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Wednesday, June 22, 2011

Prieto v. US Bank: District Court Denies Motion for Summary Judgment on Prior Class Action Res Judicata Grounds

Thank you to Christian Schreiber for providing this decision.

In Prieto v. U.S. Bank, 2011 WL 2181459 (E.D. Cal. 6/2/11), the District Court for the Eastern District of California (Judge Kimberly J. Mueller) held, on a defendant's motion for summary judgment, that a wage and hour class action settlement on behalf of hourly employees does not prevent an action by an employee who alleges that the defendant misclassified her as exempt during part of her employment. That sounds more confusing than it is. Here are the facts:

Dolores Prieto worked for U.S. Bank in both non-exempt and exempt positions. She filed an action alleging that U.S. Bank misclassified her as exempt and thereby violated California and federal wage and hour laws. U.S. Bank settled a separate class action (Ross) on behalf of non-exempt employees. The settlement included a broad release of claims under California and federal law. Ms. Prieto was a member of the Ross settlement class for the time when she worked as a non-exempt employee. U.S. Bank moved for summary judgment, arguing that the Ross settlement barred Ms. Prieto's action.

The Court denied U.S. Bank's motion. First, relying on California law, the Court held that Ms. Prieto's claims were not barred by the doctrine of release because Ms. Prieto did not sign a release in the Ross action. Then the Court held:
Even if the court construes the settlement provisions of the Ross class action as a release, there are material issues of fact as to its scope.... [T]he agreement in this case must be read in its context: it was negotiated by hourly employees on behalf of other hourly employees, as defined by the two classes. Defendant has pointed to nothing beyond the language of the agreement itself suggesting that the named class members had any authority to negotiate a settlement on behalf of non-exempt employees.
Slip op. at 12. The Court then held that res judicata also did not bar Ms. Prieto's action:
Plaintiff does not dispute the fact that there was a final judgment in the Ross case, but argues that the instant cause of action is different than that litigated in Ross. Defendant insists that the same primary right is involved: the right to be compensated for earned overtime and for meal and rest periods that were denied. ECF No. 44 at 14. To resolve this dispute, the court “must compare the two actions, looking at the rights which are sought to be vindicated and the harm for which redress is claimed.” Citizens for Open Access to Sand and Tide, Inc. v. Seadrift Association, 60 Cal.App.4th 1053, 1067 (1998).

There is much overlap in the two actions, starting with the similarity of the facts and the Labor Code violations presented through the requests for payment of lost wages. In the case proceeding in this court, however, the harm flowed from defendant’s alleged misclassification of plaintiff and could have occurred even if it honored all its obligations concerning meal and rest periods and off the clock work to hourly employees; in Ross, the harm flowed from defendant’s refusal to pay hourly employees’ wages due under the provisions of the Labor Code. The harm in the instant case is the misclassification, which led to the alleged failure to pay, while the harm in Ross was the failure to pay. Because the actions involve different primary rights, res judicata does not bar the instant suit.
Slip op. at 14-15.

Tuesday, June 21, 2011

Smith v. Bayer Corp: SCOTUS Allows State Court Class Action After Denial of Certification in District Court

In a Supreme Court session that could be described as anti-class-action,
Smith v. Bayer Corp., 564 U.S. ---, 131 S.Ct. 2368, 2011 WL 768649 (6/16/11) provides an interesting, though limited, counter-point. Smith addresses whether a District Court's denial of a Rule 23 class certification motion prevent separate plaintiffs from obtaining certification in a separate state court action? The Court held that it does not, and that the District Court abused its authority by attempting to enjoin the state court from considering the class certification motion. The syllabus explains the decision as follows:
Respondent (Bayer) moved in Federal District Court for an injunction ordering a West Virginia state court not to consider a motion for class certification filed by petitioners (Smith), who were plaintiffs in the state-court action. Bayer thought such an injunction warranted because, in a separate case, Bayer had persuaded the same Federal District Court to deny a similar class-certification motion that had been filed against Bayer by a different plaintiff, George McCollins. The District Court had denied McCollins’ certification motion under Fed. Rule Civ. Proc. 23.

The court granted Bayer’s requested injunction against the state court proceedings, holding that its denial of certification in McCollins’ case precluded litigation of the certification issue in Smith’s case. The Court of Appeals for the Eighth Circuit affirmed. It first noted that the Anti-Injunction Act (Act) generally prohibits federal courts from enjoining state court proceedings. But it found that the Act’s relitigation exception authorized this injunction because ordinary rules of issue preclusion barred Smith from seeking certification of his proposed class. In so doing, the court concluded that Smith was invoking a State Rule, W. Va. Rule Civ. Proc. 23, that was sufficiently similar to the Federal Rule McCollins had invoked, such that the certification issues presented in the two cases were the same. The court further held that Smith, as an unnamed member of McCollins’ putative class action, could be bound by the judgment in McCollins’ case.

Held: In enjoining the state court from considering Smith’s class certification request, the federal court exceeded its authority under the “relitigation exception” to the Act. Pp. 5–18

(a) Under that Act, a federal court “may not grant an injunction to stay proceedings in a State court except” in rare cases, when necessary to “protect or effectuate [the federal court’s] judgments.” 28 U. S. C. §2283. The Act’s “specifically defined exceptions,” Atlantic Coast Line R. Co. v. Locomotive Engineers, 398 U. S. 281, 286, “are narrow and are ‘not [to] be enlarged by loose statutory construction,’ ” Chick Kam Choo v. Exxon Corp., 486 U. S. 140, 146. Indeed, “[a]ny doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed.” Atlantic Coast Line R. Co., 398 U. S., at 297. The exception at issue in this case, known as the “relitigation exception,” authorizes an injunction to prevent state litigation of a claim or issue “that previously was presented to and decided by the federal court.” Chick Kam Choo, 486 U. S., at 147. This exception is designed to implement “well-recognized concepts” of claim and issue preclusion. Ibid. Because deciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court—here, the West Virginia court—every benefit of the doubt goes toward the state court, see Atlantic Coast Line, 398 U. S., at 287, 297; an injunction can issue only if preclusion is clear beyond peradventure. For the federal court’s class-action determination to preclude the state court’s adjudication of Smith’s motion, at least two conditions must be met. First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, Smith must have been a party to the federal suit or must fall within one of a few discrete exceptions to the general rule against binding nonparties. Pp. 5–7.

(b) The issue the federal court decided was not the same as the one presented in the state tribunal. This case is little more than a rerun of Chick Kam Choo. There, a federal court dismissed a suit involving Singapore law on forum non conveniens grounds and then enjoined the plaintiff from pursuing the “same” claim in Texas state court. However, because the legal standards for forum non conveniens differed in the two courts, the issues before those courts differed, making an injunction unwarranted. Here, Smith’s proposed class mirrored McCollins’, and the two suits’ substantive claims broadly overlapped. But the federal court adjudicated McCollins’ certification motion under Federal Rule 23, whereas the state court was poised to consider Smith’s proposed class under W. Va. Rule 23. And the State Supreme Court has generally stated that it will not necessarily interpret its Rule 23 as coterminous with the Federal Rule. Absent clear evidence that the state courts had adopted an approach to State Rule 23 tracking the federal court’s analysis in McCollins’ case, this Court could not conclude that they would interpret their Rule the same way and, thus, could not tell whether the certification issues in the two courts were the same. That uncertainty would preclude an injunction. And indeed, the case against an injunction here is even stronger, because the State Supreme Court has expressly disapproved the approach to Rule 23(b)(3)’s predominance requirement embraced by the Federal District Court. Pp. 8–12.

(c) The District Court’s injunction was independently improper because Smith was not a party to the federal suit and was not covered by any exception to the rule against nonparty preclusion. Generally, a party “is ‘[o]ne by or against whom a lawsuit is brought,’ ” United States ex rel. Eisenstein v. City of New York, 556 U. S. ___, ___, or who “become[s] a party by intervention, substitution, or third-party practice,” Karcher v. May, 484 U. S. 72, 77. The definition of “party” cannot be stretched so far as to cover a person like Smith, whom McCollins was denied leave to represent. The only exception to the rule against nonparty preclusion potentially relevant here is the exception that binds non-named members of “properly conducted class actions” to judgments entered in such proceedings. Taylor v. Sturgell, 553 U. S. 880, 894. But McCollins’ suit was not a proper class action. Indeed, the very ruling that Bayer argues should have preclusive effect is the District Court’s decision not to certify a class. Absent certification of a class under Federal Rule 23, the precondition for binding Smith was not met. Neither a proposed, nor a rejected, class action may bind nonparties. See id., at 901. Bayer claims that this Court’s approach to class actions would permit class counsel to try repeatedly to certify the same class simply by changing plaintiffs. But principles of stare decisis and comity among courts generally suffice to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs. The right approach does not lie in binding nonparties to a judgment. And to the extent class actions raise special relitigation problems, the federal Class Action Fairness Act of 2005 provides a remedy that does not involve departing from the usual preclusion rules. Pp. 12–1.
Justice Kagan wrote the Court's near-unanimous opinion. Justice Thomas joined only in parts I and II-A. The opinion is available here.

Campbell v. PwC: Ninth Circuit Says Unlicensed Accountants May Be Exempt under California Law

Two-thousand unlicensed junior accountants brought this wage-and-hour class action against their employer, PricewaterhouseCoopers LLP (PwC). Among other things, the accountants claim PwC failed to pay them mandatory overtime under California law. The district court granted partial summary judgment to the accountants, finding as a matter of law that PwC could not exempt them from California’s overtime requirements. PwC filed this interlocutory appeal.

We must decide whether unlicensed accountants in California are categorically ineligible, as a matter of law, to fall under two state regulatory exemptions from mandatory overtime: the professional exemption and the administrative exemption. We hold they are not. Because the district court [E.D. Cal., Judge Karlton] erroneously rejected triable defenses under both exemptions at summary judgment, we reverse.
Campbell v. PricewaterhouseCoopers LLP, --- F.3d ----, 2011 WL 2342740 (9th Cir. 6/15/11). Slip op. at 1.

The parties' exemption arguments followed familiar lines: 
Plaintiffs claim their work is predominately routinized and menial. They argue that strict instructions, comprehensive computer auditing software, and an extensive work-review system all preclude them from exercising any significant degree of discretionary judgment or analytical thinking. Named-plaintiff Sobek described her work as “comparing one number to another number to see if they agree. . . . a very tedious activity.” Plaintiffs also characterize their responsibilities as “sitting at[a] computer, going through highly routinized and nondiscretionary Steps.”

PwC, on the other hand, argues Plaintiffs perform analytical work “integral” to PwC's Attest services. To the extent Plaintiffs do not regularly exercise discretion and independent judgment during an audit engagement, PwC says they are failing to meet the firm's expectations. PwC emphasizes the variety of duties performed by Plaintiffs during an engagement and claims the failure to perform those tasks adequately can have “significant consequences” for PwC's clients. During one engagement, for example, named-plaintiff Campbell overlooked approximately $500,000 in the client's unrecorded liabilities. This oversight, which Campbell himself described as a “serious error,” was ultimately discovered by another team member. The error required a late financial adjustment and made the client unhappy.
Slip op. at 2.

First, the Ninth Circuit held that unlicensed accountants may be exempt as professionals, focusing on the alternative language of the Wage Order:
(3) Professional Exemption[:] A person employed in a professional capacity means any employee who meets all of the following requirements:

(a) Who is licensed or certified by the State of California and is primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or

(b) Who is primarily engaged in an occupation commonly recognized as a learned or artistic profession.
In other words, even though the Wage Order lists accounting as a profession in section (a), an accountant can be exempt under section (b). Slip op. at 4. The Court rejected the plaintiffs' contention that the language of section (a) requires accountants to be licensed in order to be exempt. Ibid. "Although we express no opinion on how easily or frequently unlicensed accountants might satisfy subsection (b), we do not agree that an unlicensed accountant could never possibly do so." Ibid.

The Court then held that PwC had raised triable issues of fact as to whether or not the plaintiffs were in fact exempt.
As already explained, the crucial touchstone for the professional exemption—especially subsection (b)—is the employee's actual job duties and responsibilities. § 541.308(a) (incorporated by § 11040(1)(A)(3)(e)); see also DLSE Enforcement Policies & Interpretations Manual § 52.3.1 (2002) (“As with any of the exemptions, job titles ... alone may not reflect actual job duties, and therefore[ ] are of no assistance in determining exempt or non-exempt status.”) [hereinafter 2002 DLSE Manual]. The record here contains myriad conflicting evidence about Plaintiffs' duties and responsibilities as unlicensed Attest associates. The parties dispute everything from what Attest associates actually do during audit engagements to whether PwC can reasonably expect unlicensed junior accountants to perform anything more than menial, routinized work. The wide array of evidence from both parties includes depositions from class members and other PwC employees, internal PwC manuals explaining job roles and procedures for audit engagements, and detailed training documents for PwC's auditing software. Only a factfinder can weigh this voluminous conflicting evidence and determine whether Plaintiffs meet the standards of the professional exemption. See People v. Maury, 30 Cal.4th 342, 133 Cal.Rptr.2d 561, 68 P.3d 1, 46 (Cal.2003) (“[I]t is the exclusive province of the [factfinder] to determine the credibility of a witness and the truth or falsity of the facts upon which a determination depends.”).
Slip op. at 8.

Next the Court held that PwC had "proffered enough evidence to survive summary judgment and take the administrative-exemption defense to trial." The district court "found there was no material fact question on whether Plaintiffs' work during audit engagements was performed 'under only general supervision.'" The Ninth Circuit disagreed:
[The district court cited] a California statute and a professional accounting standard, both require that unlicensed accountants be subject to control, supervision, and review by licensed CPAs. Campbell, 602 F.Supp.2d at 1183–84 (citing Cal. Bus. & Prof.Code § 5053; American Institute of Certified Public Accountants (AICPA) Professional Standards § 311.12). Although these two provisions tell us Plaintiffs must be supervised, they say nothing about whether that supervision must exceed mere “general” supervision. Neither provision distinguishes general supervision from any other kind of supervision. Both provisions require supervision of some kind, but not of any particular degree or scope. See Amicus Br. of AICPA 8 (“It simply is impossible to derive a single rule of supervision from the Auditing Standards....”). For that reason, we cannot conclude as a matter of law that all unlicensed accountants are necessarily subject to more than general supervision.
Slip op. at 10. The Court thus held that PwC's exemption defenses "must be resolved at trial." Slip op. at 11.

The opinion is available here.

Monday, June 20, 2011

Supreme Court Reverses Certification Order in Dukes v. Wal-Mart

As anticipated, the Supreme Court of the United States this morning reversed the district court's order in Dukes v. Wal-Mart certifying a class of female employees' gender discrimination claims. The decision's syllabus states:
Respondents, current or former employees of petitioner Wal-Mart, sought judgment against the company for injunctive and declaratory relief, punitive damages, and backpay, on behalf of themselves and a nationwide class of some 1.5 million female employees, because of Wal-Mart’s alleged discrimination against women in violation of Title VII of the Civil Rights Act of 1964. They claim that local managers exercise their discretion over pay and promotions disproportionately in favor of men, which has an unlawful disparate impact on female employees; and that Wal-Mart’s refusal to cabin its managers’ authority amounts to disparate treatment. The District Court certified the class, finding that respondents satisfied Federal Rule of Civil Procedure 23(a), and Rule 23(b)(2)’s requirement of showing that “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” The Ninth Circuit substantially affirmed, concluding, inter alia, that respondents met Rule 23(a)(2)’s commonality requirement and that their backpay claims could be certified as part of a (b)(2) class because those claims did not predominate over the declaratory and injunctive relief requests. It also ruled that the class action could be manageably tried without depriving Wal-Mart of its right to present its statutory defenses if the District Court selected a random set of claims for valuation and then extrapolated the validity and value of the untested claims from the sample set.
1. The certification of the plaintiff class was not consistent with Rule 23(a). Pp. 8–20.
(a) Rule 23(a)(2) requires a party seeking class certification to prove that the class has common “questions of law or fact.” Their claims must depend upon a common contention of such a nature that it is capable of classwide resolution—which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. Here, proof of commonality necessarily overlaps with respondents’ merits contention that Wal-Mart engages in a pattern or practice of discrimination. The crux of a Title VII inquiry is “the reason for a particular employment decision,” Cooper v. Federal Reserve Bank of Richmond, 467 U. S. 867, 876, and respondents wish to sue for millions of employment decisions at once. Without some glue holding together the alleged reasons for those decisions, it will be impossible to say that examination of all the class members’ claims will produce a common answer to the crucial discrimination question. Pp. 8–12.
(b) General Telephone Co. of Southwest v. Falcon, 457 U. S. 147, describes the proper approach to commonality. On the facts of this case, the conceptual gap between an individual’s discrimination claim and “the existence of a class of persons who have suffered the same injury,” id., at 157–158, must be bridged by “[s]ignificant proof that an employer operated under a general policy of discrimination,” id., at 159, n. 15. Such proof is absent here. Wal-Mart’s announced policy forbids sex discrimination, and the company has penalties for denials of equal opportunity. Respondents’ only evidence of a general discrimination policy was a sociologist’s analysis asserting that WalMart’s corporate culture made it vulnerable to gender bias. But because he could not estimate what percent of Wal-Mart employment decisions might be determined by stereotypical thinking, his testimony was worlds away from “significant proof” that Wal-Mart “operated under a general policy of discrimination.” Pp. 12–14.
(c) The only corporate policy that the plaintiffs’ evidence convincingly establishes is Wal-Mart’s “policy” of giving local supervisors discretion over employment matters. While such a policy could be the basis of a Title VII disparate-impact claim, recognizing that a claim “can” exist does not mean that every employee in a company with that policy has a common claim. In a company of Wal-Mart’s size and geographical scope, it is unlikely that all managers would exercise their discretion in a common way without some common direction. Respondents’ attempt to show such direction by means of statistical and anecdotal evidence falls well short. Pp. 14–20.
2. Respondents’ backpay claims were improperly certified under Rule 23(b)(2). Pp. 20–27.
(a) Claims for monetary relief may not be certified under Rule 23(b)(2), at least where the monetary relief is not incidental to the requested injunctive or declaratory relief. It is unnecessary to decide whether monetary claims can ever be certified under the Rule because, at a minimum, claims for individualized relief, like backpay, are excluded. Rule 23(b)(2) applies only when a single, indivisible remedy would provide relief to each class member. The Rule’s history and structure indicate that individualized monetary claims belong instead in Rule 23(b)(3), with its procedural protections of predominance, superiority, mandatory notice, and the right to opt out. Pp. 20–23.
(b) Respondents nonetheless argue that their backpay claims were appropriately certified under Rule 23(b)(2) because those claims do not “predominate” over their injunctive and declaratory relief requests. That interpretation has no basis in the Rule’s text and does obvious violence to the Rule’s structural features. The mere “predominance” of a proper (b)(2) injunctive claim does nothing to justify eliminating Rule 23(b)(3)’s procedural protections, and creates incentives for class representatives to place at risk potentially valid monetary relief claims. Moreover, a district court would have to reevaluate the roster of class members continuously to excise those who leave their employment and become ineligible for classwide injunctive or declaratory relief. By contrast, in a properly certified (b)(3) class action for backpay, it would be irrelevant whether the plaintiffs are still employed at Wal-Mart. It follows that backpay claims should not be certified under Rule 23(b)(2). Pp. 23–26.
(c) It is unnecessary to decide whether there are any forms of “incidental” monetary relief that are consistent with the above interpretation of Rule 23(b)(2) and the Due Process Clause because respondents’ backpay claims are not incidental to their requested injunction. Wal-Mart is entitled to individualized determinations of each employee’s eligibility for backpay. Once a plaintiff establishes a pattern or practice of discrimination, a district court must usually conduct “additional proceedings . . . to determine the scope of individual relief.” Teamsters v. United States, 431 U. S. 324, 361. The company can then raise individual affirmative defenses and demonstrate that its action was lawful. Id., at 362. The Ninth Circuit erred in trying to replace such proceedings with Trial by Formula. Because Rule 23 cannot be interpreted to “abridge, enlarge or modify any substantive right,” 28 U. S. C. §2072(b), a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims. Pp. 26–27.
603 F. 3d 571, reversed.
Justice Scalia wrote the opinion. Justices Roberts, Kennedy, Thomas, and Alito joined. Justices Ginsburg, Breyer, Sotomayor, and kagan joined in Parts I and III, making those parts unanimous. Justice Ginsburg wrote an opinion concurring in part and dissenting in part, in which Justices Breyer, Sotomayor, and Kagan joined.

The opinion is available here.

Monday, June 13, 2011

Kelley v. Conco: Court of Appeal Issues Same Sex Harassment Decision

In Kelley v. The Conco Companies (6/6/11) --- Cal.App.4th ----, 2011 WL 2177235, the plaintiff, Kelley, was an apprentice ironworker. He complained that he was subjected to extremely demeaning, sexually explicit comments and gestures by his male supervisor, and later to similar comments by male coworkers, and that he was also subjected to physical threats by coworkers in retaliation for his complaints about his supervisor. The defendant changed his work site to separate him from his harassers, but his union suspended him from its apprenticeship program and, after the suspension expired, his employer did not rehire him. 

Kelley filed suit, and the court (Alameda County Superior, Judge True) granted the defendants' motion for summary judgment on his claims for sexual harassment, retaliation and related causes of action. The Court of appeal affirmed, except as to the retaliation claim.
The Court held that the defendants did not subject Kelley to sexual harassment, even though the comments directed at him were "graphic, vulgar, and sexually explicit" and "expressed sexual interest and solicited sexual activity." Slip op. at 6. 

There was, however, no “credible evidence that the harasser was homosexual” or that the harassment was “motivated by sexual desire.” Kelley makes no contention here that Seaman's statements were intended to be taken literally. Instead, it appears undisputed that in the environment in which this incident took place, sexually taunting comments by supervisors and employees were commonplace, including gay innuendo, profanity, and rude, crude and insulting behavior. Such comments were made both jokingly and in anger. 
Ibid. The Court declined to follow Singleton v. United States Gypsum Co. (2006) 140 Cal.App.4th 1547, in which the Second District Court of Appeal found that same-sex harassment was gender-specific because the same conduct would not have been directed toward a member of the opposite sex and thus constituted discrimination because of sex. 

Singleton's reasoning inevitably leads to the conclusion that any hostile, offensive and harassing comment or conduct, with or without sexual content or innuendo, made to one gender and which would not be made to the other, would constitute discrimination because of sex within the scope of FEHA. 
Slip op. at 8. 
The Court reversed as to the retaliation cause of action because Kelley reasonably believed that the conduct was discriminatory, and his complaints were protected activity. Slip op. at 10. 

The opinion is available here

Friday, June 10, 2011

Erica P. John Fund v. Haliburton: Supreme Court Holds that Securities Fraud Plaintiffs Need Not Show Loss Causation on Class Certification

The Supreme Court of the United States has issued an important class certification decision, and it is not Dukes v. Wal-Mart. In Erica P. John Fund v. Haliburton, --- U.S. ----, 2011 WL 2175208 (6/6/11), the Supreme Court held that a plaintiff in a securities fraud class action need not prove "loss causation" in order to obtain class certification under Federal Rule 23(b)(3). In other words, a plaintiff need not show that the defendant's material misrepresentation or omission caused the plaintiff to suffer economic loss, even though this is an element of the plaintiff's case. The syllabus explains:
Petitioner Erica P. John Fund, Inc. (EPJ Fund), is the lead plaintiff in a putative securities fraud class action filed against Halliburton Co. and one of its executives (collectively Halliburton). EPJ Fund alleges that Halliburton made various misrepresentations designed to inflate the company’s stock price, in violation of §10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b–5. EPJ Fund also contends that Halliburton later made a number of corrective disclosures that caused the stock price to drop and, consequently, investors to lose money. EPJ Fund sought to have its proposed class certified pursuant to Federal Rule of Civil Procedure 23. The District Court found that the suit could proceed as a class action under Rule 23(b)(3), but for one problem: Fifth Circuit precedent required securities fraud plaintiffs to prove “loss causation”— i.e., that the defendant’s deceptive conduct caused the investors’ claimed economic loss—in order to obtain class certification. The District Court concluded that EPJ Fund had failed to satisfy that requirement. The Court of Appeals agreed and affirmed the denial of class certification.

Held: Securities fraud plaintiffs need not prove loss causation in order to obtain class certification. Pp. 3–10.

(a) In order to certify a class under Rule 23(b)(3), a court must find “that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Considering whether “questions of law or fact common to class members predominate” begins, of course, with the elements of the underlying cause of action. The elements of a private securities fraud claim based on violations of §10(b) and Rule 10b–5 are: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___.

Whether common questions of law or fact predominate in such an action often turns on the element of reliance. The traditional way a plaintiff can demonstrate reliance is by showing that he was aware of a company’s statement and engaged in a relevant transaction—e.g., purchasing common stock—based on that specific misrepresentation. The Court recognized in Basic Inc. v. Levinson, 485 U. S. 224, however, that “[r]equiring proof of individualized reliance from each member of the proposed plaintiff class effectively would” prevent such plaintiffs “from proceeding with a class action, since individual issues” would “overwhelm[ ] the common ones.” Id., at 242. The Court in Basic sought to alleviate that concern by permitting plaintiffs to invoke a rebuttable presumption of reliance based on what is known as the “fraud-on-the-market” theory. According to that theory, “the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations.” Id., at 246. Under that doctrine, the Court explained, one can assume an investor relies on public misstatements whenever he “buys or sells stock at the price set by the market.” Id., at 247. The Court also made clear that the presumption could be rebutted by appropriate evidence. Pp. 3–5.

(b) It is undisputed that securities fraud plaintiffs must prove certain things in order to invoke Basic’s rebuttable presumption of reliance. According to the Court of Appeals, EPJ Fund had to prove the separate element of loss causation in order to trigger the presumption. That requirement is not justified by Basic or its logic. This Court has never mentioned loss causation as a precondition for invoking Basic’s rebuttable presumption. Loss causation addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock.

The Court has referred to the element of reliance in a private Rule 10b–5 action as “transaction causation,” not loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336, 341–342. Consistent with that description, when considering whether a plaintiff has relied on a misrepresentation, the Court has typically focused on facts surrounding the investor’s decision to engage in the transaction. Loss causation, by contrast, requires a plaintiff to show that the misrepresentation caused a subsequent economic loss. That has nothing to do with whether an investor relied on that misrepresentation in the first place, either directly or through the fraud-on-the-market theory. The Court of Appeals’ rule contravenes Basic’s fundamental premise — that an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction. Pp. 5–8.

(c) Halliburton concedes that securities fraud plaintiffs should not be required to prove loss causation in order to invoke Basic’s presumption of reliance. Halliburton nonetheless defends the judgment below on the ground that the Court of Appeals did not actually require EPJ Fund to prove “loss causation” as the Court has used that term. According to Halliburton, “loss causation” was shorthand for a different analysis. The lower court’s actual inquiry, Halliburton insists, was whether EPJ Fund had demonstrated “price impact”—that is, whether the alleged misrepresentations affected the market price in the first place.

The Court does not accept Halliburton’s interpretation of the Court of Appeals’ opinion. Loss causation is a familiar and distinct concept in securities law; it is not price impact. Whatever Halliburton thinks the Court of Appeals meant to say, what it said was loss causation. The Court takes the Court of Appeals at its word. Based on those words, the decision below cannot stand. Pp. 8–9.
The full opinion is available here.

Friday, June 3, 2011

UPS v. Superior Court: Court Confirms that Plaintiffs Can Recover Two Hours of Pay Per Day for Meal and Rest Violations

In February, the Second District Court of Appeal issued its decision in United Parcel Service, Inc. v. Superior Court (Allen) (2/17/11) --- Cal.App.4th ----, 2011 WL 523633, holding that Labor Code section 226.7 provides for two hours of pay per day when an employee misses both a meal and a rest period. See our blog post here. The Court then granted UPS's petition for rehearing and recently re-issued its decision, confirming its earlier holding. The Court held:
In short, we conclude, based upon the wording of section 226.7, subdivision (b), the IWC's wage orders, the public policy behind the statute and wage orders, and also the principle that we are to construe section 226.7 broadly in favor of protecting employees, that the employees in this case may recover up to two additional hours of pay on a single work day for meal period and rest period violations—one for failure to provide a meal period and another for failure to provide a rest period.
Slip op. at 7.

The new decision is virtually identical to the old, except that it cites three recent decisions supporting its conclusion: Schuyler v. Morton's of Chicago, Inc. (C.D. Cal. Jan. 25, 2011, CV 10–06762 ODW) 2011 U.S.Dist. Lexis 10130, pp. 12–13 and Lara v. Trimac Transp. Servs. (Western) (C.D.Cal. Aug. 6, 2010, CV 10–4280–GHK) 2010 U.S.Dist. Lexis 82420, pp. 10–11 [both following Marlo's conclusion that section 226.7 allows an employee to recover up to two additional hours of pay on a single work day]; Coleman v. Estes Express Lines, Inc. (C.D.Cal.2010) 730 F.Supp.2d 1141, 1148–1149 [concluding class member employees were entitled to “one hour of pay for each work day that the meal period was not provided and also one hour of pay for each work day that the rest period was not provided”].)

The new decision can be cited as United Parcel Service, Inc. v. Superior Court (Allen) (6/2/11) --- Cal.Rptr.3d ----, 2011 WL 2150776. The full opinion is available here.