Employment Class Action Blog

California Appeals Court Rejects Attempt to Try California Misclassification Case by Statistics

Gilbert Brosky — Mon, 13 Feb 2012 11:43:52 -0500

The California Court of Appeal issued a rare decision in favor of employers last week, when it reversed a class action judgment of $15 million and decertified a class of 260 current and former bank employees who claimed they had been misclassified as exempt and were therefore entitled to meal and rest break premiums. News of the opinion caused many in the employment defense bar to double check their calendars that it wasn’t April 1.

The class consisted of current and former business banking officers who claimed they were misclassified by USB as outside sales personnel exempt from California’s overtime laws, and were thus unlawfully denied overtime pay. The central issue on appeal with whether the trial court had properly used statistical sample of class members to determine liability. Specifically, the trial court had limited the phase of the bench trial dedicated to determination of liability to testimony from and about only 20 members of the class. The employer was therefore not permitted to introduce significant evidence that several of the non-sample group class members were, in fact, properly classified as exempt.

At the end of this phase of the trial, the trial court found that 19 of the 20 sample class members had been misclassified. The trial court then used this initial finding to make a finding of liability on a class-wide basis, a determination which, statistically speaking, had a 43.3% margin of error.

The Court of Appeal rejected the trial court’s broad reading of Bell v. Farmers Ins. Exchange, 115 Cal. App. 4th 715 (2004) (referred to by the Court as “Bell III”), which had held that statistical sampling could be used to determine class-wide damages. Stating that Bell III was “manifestly inapposite” to the question of class-wide liability, the Court of Appeal explained that:

[t]he procedures we approved in Bell III are only superficially similar to the procedures utilized in the present case. Again, in Bell III we did not have occasion to consider the use of a representative sample to determine class-wide liability, since liability was not an issue on appeal. Accordingly, the only issue we addressed was the damages calculation itself, and not whether the plaintiff employees had a right to recover damages in the first place. And our assessment was based on a record evidencing cooperation and agreement among the parties and their counsel.

Use of sampling to determine liability, the Court of Appeal held, was in this case a violation of state and federal due process guarantees, despite its efficacy as a method for liability analysis: “[W]e have never advocated that the expediency afforded by class action litigation should take precedence over a defendant’s right to substantive and procedural due process.” In short, the court found that the time-consuming individual inquires could not be avoided by using random sampling of class members to determine whether the class, as a whole, qualified for any of the asserted exemptions.

Though the opinion did not go as far as to make a bright-line prohibition on statistical sampling in class-wide liability determinations, it clearly set a tone that such sampling would be subject to significant scrutiny. Indeed, the Court relied on the U.S. Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), in which the Supremes rejected wholesale the use of statistical sampling in the determination of Wal-Mart’s liability to a 1.6 million-strong class. “The same type of ‘Trial by Formula’ that the U.S. Supreme Court disapproved of in Wal-Mart,” the Court of Appeal noted, “is essentially what occurred in this case . . . . we find this approach to be untenable.”

The court found that the trial court also erred in denying USB’s motion for decertification for many of the same reasons. The court first found that the trial court’s denial of decertification was based on “the erroneous legal assumption that a finding of liability due to misclassification could be determined by extrapolating the findings based on the [random witness group] to the entire class.” The court also found that the trial court gave “excessive weight” to the fact that USB classified all of its business banking officers as exempt without inquiring as to the particular employees’ job duties, hours worked, or performance. Finally, the court noted that it was “doubtful” a trial plan could have been created that would have accounted for the all the necessary individual inquiries.

Though employers should, of course, remain diligent in their determination of employee exempt/non-exempt status and in their compliance with meal and rest break mandates, the Duran opinion will prove a useful spear in employer’s defense of class actions where plaintiffs regularly attempt to prove their cases with the assistance of statistical sampling and analysis.

The Bottom Line: The decision in Dukes criticizing attempts at "Trial by Formula" in class actions seems to be taking hold, even in California state courts.

Authorship credit: Gilbert P. Brosky and Alastair J. Gamble

In Re American Express Merchants' Litigation

John Lewis — Mon, 06 Feb 2012 15:09:24 -0500

Posted by John Lewis

The Third Time is Not a Charm as the Second Circuit Again Holds Class Action Waivers Unenforceable

The Second Circuit considered the validity of class action waivers for the third time in an antitrust action brought against American Express ("AMEX") based upon the company’s Card Acceptance Agreement. And, despite intervening Supreme Court opinions, for the third time the appellate court held class action waivers involving federal statutory rights were unenforceable. The Second Circuit’s February 1, 2012 opinion held "that each waiver must be considered on its own merits based on its own record and governed with a healthy regard for the fact that the [Federal Arbitration Act] is a congressional declaration of a liberal federal policy favoring arbitration agreements." This third opinion likely will have an impact beyond costly antitrust litigation, but the question is how far? Indeed, the opinion cited two District Court decisions denying enforcement of class action waivers in the employment law context.

I. The History

A brief review of the case’s long appellate history is helpful. The appeal was originally argued on December 10, 2007. In Re American Express Merchants' Litigation.pdf, 554 F.3d 300 (2d Cir. 2009) ("AMEX I") the court held the class action waiver unenforceable “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs." AMEX I at 304. The U.S. Supreme Court vacated that decision and remanded it for reconsideration in light of its Opinion in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010). Stolt-Nielsen, which was previously discussed in this blog, held that imposing class arbitration on parties that had not agreed to it conflicts with the FAA. The Second Circuit, however, found that Stolt-Nielsen did not affect its original analysis and again reversed the District Court's decision and remanded the case. AMEX II, 634 F.3d at 199-200.

On April 11, 2011, the appellate court placed a hold on the mandate in AMEX II so that AMEX could seek a writ of certiorari. During that time, the Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Concepcion decision, also extensively covered in this blog, held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context. 131 S.Ct. 1740 (2011). The Second Circuit then received supplemental briefing on Concepcion's potential impact on the case.

II. The Background

A. The Claims

The Merchants in the AMEX litigation brought antitrust claims under both the Sherman and Clayton Acts maintaining that the "Honor All Cards" provision in AMEX’s Card Acceptance Agreement created an illegal "tying arrangement." The Merchants were "faced with the choice of paying supracompetitive merchant discount fees . . . on AMEX’s new mass-market products [credit cards] or losing 'a significant portion of the sales they received from businesses, travelers, affluent consumers, and others’ who are the traditional users of AMEX charge cards."

B. The Costs

The Court found that the Merchants' evidence "establishes, as a matter of law, that the cost of plaintiff's individually arbitrating their dispute with AMEX would be prohibitive, effectively depriving plaintiffs of the statutory protection of the antitrust laws." In reaching that conclusion, the appellate court relied upon the affidavit of economist Gary L. French, Ph.D. which detailed the costs of expert assistance for individual plaintiffs in antitrust cases. Dr. French summarized those expert costs:

. . . the cost of [Nathan Associates'] expert assistance in individual plaintiff antitrust cases has ranged from about $300 thousand to more than $2 million. However, after reviewing the complaint and doing some preliminary research in this case, it is my opinion that . . . the cost for this case will fall in the middle of the range of [Nathan Associates'] experience.

Dr. French then considered those expert witness costs in relation to a plaintiffs' potential recovery. He concluded:

The largest volume named plaintiff merchant, with reported American Express Card volume of $1,690,749 in 2003, might expect four-year damages of $12,850, or $38,549 when trebled.

In my opinion as a professional economist . . . it would not be worthwhile for an individual plaintiff . . . to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million. (Emphasis added).

Largely based on Dr. French’s affidavit, the Second Circuit concluded that "the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action." In AMEX I the court had found the expert’s affidavit was "essentially uncontested". 554 F.3d at 317. In reaching its conclusion, the court discounted the fact that the Clayton Act provides for treble damages and the recovery of attorneys' fees and expenses.

III. Legal Analysis in AMEX III

AMEX argued that Concepcion required a reversal of the holding in AMEX III. The Second Circuit rejected that argument stating:

It is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class action arbitration waivers per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights. (Emphasis added).

The Court, in a footnote, also brushed aside the Supreme Court’s opinion in CompuCredit Corp. v. Greenwood, 2012 WL 43517 (Jan. 10, 2012) (addressed in this recent blog post). CompuCredit Corp. held that because the Credit Repair Organization Act was silent on whether claims could be arbitrated, the FAA mandated that the arbitration agreement be enforced. Even after CompuCredit Corp., the Second Circuit found that Congressional intent could be discovered in the history or purpose of a statute. So,

[a]lthough the Sherman Act does not provide plaintiffs with an express right to bring their claims as a class in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute. (Emphasis added).

The Court instead looked to older Supreme Court precedent to find support for whether arbitration can be rejected if it does not fully vindicate federal statutory rights. It cited Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., for the proposition that arbitration can be "an effective vehicle for vindicating statutory rights but only 'so long as the prospective litigant may effectively vindicate its statutory cause of action.'" Citing Mitsubishi, 473, U.S. 614, 632 (1985). The Court then looked to dicta in Green Tree Financial Corp-Alabama v. Randolph stating "that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum." 531 U.S. 79, 90 (2000). Because Mitsubishi and Green Tree were not impacted by Stolt-Nielson or Concepcion, the Second Circuit felt it was free to rely on those opinions.

The Court emphasized that it relied not on the size of the Merchants involved but "on the need for plaintiffs to have the opportunity to vindicate their statutory rights." As support of this analysis, the Court cited two employment cases – Raniere v. Citigroup, Inc.pdf., No. 11 Cir. 2248, 2011 WL 5881926 (S.D.N.Y., November 22, 2011) and Chen-Oster v. Goldman, Sachs & Co.pdf., No. 10 Cir. 6950, 2011 WL 2671813 (S.D.N.Y. July 7, 2011). Raniere involved a putative nationwide collective action under the Fair Labor Standards Act as well as a New York class action under the New York Labor Law. The District Court found that since Concepcion involved state not federal rights, "even if . . . read broadly to acquiesce to the enforcement of an arbitral agreement that as a practical matter would prevent the vindication of state rights in the name of furthering the strong federal policy favoring arbitration, that would not alter the validity of the federal statutory rights analysis . . . . " (Emphasis added).

The underlying action in Chen-Oster was a pattern and practice claim for gender discrimination under Title VII of the Civil Rights Act of 1964. After considering Concepcion, the judge in Chen-Oster found it was not a "controlling decision." And, both Raniere and Chen-Oster cited AMEX II as controlling precedent. So, what these two lower court decisions really illustrate is that the reasoning in AMEX III may well extend into other areas of federal law.

IV. What’s Next

While the AMEX III decision cautioned that it did not hold that class action waivers were "per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions," it left many unanswered questions. Instead of considering whether Congress intended to preclude arbitration of the statutory claims involved, it focused on whether arbitration would preclude vindication of the federal statutory rights. It also took a broad view of the way in which the statutory rights would be determined. It apparently based its decision on a case-by-case analysis of litigation costs (expert witness fees) and discounted the potential benefits of multiple damage awards, attorneys' fees and expenses provided to successful plaintiffs by the federal statutes involved.

But, AMEX III established no objective guidelines for the task – other than to point out that many plaintiffs failed in their quest. "The fact that plaintiffs so often fail in their attempts to overturn such waivers demonstrate that the evidentiary record . . . is not easily assembled, and that the courts are capable of the scrutiny such arguments require." But are they? Is it only where vindication of the federal rights would be impossible? And, does the ability to bring aggregate actions become a substantive right when the statute does not mention the procedure and when the federal statute provides multiple damages, attorneys fees for prevailing parties and other fee shifting provisions. Under what circumstances will the statutorily created remedies be considered inadequate? Hopefully, the Supreme Court will resolve some of these issues and properly interpret Concepcion when AMEX III is considered on certiorari.

The Bottom Line: AMEX III will be another potential obstacle to enforcing class action waivers, at least in the Second Circuit. However, it’s difficult to say what practical effect it will have on employment actions. It’s a rare employment case, indeed, in which a plaintiff must spend between $300 thousand to more than $2 million for expert witness costs and only expect to recover $38,549 (after being trebled).

Court Finds Twombly/Iqbal Pleading Standard Does Not Apply to Class Action Defenses

Greg Mersol — Mon, 06 Feb 2012 05:25:03 -0500

Posted by Greg Mersol

Alright, it’s a lawyer’s case, but it’s an important one for employers defending class actions.

As we have written before in this blog, the Supreme Court made clear in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), that a complaint cannot parrot the elements of a claim but must make specific factual allegations regarding the actions the plaintiffs seek to challenge. Since that decision, several courts have rejected “bare bones” class action complaints because they do not meet the Twombly/Iqbal standards.

In response, some plaintiffs have tried to strike defenses from the defendant’s answer on the grounds that they do not meet those standards. While these arguments may have a certain “tit for tat” feel, an answer is not the same as a complaint in that the plaintiff is the one to frame the dispute, and the defendant is not in the same position at the outset of the case to spell out its defenses in detail. Further, in the case of a class action, it has no meaningful way to spell out the facts that relate to each individual class member and may very well intend to argue that each claim is different. Thus, answering to Twombly/Iqbal standards would become a monumental tasks that would convert the preparation of an answer to a years-long process.

Most courts seem to reject the application of Twombly and Iqbal at this stage, and a recent case reflects such a rejection in the class action context. In Dudley v. Regions Financial Corp.pdf., Case No. 1:11-CV-2700-RLV (N.D. Ga. Jan. 26, 2011), the plaintiff sought to pursue a collective action under the FLSA. She moved the court to dismiss several of the defendant’s 18 or more affirmative defenses (such as “accord and satisfaction”, “arbitration”, or “mitigation of damages”) under the Twombly/Iqbal standards.

The district court denied the motion. It found as a preliminary matter that the decisions in Twombly and Iqbal did not apply to answers. It found independently that the plaintiff’s arguments were premature given the lack of discovery at that stage of the case and the level of detail already provided by the defendant. Although it ultimately urged the defendant to drop those defenses it did not intend to pursue, the court found that the defenses were adequately pleaded.

The Bottom Line: The Twombly/Iqbal pleading standards should not apply to answers in class action cases.

Seventh Circuit Finds Certification of Overtime Disputes Meets Dukes Standards

Greg Mersol — Thu, 02 Feb 2012 14:10:00 -0500

Posted by Greg Mersol

The Seventh Circuit has now issued a decision relating to the application of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), to state law overtime disputes. While the decision is curious for many reasons, it may prove problematic for Seventh Circuit employers as it relates both to the issue of class definitions and as to how the Dukes “commonality” determination will apply to wage and hour claims.

In Ross v. RBS Citizens, N.A.pdf, Case No. 10-3848 (7th Cir., Jan. 27, 2012), the plaintiffs brought two sets of claims against Charter One Bank. First, the plaintiffs contended that the bank denied overtime by discouraging hourly workers to record their overtime, “erased” their time when they did record it, and improperly used the concept of “comp” time. Second, they claimed that the bank misclassified assistant branch managers as exempt, arguing, as one might expect, that their jobs consisted primarily of non-exempt tasks. Although they asserted claims under both federal and Illinois law, they only sought certification as to the state law wage and hour claims.

The trial court certified two classes. The first was of hourly employees affected by “unlawful compensation policies.” The second was of the salaried assistant branch managers, who also were subject to “unlawful compensation policies.” The problem with these definitions is that they really don’t define the class at all: if the question is whether the class members were subject to “unlawful” policies, then logically if the employer acted lawfully there is no class.

Charter One sought review under Rule 23(f) and the Seventh Circuit originally accepted the case limited to the class definition issue. After oral argument, the Supreme Court decided the Dukes case and the court requested additional briefing on that opinion’s application.

The end result is disappointing and of limited utility for any party. First, one of the Seventh Circuit judges assigned the case died before it was decided, and one of the other judges was a district court judge sitting by designation. Thus, only two judges, and only one Seventh Circuit judge, decided the case. In any event, the court’s analysis of both issues was underwhelming to say the least.

The court first upheld the class definition under Rule 23(c)(1)(B), a Rule designed to protect parties against vague class definitions. The court, following the lead of the Third Circuit, found that a class definition satisfies the rule if it provided a “readily discernible, clear, and precise” definition of the class and a similar “readily discernible, clear, and complete” listing of claims and issues. So far, so good, but where the opinion breaks down is where it addresses the trial court’s definition couched in terms of “unlawful compensation policies.” The court makes no meaningful effort to defend such a definition but, instead, found that with the remainder of the trial court’s opinion made it clear that the classes consisted of (a) all hourly employees; and (b) all assistant managers. That is not a satisfactory answer and largely defeats the purpose of Rule 23(c)(1)(B) because it ignores the trial court’s use of the word “unlawful.” For a host of reasons, including the scope of discovery, the issues at trial and (in subsequent lawsuits) issues of res judicata and collateral estoppel, having an imprecise and questionable class definition only makes litigation of the class issues all the more difficult, unpredictable, and expensive.

The truncated court’s analysis of the Dukes issues, too, was disappointing. It recited some of the Dukes language relating to commonality under Rule 23(a)(2), but largely rejected its application because the proposed class consisted of barely 1,000 employees, rather than the over one million in Dukes. Turning Dukes on its head, the court found that the “glue” binding the case together was the common question of whether the company “policies” resulted in the employees being denied overtime. This was, of course, virtually the opposite of what the Dukes court held, which was that the “common question” was not simply whether the employer discriminated or violated the statute in question. The court refused to review any other issues relating to certification, including the obvious questions of predominance and superiority under Rule 23(b)(3).

The court’s decision will result in further proceedings that will likely be hobbled by the imprecise class definition and cardboard analysis of the commonality and remaining issues. Still, the opinion is likely to be cited by plaintiffs seeking certification of poorly defined classes based on allegations of unwritten policies.

The Bottom Line: The Seventh Circuit has issued a decision making it easier to pursue unfocused class allegations based on fairly general claims of wage and hour violations.

Dukes Claims California Meal and Rest Period Cases

Greg Mersol — Tue, 31 Jan 2012 09:08:47 -0500

Posted by Greg Mersol

The Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), seems to be taking hold in meal and rest period cases in California, as shown by two decisions handed down this month.

The most recent casualty of the holding in Dukes is Cortez v. Best Buy Stores, LP, Case No. CV-11-05053 SJO (FFMx) (C.D. Cal. Jan. 25, 2012). The Cortez case was a putative class action against electronics retailer Best Buy. To meet the Dukes requirement of a common policy, the plaintiffs contended that the company’s policy of not budgeting for overtime or for missed meal and rest periods at the store level resulted in employees being pressured to falsify their time records by local managers and thus not being paid properly under California law.

This is actually a pretty clever theory, but the court didn’t buy it. It noted that the company’s policy was compliance with applicable law and the company could certainly direct its managers to manage their stores in a way that did not incur unnecessary overtime or other obligations above straight time pay. It found that the plaintiffs’ claims all boiled down to reliance on one-on-one oral statements (or possibly store-wide, but no greater), that rendered a state-wide class unavailable under Dukes. Indeed, the court’s opinion casts doubt on whether a case relying on oral statements should ordinarily ever be certified.

The court similarly found that any claims that time records were falsified would have to be evaluated on a case-by-case basis as there are many legitimate reasons why time records could be changed, such as an employee forgetting to punch in or out, etc. Applying Dukes, the court denied the plaintiffs’ motion for class certification.

Earlier this month, in Hughes v. Winco Foods.pdf, Case No. ED CV11-00644 JAK (Opx), (C.D. Cal. Jan. 4, 2012), a different judge of the same court reached the same conclusion with respect to a proposed class of grocery store workers at approximately 30 stores. In Hughes, the plaintiffs brought run-of-the-mill California claims for missed meal and rest periods. They relied on electronic payroll data that showed that over one-third of the time employees did not receive their initial meal period within 5 hours as required under California law. They argued that the company policy requiring employees to obtain approval from a supervisor before taking a break resulted in employees not receiving the time to which they were entitled.

The court, relying on evidence from the employer (and a dose of common sense), found that the issue of management approval of breaks necessarily came down to the individual manager. Management differed between stores, departments, and employee functions, as well as other factors. Further, significantly in light of Dukes, the employer’s formal policies required compliance with California law. The court found that the only truly uniform policy was one of management discretion, which was, of course, the very argument rejected in Dukes. The court concluded that the plaintiffs could not meet the requirement of commonality under Rule 23(a)(2) and Dukes, and further could not demonstrate either predominance or superiority under Rule 23(b)(3). Thus, it denied certification.

The Bottom Line: California district courts are applying Dukes to bar certification of California meal and rest period claims based on conduct attributable to individual managers.

Court Refuses to Approve Collective Action Settlement Without Disclosure of Terms

Greg Mersol — Tue, 24 Jan 2012 06:34:45 -0500

Posted by Greg Mersol

Confidentiality provisions in employment settlements are routine, but they can be problematic in the context of the settlement of a class or collective action. Class action settlements require court approval under Rule 23(e) (if the class is certified) and FLSA settlements require approval from either the United States Department of Labor or a court. See Lynn's Food Stores v. United States, 679 F.2d 1353 (11th Cir. 1982). So, can the parties get that approval without publicly disclosing the terms through a court filing?

In a recent case, Rice v. Lucky Brand Dungarees Stores, Inc., Case No. 11-CV-61923 (Jan. 9, 2012), the parties settled a putative FLSA collective action, but apparently chose not to seek court approval, and simply tendered a stipulation that stated that the case was to be dismissed with prejudice. The court, however, refused to enter the stipulation and directed the parties to file the agreement publicly or to show extraordinary circumstances why the agreement should not be filed. This decision is similar to one reached two years ago by another district court in Florida in Dees v. HydraDry, Inc., Case No. 8:09-CV-1405 (M.D. Fla. Apr. 19, 2000), in which the court rejected such an attempt in a much longer opinion.

One interesting twist in the Rice case is that the parties did not explicitly ask the court to approve the settlement or to issue any class-wide relief, but had only filed the stipulation of the court. Despite the lack of any such request, the court still refused to permit so much as a stipulation for dismissal with prejudice under Rule 41.

Rice was, of course, under the FLSA, but class actions (as opposed to collective actions) are subject to the additional disclosure requirements of Rule 23(e) and the Class Action Fairness Act, 28 U.S.C. section 1715. Thus, the same, and probably higher, obligations apply.

The Bottom Line: Parties should assume that a court will demand the public disclosure of the terms of a either a class or collective action settlement.

The Supreme Court Reaffirms Mandatory Arbitration in Compucredit Corp. v. Greenwood: The Antidote for D.R. Horton?

John Lewis — Fri, 20 Jan 2012 12:35:39 -0500

Posted by John Lewis

Is the Supreme Court’s January 10th opinion in CompuCredit Corp v. Greenwood.pdf a potential antidote for the National Labor Relations Board’s (“NLRB”) decision in D.R. Horton? Perhaps. CompuCredit Corp. considered whether the Credit Repair Organizations Act (“CROA”), 15 U.S.C. § 1679 et seq., foreclosed enforcement of an arbitration agreement in a class action filed in the Northern District of California alleging CROA violations stemming from alleged misrepresentations made by CompuCredit in marketing its Aspire Visa credit card.

The District Court denied CompuCredit’s motion to compel arbitration, finding that claims under CROA were non-arbitrable based on its language. The Ninth Circuit affirmed and the Supreme Court reversed.

I. The Arbitration Provision

The arbitration provision in CompuCredit Corp. required individual arbitration of all claims. It provided:

Any claim, dispute or controversy (whether in contract, tort or otherwise) at any time arising from or relating to your Account . . . will be resolved by binding arbitration . . . .

* * *

In addition, you will not have the right to participate as a representative or member of any class of claimants relating to the claim subject to arbitration.

II. The CROA’s Provisions

The CROA regulates the practices of credit repair organizations and provides a private cause of action for violations as well as federal and state administrative enforcement. The CROA also has disclosure and nonwaiver provisions, which were focused upon by the District Court and the Ninth Circuit. The required disclosure statement, stated in pertinent part: “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.” (Emphasis added). The non-waiver provision declares:

“Any waiver by any consumer of any protection provided by or any right of the consumer under their subchapter – (1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.” (Emphasis added).

III. The FAA and Federal Statutory Claims

As a threshold matter, Justice Antonin Scalia, writing for the Court, examined the Federal Arbitration Act (“FAA”) as background for resolution of the case. He found that the FAA’s “liberal policy favoring arbitration agreements” applied to federal statutory claims “unless the FAA’s mandate has been ‘overridden by a contrary Congressional Command.’” With that understanding, Justice Scalia reviewed CROA’s provisions to determine if the Act contained such a Congressional command.

IV. CROA’s Provisions and The Duty to Arbitrate

The opinion found that the disclosure provision did not give consumers a right to bring an action in court. Instead, Justice Scalia concluded “[t]he only consumer right it creates is the right to receive the statement, which is meant to describe the consumer protections that the law elsewhere provides.”

The opinion went on to note that it was common for statutes creating civil causes of action to detail the claims, and relief available in a judicial context. Yet, the mere reference to a cause of action is insufficient to establish a “’contrary congressional command’ overriding the FAA.”

The opinion commented that in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991), an arbitration agreement was enforced as to an Age Discrimination in Employment Act of 1967 (“ADEA”) claim despite language that declared: “Any person aggrieved may bring a civil action in any court of competent jurisdiction for such legal or equitable relief as will effectuate the purpose of this chapter.” Justice Scalia emphasized that the court had “repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court.”

The opinion reasoned that at the time of CROA’s enactment in 1996, arbitration provisions in agreements were not unusual. So, if Congress intended to prohibit arbitration of CROA claims it would have done so with greater clarity. This reasoning led Justice Scalia to conclude “[b]ecause the CROA is silent on whether claims under the Act can proceed in an arbitral form, the FAA requires the arbitration agreement to be enforced according to its terms.” (Emphasis added). In her concurring opinion, Justice Sotomayor attempted to place the majority opinion in the context of existing precedent. She wrote: “I do not understand the majority opinion to hold that Congress must speak so explicitly in order to convey its intent to preclude arbitration of statutory claims.”

V. The Antidote or Just Another Pro-Arbitation Opinion?

Does CompuCredit Corp. signal an even more aggressive enforcement of arbitration procedures with class action waivers? Does the silence of the 1930’s vintage National Labor Relations Act on the key “congressional command” needed to foreclose arbitration mean that D.R. Horton is destined to be overturned? Or, as Justice Sotomayor states, can the Congressional will be “discovered in the history or purpose of the statute in question?” Too soon to tell. Yet, the CompuCredit Corp. opinion plainly raises additional doubts about the future viability of D.R. Horton.

The Bottom Line: Only time will tell what role the CompuCredit Corp. opinion will play in the future development of the law on mandatory arbitration. But, the opinion certainly provides at least one basis to challenge the NLRB’s decision in D.R. Horton.

New York Court Rejects D.R. Horton; Orders Arbitration Despite Class Action Waiver

Greg Mersol — Thu, 19 Jan 2012 10:15:52 -0500

Posted by Greg Mersol

A great deal of intellectual energy has been spent on the issue of whether various employment arbitration agreements are enforceable, but the debate pretty much comes down to two camps. Over 80 years ago, in response to judicial reluctance to enforce arbitration agreements, Congress passed the Federal Arbitration Act. Virtually every court on both sides of the debate cites this statute and parrots the language of the Act and the Supreme Court opinions requiring the enforcement of arbitration agreements and stating the strong public policy favoring their enforcement. Some courts, most notably the Supreme Court, believe this language. Others simply do not, and appear willing to find or create any argument why they should not be enforced, particularly where class actions are involved.

The Supreme Court in 2010 and again in 2011 recognized the importance of enforcing arbitration agreements even when they did not permit class actions. AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010). These cases not only dispelled the notion held by some courts that the availability of class action arbitrations was a prerequisite to the enforcement of such agreements, but discussed in detail the practical and policy reasons why that was so.

Only two weeks ago, in D.R. Horton, Inc., Case No. 12-CA-25764 (dated Jan. 3, 2012), an undaunted National Labor Relations Board concluded, in spite of these holdings, that a class action waiver contained in an arbitration agreement constituted an unfair labor practice. That decision has generated a host of controversy both for its procedural irregularities and its analysis, but raised the question of the enforcement of class action waivers in the employment context.

The dust has not yet begun to settle on that decision, but it has now already been rejected by at least one court. In LaVoice v. UBS Financial Services, Inc.pdf., Case No. 11 Civ. 2308 (S.D. N.Y., Jan. 13, 2012), the plaintiff was a financial advisor for the defendant who sought to assert a federal collective action for violation of the FLSA and a Rule 23 class action for alleged violations of New York State law. The defendant moved to compel arbitration on an individual basis under arbitration agreements the lead plaintiff had signed. Those agreements also contained class action waivers.

The district court had little difficulty in concluding that Concepcion and Stolt-Nielsen dictated enforcement of the agreement. It found that they had overruled prior Second Circuit authority that had cast doubt on the enforceability of class action waivers in the arbitration context.

Following that analysis, the court simply declined to follow D.R. Horton. Instead, it found that nothing in a single-plaintiff arbitration undermined federal statutory rights. It noted that the plaintiff asserted a substantial individual claim and that he would be entitled to payment of his attorney fees if he prevailed. It rejected the complaints by plaintiff’s counsel that the case would not be sufficiently lucrative for him to pursue on an individual basis. Having rejected the plaintiff’s arguments, the court ordered that the claims be arbitrated.

LaVoice is but one of the first, if the first, decision addressing this issue in the wake of D.R. Horton. There are sure to be many others.

The Bottom Line: At least one court has already rejected the most recent view of the NLRB that class action waivers are unenforceable.

California Court Affirms Summary Judgment Against Putative Class of Insurance Agents

Greg Mersol — Fri, 13 Jan 2012 11:58:33 -0500

Posted by Greg Mersol

Court Finds That Insurance Agents Were Independent Contractors As A Matter Of Law

As we have noted in prior blogs, litigation involving alleged independent contractor status is on the rise, and is increasingly the topic of class action claims. Plaintiffs in these cases tend to argue that they were misclassified as independent contractors and were improperly denied their rights as employees, ranging from employee benefits to overtime to the right to assert certain types of discrimination claims. In several industries these challenges have proven successful, but a recent California case reflects that victory for the plaintiffs is far from a certainty.

In Arnold v. Mutual of Omaha Insurance Co.pdf., Case No. A131440 (Cal. 1st App. Dec. 30, 2011), the plaintiff sought to bring a class action against insurer Mutual of Omaha, with which she had been an agent. She claimed that although classified as an independent contractor agent, she was in fact an employee and had been denied the incidents of an employment relationship under California law, such as the right to reimbursement of business expenses and immediate payment of wages upon termination. The claims were brought solely under California law.

The trial court granted summary judgment, and the court of appeals affirmed. The court of appeals held that in California a common law test was to be used to determine independent contractor status. The primary focus of the common law test was whether the alleged employer had "the right to control the manner and means of accomplishing the result desired." Quoting S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989). Although the right of control was the primary factor, it was not exclusive, and the inquiry might require review of additional factors such as whether the relationship was at will, the intent of the parties, the type of business etc.

The court rejected arguments by the plaintiff that a different (and more favorable) standard should apply under the California Labor Code. Instead, it found that the California Labor Code provisions should be read "with" the common law test for employment.

Applying the common law factors, the court concluded that the agents were independent contractors. It began by examining the plaintiffs' evidence first, but found that managers generally assisted agents rather than supervise them. The company did not reimburse agents for their expenses and paid them solely by commission. No one dictated how agents made sales or how they spent their time. Further, the contract provided that the relationship was at will and was one of an independent contractor and not an employee. Taken as a whole, the court had "little difficulty" concluding that the Mutual of Omaha agents were independent contractors.

Interestingly, the case was decided solely under California law. The court therefore had no reason to cite, and did not cite, two significant federal cases addressing the same issue of whether insurance agents were independent contractors. See Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) (applying common law test; agents were independent contractors under ERISA); Barnhart v. New York Life Insurance Co., 141 F.3d 1310 (9th Cir. 1998) (agent was independent contractor and could not recover under ERISA or ADEA).

The Bottom Line: Even courts perceived to favor plaintiffs can be persuaded that agents are independent contractors with the right facts.

NLRB Holds Class Action Waivers Violate the National Labor Relations Act

John Lewis — Mon, 09 Jan 2012 11:11:35 -0500

Posted by John Lewis

In the much anticipated ruling in D.R. Horton, Inc. and Michael Cuda.pdf, released Friday, January 6, the National Labor Relations Board (“NLRB”) held that the Company violated Section 8(a)(1) of the National Labor Relations Act (“NLRA”) by “requiring employees to waive their right to collectively pursue employment-related claims in all forums, arbitral and judicial.” The decision, which will have a far-reaching impact on all employers, also concluded that recent United States Supreme Court rulings on the Federal Arbitration Act and class arbitration were not implicated. To many management observers, the ruling elevates a procedural device, a class or aggregate proceeding, to the status of an individual statutory right applicable to any employment claim. The decision reasoned:

“an individual who files a class or collective action regarding wages, hours or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7.”

The Company and the Arbitration Agreement

The Company, D.R. Horton, Inc., builds homes and operates in more than 20 states. Starting in 2006, the Company required employees to sign a Mutual Arbitration Agreement (“MAA”) that essentially provided that all employment-related disputes be resolved through individual arbitration. The Charging Party Michael Cuda worked for the Company as a superintendent and had signed the MAA. His attorney later informed the Company that it was misclassifying superintendents as “exempt” under the Fair Labor Standards Act and that he had been retained to represent Cuda and a nationwide class of superintendents. Cuda’s attorney also attempted to give notice of intent to arbitrate on a class or collective basis. When the Company resisted, Cuda filed an unfair labor practice charge with the NLRB.

A Necessary Substantive Right?

Several groups that filed Amici Curiae briefs with the NLRB urged that employees’ Section 7 rights were not impacted because they could jointly discuss their claims, pool their resources to hire a lawyer, seek litigation advice and support from a union, seek support from other employees and coordinate the filing of claims. The Board majority was unpersuaded, responding,

“if the Act makes it unlawful for employers to require employees to waive their right to engage in one form of activity it is no defense that employees remain able to engage in other concerted activities.”

The decision also categorically rejected arguments that the right to bring a class or collective action was “procedural” rather than substantive.

“Any contention that the Section 7 right to bring a class or collective action is merely ‘procedural’ must fail.”

According to the decision, the salient issue is:

“Whether [the Company] may lawfully condition employment on employees’ waiving their right under the NLRA to take the collective action inherent in seeking class certification . . . .. Rule 23 may be a procedural rule but the Section 7 right to act concertedly by invoking Rule 23 . . . or other legal procedures is not” (emphasis added).

Supreme Court Precedent Found Not Implicated

The ruling also found that the U.S. Supreme Court’s opinions in Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), and AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011) (discussed in detail in other blog articles here and here) were not implicated. The Board majority reasoned that “[n]either involved the waiver of rights protected by the NLRA or even employment agreements.” AT&T Mobility (which arose in a consumer context) was distinguished by the majority because it involved a conflict between the Federal Arbitrator Act (“FAA”) and state law not where two federal statutes potentially conflict. The FAA did not preempt the NLRA which gave employees a federally protected right to engage in concerted action. And, the Cuda decision emphasized it did not require class arbitration to protect employees’ rights under the NLRA. Instead, it held “only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial.

Impact and Next Steps

The decision was completed last Tuesday and signed by the two Democratic Board members, before one, Craig Becker, had his recess appointment expire. The Board’s sole Republican member, Brian Hayes, recused himself, without explanation.

The decision, which applies both to union and non-union workforces, will undoubtedly be appealed to a federal court of appeal.

The Bottom Line: The controversial NLRB has created another potential obstacle to the enforcement of class action waivers. A federal appellate court or the Supreme Court will likely resolve these important issues.