Class Action Defense Strategy Blog

California Supreme Court Clarifies Class Action Standards in Brinker

Sheppard Mullin — Mon, 16 Apr 2012 09:38:42 -0800

On Thursday, April 12, 2012, the California Supreme Court issued its much anticipated decision in Brinker Restaurant Corp. v. Superior Court. In addition to providing needed clarity regarding the law of meal and rest periods (which we separately analyze here), the decision also contains several defense-friendly statements regarding class action law more generally.

First, the Court agreed with the dominant line of precedent by holding that a trial court may reach questions regarding the merits of the plaintiff’s claims where the answer to those questions will “affect” the class certification decision. Indeed, where “the propriety of class certification depends upon disputed threshold legal or factual questions,” the trial court “must resolve” those disputed threshold questions first. (Emphasis added.) For example, the Court recognized that “whether common or individual questions predominate will often depend upon resolution of issues closely tied to the merits.” Implicit in the Court’s ruling is that a trial court commits error if it fails to first resolve such “necessary” issues prior to reaching the class certification question.

Second, the Court confirmed what a trial court should focus on in reaching the class certification decision. In particular, “[a] court must examine the allegations of the complaint and supporting declarations and consider whether the legal and factual issues they present are such that their resolution in a single class proceeding would be both desirable and feasible.” (Emphasis added.) Citing Professor Richard Nagareda’s NYU Law Review commentary on class actions – importantly, the same authority relied on by the United States Supreme Court in its recent, defense-friendly decision in Wal-Mart Stores, Inc. v. Dukes – the Court reasoned that “‘what really matters to class certification’ is ‘not similarity at some unspecified level of generality but, rather, dissimilarity that has the capacity to undercut the prospects for joint resolution of class members’ claims through a unified proceeding.’” This is important because it sets forth a standard whereby a defendant can defeat class certification by presenting declarations or other individualized evidence which reveals that disputed questions about essential elements of liability can be resolved only through individualized testimony.

Lastly, in rejecting the plaintiffs’ request for class certification as to their claim that they worked off the clock, the Court further embraced the narrow view of class certification advanced by the United States Supreme Court in Dukes. The Court reasoned that “where no substantial evidence points to a uniform, companywide policy” in violation of the law, “proof of off-the-clock liability would have had to continue in an employee-by-employee fashion, demonstrating who worked off the clock, how long they worked, and whether Brinker knew or should have known of their work.” For this reason, class certification was improper. Implicit in this ruling is a determination that the case could not have been tried using a “Trial by Formula” approach. Under the “Trial by Formula” approach, a sample set of the class is chosen, the trial court then determines how much the members of the sample set worked without pay, and the results are then applied against the class as a whole. This aspect of the decision represents another win for defendants in class actions, in that it is consistent with the United States Supreme Court’s holding that the “Trial by Formula” approach violates the defendant’s due process right to present evidence and challenge liability as to each member of the proposed class.

If you have further questions, please do not hesitate to contact a Sheppard Mullin attorney for guidance.

The Ninth Circuit Again Follows Concepcion And Enforces Consumer Arbitrations

Sheppard Mullin — Wed, 28 Mar 2012 14:54:57 -0800

By Sarah Kagan and Shannon Petersen

On March 16, 2012, the Ninth Circuit followed the recent U.S. Supreme Court decision in AT&T Mobility, Inc. v. Concepcion, 131 S. Ct. 1740 (2011), and held that the Federal Arbitration Act (the FAA) preempts state law refusing to enforce arbitration provisions with class action waivers. See Marygrace Coneff v. AT&T Corp., --- F.3d ----, 2012 U.S. App. LEXIS 5520 (9th Cir. Wash. Mar. 16, 2012). Coneff follows closely on the heels of the Ninth Circuit's recent opinion in Kilgore v. KeyBank, Nat'l Ass'n, --- F.3d ----, 2012 WL 718344, *10 (9th Cir. March 7, 2012), in which it followed Concepcion in holding the FAA preempts California law excluding claims for "public injunctions" from arbitration.

In Coneff, the plaintiffs were wireless cell phone customers of AT&T Mobility, LLC. They entered into service agreements with AT&T that included clauses requiring the arbitration of any dispute and waiving any right to bring a class action. AT&T moved to compel arbitration, but the district court denied the motion and, applying Washington law, found the class action waiver substantively unconscionable and therefore unenforceable.

The Ninth Circuit applied Concepcion, reversed the district court, and held that states cannot require a procedure that is inconsistent with the FAA. Id. at 3147. In doing so, the Court rejected the plaintiffs' attempt to distinguish the Washington law from the California law at issue in Concepcion. The Court held that the state laws were similar and that the underlying state policy concerns behind both laws were the same. The FAA preempted both. Id.

The plaintiffs also argued that there must exist an implied exception to Concepcion when arbitration provisions interfere with the effective vindication of statutory rights, such as a right to a class action. Id. at 3147. The Ninth Circuit rejected this argument, at least with regard to statutory rights under state law. Though the rule might be different with respect to statutory rights under federal law, the FAA displaces any such right under state law. Id. at 3147, fn. 2.

The Court also observed that the plaintiffs failed to grasp the distinction between having "no effective means" to vindicate statutory rights through arbitration and having "insufficient incentive to do so." Id. at 3148 (emphasis in original). Just because individuals might not pursue small value claims in arbitration does not mean that there is no effective means to vindicate those rights. Under Concepcion, the risk of small claims falling through the cracks is an inadequate justification to avoid the application of the FAA. Id. at 3149.

Authored By:

Sarah A. Kagan
(213) 617-5521
SKagan@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
SPetersen@sheppardmullin.com

Federal Law Preempts State Law Barring Arbitration Of Claims For Public Injunction

Sheppard Mullin — Fri, 23 Mar 2012 15:06:06 -0800

By Travis Anderson and Shannon Petersen

On March 7, 2012, the Ninth Circuit held that the Federal Arbitration Act preempts California's rule prohibiting the arbitration of claims for public injunctions. Kilgore v. KeyBank, Nat'l Ass'n, --- F.3d ----, 2012 WL 718344, *10 (9th Cir. March 7, 2012). Referring to this as the "Broughton-Cruz rule," after the California Supreme Court's decisions in Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999), and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 303 (2003), the Ninth Circuit unanimously held that "the Broughton-Cruz rule does not survive" the United States Supreme Court decision in AT&T Mobility, Inc. v. Concepcion, 131 S. Ct. 1740 (2011) (FAA preempts California law refusing to enforce class action waivers in arbitration provisions).

Plaintiffs in Kilgore obtained private loans through KeyBank to pay their tuitions for a helicopter vocational school and each signed a promissory note containing an arbitration clause. Before plaintiffs could complete their training, the school went bankrupt and ceased operations. Plaintiffs then sued for a public injunction under California's Unfair Competition Law to prevent KeyBank from collecting on the student loans. The district court denied KeyBank's motion to compel arbitration under the Broughton-Cruz rule. Kilgore, 2012 WL 718344 at *3-*4.

The Ninth Circuit reversed, holding that the FAA preempted the Broughton-Cruz rule "because the rule 'prohibits outright the arbitration of a particular type of claim'—claims for broad public injunctive relief." Id. at *10, quoting Concepcion, 131 S. Ct. at 1747. The Ninth Circuit found the state rationale behind this rule—that the judiciary is better suited to administer public injunctions—irrelevant. "[F]ederal preemption requires that state law bend to conflicting federal law—no matter the purpose of the state law." Kilgore, 2012 WL 718344 at *12.

Next, Kilgore examined whether the arbitration clause was unconscionable. It noted that "generally applicable" contract defense doctrines like unconscionability still apply to arbitration clauses, but only "so long as those doctrines are not 'applied in a fashion that disfavors arbitration.'" Id. at *13, quoting Concepcion, 131 S. Ct. at 1747. As to procedural unconscionability, the arbitration provision gave plaintiffs 60 days to opt-out. Primarily for this reason, the Ninth Circuit rejected the plaintiffs' claim that the arbitration provision was buried in the fine print and that they did not have a meaningful opportunity to review it. Accordingly, the Kilgore court enforced the arbitration provision.

Authored By:

Travis J. Anderson
(858) 720-8940
TAnderson@sheppardmullin.com

Shannon Z. Petersen
(619) 338-6656
SPetersen@sheppardmullin.com

The U.S. Supreme Court Reaffirms The Enforceability Of Arbitration Agreements

Sheppard Mullin — Tue, 31 Jan 2012 14:31:09 -0800

By Shannon Petersen

In CompuCredit Corp. v. Greenwood, ---S.Ct.---, 2012 WL 43514 (U.S. Jan. 10, 2012), the Supreme Court has again enforced an arbitration clause and class action waiver in a consumer contract. In doing so, the Court solidified the holding of its recent landmark decision of AT&T Mobility v. Concepcion, 563 U.S. ___, 131 S.Ct. 1740 (2011) that under the Federal Arbitration Act (the “FAA”) arbitration agreements must be enforced according to their terms. Indeed, CompuCredit demonstrates a growing consensus on this point. While the Court decided Concepcion by a 5-4 majority, 8 out of 9 justices formed the majority in CompuCredit, with only Justice Ginsberg dissenting. Justice Scalia wrote the majority opinions in both cases.

CompuCredit, however, does not merely repeat Concepcion. The Court in Concepcion held that the FAA preempts state law refusing to enforce arbitration terms (such as class action waivers) that some argue favor corporate defendants over consumers. The Court in CompuCredit expands this by holding that the FAA also trumps federal law implying a statutory right to a civil action in a court of law. Unless some other federal law expressly prohibits arbitration, the FAA requires that arbitration agreements be enforced. As for state law, the FAA preempts any implied or express statutory right to a judicial action.

The class action plaintiffs in CompuCredit obtained credit cards through a form application containing an arbitration provision enforceable under the FAA. The plaintiffs sued in federal court in California claiming CompuCredit violated the federal Credit Report Organization Act (the “CROA”), 15 U.S.C. § 1679 et seq. by allegedly misrepresenting the credit limits and by claiming that credit cards could be used to rebuild poor credit. CompuCredit moved to compel arbitration and enforce a class action waiver.

The plaintiffs opposed the motion, arguing that the CROA granted them a statutory right to a judicial action. Specifically, the plaintiffs relied on a provision of the CROA stating that consumers: “have a right to sue a credit repair organization that violates” its provisions and that this right cannot be waived. The U.S. District Court for the Northern District of California agreed with the plaintiffs and denied the motion to compel arbitration, holding that “Congress intended claims under the CROA to be non-arbitrable.” CompuCredit, ---S.Ct.---, 2012 WL 43514 at *2-*3. The Ninth Circuit affirmed, holding that CROA’s “right to sue” provision “clearly involves the right to bring an action in a court of law.” Id.

The U.S. Supreme Court disagreed, and reversed the decision of the Ninth Circuit. The Court began by repeating from Concepcion and other precedent that the FAA “establishes a liberal policy favoring arbitration agreements.” Id. at *3. “It requires courts to enforce agreements to arbitrate according to their terms.” Id.

The Court then went on to add that this “is the case even when the claims at issue are federal statutory claims, unless the FAA’s mandate has been overridden by a contrary congressional command.” Id. According to the Supreme Court, the CROA’s “right to sue” provision does not override the FAA. Instead, it means only that consumers “have the legal right, enforceable in court, to recover damages from credit report organizations that violate CROA.” Id. at *5. The parties “remain free to specify” how this legal right can be pursued, including by arbitration. Id. at *4. “Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms.” Id. at *6.

This decision reaches well beyond the CROA. Prior to Concepcion, the plaintiffs’ class action bar argued that class action waivers are unenforceable as unconscionable under state law. Deprived of that argument post-Concepcion, they now focus on the argument that plaintiffs have unwaivable statutory rights that trump any agreement under the FAA. In California, for example, plaintiffs argue that the Consumers Legal Remedies Act (the “CLRA”) grants an unwaivable statutory right to a class action in a court of law. See Fisher v. DCH Temecula Imports, 187 Cal.App.4th 610 (2010); Gentry v. Superior Court, 42 Cal.4th 443 (2007). Similarly, plaintiffs also argue that they have an unwaivable right to a public injunction in a court of law under both the CLRA and California’s Unfair Competition Law (the “UCL”). See Cruz v. Pacific Health Systems, Inc., 30 Cal. 4th 303, 316 (Cal. 2003); Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 1082 (1999).

The language of the CLRA and the UCL, however, is similar to the language of the CROA. The CLRA states that a consumer “is entitled to bring an action,” including a class action, and that any waiver of this right is unenforceable. Similarly, the CLRA and the UCL state that plaintiffs have the right to seek injunctions on behalf of the public. Like the CROA, the CLRA and the UCL do not expressly preclude arbitration. Thus, according to the U.S. Supreme Court, the parties “remain free to specify” how these legal rights can be pursued. See CompuCredit, ---S.Ct.---, 2012 WL 43514 at *4. Because the CLRA and the UCL are silent on whether claims under them can proceed in an arbitrable forum, “the FAA requires the arbitration agreement to be enforced according to its terms.” Id. at *6.

In any event, under Concepcion and other law, the FAA preempts any state-law based statutory right to a class action, a public injunction, or a judicial action. See, e.g., Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (holding the FAA preempts any unwaivable statutory right to a class action under the CLRA).

The Ninth Circuit Applies the Brakes to Runaway Nationwide Class Actions

Sheppard Mullin — Fri, 27 Jan 2012 09:45:08 -0800

By Paul Seeley

In the recently published decision Mazza v. American Honda Motor Company, Inc., No. 09-55376 (9th Cir. 1-12-12), the Ninth Circuit reversed the certification of a nationwide class composed of consumers seeking relief under California’s consumer protection laws. In doing so, the court significantly decreased the viability of such nationwide classes, particularly when the plaintiff seeks to recover under any particular state’s consumer protection statutes.

In Mazza, the plaintiff sought to represent a class composed of certain purchasers of the Acura RL automobile. On the Acura RL, an available option was the Collision Mitigation Braking System (“CMBS”), costing roughly $4,000. According to Honda, the CMBS involved a three-step process whereby sensors in the car would trigger alarms and apply increasing brake pressure to alert drivers to possible accidents and, then, reduce injuries if the accident could not be avoided. Mazza, at pp. 190-191. Honda advertised the CMBS in brochures, television commercials (two commercials, each running for a week nationwide), and videos available to customers at Acura dealerships. Id. at 191-192.

The plaintiffs filed suit claiming that Honda failed to warn consumers that (1) the CMBS’s three steps may overlap, (2) the system may not warn drivers with enough time to avoid the accident, and (3) that the CMBS shuts off in bad weather. Id. at 193. Seeking to represent CMBS purchasers from California and 43 other states, the plaintiffs sought recovery under California’s Unfair Competition Law (“UCL”), the False Advertising Law, and the Consumer Legal Remedies Act (“CLRA”).

The district court certified a nationwide class under Federal Rule of Civil Procedure 23(b)(3), finding that common questions of law and fact predominate. Id. at 194. The court concluded that California law would apply to purchasers in other states and that class-wide reliance on Honda’s advertisements could be presumed under the recent California Supreme Court decision, In re Tobacco II Cases, 46 Cal. 4th 298 (2009). Honda appealed the certification order.

The Ninth Circuit reversed. The court first addressed the “choice of law” issue, setting forth the three-part test for choice of law in nationwide class actions: (1) the court must determine if the laws of two jurisdictions are different, (2) if there is a difference, the court must consider each jurisdiction’s interest in applying its laws, and (3) if there is a conflict in the interests, the court must consider each jurisdiction’s policy and apply the law “of the state whose interest would be more impaired if its law were not applied to members of the proposed class.” Mazza, at 198-199, citing McCann v. Foster Wheeler, 48 Cal. 4th 68, 81-82 (2010).

The Ninth Circuit held that California law does not apply to a nationwide class. First, the court recognized the significant differences between consumer protection laws in numerous states. For example, California’s CLRA does not have a scienter requirement, while states like Colorado and New Jersey require a knowingly false advertisement or omission. Mazza, at 200. Additionally, California’s remedies under the CLRA and UCL are more limited than other states’ consumer protection laws, which may allow treble damages or attorneys’ fees. Id. at 201.

Second, the Ninth Circuit held that other states had a strong interest in having their laws applied to the facts of this case. The Ninth Circuit described the “balance” between protecting consumers and encouraging economic growth. Since each state may achieve balance differently, every state has an interest in having its laws (rather than California's laws) apply to the consumers who purchased Acura RLs within their state. Id. at 203.

Third, the Ninth Circuit held that, because each state has an interest in seeing its own laws applied, “if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce.” Id. at 204. Since California’s interest in applying the UCL and CLRA to transactions occurring in other states is minimal, the district court erred in concluding that California’s consumer protection laws should apply to those class members who purchased Acura RLs with the CMBS in the 43 states other than California. Id. at 205. Accordingly, there were no “common questions of law,” and certification was improper.

Separate and apart from the erroneous choice of law analysis, the Ninth Circuit also held that certification was improper because class-wide reliance could not be presumed. The court noted that, as set forth in Tobacco II, class-wide reliance on the allegedly false advertisement may be presumed in some situations, thereby creating common questions of law and fact suitable for class-wide determination. In this case, however, no such presumption was possible: Unlike the ever-present cigarette advertisements in Tobacco II, Honda had limited advertisements for the CMBS. Mazza, p. 209. Thus, whether a class member was entitled to recovery was completely determinative upon whether that class member saw the limited advertisements and relied on those advertisements in buying the CMBS. Id. Given the class definition (everyone who purchased or leased an Acura RL with CMBS), the class was overbroad because individuals who never saw the advertisements would not be eligible for recovery. Since whether each class member relied on the advertisements was a necessary question of fact, common issues of fact did not predominate and class certification was improper. Id.

Mazza represents a significant victory for defendants facing alleged nationwide consumer class actions. The choice of law analysis by the Ninth Circuit essentially establishes a policy against nationwide class actions: Since California’s UCL and CLRA statutes are so different from other states’ consumer protection laws, and every state is entitled to strike a balance between consumer protection and commerce, it is difficult to imagine how any nationwide class could be certified when potential class members purchased the product in other jurisdictions. The analysis in Mazza is not case-specific, as the Ninth Circuit relied on high-level economic policy analysis to conclude that it was improper to apply the UCL and CLRA to the nationwide class. This choice of law argument could be asserted by any defendant faced with allegations of a nationwide class action. As if to emphasize the results of Mazza, Judge Nelson, who dissented from the decision, concluded that “The majority’s holding will prove devastating to consumers” who will be unable to assert nationwide class actions when the potential recovery from individual actions is so small. Id. at 213-214.

Mazza also signals a further retreat from the class-wide reliance espoused in Tobacco II. The limited nature of the advertisements for the CMBS stood in stark contrast to the prevalent advertisements addressed in Tobacco II. Here, class-wide reliance was wholly improper even though there were nationwide commercials and numerous opportunities for all class members to view the literature and commercials when purchasing their cars. Thus, defendants trying to defeat class certification should analogize to Honda’s limited advertisements and defeat the assumption that common questions of reliance will predominate.

Court of Appeal Reminds Litigants That Settling With Named Plaintiff Does Not Necessarily End Putative Class Action

Sheppard Mullin — Tue, 03 Jan 2012 15:59:24 -0800

By Neil A.F. Popović and Lai Lam Yip

If a defendant in a putative class action settles with the class representative prior to class certification, does the defendant nonetheless have to respond to pre-settlement discovery requests to identify absent class members? According to the California Court of Appeal in Pirjada v. Superior Court, 2011 WL 6144930, Case No. B234813 (Cal. App. Dec. 12, 2011), the answer is no, although the appellate court left open the possibility that the trial court could require some form of notice to protect the interests of absent class members.

Plaintiff Seeks Discovery Identifying Putative Class Members

Putative class representative Obaidul Pirjada ("Pirjada") brought a purported class action on behalf of all security guards who had been employed in California by defendant Pacific National Security, Inc. ("Pacific National") during the preceding four years, alleging violations of the California Labor Code and the California Business and Professions Code. Pirjada propounded discovery requesting, among other things, the names and addresses of all putative class members. Pacific National did not object or respond to the discovery requests.

Plaintiff, Without Counsel Involvement, Settles Directly With Defendant

Without the involvement of his attorneys, Pirjada settled directly with Pacific National after negotiating with its CEO. Then, by letter to his counsel, Pirjada requested that his claims be dismissed with prejudice, and enclosed the settlement agreement along with payment for legal services.

Plaintiff's Counsel Files Motion for Order Providing Notice to Putative Class Members; Defendant Files Motion to Dismiss

Instead of dismissing the lawsuit, however, Pirjada's counsel filed a motion seeking to provide notice to absent members of the proposed class that substitution of a suitable class representative was necessary. Pacific National filed a motion to dismiss based on the parties' settlement, which Pirjada joined.

Superior Court Denies Both Motions

The superior court denied Pacific National's motion to dismiss, noting that a plaintiff's individual settlement does not vitiate plaintiff's or his counsel's fiduciary obligations to the putative class members. The court granted sixty days leave to amend to add a new plaintiff as class representative. The court denied counsel's motion for notice, finding it unnecessary because unlike in CashCall, Inc. v. Superior Court, 159 Cal. App. 4th 273 (2008), and Best Buy Stores, L.P. v. Superior Court, 137 Cal. App. 4th 772 (2006), members of the putative class of security guards know whether they were injured and thus can determine without notice whether to assert claims against Pacific National. The court specifically noted, however, that regardless of notice, plaintiff's counsel was authorized to communicate with potential class members.

Plaintiff's Counsel Moves to Compel Discovery to Identify New Class Representative, Which Superior Court Denies

Plaintiff's counsel then moved to compel responses to the previously propounded requests for information identifying putative class members, arguing that Pacific National had waived its objections by failing to respond; that Pirjada could not provide contact information for other putative class members because he worked at only one Pacific National location and was the only guard assigned there; and that Pirjada contacted counsel only after his employment at Pacific National had ended. The superior court denied the motion to compel, stating that Pirjada had settled his claims and that his discovery requests were therefore moot. The court reiterated, however, that counsel were free to communicate with class members, even if it they were not entitled to discovery.

Court of Appeal Denies Petition, Deciding Superior Court Did Not Abuse Discretion

Plaintiff's counsel filed a petition for writ of mandate challenging the superior court's denial of the motion to compel, as well as the denial of the motion to provide notice.

The Court of Appeal concluded that the superior court acted within its broad discretion in denying the motion to compel, and choosing instead to protect absent class members by allowing counsel leave to amend the complaint after using informal means to identify potential replacement class representatives.

With respect to notice, the Court stated:

[P]recertification discovery may be allowed in appropriate circumstances to identify a substitute class representative in place of one who is not able to serve in that capacity, as well as to assist the lead plaintiff in learning the names of other individuals who might assist in prosecuting the action. But the obligation to notify absent class members before dismissing the case rests with the superior court, not the lead plaintiff or class counsel. The nature and extent of that notice must be decided by the court itself.

Pirjada, 2011 WL 6144930. at *14. The Court noted that under California Rule of Court 3.770, no notice to absent class members is required at all "if the court finds that the dismissal will not prejudice them." Id. Moreover, because the superior court issued an order to show cause regarding dismissal, counsel will have the opportunity at that hearing to demonstrate that some form of notice is required to avoid prejudice to absent class members.

Lessons for Class Action Defendants

The somewhat unique circumstances in Pirjada highlight the importance of making sure to tie up procedural loose ends, such as outstanding discovery, when a defendant settles with the named plaintiff(s) prior to class certification. More broadly, the case serves as a reminder that named plaintiffs and their counsel have an ongoing fiduciary duty to potential class members, and courts must take reasonable steps to protect those interests, including through potential discovery and notice procedures.

Under Parris v. Superior Court, 109 Cal. App. 4th 285 (2003), and its progeny, "'trial courts must apply a balancing test and weigh the actual or potential abuse of the class action procedure against the potential benefits that might be gained'" by allowing precertification discovery to identify a substitute class representative. Pirjada, 2011 WL 6144930, at *5 (quoting Starbucks Corp. v. Superior Court, 194 Cal. App. 4th 820, 825 (2011)). Addressing that standard remains a key consideration for defendants who seek to avoid ongoing class action litigation when they settle with a named plaintiff.

California Court of Appeal Holds Defendant Did Not Waive Its Right To Compel Arbitration By Waiting Until After Class Certification Where Other Class Members--But Not Plaintiff--Had Agreed To Arbitrate

Sheppard Mullin — Thu, 22 Dec 2011 08:53:06 -0800

By Thomas Kaufman and Travis Anderson

In Sky Sports, Inc. v. Superior Court, (2nd Dist., Div. 3, Dec. 15, 2011) Case No. B233820, the California Court of Appeal held that a defendant does not waive its right to compel arbitration of a class action by waiting to file a motion to compel arbitration until the class has been certified, where some of the class members, but not the class representative, signed arbitration agreements with defendant.

Plaintiff, a private security guard, filed a class action against his employer, Sky Sports, Inc. ("Sky Sports") for failing to provide rest breaks to its security guard employees. In its answer to the complaint, Sky Sports contended the action was barred by a mandatory arbitration agreement. Although plaintiff had not signed an arbitration agreement with Sky Sports, many other putative class members had.

Plaintiff subsequently moved to certify a class of "all current and former licensed security guards." In its opposition, Sky Sports submitted a list of putative class members who had signed arbitration agreements. Sky Sports contended that plaintiff was an inadequate class representative because he had not signed such an agreement. Sky Sports further contended that plaintiff could not use the class action procedure to circumvent valid arbitration agreements. The trial court agreed with the plaintiff. It certified the class and ruled that Sky Sports had waived its right to arbitration by unreasonably delaying in filing their motion to compel arbitration. Sky Sports filed a petition for writ of mandate to overturn the trial court, and the Court of Appeal stayed the proceedings and granted the petition.

The Court of Appeal explained that Sky Sports could not have filed a petition to compel arbitration before the class was certified because the plaintiff was not a party to its arbitration agreement. California Code of Civil Procedure section 1281.2, the statute providing the procedure to file a motion to compel arbitration, requires the existence of an arbitration agreement between the parties. As a result, it would have been premature for Sky Sports to file a precertification motion to compel arbitration because the plaintiff could have "narrowed the class to include only those employees who did not sign the agreements." Therefore, Sky Sports had no choice but to wait until the class was certified before it could bring its motion to compel arbitration.

The appellate court stated that "[a] class action is a procedural device and cannot be used to subvert an otherwise enforceable contract." Because Sky Sports could not have brought its motion before the class was certified, its delay "cannot constitute a waiver . . . Until the class was certified, the pleading requirements to move to compel arbitration under section 1281.2 were not satisfied." The Court of Appeal issued a writ of mandate directing the trial court to vacate its order denying the company's motion to compel arbitration.

The court did not, however, address the issue of whether the arbitration agreement was enforceable. For example, the opinion does not specify whether the arbitration agreement contained a class action waiver and, if so, whether such a waiver would be enforceable. Instead the court simply remanded the matter to the trial court to consider the substance of the argument as to whether there was a valid arbitration agreement.

Despite the narrowness of its holding, Sky Sports, Inc. is a valuable case for both employers and class-action defendants alike. When the named plaintiff is not a party to an arbitration agreement, but the putative class includes members who are parties to arbitration agreements with the defendant, the defendant may wait until class certification before bringing a motion to compel arbitration. The decision also highlights that a court cannot simply ignore the arbitration agreements of putative class members, but must instead determine whether they are enforceable, and what their impact will be on class issues such as numerosity and commonality. Defendants should therefore raise the existence of arbitration agreements in opposition to class certification.

California Court of Appeal Clarifies Breach of Warranty Law in Class Actions and Vacates Order Certifying Class of Consumers in American Honda Motor Company, Inc. v. Superior Court

Sheppard Mullin — Fri, 09 Dec 2011 14:19:25 -0800

By Judy Suwatanapongched

In American Honda Motor Company, Inc. v. Superior Court of Los Angeles County, 199 Cal. App. 4th 1367 (2011), the California Court of Appeal for the Second Appellate District clarified that, under California law, a party moving for class certification in a breach of warranty action must provide “substantial evidence of a defect that is substantially certain to result in malfunction during the useful life of the product.” American Honda Motor Co., Inc., 199 Cal. App. 4th at 1375.

Plaintiff Jin Hyeong Lee purchased a new Acura RSX with a six-speed manual transmission from Defendant American Honda Motor Company, Inc. (“Honda”). Id. at 1369. The standard manufacturer’s four-year warranty certified that Honda would replace any parts defective in material or workmanship under normal use. Id. The plaintiff experienced problems with the transmission within the warranty period when the car would pop out of third gear while it was running, but Honda technicians told him that the car was operating as designed. Id. Honda issued a service update to its dealers and a technical service bulletin (“TSB”) about this issue, advising Honda technicians on how to address the problem, such as replacing the third gear set. Id. at 1369-70.

The plaintiff brought a class action suit against Honda, alleging breach of warranty and unfair business practices under the UCL. Id. at 1370. The trial court granted the plaintiff’s motion to certify a class of all individuals in California who purchased or leased the Acura models described in Honda’s TSB, but whose third gear set was not replaced by Honda. Id. Honda filed a petition for writ of mandate. Id.

The Court of Appeal granted Honda’s petition, holding that the trial court abused its discretion when it certified the plaintiff’s proposed class because it relied almost exclusively on a Ninth Circuit opinion, Wolin v. Jaguar Land Rover North America, LLC, 617 F.3d 1168 (9th Cir. 2010), without properly applying California law. Id. at 1375. Although Wolin correctly stands for the proposition that proof of manifestation of a defect is not a prerequisite to class certification in a breach of warranty case, the analysis under California law does not end there. Id. at 1375. Rather, under Hicks v. Kaufman & Broad Home Corporation, 89 Cal. App. 4th 908 (2001), the plaintiff must still provide proof that “an inherent defect exists which is substantially certain to result in malfunction during the useful life of the product.” Id. at 1373. Because the trial court did not follow Hicks and based its ruling on the erroneous legal assumption that Wolin alone was the law, the Court of Appeal reversed the class certification order. Id. at 1376.

In addition, the Court of Appeal held that the plaintiff’s breach of warranty claims were not amenable to class treatment as the class was currently defined because the plaintiff’s own evidence showed that, of the vehicles in question, less than four percent reported warranty claims for third gear problems, and, of that number, many had received a new third gear. Id. at 1377. Several other individualized issues persisted, including whether the warranty had expired or whether the alleged defect caused the problems. Id. at 1378. Notably, the Court of Appeal held that a TSB is not and cannot be fairly construed by a trial court as an admission of a design or other defect. Id.

Lastly, as to the plaintiff’s UCL cause of action, the Court of Appeal held it was not subject to common proof because the plaintiff did not allege that Honda or its dealers made standard or scripted representations to class members. Id. at 1379. Rather, the plaintiff’s own evidence showed how variable the representations could be and that, since many of the class members never even reported third gear problems, many class members were undisputedly never exposed to the alleged misrepresentations about a third gear problem. Id.

Using a Rule 12(f) Motion to Strike Class Allegations in the Ninth Circuit: The Aftermath of Whittlestone

Sheppard Mullin — Wed, 09 Nov 2011 15:54:12 -0800

By Alona G. Metz

Last year, the Ninth Circuit curtailed the use of Rule 12(f) motions to strike in a case of first impression called Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970 (9th Cir. 2010). The narrow holding of Whittlestone is that "Rule 12(f) does not authorize district courts to strike claims for damages on the ground that such claims are precluded as a matter of law." Id. at 974-975. Rule 12(f) of the Federal Rules of Civil Procedure states that a district court "may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." "The function of a 12(f) motion to strike is to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial . . . ." Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993) (overruled on other grounds in Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994)).

Whittlestone was a breach of contract case where the defendant filed a motion to strike the plaintiff's claims for lost profits and consequential damages, arguing that the claims were barred under the contract. Id. at 973. The district court granted the motion to strike. Id. The Ninth Circuit reversed because courts "may not resolve disputed and substantial factual or legal issues in deciding a motion to strike." Id. (internal quotation marks and brackets omitted). Specifically, the court found that a claim for damages was not an insufficient defense, redundant, immaterial, impertinent, or scandalous matter. Id. at 974. Further, the court reasoned that reading "Rule 12(f) in a manner that allowed litigants to use it as a means to dismiss some or all of a pleading . . . would be creating redundancies within the Federal Rules of Civil Procedure, because a Rule 12(b)(6) motion . . . already serves such a purpose." Id. Additionally, the court reasoned that because Rule 12(f) motions are reviewed for abuse of discretion and Rule 12(b)(6) motions are reviewed de novo, it would not make sense to allow litigants to seek dismissal of a pleading under 12(f) when it could do so under Rule 12(b)(6). Id.

Since Whittlestone, district courts in the Ninth Circuit have been split over the issue of whether a defendant may use a Rule 12(f) motion to strike class allegations. For instance, in Astiana v. Ben & Jerry's Homemade, Inc., No. C 10-4387 PJH, 2011 U.S. Dist. LEXIS 57348, at *39 (N.D. Cal. May 26, 2011), the court held that "the questions [of] whether the class is ascertainable and whether a class action is superior should be resolved in connection with a class certification motion." The Astiana Court, citing Whittlestone, held that the defendants had not established that the allegations they sought to have stricken were "either part of an insufficient defense, or are redundant, immaterial, impertinent, or scandalous." Id.; see also Beal v. Lifetouch, Inc., No. CV 10-8454-JST (MLGx), 2011 U.S. Dist. LEXIS 33758, at *20-21 (C.D. Cal. Mar. 15, 2011) (holding that motion to strike class allegations was "premature at the pleadings stage, as the issue of class certification is not yet before the Court" and finding that "the class allegations are clearly relevant to the subject matter of the litigation, and do not amount to redundant, immaterial, impertinent, or scandalous matters"); Swift v. Zynga Game Network, Inc., No: C 09-05443 SBA, 2010 U.S. Dist. LEXIS 117355, at *29-30 (N.D. Cal. Nov. 2, 2010) (citing Whittlestone and denying a motion to strike class allegations).

Other district courts in the Ninth Circuit have allowed a defendant to bring a Rule 12(f) motion to strike class allegations and will grant the motion "if it is clear from the complaint that the class claims cannot be maintained." Murphy v. DirecTV, Inc., Case No. 2:07-cv-06465-JHN-VBKx, 2011 U.S. Dist. LEXIS 87627, at *4-5 (C.D. Cal. Feb. 11, 2011) (denying motion to strike class allegations because it was not clear from the complaint that the class claims could not be maintained). The United States Supreme Court has held that "[s]ometimes the issues are plain enough from the pleadings to determine whether the interests of the absent parties are fairly encompassed within the named plaintiff's claim . . . ." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982) (reversing a class certification order). See also Collins v. GameStop Corp., No. C10-1210 THE, 2010 U.S. Dist. LEXIS 88878, at *6 (N.D. Cal. Aug. 6, 2010) (granting, in part, a motion to strike class allegations before Whittlestone).

However, while courts may entertain the motion to strike, it is rare to strike class allegations in advance of a motion for class certification. Cholakyan v. Mercedes-Benz USA, LLC, No. CV 10-05944 MMM (JCx), 2011 U.S. Dist. LEXIS 72584, at *66, 70 (C.D. Cal. June 30, 2011) ("Defendant has yet to file an answer and discovery has not begun. Given the early stage of the proceedings, it is premature to determine if this matter should proceed as a class action. Accordingly, the court denies defendant's motion to strike plaintiff's class allegations") (internal citation omitted); see also Clerkin v. MyLife.com, Inc., No. C 11-00527 CW, 2011 U.S. Dist. LEXIS 96735, at *9-10 n. 4(N.D. Cal. Aug. 29, 2011) ("Some defendants have brought motions under Rule 12(f) to strike class allegations from complaints. While courts entertain such motions, it is rare that class allegations are stricken at the pleading stage") (internal citation omitted); Sliger v. Prospect Mortg., LLC, NO. CIV. S-11-465 LKK/EFB, 2011 U.S. Dist. LEXIS 57393 (E.D. Cal. May 26, 2011) (entertaining motion to dismiss and strike class allegations and definition, but denying the motions).

There are certainly cases where the class allegations are so deficient on the face of the complaint that the allegations should be stricken to conserve resources. Thus, a Rule 12(f) challenge is probably worth a try where the class allegations in a complaint are severely lacking.

The California Court Of Appeal Disagrees With The U.S. Supreme Court On The Enforceability Of Arbitration Agreements

Sheppard Mullin — Wed, 02 Nov 2011 11:16:22 -0800

In Sanchez v. Valencia Holding Company, LLC, --- Cal.Rptr.3d ----, 2011 WL 5027488 (Cal.App. 2 Dist. Oct. 24, 2011), the California Court of Appeal attempts an end run around the U.S. Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In Concepcion, the Supreme Court found that the Federal Arbitration Act (the "FAA") preempts state efforts to invalidate or re-write arbitration agreements by applying rules that would not result in the invalidation of other contracts. "The principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms." Id. at 1748. Specifically, the U.S. Supreme Court held that the FAA preempts state law restrictions on class action waivers in consumer arbitration agreements.

Sanchez also involves an arbitration agreement containing a class action waiver. In it, a consumer filed a putative class action against an automotive dealership, alleging disclosure violations in the purchase of his vehicle. The dealership moved to compel arbitration and enforce the class action waiver contained in a form contract widely used by dealerships throughout California. Before Concepcion, the trial court denied the motion on the ground the class action waiver was unconscionable under California law. The dealership appealed, and while that appeal was pending Concepcion was decided.

Side-stepping the class action waiver, the Court of Appeal in Sanchez affirmed the denial of the motion to compel arbitration on other grounds. It began by finding procedural unconscionability in part because the contract was a take-it-or-leave-it contract not open to negotiation. Sanchez, 2011 WL 5027488 at *9. The Supreme Court in Concepcion gave short shrift to such concerns, observing that the "times in which consumer contracts were anything but adhesive are long past." Concepcion, 131 S.Ct. at 1750.

The Sanchez court then went on to find the arbitration agreement substantively unconscionable because of the following four terms--1) a party who loses at arbitration can appeal to a panel of three arbitrators only if the award is $0 or exceeds $100,000; 2) a party can appeal any award of injunctive relief; 3) an appealing party must advance the arbitration costs of appeal subject to a final determination by the arbitrator; and 4) self-help remedies, including the right to repossession, are excluded from arbitration. The Sanchez court concluded these provisions, though neutral on their face, are in practice one-sided in favor of the dealership. Citing Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the Sanchez court held these arbitration terms to be unconscionable.

The FAA, however, plainly preempts such an approach. In Concepcion, the Court upheld class action waivers, even though they favor defendants. The Court was also untroubled by the fact that AT&T, the defendant in that case, had the unilateral right to amend the wireless service agreement at issue in that dispute. Id. at 1744. Indeed, AT&T exercised that right, unilaterally making "significant changes" to the arbitration agreement after the plaintiff entered into his contract. The Court also found that the FAA preempts state invalidation of arbitration agreements restricting discovery, even though a "court might reason that no consumer would knowingly waive his right to full discovery, as this would enable companies to hide their wrongdoing." Id. The FAA also preempts state invalidation of arbitration agreements allowing procedures that fail to abide by the Federal Rules of Evidence. Id. Indeed, the Court correctly noted that the FAA, and federal law generally, favors arbitration, even though arbitration necessarily waives the right to a jury trial. Id.

Instead, the Court in Concepcion was more concerned about the freedom of contract and federal law favoring arbitration, concluding that arbitration agreements must be enforced "according to their terms." Id. at 1745. Noting the long history of "judicial hostility" to arbitration agreements, especially in California, the Court held that state courts "may not rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable." Id. at 1747. Unconscionability cannot be based on "defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." Id. at 1746. State law that has a "disproportionate impact on arbitration agreements" is suspect if not outright preempted. Id. at 1747. "Contract defenses unrelated to the making of the agreement--such as public policy--could not be the basis for declining to enforce an arbitration clause." Id. at 1755 (J. Thomas concurring). Thus, arbitration terms are enforceable even if arguably one-sided.

The four terms identified by the Court in Sanchez fall far short of shocking the conscience. They are bilateral on their face. Three of the four terms appropriately and reasonably define and limit the rights of appeal. As for the right to repossession, such a right exists regardless of an arbitration agreement. In other words, the consumer would not be better off without an arbitration agreement. Further, a consumer may challenge a repossession in arbitration, in the same way he or she could do in court. These four terms are certainly less one-sided than arbitration terms that waive rights to a jury, a class action, discovery, or the rules of evidence--all of which states cannot restrict because of FAA preemption. And they are far less one-sided than the unilateral right to change contract terms, including the terms of arbitration, after a contract is entered into.

According to the U.S. Supreme Court, "California courts have been more likely to hold contracts to arbitrate unconscionable than other contracts." Id. at 1747. Sanchez is but the latest example of this "judicial hostility to arbitration agreements." Id. at 1745. Such hostility is further evidenced by the fact that the Court in Sanchez refused to sever the offending terms, and otherwise enforce the arbitration agreement. Instead, it concluded that the arbitration terms were "permeated" with unconscionability. Thus, the entire arbitration agreement, including the class action waiver, was invalid. In this way, a California court has once again found that state public policy concerns about arbitration agreements trump freedom of contract and federal law favoring arbitration under the FAA. Such maneuvering flies in the face of the U.S. Supreme Court's decision in Concepcion.

Authored By:

Shannon Petersen
(619)338-6656
spetersen@sheppardmullin.com

and

Travis Anderson
(858)720-8940
tanderson@sheppardmullin.com

ZIPped Back Up: Williams-Sonoma Gains Federal Dismissal Of New Jersey Consumer Privacy Claim in Feder

Sheppard Mullin — Wed, 12 Oct 2011 04:31:17 -0800

By Ted Max and Valentina Shenderovich

In Feder v. Williams-Sonoma Stores, Inc., the United States District Court for the District of New Jersey joined the New Jersey Superior Court in weighing in on the issue of whether a retailer violates consumer privacy state law by requesting a customer's zip code at the point of purchase. Feder was brought by the same plaintiff’s lawyers and with claims similar to those in the state court case Imbert v. Harmon Stores, Inc.(Bed, Bath & Beyond). Imbert was decided last month, but without any written decision, and permitted that case to proceed past the pleading stage. The District Court in Feder, however, issued the first written opinion under the New Jersey statutes, finding that allegations that a zip code was verbally requested could not support a claim under New Jersey law.

Both Feder and Imbert involved plaintiffs suing under New Jersey’s Truth-in-Consumer Contract, Warranty and Notice Act (“TCCWNA”), alleging that a store’s requirement that customers provide their zip codes during a credit card transaction violates their rights under the TCCWNA. The TCCNWA prohibits a seller from "offering, entering into, giving or displaying a written consumer contract or notice that violates a clearly established right of the consumer." N.J. Stat. Ann. 56: 12-15. As a predicate for the TCCNWA claim, both Feder and Imbert relied on the Restrictions on Information Required to Complete Credit Card Transactions ("Restriction Statute"). The Restriction Statute prohibits a retailer from requiring a customer to provide "personal identification information" to complete a credit card transaction, thus providing the basis for violation of a "clearly established consumer right."

Senior District Judge Walls in Feder granted Williams-Sonoma's Motion to Dismiss, finding that the plaintiff failed to sufficiently allege conduct that violated the TCCWNA because she failed to identify a particular provision of a written consumer contract that violated her rights. Feder pled that the credit card transaction form constituted the written consumer contract. Judge Walls, skeptical of this assertion, reasoned that even if the form qualified as a contract, plaintiff's recorded zip code and verbal request for the same did not constitute a contract provision. Consequently, Judge Wales found that plaintiff failed to satisfy the elements of TCCNWA because "[t]he alleged requirement that plaintiff provide her zip code would only violate the TCCWNA if it was a provision of a written contract." Plaintiff also alleged that her rights were violated under the Restriction Statute -- not by the recording of her zip code -- but by the requirement that she provide her zip code. However, the Restriction Statute does not provide for a private right of action, and, as discussed above, a claim under Plaintiff’s proposed private vehicle for enforcement, the TCCNWA, failed.

Williams-Sonoma also argued that if the credit card transaction was considered a written consumer contract, the court must consider all terms of that “contract” including the point of sale signage at Williams-Sonoma stores expressly stating that when a zip code is requested it is used for marketing purposes, and that providing it is voluntary and is not a condition of processing the transaction. The Restriction Statute differs critically from California’s Song-Beverly in that New Jersey’s Restriction Statute only applies to information being “required,” whereas Song-Beverly also applies to a “request.” This issue was not presented in Imbert. However, since the District Court ruled on the TWNCCA, it did not need to reach this issue.

One additional anomaly between the Feder and Imbert cases is that in Imbert the state court permitted the plaintiff to proceed with an invasion of privacy claim. However, when presented with Williams-Sonoma’s Motion to Dismiss, Feder abandoned her invasion of privacy claim in her Opposition because the Motion revealed she had previously provided her contact information to Williams-Sonoma. Feder also filed a cross-motion for leave to file an Amended Complaint, which the District Court denied as futile.

Craig Cardon, Elizabeth Berman; and Sean Kirby of Sheppard Mullin Richter & Hampton LLP represented Williams-Sonoma.

Authored By:

Ted Max
(212) 653-8702
tmax@sheppardmullin.com

and

Valentina Shenderovich
(212) 634-3019
vshenderovich@sheppardmullin.com

UnZIPped in New Jersey?

Sheppard Mullin — Thu, 22 Sep 2011 03:55:04 -0800

By Craig Cardon

A New Jersey state trial court has initially weighed in on the issue of whether a retailer violates state law by requesting a customer’s zip code at the point of purchase. In a case fashioned after the California Supreme Court's decision in Pineda v. Williams-Sonoma, 51 Cal.4th 524 (Feb. 10, 2011), New Jersey Superior Court Judge Stephan Hansbury has denied a motion to dismiss brought by Harmon Stores, Inc. (Bed, Bath & Beyond), finding that the plaintiff Robert Imbert adequately pled a claim for violation of New Jersey's Truth in Consumer Contract, Warranty and Notice Act, N.J.S.A. 56:11-17 (“TCCWNA”). The Court's ruling allows plaintiff to proceed beyond this initial stage, but no liability has been found.

In the matter of Imbert v. Harmon Stores, Inc., plaintiff Robert Imbert filed a complaint against Harmon Stores, Inc., alleging that Harmon Stores violated the TCCWNA by requesting his and other customers’ zip codes at the point of sale. The allegations in the complaint (which are virtually the same as the allegations set forth in California cases) assert that Harmon Stores’ practice of requiring a customer’s zip code at the point of sale violates the New Jersey Restrictions on Information Required to Complete Credit Card Transactions (the “Restriction Statute”), which prohibits a retailer from requiring a customer to provide “personal identification information” to complete the credit card transaction. The Restriction Statute is only directly enforceable by the state Attorney General. However, plaintiff has alleged that a violation of the Restriction Statute, in turn, violates the TCCWNA’s prohibition against “enter[ing] into any written consumer contract or giv[ing] or display[ing] any written consumer warranty, notice or sign . . . which includes any provision that violates any clearly established legal right of a consumer or responsibility of a seller, lessor, creditor, lender or bailee as established by State or Federal law . . .” which does provide for a private right of action. In issuing his ruling from the bench, Judge Hansbury held that, as pled, the transaction appears to qualify as a written consumer contract within the meaning of the TCCWNA. The judge's reasoning in reaching this limited conclusion is not specifically known as no written opinion was issued. This decision appears to be the first decision outside of the State of California where a court has held that a retailer could potentially be held liable under state law for requesting a customer’s zip code at the point of sale.

One important difference between the Restriction Statute and California's Song-Beverly is that a "request" does not violate the Restriction Statute -- only "requiring" the information does. This issue is before a federal court in a different case alleging violations of the TCCWNA for requesting a zip code. That case against Williams-Sonoma Stores, Inc. (“Williams-Sonoma”) is currently pending in the District Court for the District of New Jersey. Williams-Sonoma has filed a motion to dismiss the plaintiff’s claims and is awaiting a ruling from the Court. That motion addresses the fact that Williams-Sonoma requires the posting of a sign at the point of purchase which explains that a zip code is requested for marketing purposes and that providing it is voluntary.

California Appellate Court Analyzes Employment Arbitration Agreement after Supreme Court's AT&T Decision

Sheppard Mullin — Fri, 15 Jul 2011 03:24:45 -0800

On July 12, 2011, California's Second Appellate District Court of Appeal issued a decision in Brown v. Ralphs Grocery Company regarding the enforceability of arbitration agreements in the employment context that limit employees' rights to assert class and representative actions. This was the first published state court decision in California regarding employment arbitration agreements since the United States Supreme Court's groundbreaking decision in AT&T Mobility, LLC v. Concepción ("AT&T Mobility"), where the Supreme Court held that California case law invalidating class action waivers in consumer arbitration agreements is preempted by the Federal Arbitration Act ("FAA"). (For a detailed analysis of the AT&T decision, please visit Sheppard Mullin's labor and employment blog dated April 27, 2011.)

The mandatory arbitration agreement used by Ralphs barred class actions as well as representative actions under the Private Attorneys General Act ("PAGA"). The agreement provided: "There is no right or authority for any Covered Disputes to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of the general public, of other Ralphs employees (or any of them), or of other persons alleged to be similarly situated. . . . [T]here are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy.” When an employee filed a class and representative action under PAGA for alleged violations of the Labor Code, Ralphs filed a petition to compel arbitration. The employee opposed arbitration, arguing that the class action and PAGA representative action waivers were unconscionable and, therefore, invalid. The trial court—who ruled on the motion to compel arbitration before AT&T Mobility was decided—held that both provisions were unconscionable under established California precedent and refused to enforce the arbitration agreement. Ralphs appealed.

In a 2-1 decision, a panel of the Second Appellate District held that the PAGA representative action waiver was indeed unconscionable and unenforceable, notwithstanding AT&T Mobility. The entire panel also agreed, however, that the employee had failed to make a sufficient evidentiary showing that the class action waiver was unconscionable in this particular case. However, the panel also was unanimous that it lacked the power to invoke AT&T Mobility as a means to deem invalid the California Supreme Court's decision in Gentry v. Superior Court, which had held that most class action waivers in employment agreements are unconscionable.

Although the panel overturned the trial court's decision that the class action waiver was unconscionable, it did so because Plaintiff had failed to introduce any evidence to support that argument. In Gentry, the California Supreme Court held that a plaintiff could establish that a class action waiver was unconscionable by establishing four factors, that together show that arbitration is likely to be a significantly more effective practical means of vindicating rights than individual litigation. Because the plaintiff made no showing on this issue at all (beyond identifying that the arbitration agreement contained a class action waiver), the panel held that the trial court lacked a sufficient basis to rule the class action waiver unconscionable. The two-judge majority of the panel held that the ability to find the class action waiver enforceable in spite of Gentry eliminated the need to address whether AT&T Mobility overturned Gentry. The third judge opined that AT&T Mobility probably invalidated Gentry, but further opined that an appellate court lacked the power to depart from Gentry until the California Supreme Court itself recognized that Gentry was no longer good law. So, the panel ultimately avoided resolving the key issue of whether Gentry remains good law in the wake of AT&T Mobility.

On the PAGA issue, the majority of the panel held that AT&T Mobility does not apply to provisions of arbitration agreements barring PAGA representative actions. The majority reasoned that, unlike a class action, a representative PAGA action is an enforcement action with an aggrieved employee acting as a private attorney general to collect civil penalties for an employer's violation of the Labor Code that would otherwise be collectible only by state labor law enforcement agencies. PAGA provides a means of "deputizing" citizens to enforce the Labor Code and protect the public. The court opined that the entire purpose of the statute would be frustrated if it could only be enforced through individual arbitrations collecting penalties for individual employees. Because AT&T Mobility did not expressly address a circumstance where enforcing an arbitration agreement effectively nullified the purpose of a state statute, the majority declined to find that AT&T Mobility required enforcement of an arbitration agreement that precluded PAGA collective actions.

The dissenting judge opined that the holding of AT&T Mobility was that states could not except classes of cases from arbitration for collateral public policy reasons, so the dissent concluded that the FAA required enforcement of the PAGA representative action waiver. Because the California Supreme Court had never addressed this issue, the dissenting judge did not feel constrained in the same manner as he had been with respect to matters addressed in Gentry.

In sum, the final holding of the case was that the PAGA waiver provision was unconscionable, and the Court remanded the case to the trial court to decide whether this one unconscionable provision could be severed or instead invalidated the entire arbitration agreement. Both the majority and concurring/dissenting opinions appeared to invite the California Supreme Court to grant review and decide for itself how it was going to construe AT&T Mobility.

Because review of this decision is likely, and it typically takes two years or more before the California Supreme Court issues a decision, the law surrounding the application of AT&T Mobility in the wage/hour context will remain unsettled for some time. While employers may still seek to implement arbitration agreements with class and collective action waivers, they should recognize that there remains significant uncertainty whether they will actually be able to enforce them. If you have further questions, you can discuss them any time with the lawyers of Sheppard Mullin.

Authored by Sheppard Mullin's Labor & Employment Practice Group.

The California Court of Appeal Again Chips Away at In re Tobacco II

Sheppard Mullin — Tue, 24 May 2011 11:49:15 -0800

By David Snyder and Shannon Petersen

Knapp v. AT&T Wireless Services, Inc. (Case No. G043744, May 20, 2011) __Cal.App.4th__, is the latest in a line of recent class action cases limiting the scope of In re Tobacco II Cases (2009) 46 Cal.4th 298. In Tobacco II, the California Supreme Court held that a named plaintiff in a putative class action must have suffered injury-in-fact to bring a claim for violation under the fraud prong of California's Unfair Competition Law (the "UCL"), but that the named plaintiff need not show actual injury to unnamed class members. The court in Knapp held that Tobacco II applies only to standing, and not commonality, which requires a separate analysis. For this reason, the Fourth Appellate District upheld the trial court's order denying plaintiff's motion for class certification, finding that because AT&T Wireless did not make uniform representations to proposed class members, common issues of law did not predominate over individual issues and a class should not be certified under the UCL.

Julia Knapp subscribed to AT&T Wireless' cell phone service. She claimed that AT&T Wireless fraudulently misrepresented and failed to disclose that it rounded up a customer's partial airtime minutes to full minutes when calculating customers' monthly minute totals. She claimed she suffered actual injury from this practice and, in a putative class action, sued for violations of the UCL and California's Consumers Legal Remedies Act (CLRA), as well as common-law fraud. She then moved to certify a class, in part on the basis that her claims were common among the proposed class.

AT&T Wireless opposed the motion, arguing that the alleged misrepresentations were not uniformly made to proposed class members -- some representations were oral with sales representatives either over the telephone or in person, while AT&T made many other relevant representations about the cell phone service in various advertisements, including radio, television, print and direct mailings.

Plaintiff argued that Tobacco II prohibited such individual inquiries. The Court of Appeal in Knapp, however, disagreed. "We see no language in Tobacco II that suggests to us that the Supreme Court intended our state's trial courts to dispatch with an examination of commonality when addressing a motion for class certification." The Knapp court found that Tobacco II was "irrelevant because the issue of 'standing' simply is not the same thing as the issue of 'commonality.'" For these reasons, the Court of Appeal affirmed the decision of the trial court finding a lack of commonality and denying the motion to certify the class.

This decision is the latest in a growing line of Court of Appeal decisions to circumscribe Tobacco II's apparent prohibition on inquiring into the standing of individual members of a putative class under the fraud prong of the UCL. Several courts have now drawn sharp distinctions between analyzing the standing of absent class members--rejected by the Tobacco II court--and analyzing the circumstances of absent class members cases for the purposes of analyzing common issues for class certification. Drawing on recent decisions in Cohen v. DIRECTV, Inc. (2009) 178 Cal.App.4th 966, Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, 843 and Pfizer v. Superior Court (2010) 182 Cal.App.4th 622, the Knapp court concluded that Tobacco II "does not affect our analysis as to commonality."

In Pineda's Wake

Sheppard Mullin — Tue, 24 May 2011 10:38:57 -0800

By Phil Davis, Robert Mussig and John Dineen

In the wake of Pineda v. Williams-Sonoma Stores, Inc. (2011) 51 Cal. 4th 524 ("Pineda"), Divisions One and Five of California's Second Appellate District have published two opinions that put some constraints on Song-Beverly class action litigation.

The first case is Archer v. United Rentals, Inc. (May 19, 2011, B219089) __ Cal.App.4th ___, [2011 BL 134609, 2011 DJDAR 7158]. In Archer, the trial court (Anthony J. Mohr, J.) awarded summary adjudication to the defendants on plaintiffs' claim under the UCL, finding that plaintiffs' lacked standing to proceed "because they did not lose money or property." After a thorough discussion of the California Supreme Court's recent decision in Kwikset Corp. v. Superior Court (2011) 51 Cal. 4th 310 ("Kwikset"), Division One ruled that plaintiffs "have failed to demonstrate" how the alleged invasion of privacy "translates into a loss of money or property." The trial court's summary adjudication was affirmed. Archer v. United Rentals, Inc. (May 19, 2011, B219089) __ Cal.App.4th ___, [2011 BL 134609, 2011 DJDAR 7158] slip op. at p. 8.

Judge Mohr also denied class certification of Mr. Archer's claims brought under the Song-Beverly Credit Card Act ("SBCCA") and the Consumer Legal Remedies Act ("CLRA"). He reasoned that the SBCCA does not apply to business credit cards or personal credit cards used primarily for business purposes. On this basis, he found that determining class membership would be an "intensely fact-driven" and costly process that was not justified. His denial of class certification was based on the ascertainability requirement. See Sevidal v. Target Corp. (2010) 189 Cal App. 4th 905, 919; Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal. 4th 319, 326.

Division One agreed, in part, with Judge Mohr. The Appellate Court held that "section 1747.08 does not apply to credit cards issued for business purposes," but it does apply to a natural person to whom a credit card is issued for consumer credit purposes "without regard to the actual purpose for which the card is used, namely, business or otherwise." Archer, slip op. at p. 18. Relying upon the definition of "cardholder" in section 1747.02(d) and certain legislative history, the Court held that "credit cards issued for business purposes are excluded from the privacy protection afforded under section 1747.08." Id. at p. 17. However, because 1747.02(d) focuses on the purpose for which the card was "issued," as opposed to "used," the Appellate Court found that section 1747.08 applies to consumers who are issued credit cards for consumer credit purposes without regard to the purpose for which the card is actually used.

Division One reversed the order denying class certification and remanded the matter to the trial court to conduct further proceedings on the question of whether a class of personal credit card holders could be ascertained, and thus certified. (The Court noted that the parties' treated the CLRA and SBCCA claims as the same in the context of the appeal and did not address any additional issues related to the CLRA claim.)

In sum, the Archer opinion impacts the size of putative classes under Song-Beverly. It stands for the proposition that putative classes under Song-Beverly cannot include consumers who used credit cards that were issued for business purposes. Further, it confirms that UCL claims in the context of Song-Beverly violations are subject to summary adjudication, under Proposition 64's standing requirement that a plaintiff show "injury in fact" through the loss of money or property.

The second case, Folgelstrom v. Lamps Plus, Inc., involved an appeal based on a judgment that was entered after demurrers to the plaintiff's SBCCA, invasion of privacy, and UCL claims were sustained by the trial court (Anthony J. Mohr, J.), without leave to amend. Division Five reversed Judge Mohr as to the Song-Beverly claim, in light of Pineda (the complaint alleged requests for zip codes). However, the Appellate Court affirmed the judgment as to the invasion of privacy and UCL claims. Folgelstrom v. Lamps Plus, Inc. (May 20, 2011, B221376) ___ Cal. App.4th ___, [2011 WL 1902202, 2011 DJDAR 7276].

With reference to the constitutional invasion of privacy claim, Division Five was not convinced that plaintiff had alleged facts demonstrating a protected privacy interest in his home address. But in any event, plaintiff had not alleged facts showing a "serious" invasion of privacy. Allegations that the retailer had obtained plaintiff's address without his knowledge or permission, and mailed him coupons or other advertisements, is not "an egregious breach of social norms, but routine commercial behavior." Folgelstrom, slip op. at pp. 5-6.

In addressing the common law tort of invasion of privacy, Division Five looked to § 652B of the Restatement Second of Torts, which has been adopted in California. The Court determine that the intrusion as well as the use of the information obtained from the plaintiff must be "highly offensive." No facts were alleged showing any offensive or improper use. The Court dismissed the plaintiff's argument that he was subject to an increased risk of identity theft.

As in Archer, the Folgelstrom Court found that the UCL claim failed under Kwikset and Proposition 64's requirement that the plaintiff suffer economic injury in fact and loss of money or property. The Court rejected the plaintiff's novel arguments that he had lost intellectual property rights in his home address and that he failed to demonstrate that he suffered any economic injury, lost money, or lost property.

Thus, within the span of a few days, the Second District Court of Appeal has published two important Song-Beverly decisions that put the brakes on attempts to over-plead cases involving requests for personal information from credit card customers.

Discover Bank Is Dead: The U.S. Supreme Court Rules That Federal Law Preempts State Laws That Obstruct The Enforcement Of Class Action Waivers In Arbitration Agreements

Sheppard Mullin — Wed, 27 Apr 2011 15:38:58 -0800

On April 27, 2011, the Supreme Court held that the Federal Arbitration Act "preempts California's rule classifying most collective arbitration waivers in consumer contracts as unconscionable." AT&T v. Concepcion, 563 U.S. ____, majority at 5, 18 (2011). The Court referred to this rule as the "Discover Bank rule," after the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), though variations of this public policy-based rule have been articulated by many other court decisions in California and elsewhere. Writing for the majority in a 5 to 4 opinion, Justice Scalia concluded that state laws that undermine the enforceability of class action waivers in consumer arbitration agreements improperly obstruct the FAA.

The plaintiff in Concepcion brought a class action against AT&T for false advertising in violation of California law for charging $30.22 in sales tax for a cell phone advertised as free. AT&T moved to compel arbitration and enforce a class action waiver. The federal trial court in San Diego denied the motion based on the three prongs of Discover Bank, finding that the class action waiver was unconscionable because 1) the contract was a non-negotiable contract of adhesion, 2) the damages at issue were small, and 3) the plaintiff alleged a scheme to cheat consumers of small sums of money. The Ninth Circuit affirmed, holding that the FAA did not preempt Discover Bank. The Supreme Court reversed.

The Court was unpersuaded by the rationale of Discover Bank: that enforcing class action waivers in cases involving small sums of money will essentially kill any such claim. As the dissent argued: "The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30." Id., dissent at 9. The majority was untroubled: "The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." Id., majority at 17.

Given its broad reasoning, Concepcion should apply beyond Discover Bank to other judicially-constructed obstacles to the enforcement of consumer arbitration clauses in California. For example, some courts have held that there is an unwaiveable right to a class action under California's Consumers Legal Remedies Act (the "CLRA"). Some courts have held that there is an unwaiveable right to a class action in the context of employment disputes. Some courts have held that claims for public injunctions under the CLRA and California's Unfair Competition Law cannot be arbitrated.

Under Concepcion, the FAA now preempts all these judicial attacks on arbitration. According to the Court, "When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA." Id., majority at 7. In his concurring opinion, Justice Thomas writes: if the FAA, "means anything, it is that courts cannot refuse to enforce arbitration agreements because of a state public policy against arbitration, even if the policy nominally applies to 'any contract.'" Id., concurring at 1. "Contract defenses unrelated to the making of an agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause." Id., concurring at 4.

The majority recognizes that the FAA does not preempt "generally applicable contract defenses." Id., majority at 9. Discover Bank, which purports to apply the generally applicable defense of unconscionability, went too far by refusing to enforce class action waivers in cases involving small sums of money. As an example of what the FAA does not preempt, in a footnote, the majority writes that, "Of course States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class action-waiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms." Id., majority at 12, n. 6. State legislatures, presumably, will have to craft such rules without singling out arbitration in a way that imposes obstacles not imposed on the enforcement other contract terms.

Businesses should consult with Sheppard Mullin or similarly qualified counsel on how best to draft an arbitration provision with a class action waiver enforceable under Concepcion.

Authored By:

Shannon Z. Petersen
(619) 338-6656
SPetersen@sheppardmullin.com

Third Circuit Follows The Second Circuit Permitting Defendants To Rebut The Fraud-On-The-Market Presumption At The Class Certification Stage

Sheppard Mullin — Thu, 14 Apr 2011 04:04:02 -0800

By John Stigi and Jonathan Moss

In In re DVI Inc. Securities Litigation, Nos. 08-8033 & 08-8045, 2011 WL 1125926 (3d Cir. Mar. 29, 2011), the United States Court of Appeals for the Third Circuit affirmed an order granting in part a motion under Rule 23 of the Federal Rules of Civil Procedure to certify a class in a securities fraud action. In this decision, the Court made important determinations regarding the application of the fraud-on-market presumption of investor reliance and the role of loss causation at the class certification stage, holding that, in the Third Circuit, a plaintiff need not establish loss causation as a prerequisite to invoking the fraud-on-the-market presumption, but also holding that, once established, the presumption may be rebutted by showing that the misleading statements or corrective disclosures at issue did not affect the market price of the security. This decision is significant because it aligns the Third Circuit with the Second Circuit in allowing a defendant the opportunity to rebut the fraud-on-the-market presumption at the class certification stage.

Investors in Diagnostic Ventures, Inc. (“DVI”) brought this securities fraud class action against multiple parties, including DVI’s auditor, Deloitte & Touche LLP, and its legal counsel, Clifford Chance LLP, alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiffs moved to certify a class under Federal Rule of Civil Procedure 23 on behalf of all DVI investors who purchased securities between August 10, 1999 and August 13, 2003, the period in which the company allegedly made misrepresentations. With respect to Deloitte, plaintiffs alleged that the auditor committed securities fraud by wrongfully issuing unqualified audit reports concerning DVI, hiding DVI’s allegedly improper accounting practices, and declining to force the company to disclose allegedly fraudulent acts. With respect to Clifford Chance, plaintiffs alleged that the law firm assisted DVI in an improper scheme via fraudulent financial reports, by conspiring with other defendants to hide material information about DVI’s financial condition, and by deflecting inquiries from the SEC.

The United States District Court for the Eastern District of Pennsylvania granted plaintiffs’ motion for class certification as to all defendants but Clifford Chance. The district court held that plaintiffs satisfied the predominance requirement in Rule 23(b)(3) with respect to Deloitte by successfully invoking the fraud-on-the-market presumption of investor reliance. The district court held, however, that plaintiffs were not entitled to the presumption with respect to Clifford Chance because the law firm’s alleged fraudulent conduct was not publicly disclosed. Both sides cross-appealed on the issue of whether plaintiffs had established common questions of law or fact under Rule 23(b)(3).

On appeal, Deloitte challenged the district court’s application of the fraud-on-the-market presumption and its finding that predominance was satisfied in this case. Deloitte argued that the district court’s factual findings on the efficiency of the market for DVI securities was an abuse of discretion and that loss causation must be established as a prerequisite before invoking the presumption of reliance at the class certification stage.

In considering these issues, the Third Circuit recognized that in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the United States Supreme Court established a rebuttablepresumption of investor reliance based upon the fraud-on-the-market theory. The Court reasoned that requiring proof of individualized reliance from each member of a proposed class would effectively prohibit a suit from proceeding as a class action because “individual issues then would . . . overwhelm[] the common ones.” The Third Circuit distinguished loss causation from the separate question of investor reliance, noting that loss causation requires a causal connection between an alleged material misrepresentation and a corresponding loss, whereas reliance requires a causal connection between an alleged material misrepresentation and a purchase or sale of a security.

The Third Circuit affirmed. The Court rejected the argument that plaintiffs must establish loss causation as a prerequisite to invoking the fraud-on-the-market presumption of reliance in the first instance, thereby distancing itself from the Fifth Circuit’s holding in Oscar Private Equity Investments v. Allegiance Telecom, Inc.,487 F.3d 261 (5th Cir. 2007). Instead, the Court explicitly agreed with the Second Circuit, and its ruling in In re Salomon Analyst Metromedia Litig.,544 F.3d 474 (2d Cir. 2008), finding “that a defendant’s successful rebuttal demonstrating misleading material statements or corrective disclosures did not affect the market price of the security defeats the presumption of reliance for the entire class, thereby defeating the Rule 23(b) predominance requirement.”

The Third Circuit also affirmed the district court’s refusal to certify a class with respect to Clifford Chance. Here again, the Third Circuit agreed with the Second Circuit, holding that a plaintiff cannot invoke the fraud-on-the-market presumption of reliance in a private action under Rule 10b-5(a) and (c) unless the deceptive conduct has been publicly disclosed and attributed to the actor. Because plaintiffs did not contend Clifford Chance’s alleged role in masterminding the fraudulent 10-Q was disclosed to the public, they could not invoke the presumption. Accordingly, their claim against the law firm could not be certified as a class action because individual issues of reliance predominated.

This decision marks a middle-ground in the Circuit split concerning consideration of “loss causation”-related evidence at the class certification stage. [See our prior blog article on this topic here.] On one hand, the Fifth Circuit, under Oscar, requires that a plaintiff show price impact as a prerequisite for class certification. On the other end of the spectrum, the Seventh Circuit, in Schleicher v. Wendt,618 F.3d 679 (7th Cir. 2010), holds that a plaintiff does not need to show that a misstatement affected the market price before obtaining class certification and that, in essence, the only relevant fraud-on-the-market element is whether the issuer’s stock trades in an efficient market. In re DVI falls somewhere in between. On one hand, deciding that loss causation is not a prerequisite to class certification and, on the other, confirming that a defendant may indeed rebut the fraud-on-the-market presumption by showing an absence of price impact. The Supreme Court may soon resolve the split in Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, a case which addresses similar issues and is set for oral argument on April 25, 2011.

Kwikset: California Supreme Court Expands Plaintiffs' Standing To Sue Under The Unfair Competition Law

Sheppard Mullin — Tue, 01 Feb 2011 10:54:24 -0800

By James M. Burgess

In Kwikset v. Superior Court (Jan. 27, 2011) __ Cal.4th __, the California Supreme Court greatly expanded the standard for determining whether a plaintiff has standing to sue under the Unfair Competition Law (“UCL”), Business and Professions Code section 17200. In doing so, the Supreme Court disapproved several prior court of appeal decisions that had narrowed standing to only those plaintiffs who were entitled to restitution. (Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4^th 210, 245; Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal.App.4^th 1, 22; and Buckland v. Threshold Enterprises, Ltd., (2007) 155 Cal.App.4^th 798, 817.) The Supreme Court’s opinion means that more lawsuits alleging UCL violations are likely to be filed and such lawsuits will be harder to dismiss at the pleading stage.

In Kwikset, the plaintiff accused Kwikset of improperly advertising locksets as “Made in USA” when, in fact, some parts were manufactured abroad. The plaintiff sued for violation of the UCL and False Advertising. At trial, the court concluded that the plaintiff was correct and issued an injunction ordering Kwikset to cease labeling its products as “Made in the USA” and to notify its retailers and distributors of the falsely labeled products so they could return them for a refund. However, the court concluded that the plaintiff was not entitled to restitution for equitable reasons. Only injunctive relief and restitution are available under the UCL. The parties appealed.

During the pendency of the appeal, on November 4, 2004, the voters passed Proposition 64. Proposition 64 limited a plaintiff’s standing to sue under the UCL and False Advertising Law. Proposition 64 required that a plaintiff plead and prove that it suffered “injury in fact” and that it “lost money or property” as a result of the alleged unfair competition. Prior to Proposition 64 anyone could sue “on behalf of the general public” even if the plaintiff itself had not been harmed.

Proposition 64 was applied to pending cases. As a result, the court of appeal reversed the trial court’s judgment in Kwikset because the plaintiff lacked standing under the new rules. The case was remanded to allow a new plaintiff to sue who could meet the new standing rules. The new plaintiff filed an amended complaint under the UCL seeking only injunctive relief and foregoing restitution.

Since Proposition 64 was passed, several courts of appeal interpreted “lost money or property” to require a loss entitling the plaintiff to “restitution”. The courts reasoned that this made sense because restitution was the only form of monetary or economic relief available under the UCL. In fact, no contrary cases appeared in the courts of appeal and, this interpretation was followed by most practitioners and courts. Under these cases, some courts had ruled that UCL cases could not seek only injunctions but had to also qualify for restitution.

On remand, the trial court refused to sustain Kwikset’s demurrer on lack of standing. Kwikset’s writ to the court of appeal was granted. The court of appeal ruled that the plaintiff lacked standing to sue under the UCL because he had not alleged a cognizable loss of money or property. The Supreme Court reversed the court of appeal.

The Supreme Court concluded that “Proposition 64 should be read in light of its apparent purposes, i.e., to eliminate standing for those who have not engaged in any business dealings with would-be defendants . . . while preserving for actual victims of deception and other acts of unfair competition the ability to sue and enjoin such practices.” The Court held that “plaintiffs who can truthfully allege they were deceived by a product's label into spending money to purchase a product, and would not have purchased it otherwise, have “lost money or property” within the meaning of Proposition 64 and have standing to sue.

The Court interpreted “lost money or property” to mean that “plaintiff now must demonstrate some form of economic injury.” This formulation is vastly broader than the previously understood interpretation limiting it to restitution. The court stated that “[t]here are innumerable ways in which economic injury from unfair competition may be shown. A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have, (2) have a present or future property interest diminished, (3) be deprived of money or property to which he or she has a cognizable claim, or (4) be required to enter into a transaction, costing money or property, that otherwise would have been unnecessary.” According to the Supreme Court, the “quantum of lost money or property necessary to show standing is only so much as would suffice to establish injury in fact.”

The court distinguished between restitution and the economic injury needed to satisfy the standing requirement. “A restitution order against a defendant . . . requires both that the money or property have been lost by a plaintiff. . . and that it have been acquired by a defendant. [citation] But the economic injury that an unfair business practice may occasion may often involve a loss by the plaintiff without any corresponding gain by the defendant such as, for example, a diminishment in the value of some asset a plaintiff possesses.” The court also ruled that a plaintiff may seek an injunction only and may pursue a UCL action even if it is not entitled to restitution, as long as it can show the requisite economic injury.

Defendants will now face more lawsuits that will be harder to dismiss easily and for less cost. However, there are a few important things to consider. First, the Supreme Court did not alter the monetary remedy that is available, which is limited to restitution. Monetary relief is not available for all economic injury and damages are still not available. Second, the Supreme Court did not change the requirement that the plaintiff must show injury “as a result of” the unfair competition, which requires a showing of actual reliance in many cases. This not only makes it harder for the plaintiff to establish liability but also presents challenges for class certification.

California Court of Appeal Continues the Trend of Limiting Tobacco II

Sheppard Mullin — Mon, 15 Nov 2010 05:38:05 -0800

By Anna McLean and Rachel Tarko Hudson

The California Court of Appeal for the Fourth Appellate District recently added to the growing jurisprudence interpreting the scope and effect of In re Tobacco II Cases (2009) 46 Cal.4th 298 in its decision last month in Sevidal v. Target Corp. (Case No. D056206, Oct. 29, 2010) __ Cal.App.4th __. Following a trend of other California appellate courts, including the Second Appellate District in Pfizer v. Superior Court (2010) 182 Cal.App.4th 622, Target stands for the proposition that Tobacco II applies only to standing, and does not change the requirements for class certification under California's Unfair Competition Law ("UCL"). The Target court upheld the lower court's decision denying class certification, holding that Tobacco II's limitation of traditional reliance and causation standing requirements to the named plaintiff in certain cases brought under the UCL does not eliminate the need for absent class members to establish that they were affected by the allegedly unfair practice in order to meet class certification requirements.

Raymundo Sevidal was a customer who purchased items of clothing through Target's website. Sevidal claimed he purchased these goods based on Target's representation on its website that the items were made in the United States when in fact they were not. He brought a class action suit against Target alleging fraud and violations of the UCL and false advertising laws.

Sevidal moved to certify a new class composed of "any California consumer who purchased any product from Target.com on or after November 21, 2003 which was identified on Target.com as 'Made in USA,' when such product was actually not manufactured or assembled in the United States." In support of his motion, Sevidal produced evidence obtained from Target that a "computer bug" caused some products at times to be incorrectly identified on the website as being produced in the United States when in fact they were not.

Target opposed certification of the class arguing that it was not ascertainable, that it was overbroad, and that common factual questions did not predominate. Target presented evidence that consumers had to click on an "additional info" link to find the country of manufacture and thus that not all potential class members were exposed to the incorrect information. Furthermore, Target produced evidence to show that it did not track which customers clicked on the "additional info" link for a particular product. When Target did track the percentage of customers who clicked the "additional info" link for a period of time in 2009, it found that the link was selected in only 20% of online shopping sessions; not all of those customers then went on to make a purchase.

Sevidal argued that "under Tobacco II . . . , the putative class members need not have reviewed or relied on Target's misrepresentations." The trial court ruled in favor of Target, holding that the class was not ascertainable, that common issues did not predominate, and that the class was overbroad.

The Court of Appeal affirmed the lower court's decision. As to ascertainability, it upheld the trial court's finding that Target did not have adequate records to be able to identify customers who purchased items while they were incorrectly labeled. The court rejected Sevidal's arguments that customer purchase records and self identification could be used to determine which customers were part of the class. The "computer bug" that caused the incorrect "Made in USA" designation had operated inconsistently, so it was not possible even to identify which items has been inappropriately labeled at which times. In addition, because on average, 80% of customers did not view the additional product information, those customers would not know if the information was incorrect when they made their purchase and thus would not know if they were members of the class or not. As a result, the class would be significantly overbroad—by as much as 80%—which, the court held, was more than was acceptable.

The Court of Appeal also rejected Sevidal's argument that the trial court's ruling was contrary to the holding in Tobacco II. In doing so, the court noted that the trial court did not base its decision on reliance, which was addressed in Tobacco II, but rather on how Sevidal chose to define the class, which was not. The Court of Appeal agreed with the trial court that under Tobacco II, class actions brought under the UCL must still comply with the statutory class certification rules, including those that require that the class be ascertainable.

Tobacco II, the Court of Appeal held, does not stand for the proposition that "there are no substantive limits on absent class members seeking restitution . . . ." Under the language of the UCL, "a person is entitled to restitution for money or property 'which may have been acquired' by means of the unfair or unlawful practice." The Court of Appeal reasoned that, so as not to render this statutory language meaningless in practice, some connection between the defendant's conduct and the unnamed class members must exist.

The Court of Appeal drew further support for its decision from Pfizer,182 Cal.App.4th 622, also decided after Tobacco II. Pfizer involved an advertising campaign for Listerine in which only a small percentage of absent class members were exposed to the allegedly misleading label claiming that Listerine was "as effective as floss." The court in Pfizer held that, where large numbers of class members were never exposed to the advertising in question, there was no likelihood that that money or property was taken from them by means of unfair competition. The Target court held the same was true in the case of Target's "Made in USA" designations and came to the same conclusion. In Tobacco II, by contrast, all members of the class were likely exposed to the long-term advertising campaign at issue.

On the one hand, the implications of Target are clear: Target reiterates the limits of Tobacco II as applied in Pfizer. Tobacco II applies only to standing and does not change the requirements for class certification under the UCL. On the other hand, Tobacco II, Pfizer, and Target all involved claims of misleading advertising or promotional information. It remains to be seen how Tobacco II will be applied when addressing other types of activities allegedly prohibited by the UCL.

Target also suggests that in defending against UCL class actions involving claims of false advertising or other allegedly misleading disclosures which not all putative class members may have seen, defendants should consider challenging certification of the class on overbreadth, ascertainability, and other standard class certification grounds. Taken together, Target and Pfizer suggest a new tack for defendants seeking to navigate the post-Tobacco II UCL waters.

Second Circuit Rejects the Use of "Aggregate Proof" of Causation in a Putative Consumer Class Action

Sheppard Mullin — Fri, 15 Oct 2010 09:51:18 -0800

By John Stigi and Eric O’Connor

In UFCW Local 1776 v. Eli Lilly & Co., No. 09-0222-CV, 2010 WL 3516183 (2d Cir. Sept. 10, 2010), the United States Court of Appeals for the Second Circuit reversed an order of the United States District Court for the Eastern District of New York certifying a class of third party payors (“TPPs”) consisting of unions and insurers who underwrite the purchase of drugs prescribed by physicians in an action against pharmaceutical manufacturer Eli Lilly & Co. (“Lilly”) alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962, 1964 (“RICO”). At the core of this decision is the Second Circuit’s rejection of the use of “aggregate proof” of causation in the consumer class certification process.

In this case, the TPPs asserted, among other things, civil RICO violations based on Lilly’s alleged misrepresentations about its drug Zyprexa®. Zyprexa® is a prescription medication that has been approved by the United States Food & Drug Administration for treatment of schizophrenia and bipolar disorder. However, Lilly actively promoted the use of Zyprexa® to treat less severe conditions, such as depression and anxiety, for which there is allegedly no evidence that Zyprexa® provides effective treatment. The TPPs alleged that Lilly engaged in mail and wire fraud by deliberately misrepresenting the drug’s safety and efficacy to physicians, thereby conducting a racketeering enterprise in violation of RICO. A civil RICO claim requires a plaintiff to show (1) a substantive RICO violation; (2) injury to the plaintiff's business or property; and (3) that such injury was by reason of the substantive RICO violation.

Under the predominance requirement of Federal Rule of Civil Procedure Rule 23(b)(3), the TPPs needed to show that substantial elements of their claim against Lilly may be established by generalized, rather than individualized, proof. To recover damages under RICO, a plaintiff must show (1) a substantive RICO violation; (2) injury to the plaintiff’s business or property; and (3) that such injury was by reason of the substantive RICO violation. The TPPs theory of injury on class certification was that they had paid a higher price for Zyprexa® than they would have been charged absent these misrepresentations (the “loss-of-value” or “excess price” theory). The district court certified the TPPs class finding that the misrepresentations were “broadbased” and consequently that the requisite reliance could be proved by “aggregate proof.” Lilly appealed the class certification order under Federal Rule 23(f).

The Second Circuit reversed, holding that the RICO claims could not be pursued by the TPPs as a class because a resolution of the issues was impossible to achieve through generalized proof as required by Rule 23(b)(3). In reversing the grant of class certification, the Second Circuit focused heavily on the issue of causation. It noted that to show injury by reason of a RICO violation, a plaintiff must demonstrate that the violation was the but-for and proximate cause of his or her injury. The Second Circuit concluded that the TPPs’ “excess price” theory of injury was not susceptible to generalized proof with respect to either form of causation. The TPPs could not show but-for causation because doctors generally do not consider the price of a medication when prescribing pharmaceuticals. Thus, any reliance by doctors on Lilly’s supposed misrepresentations could not be the but-for cause of the price that the TPPs ultimately paid for each prescription.

The Court cited its decision in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008), which dealt with alleged misrepresentations in the marketing of light cigarettes as healthier than full-flavored cigarettes. The putative plaintiff class in McLaughlin consisted of smokers who had bought the light cigarettes and had suffered the same ill health effects as if they had smoked the full-flavor ones. The Second Circuit held that reliance on a misrepresentation made as part of a nationwide marketing strategy “cannot be the subject of general proof.” In arriving at this conclusion, the Court rejected application of a “fraud-on-the-market” presumption analogous to the presumption in securities fraud cases, explaining that the market for consumer goods is “anything but efficient” and that general reliance on public misrepresentations cannot be assumed when deciding whether to certify a class. Because prescribing doctors consider a number of factors, usually not including price, when prescribing a medication, the Court held that reliance upon Lilly’s statements as to efficacy and side effects could not be presumed for each prescription and could therefore not be a but-for cause of the premium price paid by the TPPs.

The Second Circuit also rejected the TPPs’ proximate cause theory. It held that, even assuming but-for causation, the causal chain between Lilly and the overpaying TPPs was unacceptably “attenuated” and could not be demonstrated by generalized proof. The TPPs’ theory of liability “rested on the independent actions of third and even fourth parties” as physicians, pharmacy benefit managers and therapeutics committees all played a role in the chain between the Lilly and the TPPs. Assuming uniform reliance and behavior on the part of each of these assorted players would be assuming too much. The Court also stressed that the TPPs did not allege that they themselves had relied upon Lilly’s misrepresentations, stating that “the only reliance that might show proximate causation with respect to price is reliance by the TPPs, not reliance by the doctors.” The TPPs were in a position, after all, to negotiate the price paid for Zyprexa®. While most TPPs failed to negotiate Zyprexa®’s price, there is evidence that some did begin to request rebates as the side effects of Zyprexa® became more generally known. However, other TPPs, even after the alleged misrepresentations came to light, continued to pay full price. These varied responses, said the Second Circuit, made generalized proof of reliance by doctors inappropriate. Thus, proximate cause could not be shown through generalized proof. The Court remanded Lilly to the district court to reconsider a portion of its ruling denying Lilly’s motion for summary judgment.

Further, the Second Circuit vacated the order denying Lilly’s motion for summary judgment on the merits. The TPPs’ “excess price” theory was “too attenuated” to satisfy RICO’s causation requirement. However, the TPPs’ alternative theory (the “quantity effect” theory, which posited that improper promotion of off-label use for Zyprexa resulted in more off-label prescriptions for Zyprexa than would otherwise have been written) was “less attenuated” and, while it could not support class certification, this alternative theory could be viable for some individual TPPs or other purchasers. Because the District Court did not consider individual claims under the “quantity effect” theory, the case was remanded for possible further consideration of summary judgment.

The decision in Lilly, along with the decision in McLaughlin, demonstrates an unwillingness by the Second Circuit to allow “aggregate proof” of causation to facilitate class certification in consumer class actions. Further, although only mentioned explicitly in McLaughlin but not Lilly, both of these decisions demonstrate that the use of “aggregate proof” in class actions can distort the number of plaintiffs actually injured and/or the total amount of damages caused by the alleged wrongful conduct. This kind of disconnect offends the Rules Enabling Act, 28 U.S.C. § 2072(b), which provides that federal rules of procedure, such as Rule 23, cannot, be used to “abridge, enlarge, or modify any substantive right.”