Statistical Sampling in Class Action Trial Violated Defendant's Due Process Rights

In a unanimous decision, the California Supreme Court on May 29 reversed a class action verdict for a class which was based on a flawed statistical model to determine liability and damages. Duran v. U.S. Bank National Association.

In Duran, plaintiffs brought a class action to challenge U.S. Bank’s (“USB”) classification of its business banking officers (“BBO’s”) as exempt under the “outside salesperson” exemption under California Labor Code section 1171

At trial, USB sought to introduce evidence demonstrating that a substantial amount of the class members performed more than 50% of their work engaged in outside sales and thus fell within the “outside salesperson” exemption. The trial court barred this evidence and instead relied on testimony from its sample size of 21 class members to find USB liable to the entire class for misclassification.  With respect to damages, the trial court accepted the estimate of plaintiffs’ expert (with an admitted 43.3% margin of error) that each class member on average worked approximately 11.87 hours of overtime per week. 

In reversing the verdict, the Supreme Court gave a scathing review of the class action trial plan at issue, specifically, its sole reliance on evidence from a flawed statistical sample of the class and its refusal to permit litigation of relevant affirmative defenses outside of the sample.

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Meaning of "Mass Actions" Under CAFA clarified by SCOTUS

By James Castle and Natalie Ferrall

In one of its first decisions of the year, the United States Supreme Court unanimously held that a civil action filed solely by the State of Mississippi did not constitute a “mass action” under the Class Action Fairness Act of 2005 (“CAFA”) (Mississippi ex rel. Hood v. AU Optronics Corp.).

CAFA permits defendants in civil suits to remove “mass actions,” a statutorily defined term, from state to federal court. CAFA defines a “mass action” as “any civil action . . . in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” 28 U.S.C. § 1332(d)(11)(B)(i)

In Hood, the State of Mississippi sued a group of LCD manufacturers in Mississippi state court, alleging violations of state law. The suit sought restitution for injuries suffered by Mississippi citizens. The defendants, the LCD manufacturers, removed the case to U.S. District Court, asserting that federal jurisdiction was appropriate under CAFA’s mass action provision. 

The District Court agreed with the defendants and found that the suit qualified as a “mass action” under CAFA because it sought recovery of restitution on behalf of more than 100 Mississippi residents. However, the District Court still remanded to state court on the ground that it fell within CAFA’s “general public” exception. 

The Fifth Circuit reversed, agreeing with the district court that the suit was a mass action but finding that the “general public” exception did not apply. The Fifth Circuit’s ruling created a split with the Fourth, Seventh, and Ninth Circuits, all of which had previously held that similar lawsuits were not “mass actions.” 

On review, and in order to alleviate the split between the Circuits, the Supreme Court unanimously held that removal was improper. The Court stated that CAFA’s “100 or more persons” condition does not include unnamed individuals who are real parties in interest to claims brought by named plaintiffs. 

Rather, a mass action must involve monetary claims brought by 100 or more named plaintiffs. Here, because the State of Mississippi was the sole named plaintiff, the Supreme Court found the lawsuit did not constitute a mass action under CAFA, and therefore, was remanded to state court.


Class Certification Rules Clarified: Harder for Plaintiffs to Certify Classes

On September 3, 2013, in Wang v. Chinese Daily News, Inc., the Ninth Circuit clarified the restrictions on class certification imposed by Wal-Mart Stores, Inc. v. Dukes. The net effect of this ruling is to make it harder for plaintiffs to certify classes.

In Wang, named plaintiffs were employees of Chinese Daily News (“CDN”) who alleged that they had been made to work more than eight hours per day and more than forty hours per week. They also alleged that they were wrongfully denied overtime compensation, meal and rest breaks, and accurate and itemized wage statements.

Plaintiffs sought to certify a class of non-exempt employees at a single facility (consisting of about 200 affected employees) as to violations of the Fair Labor Standards Act. The Ninth Circuit held that, in light of Dukes, the district court had wrongly certified the class.

The district court had purported to certify the class under several different parts of Federal Rules of Civil Procedure, Rule 23. In each instance, the Ninth Circuit explained why class certification had been inappropriate, and remanded the rulings for further consideration in light of applicable law.

Rule 23(a)

As the Court explained, Rule 23(a) ensures that the named plaintiffs are appropriate representatives of the class whose claim they wish to litigate. It requires the party seeking certification to satisfy four requirements, one of which is “commonality,” specifically Rule 23(a)(2) After ruling that CDN had not waived its right to challenge the district court’s finding of commonality, the Ninth Circuit held that such finding was incorrect. Quoting Wal-Mart, the Court noted that

What matters to class certification is not the raising of common questions – even in droves – but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. . . . If there is no evidence that the entire class was subject to the same allegedly discriminatory practice, there is no question common to the class.”

Furthermore, the “rigorous analysis” under Rule 23(a) “sometimes [requires] the court to probe behind the pleadings before coming to rest on the certification question.” The Ninth Circuit remanded the district court’s Rule 23(a)(2) commonality finding for reconsideration in light of Wal-Mart.

Rule 23(b)(2)

In its earlier opinion, the Ninth Circuit had affirmed the district court’s certification under Rule 23(b)(2), which provides for relief “when a single injunction or declaratory judgment would provide relief to each member of the class.” The Supreme Court had reversed this decision, making clear that individualized monetary claims cannot be asserted under Rule 23(b)(2). The Court remanded to the district court to determine, in light of Dukes, whether the previously granted certification under Rule 23(b)(2) should continue for the purposes of injunctive relief. As with Rule 23(a)(2), the commonality requirement would need to be met.

Rule 23(b)(3)

Rule 23(b)(3) provides that class certification is permissible if the court finds that the questions of law or fact common to the class members predominate over questions affecting only individual members and that a class action is superior to other available methods. As the Ninth Circuit noted, the predominance analysis under Rule 23(b)(3) focuses on “the relationship between the common and individual issues” in the case and “tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation.”

The Court remanded the certification question under Rule 23(b)(3) to the district court for reconsideration for three reasons: (1) The commonality requirement must again be met for certification under Rule 23(b)(3) to be appropriate; (2) the trial court erred in basing its predominance decision on the mere fact that CDN had a uniform policy classifying all reporters and account executives as exempt employees, but should have focused on other potential individual issues relevant to the predominance inquiry; (3) in the recent decision, Brinker Restaurant Corp. v. Superior Court, the California Supreme Court had held that an employer need not ensure that its employees take meal breaks, and, the Ninth Circuit ruled, the district court should reconsider its decision in light of Brinker.

The above ruling replaced and superseded the previous opinion issued March 4, 2013.

Please contact the author if you have any questions regarding class certification or any other issues addressed in Wang v. Chinese Daily News.

Originally posted to Barger & Wolen's Employment Law Observer.

Health Insurer Again Evades TCPA Suit Over Jobs Calls

Larry Golub was quoted in an Aug. 14, 2013, Law360 article, Health Insurer Again Evades TCPA Suit Over Jobs Calls, about the dismissal of a case against United American Insurance Co. alleging that the insurance company's prerecorded telephone calls advertising job openings violated the Telephone Consumer Protection Act.

Golub is one of the attorneys representing United American in Jordan Friedman v. Torchmark Corp. et al., a putative class action which claimed that the company was engaging in unsolicited advertising.

On Aug. 13, a judge tossed the suit ruling that the plaintiff had not stated an actionable claim. The plaintiff Jordan Friedman alleged that the recorded messages were actually an attempt by the company to encourage people to invest in its brokerage services, an argument that the court rejected. The court instead found that the messages were not intended to sell goods, but rather to inform recipients of an independent contractor position.

The court found this didn’t change the basic nature of what the alleged telephone call was,” Golub told the publication.

Barger & Wolen partners Kent Keller and Larry Golub represented United American Insurance Company in this action.

Zhang Ruling Yanks Insurer Shield Against UCL Claims

Larry Golub was quoted in an Aug. 2, 2013, Law360 article, Zhang Ruling Yanks Insurer Shield Against UCL Claims, (subscription required) about the California Supreme Court's ruling which found that consumers can accuse insurance companies of violations of California's unfair competition law.

Some court watchers believe the ruling could invite more class actions and give plaintiffs a new means of obtaining premium refunds, injunctions and attorneys' fees.

The ruling against California Capital Insurance Co. could also motivate attorneys to add unfair competition claims to breach-of-contract and bad faith claim lawsuits against insurers, the article said.

Although violators of the unfair competition law can be forced to pay restitution and potentially attorneys' fees, doing so is not an easy task, according to Golub. Policyholders would have to demonstrate that they had done something significant for the public interest.

“In the run-of-the-mill bad-faith case, I don't think you're going to be able to establish that just because you fought an insurance company, you've done something for the public good,” he said.

Mr. Golub recently reviewed the Zhang decision on this blog, California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist.

Barger & Wolen partner skeptical that Zhang will increase suits against insurers

Larry Golub was quoted in an August 2, 2013, Daily Journal article, High Court Sides with Consumers Against Insurance Industry, (subscription required) about two recent decisions by the California Supreme Court that increase the circumstances under with consumers can sue insurance carriers, banks and other companies for unfair business practices.

The two cases, Zhang v. Superior Court of San Bernardino County and Rose v. Bank of America involve the Unfair Competition Law. Zhang says that private citizens can sue insurance companies over the way they handle claims while Rose says that federal law can serve as the basis for an unfair competition action in state court.

Some court watchers believe the rulings will lead to a new practice area for plaintiffs lawyers intent on filing unfair competition claims while others predicted it would simply prompt lawyers to add unfair competition claims to existing lawsuits.

Golub, who represents insurance companies, was skeptical that there would be a big change.

“I don't know if you are going to see more lawsuits,” he told the paper.

Mr. Golub recently reviewed the Zhang decision on this blog, California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist.


SCOTUS Rules: Right or wrong, arbitrator's interpretation stands

The United States Supreme Court in Oxford Health Plans LLC v. Sutter held that an arbitration agreement in a fee-for-services contract between physicians and a health insurance company required arbitration of a class dispute arising under the contract.

Sutter, a physician, entered into a contract with Oxford, a health insurer, to provide medical services to members of Oxford’s network. Oxford agreed to pay for Sutter’s services at an agreed upon rate. Sutter later filed suit against Oxford on behalf of himself and a proposed class of other physicians who also contracted with Oxford. Sutter’s complaint alleged that Oxford failed to reimburse the putative class as required by the contract and applicable state law.

Oxford moved to compel arbitration, relying upon a provision in the contract requiring arbitration of “any dispute arising under this Agreement.” The motion was granted, and the arbitrator determined that the contract authorized class arbitration. In doing so, the arbitrator relied upon the language of the contract’s arbitration provision.

Oxford moved to vacate the arbitrator’s decision on the grounds that he exceeded his powers under the Federal Arbitration Act (“FAA”) Section 10(a)(4) by, in effect, misinterpreting and/or improperly applying the arbitration provision. 

The Supreme Court held that the arbitrator’s decision could not be vacated because it was arguably based upon the arbitrator’s interpretation of the parties’ contract, and, right or wrong, the parties had contracted to arbitrate their disputes. 

In so holding, the Court observed that in construing whether an arbitrator exceeded his powers under the FAA, “the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” 


Oppression and Surprise Render Arbitration Provision Unenforceable

By James Hazlehurst

In Vargas v. SAI Monrovia, the California Court of Appeal for the Second Appellate District addressed the enforceability of an arbitration provision in a vehicle purchase agreement. The court held that the arbitration provision was unenforceable because it was both procedurally and substantively unconscionable. The arbitration clause therefore could not be used to preclude a class action. 

The court ruled that the arbitration clause was procedurally unconscionable because elements of oppression and surprise existed in the formation of the contract. In particular, the arbitration provision was located on the back of the two-sided contract while the buyer’s signature lines were on the front of the contract. The sales manager also allegedly told the buyers where to sign and did not give them an opportunity to fully review the contract before signing. 

Substantively, the arbitration provisions were unconscionable because they were too one-sided, containing “overly harsh terms that favor the car dealer to the detriment of the buyer.” Certain provisions, such as limiting appeals to awards that exceed $100,000 and to awards of injunctive relief, primarily benefited the dealer. Similarly, the exclusion of self-help remedies – like vehicle repossession – from arbitration only had benefit to the dealer.    

Vargas reinforces that arbitration clauses in form contracts are more likely to be enforceable when the consumer is given clear notice of the clause and where the benefits of the arbitration clause apply equally to both parties.  

HP Inkjet Printer Litigation: Fee Award Fails to Comply With Provisions of the Class Action Fairness Act

By David McMahon

In In re: HP Inkjet Printer Litigation, 2013 DJDAR 6149 (2013) the Ninth Circuit Court of Appeals reversed the approval of an attorney's fee award. The Ninth Circuit concluded that the fee award did not comply with the provisions of the Class Action Fairness Act (CAFA)Specifically, the Ninth Circuit found that the district court awarded fees that were “attributable” to the coupon relief offered in the settlement, but failed to first calculate the redemption value of the coupons as required by applicable law.

Plaintiffs filed three class actions alleging that HP engaged in unfair business practices relating to the use of ink cartridges. HP reached a settlement with the consumers, who purchased inkjet printers. The district court approved the settlement, which provided for coupons for the class members as well as injunctive relief. In addition, the district court approved an award of attorney fees of $1.5 million and a significant award of costs. 

The district court reviewed the fee request and awarded lodestar fees based on its conclusion that the settlement value to the class was $1.5 million. Recognizing that it would be improper to award fees that were higher than the class benefit, the court ordered HP to pay a reduced lodestar of $1.5 million down from a potential of $7 million in fees. Two class members objected, contending the reduced fee award still violated the provisions of CAFA.

The Ninth Circuit reversed the lower court’s decision on fees. The Ninth Circuit noted that under CAFA, when a settlement provides for coupon relief, the court must first calculate the redemption value of the coupon, as a prerequisite to considering the claim for attorney fees. As such, the Ninth Circuit concluded that under the provisions of CAFA, the district court was required to first calculate the redemption value of the e-credits in making its determination of attorney fees. 

Because the record did not reflect such an analysis, the Ninth Circuit remanded the case to the District Court to make a determination consistent with the required analysis under CAFA.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

Supreme Court Directs Trial Courts To Look At The Merits In Determining Whether To Certify A Class

Comcast v Behrend is the latest in a series of United States Supreme Court cases in recent years that have restricted the ability of plaintiffs to certify federal class actions. In so doing, it has expanded the scope of the Court's landmark 2011 decision, Walmart v. Dukes (click here for our analysis of that decision).

In Comcast, plaintiffs were subscribers to Comcast's cable-television services. Plaintiffs alleged that Comcast engaged in a practice called "clustering," a strategy of concentrating operations within a particular region, and that this practice violated antitrust law. In particular, plaintiffs alleged that the clustering scheme harmed subscribers in the Philadelphia area by eliminating competition and elevating prices.

Plaintiffs sought to certify the class under Federal Rules of Civil Procedure, Rule 23(b)(3), which permits certification only if:

the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members." 

The district court held that to meet this predominance requirement, plaintiffs needed show:

  1. that the existence of individual injury "was capable of proof at trial through evidence that [was] common to the class rather than individual members" and
  2. that the damages resulting from the injury were measurable "on a class-wide basis" through the use of a "common methodology."

Plaintiffs proposed four theories of antitrust impact. Of these four theories, the district court concluded that only one was capable of class-wide proof, and rejected the rest. 

In establishing that damages could be calculated on a class-wide basis, plaintiffs introduced the testimony of an expert, who introduced a model that calculated damages of over $875 million for the entire class. However, despite the fact that the district court had rejected three, and allowed only one, theory of antitrust impact, the model introduced by the expert did not isolate damages resulting from any one theory of antitrust impact.

The District Court approved the certification of the class, and Third Circuit Court of Appeal affirmed.  The Supreme Court, in a 5-4 decision authored by Justice Antonin Scalia, overturned these rulings, holding that the class action was improperly certified.

As Justice Scalia explained,

a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.  If the model does not even attempt to do that, it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3)." 

The Court rejected the reasoning of the Third Circuit that such inquiry would involve consideration into the "merits," which, the Third Circuit believed, has "no place in the class certification inquiry."  To the contrary, Justice Scalia explained, "our cases requir[e] a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim." 

Comcast is part of a recent trend in Supreme Court jurisprudence allowing, and indeed even requiring, district courts to examine the merits of the claim in determining the suitability of class certification. 

This principle was announced in Walmart v. Dukes, and it is no accident that the Court begins the analysis section of Comcast with an invocation from that 2011 ruling. Moreover, Comcast extends the ruling of Walmart v. Dukes, which considered only Rule 23(a) (the requirement that plaintiffs establish commonality), to the predominance requirement of Rule 23(b)(3).

Denial Of Class Certification As To Alleged Wage And Hour Violations Affirmed by Court of Appeal

In Daily v. Sears, the Fourth Appellate District, Division One, affirmed the trial court's granting of the defendant's motion to preclude class certification.

Plaintiff Dailey was a former employee of Sears, who asserted wage and hour claims individually and on behalf of a proposed class of similarly situated managers and assistant managers.

Dailey argued that Sears uniformly categorized Managers and Assistant Managers as exempt from overtime and meal/rest break requirements, but nonetheless implemented policies that had the effect of requiring the proposed class members to work at least 50 hours per week, spending the majority of their time on nonexempt activities. Sears argued that determining how the class members actually spend their time requires individualized evidence and cannot be proven on a classwide basis. The trial court granted Sears' motion.

The Court of Appeal affirmed, ruling that the trial court had not abused its discretion in denying class certification. As the Court of Appeal explained, class certification requires, among other things, "a well-defined community of interest." The "community of interest requirement," in turn, embodies three factors:

  1. predominant common questions of law or fact;
  2. class representatives with claims or defenses typical of the class; and
  3. class representatives who can adequately represent the class.

For class certification purposes, the court went on to explain, Dailey was required to present substantial evidence that proving both the existence of Sears' uniform policies and practices and the alleged illegal effects of Sears' conduct could be accomplished efficiently and manageably within a class setting. Dailey presented such evidence, and Sears presented contrary evidence, which showed that whether it misclassified Managers and Assistant Managers as exempt required individual inquiries.

The trial court, weighing evidence for both sides, found the evidence Sears presented more compelling, and thus ruled that Dailey had not satisfied his burden for establishing commonality. Dailey argued on appeal that the trial court had improperly focused on the merits. The Court of Appeal disagreed:

Dailey is correct that the validity of the complaint's allegations generally is not at issue on class certification. . . . By the same token, however, the focus of the class certification inquiry is on 'the nature of the legal and factual disputes likely to be presented' [citation omitted] as those disputes are framed not only by the complaint but also by defendant's answer and affirmative defenses. . . . Critically, if the parties' evidence is conflicting on the issue of whether common or individual questions predominate (as it often is and as it was here), the trial court is permitted to credit one party's evidence over the other's in determining whether the requirements for class certification have been met—and doing so is not, contrary to Dailey's apparent view, an improper evaluation of the merits of the case.

Thus, the Court of Appeal affirmed, substantial evidence supported the trial court's finding that common questions did not predominate.

In addition, among its other rulings, the Court of Appeal rejected Dailey's argument that a random sampling methodology he proposed could have been used to managing the individual questions requiring adjudication. In particular, Dailey sought to use such a methodology to establish both liability and damages.

As the Court of Appeal explained, sampling methodologies, while sometimes appropriate to establish damages, have never been accepted to establish liability on a class wide basis. Such a method may not "be used to manufacture predominate common issues where the factual record indicates none exist."

Indeed, the Court noted, "[i]f the commonality requirement could be satisfied merely on the basis of a sampling methodology proposal such as the one before us, it is hard to imagine that any proposed class action would not be certified." (Emphasis in original).

This opinion affirms that a trial court may indeed credit one side's evidence over another's in the class certification context. This points to high importance, for both sides, of marshalling the best evidence at the class certification stage, since it can operate as a miniature bench trial.

Please call or e-mail the author to further discuss the issues in this article.

Originally posted to Barger & Wolen's Employment Law Observer blog.

Supreme Court Closes CAFA Loophole

A unanimous decision by the United States Supreme Court has restored the integrity of the Class Action Fairness Act, or CAFA. At issue in Standard Fire Insurance Co. v. Knowles was the transparent attempt by a named plaintiff to ouster federal court jurisdiction by “stipulating” that the damages sought through a class action complaint would not exceed the $5,000,000 minimum jurisdictional limit of CAFA. 

In a brief and direct decision, Justice Stephen Breyer disallowed the use of such a pre-certification stipulation, concluding that prior to the issuance of any certification order, a named plaintiff does not have the ability to bind absent class members and to concede the value of those class members’ claims.

Knowles was the named plaintiff in an action filed in Arkansas state court against Standard Fire concerning an alleged practice of failing to include general contractor fees in homeowner’s insurance loss payments. The complaint filed by Knowles, as well as an attachment to the complaint, contained a stipulation that Knowles and the Class would not seek to recover damages “in excess of $5,000,000 in the aggregate.” 

Accordingly, after Standard Fire removed the action to federal court under CAFA jurisdiction, Knowles moved to remand the action back to state court based on the stipulation that Knowles claimed made the “amount in controversy” fall beneath the $5,000,000 CAFA threshold and therefore defeated jurisdiction under CAFA. While the federal district court agreed with Knowles, other cases reached the opposite view, and thus the issue ended up at the Supreme Court.

In Knowles, the district court had found that the amount at issue would have exceeded the $5,000,000 minimum limit, but for the stipulation. As such, the Supreme Court had little difficulty concluding that the stipulation was ineffective to bind absent class members because, at the precertification stage, the proposed class members are not yet – and potentially never will be – parties to the action, and thus the named plaintiff cannot bind those non-parties. At the pre-certification stage, the named plaintiff cannot bind “anyone but himself.”

In enacting CAFA, Congress sought to relax the jurisdictional threshold of class actions and ensure “Federal court consideration of interstate cases of national importance.” The unilateral “stipulation” attempted in Knowles and in other cases not only frustrated the intent of Congress but also prejudiced the claims of absent class members. The Supreme Court correctly restored the balance in CAFA.

FINRA Panel Rules on Charles Schwab's Challenge to FINRA Rules Prohibiting Class Action Waiver Clauses

In October 2011, Charles Schwab ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement.

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules.

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules: first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated."

On February 21, 2013, a FINRA arbitration panel ruled on FINRA's and Schwab's cross-motions for summary judgment (Department of Enforcement v. Charles Schwab & Company). The panel found that:

Enforcement [of the FINRA rules preserving judicial class actions] is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act." 

However, the panel also ruled that Schwab's arbitration language violated FINRA Rule 2268(d)(1). Rule 2268(d)(1) specifies the circumstances in which arbitrators may arbitrate consolidated claims. The panel noted that since FINRA rules prohibit arbitration on a class action basis,

it is clear that consolidation [under Rule 2268(d)(1)] is a non-representative type of procedure, distinguished from class actions." 

The panel reasoned that the Federal Arbitration Act does not bar enforcement of Rule 2268(d)(1) because the Act does not dictate how an arbitration forum should be governed and operated or prohibit the consolidation of individual claims. Therefore, Schwab was, inter alia, ordered to "cease using the portion of the Waiver purporting to delimit the authority of the arbitrators" to consolidate individual (non-representative) claims and notify customers that such a limitation is not effective. In addition, the panel fined Schwab $500,000.

While the dispute involved the arbitration provision in Schwab's customer agreements, the panel's decision potentially opens the door for the insertion of similar class action waiver clauses in employment agreements for those working in the financial services industry.

The panel's decision is subject to appeal to, and/or review by, FINRA's National Adjudicatory Council within 45 days.

California Supreme Court Allows "Continuous Accrual" Doctrine to Avoid Statute of Limitations for "Unfair" UCL Claim

Seeking to clarify the extent to which the four-year statute of limitations applies to claims under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), a unanimous California Supreme Court today issued its decision in Aryeh v. Canon Business Solutions, Inc., allowing at least a portion of the plaintiff’s UCL claim to proceed beyond demurrer.

Relying on the continuous accrual doctrine, the Court explained that this equitable exception to the usual rules governing limitations periods would permit the plaintiff to pursue:

at least some [alleged unfair] acts within the four years preceding suit, [and thus] the suit is not entirely time-barred.”


The plaintiff ran a copying business and entered into two agreements with Canon (one in November 2001 and one in February 2002) to lease copiers. The agreements required the plaintiff to pay monthly rent for each copier, subject to a maximum copy allowance. If plaintiff exceeded the monthly allowance, he had to pay an additional per copy charge. The agreements also provided that Canon would service the copiers. 

Beginning in 2002, plaintiff noticed discrepancies between meter readings taken by Canon employees and the actual number of copies made on each copier, and he began compiling independent records. Plaintiff alleged that Canon employees had run thousands of test copies during 17 service visits between February 2002 and November 2004, which he claimed resulted in him exceeding his monthly allowances and having to pay excess copy charges and fees to Canon.

Plaintiff delayed until January 2008 before he filed a single-claim complaint for violation of the UCL. In that complaint, plaintiff alleged that Canon’s practice of charging for test copies implicated both the unfair and fraudulent prong of the UCL.

Canon demurred to the complaint, contending that plaintiff’s claim was barred by the four-year statute of limitations for UCL claims. After permitting plaintiff leave to amend the complaint two times, the trial court dismissed the action. The Court of Appeal, in a 2-1 decision, affirmed the dismissal and held that neither the “delayed discovery” rule nor the “continuing violation doctrine” applied to avoid the statute of limitations. The dissenting opinion would have allowed plaintiff to proceed with a portion of his claim under the “continuous accrual” theory for those parts of the claim that were not time-barred.

Supreme Court Decision

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Trial Court Abuses Its Discretion by Forcing Insurer to Bear the Cost of Giving Notice to Putative Class Members

In In re Insurance Installment Fee Cases, 2012 DJDAR 16696 (2012), the California Court of Appeal for the Fourth Appellate District decided an important class action cost recovery issue. The case arose in the insurance context.

A class action was filed against State Farm (“State Farm”) by a class representative. The representative pursued discovery seeking access to the class members’ personal and payment information, designed to identify which insureds might be eligible as plaintiffs in the class.  State Farm objected to the discovery requests. The plaintiff filed motions to compel the requested documents and the parties agreed to refer the dispute to a discovery referee. The discovery referee overruled State Farm’s objections. State Farm filed written objections to the referee’s recommendation which were subsequently overruled by the trial judge. The trial court also ordered State Farm to pay for and to mail out the notices regarding the discovery propounded by the plaintiffs. The merits of the litigation were subsequently decided in favor of State Farm.

State Farm filed a memorandum of costs after prevailing at the trial court level. In the cost memorandum State Farm sought to recover the $713,463 it incurred in sending out the notices to putative class members. The plaintiffs filed a motion to tax those costs. The trial court granted the motion to tax costs in its entirety.

The court of appeal reversed the trial court’s decision in part, and concluded the trial judge abused his discretion in taxing the costs relating to the mailing of the notices to putative class members. 

The court of appeal noted that certain cost items may be awarded in the trial court’s discretion if they are “reasonably necessary to the conduct of the litigation.” CCP § 1033.5(c)(2) and Seever v. Copley Press, 141 Cal. App. 4th 1550, 1558 (2006). 

However, when a party demands discovery involving significant “special attendant costs” beyond those typically involved in responding to routine discovery, the demanding party should bear those costs if the party is not successful in prevailing in the litigation. 

In reversing the trial court’s decision, the court of appeal reasoned that the costs State Farm incurred in providing the notice were “special attendant” costs beyond those involved in responding to routine discovery.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

District Court Finds Class Action Waiver Clauses in Employment Agreements Are Permissible Under FINRA Rules 13204(a) and (b)

On December 4, 2012, in Cohen v. UBS Financial Services, Inc., et al, 12-CIV-2147 ("Cohen"), the United States District Court for the Southern District of New York addressed whether Rules 13204(a) and (b) of the FINRA Code of Arbitration Procedure precluded enforcement of class action waiver clauses in arbitration agreements with financial advisors.

In Cohen, financial advisors filed a putative class action alleging claims for purported violations of the Fair Labor Standards Act, the California Labor Code, and the California Unfair Competition Law.  The financial advisors' compensation plan included an arbitration provision that provided as follows:

[Y]ou and UBS agree that any disputes between you and UBS including claims concerning compensation, benefits or other terms or conditions of employment . . . Will be determined by arbitration . . . By agreeing to the terms of this Compensation Plan . . . , you waive any right to commence, be a party to or an actual or putative class member of any class or collective action arising out of or relating to your employment with UBS . . ."

Rules 13204(a) and (b) of the FINRA Code of Arbitration Procedure state that "class action claims may not be arbitrated under the Code" and that "[a]ny claim that is based upon the same facts and law, and involves the same defendants as in a . . . Putative class action . . . shall not be arbitrated under the Code." 

The financial advisors argued that these rules precluded enforcement of the class action waiver clauses.

The Court disagreed stating that "Plaintiffs' selective reading of the Code as absolutely prohibiting class and collective waiver is incorrect." The Court reasoned that Rule 13204 also provides that its subparagraphs:

do not otherwise affect the enforceability of any rights under the Code or any other agreement. [emphasis in Court's Order.] The rule therefore: (1) recognizes that parties may choose to enter into additional agreements beyond the scope of the Code; and (2) provides that the Code does not affect the enforceability of these additional agreements. That the arbitration agreements here would preclude Plaintiffs from pursuing a class or collective action does not change the Court's view."

Can a Plaintiff Evade CAFA's Jurisdictional Threshold By Stipulating to the Amount of Damages the Plaintiff Will Seek on Behalf of the Class?

On August 31, 2012, the United States Supreme Court granted review in Standard Fire Ins. Co. v. Knowles. The issue presented is whether a plaintiff can preclude removal of his state class action complaint under the Class Action Fairness Action of 2005 (“CAFA”) (PDF) by stipulating that he will not seek damages for the class in excess of the $5 million jurisdictional threshold. 

Knowles attached to his putative class action complaint a signed stipulation in which he stated he will not “seek damages for the class as alleged in the complaint . . . in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).”

Although the Arkansas federal district court determined that the aggregated claims of the individual class members exceeded the $5 million threshold, it remanded the case to state court. Central to the district court’s ruling is the principle that the plaintiff is “master of his complaint” and can plead to avoid federal jurisdiction. It found dispositive the fact that plaintiff signed a stipulation that he would not seek damages in excess of the jurisdictional threshold and that he was bound by that stipulation. 

The stipulation comported with a recent Arkansas statute that permits a plaintiff to specify an amount in controversy in the complaint in order to establish subject matter jurisdiction. The district court further reasoned that should plaintiff amend its complaint down the road to seek additional damages that trigger CAFA, then Standard Fire could file another motion to remove the case.

In its opening brief, filed on October 22, 2012, Standard Fire hits hard on the Arkansas venue to support its arguments that plaintiff’s stipulation cannot circumvent CAFA. 

Plaintiff filed this putative class action . . . in Miller County Circuit Court, a court known to be a ‘magnet jurisdiction’ for class action plaintiffs’ lawyers because of its willingness to force defendants to engage in prohibitively expensive and wide-ranging discovery that coerces substantial settlements prior to class certification, and its willingness to certify classes that have been rejected in other jurisdictions.” 

Under this backdrop, Standard Fire presents several strong arguments. These include arguments that:

  1. the district court’s remand order violates the fundamental policy behind CAFA to curtail state court class action abuses by authorizing defendants to remove sizeable interstate class actions to federal court;
  2. CAFA, unlike traditional diversity jurisdiction, specifies a methodology for determining the jurisdictional threshold;
  3. under that methodology, which expressly permits aggregation of individual claims, if the aggregate total of the individual class member’s claims exceed $5 million, CAFA has been triggered and the jurisdictional inquiry ends; and,
  4. under basic class action doctrine and due process principles, a plaintiff has no authority to bind absent individual class members to a stipulation to reduce their individual claims before a class has been certified.

Knowles’ brief is due November 28, 2012. Amicus briefs will also be coming down the pipe, and indeed the National Association of Manufacturers filed an amicus brief on October 29 suggesting reversal of the district court’s remand to state court. We will report on future developments on this case.

California Supreme Court Depublishes Decision that Found Claims Adjusters Not Exempt from California's Overtime Pay Requirement


By Larry Golub and Sam Sorich

On July 23, 2012, we reported that the California Court of Appeal (Second Appellate District) held in Harris v. Superior Court that claims adjusters for two insurers were not exempt from California’s overtime compensation laws. More specifically, the court concluded that the duties of those adjusters functioned as the day-to-day operations of the insurers and were not “directly related to management policies or general business operations” to fall within exempt status under California law.

The Court of Appeal’s earlier decision in the case was reversed and remanded by the Supreme Court on December 29, 2011, and the intermediate court was told to apply the correct analysis. Consequently, our prior report expected this second decision, as issued by a divided panel of the Court of Appeal, again to be presented to the Supreme Court seeking a petition for review.

Indeed, Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation, the insurers sued in the action, filed a Petition for Review on September 4, 2012, followed by a request to have the Court of Appeal’s decision depublished, as submitted by the California Employment Law Council.

On October 24, the Supreme Court ended the appellate proceedings in this case by (1) denying the Petition for Review and (2) depublishing the Court of Appeal decision. By this action, while the case is final as between the plaintiff claims adjusters and the insurers, the decision cannot be cited as authority in any other case.

With removal of this case from the precedential decisions of California law, the issue as to whether insurance adjusters in other cases and other contexts are exempt employees will continue to be litigated.

Court of Appeal Again Finds Claims Adjusters Not Exempt from California's Overtime Pay Requirement

By Sam Sorich and Larry Golub

Finding that the duties of insurance claims adjusters function as the day-to-day operations of an insurer and not “directly related to management policies or general business operations,” a divided panel of the California Court of Appeal (Second Appellate District) held that such adjusters are not exempt from California’s overtime compensation laws.

The July 23, 2012 decision in Harris v. Superior Court is the latest – and potentially not the last word – in the saga as to whether adjusters employed by two insurance companies were entitled to overtime pay. As we earlier reported, the California Supreme Court, in a unanimous opinion issued December 29, 2011, had ruled that the Court of Appeal used an erroneous analysis when it decided that claims adjusters were non-exempt and thus sent the case back to the Court of Appeal to use a correct analysis.

Under the California Labor Code, employees are generally entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

The Harris case involves claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation. The employees sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime compensation.

The Court of Appeal originally ruled in favor of the employees. However, as noted above, that ruling was reversed by the Supreme Court, which directed the Court of Appeal to examine the question of whether the adjusters were entitled to overtime pay in light of federal regulations that guide the interpretation of California Wage Orders on the administrative exemption.

In its reconsideration of the case, the Court of Appeal noted that under the applicable California Wage Order, in order for an employee to be subject to the administrative exemption, the employee must be primarily engaged in work that qualitatively is “directly related to management policies or general business operations.” Federal regulations describe the “directly related” requirement.

The court conceded that the federal regulations’ description of “directly related” is not perfectly clear but concluded, “We take it to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component of the ‘directly related’ requirement. In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.”

Applying this interpretation to the Liberty Mutual and Golden Eagle adjusters, the Court of Appeal held:

The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ‘directly related’ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like. 

According to the court, none of that work was carried on at a level of management policy or general operations. Instead, it was all part of the day-to-day operation of the insurers’ business. Thus, the adjusters were not administrative employees and, as a result, they were entitled to overtime compensation.

In light of the importance of this decision, including the fact that the 2-1 opinion was issued by a divided panel of the Court of Appeal, one would expect another request to the Supreme Court that it review the Court of Appeal’s latest ruling.

Action Based on 7-Eleven's Payroll System Fails, Court of Appeal Rules

In Aleksick v. 7-Eleven, Plaintiff Aleksick represented a class claiming that 7-Eleven's payroll system violated California Business and Professional Code 17200. The complaint alleged that 7-Eleven's method of converting partial hour worked from minutes to hundredths of an hour sometimes docked employees of few seconds of time, and therefore shorted them commensurate pay. The trial court had granted 7-Eleven's summary judgment motion. The California Court of Appeal, Fourth Appellate District, Division One, affirmed.

First, the Court held, raising a 17200 claim based on "unlawful" conduct required Aleksick to point to a particular statute that 7-Eleven had violated, since "section 17200 'borrows' violations of other laws and treats them as unlawful practices." Although Aleksick cited to various Labor Code sections in her appellate papers, she had not cited to any in her complaint. The Court ruled that Aleksick should have sought leave to amend to allege such violation, but did not do so, and therefore she had forfeited her argument under the Labor Code wage statutes.

Second, even if her complaint had alleged violation of the Labor Code wage statutes, the Court still would have found against her because the Labor Code governs "the employer-employee relationship, and undisputed evidence shows 7-Eleven was not the class members' employer." Aleksick's employer was the franchisee who operated a 7-Eleven franchise. 7-Eleven was the franchisor. Aleksick conceded that 7-Eleven was not her employer. The Court held that 7-Eleven's provision of payroll services to its franchisees did not change this relationship or render 7-Eleven liable under the Labor Code.

Third, Aleksick failed to establish "unfair" conduct on the part of 7-Eleven under section 17200. Where an "unfair" act is predicated on public policy, the Court explained, "the public policy which is a predicate to the action must be 'tethered' to specific constitutional, statutory, or regulatory provisions." Aleksick argued that 7-Eleven's payroll practices are "tethered" to the public policy in favor of full payment to employees of all hours worked, as codified in the Labor Code. However, because 7-Eleven was not the employer, these statutes did not apply to it.

The narrow basis of this ruling is simply that 7-Eleven was not the employer, and therefore a 17200 claim based on violation of Labor Code statutes could not apply to it. It is important to note that the Court of Appeal explicitly did not rule on the issue of whether an employer could be liable under the Labor Code wage statutes and section 17200 for using the payroll practices that 7-Eleven uses. (See Opinion, at 22, fn. 6.) Thus, this ruling provides no guidance to employers as to whether the practice of converting partial hours worked from minutes to hundredths of an hour is permissible. As the Court recounts, the trial court had determined that the amounts docked were too minimal to be a sufficient basis for a 17200 claim -- however, the Court of Appeal did not affirm this part of the trial court's ruling.

Originally posted at Barger & Wolen's Employment Law Observer blog.

California Supreme Court Refines the Scope of Considering "the Merits" of the Case in Class Certification Motions

by Larry M. Golub and Sandra I. Weishart

On April 12, 2012, the California Supreme Court issued its long-awaited decision in Brinker Restaurant Corp. v. Superior Court. Plaintiffs had sought to certify three subclasses of California restaurant employees based on the employer’s alleged violations of California’s wage and hour laws relating to rest breaks and meal breaks. The decision provides critical guidance for all employers, including insurers, as to how they should address the issue of rest breaks and meal breaks for their employees.

The trial court in San Diego certified the three subclasses, and the Court of Appeal, Fourth Appellate District, reversed that order, rejecting certification of all three subclasses. The Supreme Court accepted review in October 2008 and, on review, affirmed certification of one subclass, rejected certification of one subclass, and remanded the case to the trial court for further proceedings as to whether the third subclass should be certified. More significantly, the Supreme Court clarified when trial courts may consider the merits of a claim at the certification stage – and the Court itself addressed the merits on one issue in the case so as to provide guidance to the trial court in the next phase of the lawsuit.

In the course of its opinion, the Supreme Court also provided important substantive rulings as to the nature of employers’ duty to provide rest periods and meal breaks to non-exempt restaurant employees, in particular, and non-exempt employees in other industries, more generally. This post addresses the Court’s class certification rulings, and Michael Newman of this office analyzes the substantive employment law questions here

Considering the Merits:

After reviewing the basic class certification principles, the Supreme Court addressed the often-disputed issue as to when a trial court should consider the merits of a plaintiff’s claims in deciding a motion for class certification. In Brinker, the only class certification element at issue was whether individual questions or questions of common interest predominated with respect to the three subclasses the plaintiffs sought to certify. 

The trial court ruled that the three subclasses presented common questions that predominated and, in certifying the class, it refused to consider the correctness of the employer’s legal position concerning its obligations to provide rest breaks and meal breaks. In contrast, the court of appeal concluded the refusal to consider the merits was erroneous because the trial court needed to resolve the “threshold issue” of duty in determining whether individual or common issues predominated. The Supreme Court charted a mid-course between these two extremes.

In analyzing the issues, the Supreme Court reviewed a number of its prior decisions, confirming that class certification is essentially a procedural device “that does not ask whether an action is legally or factually meritorious,” and that “resolution of disputes over the merits of a case generally must be postponed until after class certification has been decided.”  The Court nevertheless explained that there are “issues affecting the merits of a case [that] may be enmeshed with class action requirements.” In those instances, when “evidence or legal issues germane to the certification question bear as well on aspects of the merits, a court may properly evaluate them.” In other words:

“To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them.”

Independent of these basic tenets of class certification, the Supreme Court next explained that a trial court can, at the parties’ request, examine the merits of their substantive legal disputes. Quoting its well-known decision on the ability of trial courts to consider the merits on class certification motions, Linder v. Thrifty Oil Co., 23 Cal. 4th 429, 443 (2000), the Court stated:

“[W]e see nothing to prevent a court from considering the legal sufficiency of claims when ruling on certification where both sides jointly request such action.”

While the Court did not address any merits issues “enmeshed” with the class action requirements, it did nevertheless analyze a merits issue specifically requested by the parties concerning whether the employer’s duties to provide employee rest periods and meal breaks are common issues in the plaintiffs’ three subclasses. 

The Class Certification Rulings:

The first subclass the Court examined was the “rest period subclass” that covered class members “who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties.” On this subclass, the plaintiffs merely asserted that the employer failed to provide the requisite rest periods for non-exempt employees based on the employer’s own “uniform corporate rest break policy” that allegedly violated the applicable Wage Order.  The Court observed that the employer “conceded” the existence of “a common, uniform rest break policy.” 

The Court rejected the employer’s argument that employees could waive their rest breaks and that this was an individual issue, advising that “[n]o issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it.”  Accordingly, the Court concluded that the “rest period subclass” was certifiable and that this issue was not “dependent upon resolution of threshold legal disputes over the scope of the employer’s rest break duties.”

The Court then turned to the “meal period subclass,” defined as class members “who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties.” On this subclass, the Court found, among other issues, that the subclass not only covers every employee who might have a claim under the plaintiffs’ failure to provide meal periods theory, but also, because of the timing as to when a meal break was taken, might include employees with no possible claim under the applicable Wage Order or Labor Code statute.  

The Supreme Court merits ruling concerning the existence of employees who would have no claim was, as noted above, specifically requested by the parties.  The Court found the subclass definition adopted by the trial court to be over-inclusive since it “embraces individuals who now have no claim” against the employer. Accordingly, the Court remanded the certification question as to this subclass to the trial court to reconsider based on the clarification of the substantive law provided by the Court.

Finally, the Court addressed the “off-the-clock subclass,” which was an offshoot of the meal period subclass, and was composed of class members who worked without pay, allegedly because the employer “required employees to perform work while clocked out during their meal periods” and “they were neither relieved of all duty nor afforded an uninterrupted 30 minutes, and were not compensated.” 

For this claimed subclass, the Court found that, unlike the rest period subclass, there was no common policy or apparent common method of proof. Rather, the “only formal Brinker off-the-clock policy submitted disavows such work, consistent with state law.”  Additionally, plaintiffs had failed to present “substantial evidence of a systematic company policy to pressure or require employees to work off the clock.” Consequently, “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.” Such individual issues and a lack of common issues required dismissing any “off the clock subclass.”

Ninth Circuit Holds Federal Arbitration Act Preempts California Law Prohibiting Arbitration of Claims for Broad Public Injunctive Relief

On March 7, 2012, the Ninth Circuit Court of Appeals issued an opinion that significantly limits the power of California, and other states, to restrict the enforcement of arbitration agreements and class action waiver clauses.

In Kilgore, et al. v. KeyBank, et al., the plaintiffs were students of a private helicopter vocational school that had taken out private student loans from KeyBank. The helicopter school filed for bankruptcy before the students completed their training. 

The students brought an action under California's Unfair Competition Law ("UCL"), Business and Prof. Code section 17200, alleging that KeyBank had knowledge that "the private student loan industry - and particularly aviation schools - was a slowly unfolding disaster," yet continued to make loans to students. The students sought an injunction preventing KeyBank from attempting to collect on the student loans or from reporting students who failed to pay their loans to credit rating agencies. KeyBank moved to compel arbitration under a contractual arbitration provision in the promissory notes the students had signed. The arbitration provision provided:


There shall be no authority for any Claims to be arbitrated on a class action basis.  Furthermore, an arbitration can only decide your or my Claim(s) and may not consolidate or join the claims of other persons that may have similar claims.” 

The arbitration clause also permitted the students to opt-out of the arbitration provision if they gave written notification within sixty days of signing the note.

The United States District Court refused to order arbitration under California's Broughton-Cruz rule which prohibited the arbitration of claims for broad, public injunctive relief such as those made under the UCL and the California Legal Remedies Act.  The Ninth Circuit reversed. 

The Ninth Circuit noted that the Federal Arbitration Act ("FAA") has a savings clause that allows arbitration agreements to be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract."  9 U.S.C. section 2.  The FAA, therefore,

preserves generally-applicable contract defenses and thus allows for invalidation of arbitration agreements in limited circumstances - that is, if the clause would be unenforceable 'upon such grounds as exist at law or in equity for the revocation of any contract.'  9 U.S.C. section 2. 

However, any other state law rule that purports to invalidate arbitration agreements is preempted because the Act 'withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.'" 

In applying these principles, the Ninth Circuit recognized that the United States Supreme Court has identified two situations where the state law rule will be preempted. The first is when the state law rule provides an outright prohibition to the arbitration of a particular type of claim. The other, more complicated, situation is when a doctrine thought to be generally applicable, such as duress or unconscionability, is applied in a fashion that disfavors arbitration. 

The Ninth Circuit held that the Broughton-Cruz rule was an outright prohibition on the arbitration of a particular type of claim, specifically claims for broad public injunctive relief, and was, therefore, preempted by the FAA.  In so holding, the Ninth Circuit recognized that its ruling would undercut the public policy behind state statutes:

We are not blind to the concerns engendered by our holding today. It may be that enforcing arbitration agreements even when the plaintiff is requesting public injunctive relief will reduce the effectiveness of state laws like the UCL  It may be that FAA preemption in this case will run contrary to a state's decision that arbitration is not as conducive to broad injunctive relief claims as the judicial forum.  And it may be that state legislatures will find their purposes frustrated. These concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court in Concepcion."

In addition, the Ninth Circuit found that the arbitration clause at issue was not unconscionable, reasoning that it was conspicuous, plainly set forth, and provided a means of opting-out.

FINRA and Charles Schwab Battle over Class Action Waiver Clauses

Last October, Charles Schwab & Company ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement. 

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules. 

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules:  first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated." 

On the same day that FINRA instituted the disciplinary proceeding, Schwab filed a lawsuit, Charles Schwab v. Financial Industry Regulatory Authority, Inc., in United States District Court, Northern District of California, seeking a declaration that FINRA may not enforce its rules to limit class action waiver clauses in arbitration agreements on the ground that such rules run afoul of the Federal Arbitration Act. 

FINRA has noticed a motion to dismiss Schwab's complaint that is currently scheduled for hearing on April 3, 2012. In turn, Schwab has filed a motion for a preliminary injunction against FINRA that is also scheduled for April 3, 2012.   

Barger & Wolen will continue to follow this case as it can impact other financial service and insurance companies. If you have any questions, please contact Gregory Eisenreich at

California Supreme Court Rules that Court of Appeal Used Incorrect Legal Analysis in Deciding that Claims Adjusters Are Not Exempt from Overtime Pay Requirement

By Sam Sorich and Larry Golub

In a unanimous opinion handed down on December 29, 2011, the California Supreme Court ruled in Harris v. Superior Court that the Court of Appeal used an erroneous analysis when it decided that claims adjusters are not exempt from California’s overtime pay requirement. 

The California Labor Code sets forth a general requirement that employees are entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

Claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime pay.

The California Court of Appeal rejected the insurance companies’ argument, primarily relying on a prior Court of Appeal decision in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001). The companies asked the California Supreme Court to review the Court of Appeal’s decision.

The Supreme Court’s ruling concluded that the Court of Appeal used an incorrect analysis when it rejected the argument that the adjusters were administrative employees. According to the Supreme Court, the Court of Appeal relied too heavily on the administrative/production worker dichotomy used in the Bell decision and failed to consider more recent regulations issued by the California Industrial Welfare Commission and applicable federal regulations which are supposed to guide California in applying the administrative employee exemption to the general overtime requirement.

In reversing the Court of Appeal’s decision, the Supreme Court remanded  the case back to the Court of Appeal with directions that it apply the legal standards that are set forth in the Supreme Court’s ruling.

California Courts Continue to Rein in Class Certification in the Marketing and Sale of Insurance

By Larry Golub and Marina Karvelas

In Fairbanks v. Farmers New World Life Ins. Co., decided July 13, 2011, California's Second Appellate District, Division Three, upheld the trial court’s denial of class certification for a proposed nationwide class of universal life insurance policyholders. Plaintiffs sued Farmers New World Life Insurance Company and Farmers Group, Inc. (collectively, “Farmers”) alleging violations of the Unfair Competition Law (Bus. & Prof. Code, 17200, “UCL”) in the marketing and sale of universal life insurance policies.  

The decision, authored by Justice Walter Croskey, contains in its opening pages an extensive discussion of universal life insurance policies. Justice Croskey’s discussion is well worth the read as it presents in simple and understandable terms many of the intricacies of universal life insurance.

Plaintiffs alleged in their complaint numerous theories of wrongdoing against Farmers; however, their motion for class certification was narrowly tailored and based only on one of the three prongs of the UCL, that of a fraudulent business practices. 

Relying on a series of recent decisions (Knapp v. AT&T Wireless Services, Inc., 195 Cal. App. 4th 932 (2011); Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830 (2009), and Pfizer Inc. v. Superior Court, 182 Cal. App. 4th 622 (2010)), the Fairbanks opinion reiterates the requirements for class certification under the fraudulent prong of the UCL:

“[W]hen the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.”

Finding the case “virtually identical” to Kaldenbach, the Court of Appeal upheld the trial court’s determination that the alleged misrepresentations were not commonly made to members of the class and thus class certification was properly denied.  (For a discussion of the Kaldenbach case, see our firm’s prior blog.)

Plaintiffs argued that the class action should proceed on the theory that the language in the policies was misleading. However, the class certification motion was not based on the theory that the policy language standing alone was misleading. Even if it were, “it is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them.” 

In addition, the Fairbanks Court determined that the materiality of the alleged misrepresentation was likewise not subject to common proof. Relying on the Supreme Court’s recent decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 332 (2011), the standard for materiality is whether “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question.” While noting that the standard is objective, the Court of Appeal nonetheless agreed with the trial court that the materiality of the representations at issue in the case was a matter of individual proof for any given policyholder. 

In concluding, the Court of Appeal refused to address whether commonality existed with respect to any other purported classes. None of the alternative theories were presented to the trial court in the class certification motion. “[W]e leave it to the trial court’s discretion, on remand, to determine whether it should consider any subsequent motion for class certification, should plaintiffs choose to proceed on an alternative basis.”

As is often the case in the class certification context, plaintiffs will seek to define as narrow a class as possible to present a “common issue” for certification purposes, which attempt sometimes undercuts not only the ability to obtain certification (as in the Fairbanks situation) but, even if it does survive certification, sets up a defense motion for summary judgment.

No Certification in Massive Wal-Mart Class Action

By Larry M. Golub and Misty A. Murray

On June 20, 2011, the United States Supreme Court issued its long-anticipated decision in Wal-Mart Stores Inc. v. Dukes et al., 564 U.S. ____ (2011), decertifying a class of 1.5 million female Wal-Mart employees who alleged that they were discriminated against on the basis of their sex and were denied equal pay and promotions. Justice Scalia issued the majority opinion, parts of which were joined in by all nine Justices. 

The proposed nationwide class in Wal-Mart consisted of

[a]ll women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotion policies and practices.” 

The three class representatives did not allege that Wal-Mart had an express corporate policy of discrimination, but rather that local managers had broad discretion over pay and promotions and exercised that discretion disproportionately in favor of men and that the corporate culture permitted bias against women. 

The primary evidence of the alleged uniform corporate practice consisted of statistical evidence of salaries and promotions heavily favoring male employees and anecdotal reports of female employees, along with the testimony of a sociologist who conducted a “social” analysis of Wal-Mart’s corporate culture. 

The requested relief sought an injunction to prohibit Wal-Mart’s discriminatory practices, and also a claim to recover back pay.

The District Court certified the class, finding that the class met the threshold requirements of Federal Rule of Civil Procedure 23(a)(2) that are required for all class actions, and then the requirements of Rule 23(b)(2), which requires that the

party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” 

In other words, a Rule 23(b)(2) class is typically limited to injunctive or corresponding declaratory relief.

A divided en banc Ninth Circuit panel affirmed the trial court ruling, finding that the commonality requirement was met and that the back pay claim did not predominate over the injunctive relief request.

The Ninth Circuit also found that the class could be manageably tried and that Wal-Mart would not be denied its right to present statutory defenses because the District Court could permit Wal-Mart to present individual defenses to randomly selected sample cases. 

The United States Supreme Court granted a writ of certiorari on December 6, 2010, and we reported on that event. The Court limited its review to whether claims for monetary relief could be certified under Rule 23(b)(2) and, if so, under what circumstances.

In this week’s ruling, the Supreme Court reversed the Ninth Circuit’s decision and decertified the class. Writing for five of the nine members of the Court, Justice Scalia first found that common issues were lacking under Rule 23(a)(2). Under that part of Rule 23, the Court reiterated that

“[c]ommonality requires the plaintiff to demonstrate that the class members ‘have suffered the same injury,’” (citation omitted) and that the plaintiff’s “common contention . . . must be of such a nature that it is capable of classwide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” 

The majority opinion further advised that

“Rule 23 does not set forth a mere pleading standard,” but an affirmative demonstration that each of the components of that rule have been met after the trial court has made a “rigorous analysis,” which frequently “will entail some overlap with the merits of the plaintiff’s underlying claim.”

With respect to the case before it, the majority opinion explained that “‘significant proof’ that Wal-Mart ‘operated under a general policy of discrimination’” was “entirely absent here.” It also observed that the testimony of plaintiff’s sociologist as to his analysis if Wal-Mart’s corporate culture was “worlds away” from “significant proof that Wal-Mart operated under a general policy of discrimination.” 

The opinion found that the statistical and anecdotal evidence “falls well short” and even if such evidence was taken at face value, it was “insufficient to establish that respondents’ theory can be proved on a class wide basis” or that “one named plaintiff’s experience of discrimination” was sufficient “to infer that ‘discriminatory treatment is typical of [the employer’s employment] practices.” 

Given the lack of proof of a uniform corporate practice, the commonality requirement of Rule 23(a)(2) was lacking.

The majority opinion also concluded that the back pay claims were improperly certified under Rule 23(b)(2) because claims for individualized monetary relief do not satisfy the Rule’s requirement that a single injunction or declaratory judgment provide relief for the entire class. 

Here, given the individualized nature of each employee’s claim, individualized proof of damages as to back pay would be required, making the class unmanageable under Rule 23(b)(2). Rather, Justice Scalia wrote, “we think it clear that individualized monetary claims belong in Rule 23(b)(3)” and the “procedural protections attending the (b)(3) class.” 

The minority opinion, joined in by four Justices, only agreed with the second basis for the majority opinion’s ruling, and expressly dissented from the finding that there was no commonality. Writing for the concurring/dissenting opinion, Justice Ginsburg observed:

“The evidence reviewed by the District Court adequately demonstrated that resolving those [gender discrimination] claims would necessitate examination of particular policies and practices alleged to affect, adversely and globally, women employed at Wal-Mart’s stores.  Rule 23(a)(2), setting a necessary but not a sufficient criterion for class-action certification, demands nothing further.”

Justice Ginsburg also would have remanded the case to the trial court to determine if plaintiffs could have complied with the requirements for monetary claims under a Rule 23(b)(3) class, but observing that the majority opinion “disqualifies the class at the starting gate, holding that the plaintiffs cannot cross the ‘commonality’ line set by Rule 23(a)(2).”

In the few days since the Supreme Court issued the Wal-Mart decision, numerous legal and non-legal commentators have expressed their opinion as to the reach of the decision, with some bemoaning the purported demise of class action litigation and others observing that the decision can be limited to its facts and the employment context. Time will tell whether the Wal-Mart decision substantially alters the nature of class litigation.

Another Toehold in Using the UCL to Scale the Barriers of Moradi-Shalal

In 1988, the California Supreme Court issued its landmark decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, disallowing private rights of action based on violations of the Unfair Insurance Practice Act (“UIPA”), otherwise known as third-party bad faith claims. Shortly thereafter, the prohibition was extended to first-party bad faith claims.

Most significantly, a series of Court of Appeal decisions disallowed violations of the UIPA to be brought as claims under the California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or the “UCL”). 

As one court concluded:

we have no difficulty in [holding] the Business and Professions Code provides no toehold for scaling the barriers of Moradi-Shalal.” Safeco Ins. Co. v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990). 

More recently, another court held that “parties cannot plead around Moradi-Shalal’s holding by merely relabeling their cause of action as one for unfair competition.” Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061, 1070 (2004).

In November 2009, we reported on Zhang v. Superior Court, a case that rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. 

The case was short-lived, as the Supreme Court accepted review in February 2010 and the decision became depublished. While the Zhang case is fully briefed, the Supreme Court has not yet set oral argument.

On June 15, however, another Court of Appeal decision issued again sought to undercut the prohibition on using the UCL to pursue UIPA-like claims. 

In Hughes v. Progressive Direct Ins. Co., the plaintiff sued his insurer in a purported class action based on the automobile insurer’s alleged company-wide practice of steering its insureds to repair shops that were part of Progressive’s Direct Repair Program (DRP) and misrepresenting their ability to take their vehicle to a non-DRP repair shop. 

The sole claim alleged was under the UCL, but the predicate statute relied on to support the UCL claim was Insurance Code section 758.5.

That statute, which prohibits insurers from requiring an insured’s vehicle to be repaired at a specific repair shop, or suggesting a specific shop be used, unless the insured is informed in writing of his or her rights to select another repair shop, does not, just like the UIPA, permit a private right of action but only enforcement by the Insurance Commissioner pursuant to the UIPA. 

Accordingly, the trial court sustained the insurer’s demurrer to the complaint, concluding that just as the UCL could not be used to circumvent UIPA claims under Moradi-Shalal, neither could a UCL claim proceed based upon Section 758.5.    

The Court of Appeal reversed, and concluded that Moradi-Shalal does not bar a claim by an insured against an insurer under the UCL based solely on the allegations the insurer violated Section 758.5. 

After discussing in detail the decisions issued since the time of Moradi-Shalal vis-à-vis the UCL, as well as the legislative history of Section 758.5, and then relying on a parsed reading of the language of the UCL in which its remedies are “cumulative” to other laws unless otherwise “expressly” provided, the court found that an alleged violation of a statute like Section 758.5, so long as it does not involve conduct violating the UIPA, “may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.”  

The decision, however, was not one of clear unanimity. One of the three Justices on the appellate panel issued his own concurring opinion, in which he expressed his “considerable misgivings” as to the majority opinion. After noting that the opinion “hangs precipitously on one word, namely ‘express,” Justice Fred Woods lamented that the social problems sought to be addressed by the Moradi-Shalal decision and various legislative remedies might now be undone, and that he saw “storm warnings on the horizon.”

Perhaps, just as the Supreme Court accepted review of the Zhang case last year to address that appellate decision seeking to create a chink in the armor of Moradi-Shalal, it will similarly accept review of Hughes to address this latest attack on the scope of Moradi-Shalal and bring some certainty to whether the reach of the UCL is as broad as these two lower appellate courts have held

California Court Dismisses UCL Claim Over Fiji Water


Sometimes a green drop is just a green drop.

Last week, the California Court of Appeal, First Appellate District, dismissed a purported class action against the owners of Fiji Water, finding as a matter of law that the company’s use of a green drop on its bottle, along with a slogan “Every Drop is green,” would not mislead a reasonable consumer. The case, Hill v. Roll International Corporation, is the most recent decision to disallow the use of California’s Unfair Competition Law, Business & Professions Code section 17200 et seq. (“UCL”), to restrict the marketing of a product that fails to contain any misleading symbol, slogan or message.

At issue in the case was Fiji Water’s labeling for its bottled water and specifically the use of a green drop on the front of the product, which the plaintiff contended “looks similar to environmental ‘seals of approval’ . . . by several independent, third–party organizations.” The plaintiff asserted that the use of the green drop connotes approval by such third-party organizations and that the green drop is “deceptive because it conveys that the products is environmentally sound and superior to other bottled waters that do not contain the Green Drop.” 

In addition to the UCL claim, the plaintiff sued under the False Advertising Law, Business & Professions Code section 17500 et seq.; the Consumer Legal Remedies Act, Civil Code section 1750 et seq.; and common law claims for fraud and unjust enrichment. The trial court dismissed the complaint on demurrer, without further leave to amend.

On appeal, the court first observed that, in resolving an appeal based on the reasonable consumer standard following a judge trial, some courts have evaluated whether an advertisement is deceptive as a pure question of law, while other courts have generally – though not invariably – found it to raise a question of fact such that it cannot be decided on demurrer. 

Here, however, the court found that accepting all the facts in the complaint as true, “no reasonable consumer would be mislead to think that the green drop on Fiji water represents a third party organization’s endorsement or that Fiji water is environmentally superior to that of the competition.” (Emphasis by Court.)

The plaintiff specifically relied on the California Environmental Marketing Claims Act, Business & Professions Code section 17580 et seq., along with Guidelines for the Use of Environmental Marketing Claims, issued by the Federal Trade Commission (“FTC”) to support her claims. Despite accepting for purposes of demurrer that all of plaintiff’s claims as to being misled were true, her claims still did not satisfy the reasonable consumer standard as expressed in the FTC guidelines and California’s consumer laws, which require her to “show potential deception of consumers acting reasonably in the circumstances – not just any consumers.”   This is not a “least sophisticated consumer,” an “unwary consumer,” or an “overly suspicious consumer” standard, but “a reasonable consumer in the circumstances.” And, the court emphasized that “the context of the symbol is important.”

Finally, the Court of Appeal took the occasion to distinguish this case from the recent Supreme Court decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), which involved misleading product labeling on the defendant’s locksets which were not wholly “Made in the U.S.A.”  (Our blog on Kwikset is found here.)   Unlike the Kwikset case, which concerned the issue of standing under the UCL, this case did not raise any issue of standing. Moreover, agreeing “wholeheartedly” with the Supreme Court’s statement that “labels matter,” in this case the court only held, once again, that “no reasonable consumer would be mislead to think that the green drop represents a third party organization’s endorsement of that Fiji water is environmentally superior to that of the competition.”

U.S. Supreme Court Invalidates California's Discover Bank Rule on Classwide Arbitration in AT&T Mobility v. Concepcion

By Richard B. Hopkins and John C. Holmes

On April 27, 2011, the United States Supreme Court issued an important decision in AT&T Mobility vs. Concepcion, No. 09-893, impacting the ability of defendants to move to compel arbitration in response to consumer class action complaints.

In a 5-4 decision, the Court overturned a Ninth Circuit ruling that had held an arbitration provision in AT&T Mobility contracts to be invalid. 

The arbitration provision in question required all disputes to be brought in the party’s

individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.

Plaintiffs originally filed an individual claim in federal district court alleging that AT&T improperly charged approximately $30 in sales taxes on mobile phones that AT&T advertised as free. The case was consolidated into a putative class action. 

The question presented in the case was whether §2 of the Federal Arbitration Act preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. This rule is known as the Discover Bank rule, after the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

The majority of the Supreme Court held that requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. The Court further held that class arbitration, to the extent it is mandated by Discover Bank rather than consensual, is inconsistent with the FAA.

The Court noted that arbitration is poorly suited to the higher stakes of class litigation. 

In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. 

However, in arbitration, decisions are subject to very limited review. 

Moreover, the Court noted, arbitrators are seldom experienced in class action procedure and classwide arbitration consistently takes years to resolve. 

Indeed, the Court noted that as of September 2009, the American Arbitration Association had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits.

The Court also emphasized that the district court and Ninth Circuit found that the arbitration provision at issue was

sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be ‘essentially guarantee[d]” to be made whole.’

At issue was an agreement which permitted customers to initiate a dispute by completing a form on AT&T’s website. Thereafter, AT&T was permitted under its agreement to offer to settle the claim. If it did not settle within 30 days, the customer was required to submit the claim to arbitration. 

The agreement required that in the event of arbitration, AT&T must pay all costs for nonfrivolous claims and that the arbitration must take place in the county in which the customer was billed. The agreement also provided, for claims under $10,000, that the customer could elect to conduct the arbitration via telephone, in-person or on written submissions only and that either party may bring a claim in small claims court in lieu of arbitration. The agreement also permitted the arbitrator to award any form of individual relief, including injunctions and presumably punitive damages. 

The agreement also denied AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, required AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

Justice Scalia delivered the opinion of the Court, in which Justices Robert, Kennedy, Thomas and Alito joined. Thomas filed a concurring opinion. Breyer filed a dissenting opinion, in which Justices Ginsburg, Sotomayor and Kagan joined.


California Supreme Court Holds that Zip Codes Constitute "Personal Identification Information" under the Song-Beverly Credit Card Act, Triggering a Flurry of Consumer Lawsuits

by Misty A. Murray and Larry M. Golub

In Pineda v. Williams-Sonoma Stores Inc., 2011 Cal. LEXIS 1355 (February 10, 2011), the California Supreme Court addressed the issue of whether a person’s zip code constitutes “personal identification information” under the Song-Beverly Credit Card Act of 1971, Cal. Civ. Code §§ 1747 et seq. (Credit Card Act). 

The Court held that it did, and that its holding operated retrospectively, triggering numerous lawsuits since the Court’s decision a week ago.

The Credit Card Act was enacted to protect consumers from unfair business practices during credit card transactions. Relevant to the Court’s decision is section 1747.08 of the Credit Card Act, which prohibits businesses from requiring consumers to provide "personal identification information" during credit card transactions and then recording that information. Cal. Civ. Code, § 1747.08(a)(2).

Pineda brought an action against Williams-Sonoma, asserting violations of the Credit Card Act, unfair competition laws and invasion of privacy, based on the fact that the retailer asked Pineda for her zip code during a credit card transaction, recorded that information, and then used that information to obtain her undisclosed address from a database in order to market its products and sell her private information to other businesses. 

Williams-Sonoma argued that a zip code does not constitute "personal identification information" under section 1747.08. 

The trial court agreed and the Court of Appeal affirmed, relying on Party City Corp. v. Superior Court (2008) 169 Cal.App.4th 497, which held that a zip code, without more, is not “personal identification information” as defined in the Credit Card Act.

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California Supreme Court Announces Expansive Standing Rule Under the UCL

Since the passage of Proposition 64 in November 2004 by the California electorate, which sought to limit the scope of frivolous or “shakedown” lawsuits under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), courts in California have waited for the California Supreme Court to clarify the scope of standing for a plaintiff to pursue a UCL claim. In 2009, the Court issued its decision in In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), which held that only the named plaintiffs bringing a UCL claim had to demonstrate standing, not each class member that the named plaintiffs sought to represent. 

Now, in Kwikset Corporation, Inc. v. Superior Court, decided January 27, 2011, the Court finally analyzed the scope of the Prop 64 language that limited UCL standing to “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” In a 5-2 opinion, the Court cut back Prop 64’s limitation on standing, which will allow more UCL cases to at least proceed beyond the demurrer stage.

Kwikset involved named plaintiffs who purchased a lockset that said on the packaging “Made in U.S.A,” but it was substantially made in Taiwan and Mexico. While there were no claims that the lockset was defective or worth less than ones actually made in the United States, the sole contention made in an amended complaint was that the persons would not have purchased the lockset had it not been important to them that it was made in the United States: “When purchasing the locksets each plaintiff ‘saw and read Defendants’ misrepresentations . . . and relied on such misrepresentations in deciding to purchase . . . them. [Each plaintiff] was induced to purchase and did purchase Defendants’ locksets due to the false representation that they were “Made in U.S.A.” and would not have purchased them if they had not been so misrepresented.’”

The Court of Appeal had found that the complaint should be dismissed based on the UCL standing requirements imposed by Prop 64, explaining that although the plaintiffs “had adequately alleged injury in fact, they had not alleged any loss of money or property,” and that while their “patriotic desire to buy fully American-made products was frustrated,” such an injury “was insufficient to satisfy the standing requirements” of the UCL.

The Supreme Court, in a lengthy decision, reversed and found that

“plaintiffs who can truthfully allege they were deceived by a product’s label into spending money to purchase the 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 Kwikset case sets forth a standing test broader than just for product mislabeling cases, as the Court later stated as follows:

“As we shall explain, a party who has lost money or property generally has suffered injury in fact. Consequently, the plain language of these clauses suggests a simple test: To satisfy the narrower standing requirements imposed by Proposition 64, a party must now (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.” (Emphasis by Court.) 

And, to provide further guidance for future cases, the Court observed:

“There 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 would otherwise have been unnecessary.” 

The majority opinion in Kwikset also reaffirmed that, apart from demonstrating economic injury in the form of loss of money or property, the named plaintiff must still allege the causal element of reliance (“that the misrepresentation was an immediate cause of the injury-producing conduct”), as earlier set forth in the Court’s Tobacco II decision. The Court also held that there is no need to show for standing purposes that the lost money or property would otherwise qualify as restitution, the only monetary remedy permitted under the UCL. This was a point noted by the Court in its rent decision in Clayworth v. Pfizer, Inc., 49 Cal.4th 758 (2010), which found that parties may seek an injunction under the UCL whether or not restitution is also available.

Despite the breadth of the Kwikset opinion and the position by Prop 64 proponents that this decision will undercut the protections against frivolous lawsuit intended by the proposition, in two reassuring footnotes, the Court also confirmed that it was only considering matters at the demurrer stage, where a court “must take the allegations as true,” and that “[o]nce this threshold pleading requirement has been satisfied, it will remain the plaintiff’s burden thereafter to prove the elements of standing and of each alleged act of unfair competition, and the trial court’s role to exercise its considerable discretion to determine which, if any, of the various equitable and injunctive remedies provided for by sections 17203 and 17535 may actually be warranted in a given case.”

Finally, in a powerful dissent, two of the Supreme Court justices explained how they would have affirmed the Court of Appeal’s decision and dismissed the lawsuit since the majority’s opinion disregards Prop 64’s actual statutory language and the intent of the electorate to limit standing under the UCL. Indeed, the dissent even references the fact that proponents of Prop 64 included the Kwikset case on their website as an example of a “shakedown lawsuit” that the proposition sought to curb. Ending its minority opinion, the dissent concluded that the majority opinion had relieved plaintiffs of the burden to show standing imposed by Prop 64:  

“All plaintiffs now have to allege is that they would not have bought the mislabeled product. . . . This cannot be what the electorate intended when it sought ‘unequivocally to narrow the category of persons who could sue businesses under the UCL.’”

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Decision Stands: Proposition 103 Approved Insurance Rates Cannot be Attacked in a Civil Action

California Supreme Court Rejects Requests to Depublish MacKay

by Kent R. Keller

On October 6, 2010, Division Three of the Second Appellate District issued a landmark decision in MacKay v. Superior Court, 188 Cal. App. 4th 1427 (2010), declaring that approved insurance rates subject to Proposition 103 cannot thereafter be collaterally attacked in a civil action.

In brief, MacKay was a certified Unfair Competition Law (UCL) class action involving more than 500,000 class members who contended that 21st Century Insurance Company had used two illegal “rating factors” in developing automobile insurance premiums. The two factors had been included in rate and class plan filings approved on multiple occasions by the Insurance Commissioner. 

The issue, as the Court explained, was:

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” MacKay, supra at 1434. 

In a detailed opinion, authored by Justice H. Walter Croskey, the Court concluded that approval did preclude a collateral attack in a civil action. 

This decision is of critical importance to insurers and consumers subject to rate approval pursuant to Proposition 103. 

Prior to MacKay, it was not clear whether approval precluded civil actions. As a result, many insurers were sued, virtually always in class actions, by parties challenging approved rates on one basis or another. 

The result was that, while insurers were required to obtain rate approval before putting a rate into effect and once approval was obtained could had to use the approved rate, they did so at the peril of a class action lawsuit. 

Whether such lawsuits benefited insureds or simply increased premiums in the future is a continuing debate. What, however, was clear was that such actions often produced large attorneys’ fees awards.

Given the value of these class actions to the plaintiffs’ bar, it was not surprising that requests to depublish MacKay were numerous. 

In addition to a request from counsel for the plaintiffs in MacKay, requests were filed by Consumer Watchdog, the City and County of San Francisco, the Consumer Attorneys of California, Public Advocates, the Mexican American Legal Defense & Education Fund, the Southern Christian Leadership Conference of Greater Los Angeles, United Policyholders, the California State Insurance Commissioner, and others. 

Indeed, by a letter dated January 10, 2011, new Commissioner Dave Jones advised the California Supreme Court that he, like his predecessor, supported depublication.

Despite this tsunami of support for depublication, on January 12, 2011 the Supreme Court denied all requests and declared the case closed

While the reasons for denying or granting depublication are never certain, we have to believe that the Supreme Court recognized the correctness of Justice Crokey’s decision. As a result of the Supreme Court’s action, MacKay remains valid and precedential authority.

21st Century Insurance Company was represented in this case by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

U.S. Supreme Court to Hear Dukes v. Wal-Mart Petition on Scope of Class Actions

By Sandra I. Weishart

On December 6, 2010, the United States Supreme Court granted certiorari in Wal-Mart Stores, Inc., v. Dukes, no. 10-277, agreeing to hear Wal-Mart's appeal of a California district court's order certifying a class alleging sex discrimination in the workplace.

Although the claims in Dukes specifically relate to Wal-Mart's alleged unfair employment practices concerning paying and promoting women, the Supreme Court's decision, expected in summer of 2011, could dramatically affect the class action landscape for all large companies, including insurers. 

Class action litigators following Dukes have been particularly interested in whether a class can be "too big" to certify.

In Dukes, six named plaintiffs allege that Wal-Mart -- the nation's largest employer -- discriminates against women in violation of Title VII of the Civil Rights Act of 1964. They seek to certify a nationwide class encompassing thousands of women employed by Wal-Mart at any time since December 26, 1998, in a range of positions, from part-time, entry-level hourly employees to salaried managers. The proposed class involves 3,400 Wal-Mart stores in 41 regions. Wal-Mart's counsel estimates the class size could exceed 1.5 million women. Given the size of this class, billions of dollars are potentially at stake. 

The district court certified for class treatment all of plaintiffs' claims for injunctive relief, declaratory relief and back pay, and included a separate opt-out class for employees seeking punitive damages.

On appeal, the Ninth Circuit affirmed the district court's certification, under Federal Rule of Civil Procedure ("FRCP") 23(b)(2), of a class of current employees with respect to the claims for injunctive relief, declaratory relief, and back pay and, as to the punitive damages claims, it remanded the case to the district court to make further rulings under FRCP 23(b)(2) and (b)(3). 

As to former Wal-Mart employees, the Ninth Circuit remanded the action to the district court to consider whether to certify an additional class or classes under FRCP 23(b)(3). See Dukes v. Wal-Mart Stores, 605 F.3d 571 (9th Cir. 2010).

In addition to the arguments that class action counsel routinely make to defeat class certification, such as whether the issues are sufficiently common and the claims of named class members are typical of others in the class, Wal-Mart's counsel argued that a class action this size would be inherently unmanageable and coercive. The allegations cover diverse job positions held by thousands of employees with different supervisors in numerous geographic locations. There is no way that all of the evidence relating to these plaintiffs can be presented. Further, it is unlikely that evidence relating to a "representative sample" of plaintiffs can prove the case as to the more than a million class members. 

For these reasons, if classes of this size are going to be certified, independent of the manageability issue, there is also a significant Due Process concern. Moreover, if such huge classes are certified, there is a far greater likelihood that defendants will feel compelled to settle, regardless of the merits of the action, to avoid potential billion-dollar litigation.   

Although the "too big to certify" argument is of great importance to class action lawyers and their clients, it is unclear whether or to what degree the Supreme Court will resolve that issue.

The Court granted certiorari on only one, narrow issue raised in Wal-Mart's petition:

Whether claims for monetary relief can be certified under FRCP 23(b)(2) — which by its terms is limited to injunctive or corresponding declaratory relief — and, if so, under what circumstances." 

The Court denied certiorari as to the broader issues of "whether the class certification order conforms to the requirements of Title VII, the Due Process Clause, the Seventh Amendment, the Rules Enabling Act, and FRCP 23."

Nevertheless, the Court instructed the parties to brief the issue of "whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a)." Although this vaguely worded request leaves open the door to discussion of the broader issues, it appears unlikely that the Court will focus its decision on the bigger issues.  

If the Supreme Court affirms the order granting class certification, Dukes will be the largest class action in United States history. Given the size of the class, the case potentially affects all large companies that may find themselves embroiled in class action litigation. Therefore, regardless of which way the Supreme Court decides Dukes, the case is likely to have a significant impact on future class action practice.


"Any One Act Test" Rejected by Court in Favor of "Totality of the Circumstances"

In a non-published decision issued on November 18, 2010, the California Court of Appeal affirmed summary judgment against class-action lawyers seeking refunds on broker fees in Munn v. Eastwood Insurance Services.  

The decision rejected the argument that if a broker performs any act on behalf of the insurer, the broker is a de facto agent, and subjects the broker to a refund of all broker fees collected. 

The court rejected the “any one act test” and followed the “totality of the circumstances test,” which has been advocated by this firm for several years as the appropriate test to distinguish the difference between an agent and broker.

The “totality of the circumstances test” was codified into law by legislation in 2008 (AB 2956) that Barger & Wolen Senior Regulatory Partner Robert Hogeboom helped draft.

The court’s decision upheld the FSC comparative rater and the electronic Zap App systems as the appropriate mechanisms for brokers to input information and process applications, and it rejected the plaintiffs’ claim that it was a process to encourage upfront underwriting and binding by the broker. 

Finally, the court recognized that the recent amendment to California Insurance Code section 1623, which includes the definition of “broker” and creates a presumption, did provide the court with “guidance in assessing the facts as part of the totality of the circumstances.” 

Barger & Wolen’s Robert Hogeboom and Suh Choi served as special consultants on the broker fee issue to Eastwood’s counsel, Milford Dahl and Zack Broslavsky of Rutan & Tucker, and to Judi Partridge, former owner of Eastwood. 

If you have any questions, please contact Robert Hogeboom via e-mail or at (213) 614-7304.

Insurer Has No Duty to Disclose Means of Obtaining Lower Premiums

by Sandra Weishart

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

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Employers Are Not "Big Brother" and Cannot Force Employees to Actually Take Breaks

In Hernandez v. Chipotle Mexican Grill, Inc., published October 28, 2010, the California Court of Appeal held that, while employers must provide employees with breaks, they need not ensure employees actually take their breaks. 

Rogelio Hernandez (Hernandez) brought this class action against Chipotle Mexican Grill, Inc. for allegedly denying employees meal and rest breaks. In moving for certification, Hernandez submitted statistical evidence allegedly showing that a overwhelming majority of employees missed their breaks, e.g. 92% of employees missed at least one meal break.

Chipolte also filed a motion, but to deny certification, and it presented evidence of a company-wide policy encouraging meal and rest breaks. As noted by the Court, Chipotle provides employees with free food and beverages during breaks. Because Chipotle paid employees during breaks, the employee time records may not reflect whether breaks were actually taken.

In determining whether certification was appropriate, both the trial court and appellate court addressed the legal issue of whether employers must only provide breaks, or whether employers must also ensure that breaks are actually taken.

The Court recognized that this issue was currently pending review before the California Supreme Court (Brinker v. Public Storage, S166350, and Brinkley v. Public Storage, S168806), but ruled that the Supreme Court would likely hold that employers need not ensure that breaks are actually taken.

The Court stated that placing this obligation on employers would place an

undue burden on employers whose employees are numerous or who … do not appear to remain in contact with the employer during the day.”

It would also create

perverse incentives, encouraging employees to violate company meal break policy in order to receive extra compensation under California wage and hour laws.”

The decision is significant not only for its substance, but also for procedural reasons. 

Class counsel often times will argue on certification motions that their legal theory of liability and damages should not be decided on certification, because certification is only a procedural, not a merits question. This misstates what a trial court may be obligated to review for certification.

In order to decide whether common or individual issues predominate, it must be determined at the certification stage how the law requires liability and damages to be proven at trial. This inquiry may not be able to be satisfied without the trial court actually addressing what the law is at the certification stage, and in certain cases where the certification issues are intertwined with the merits issues some analysis of the merits is permitted.

As noted by the Hernandez trial court, if the law does require employers to ensure breaks are actually taken, class treatment of this case would be appropriate. Having held that the law only requires employers to provide breaks, certification in this action was inappropriate.

Landmark Proposition 103 Decision Reached

On October 6, 2010, the California Court of Appeal issued a landmark decision involving Proposition 103 insurance rate approval in MacKay v. Superior Court, B220469 & B223772. 

The legal issue, as Division Three of the Second Appellate District explained, was

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.”  

In MacKay, the plaintiff class sued 21st Century Insurance Company asserting that its use of certain rating factors (persistency and accident verification) was illegal and therefore actionable under California’s Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200

In a unanimous decision, written by Justice Croskey, the Court held "that the statutory provisions for an administrative process . . . are the exclusive means of challenging an approved rate,” precluding a UCL action and therefore ordered the trial court to enter judgment for 21st Century.

Prior to this decision, previous decisions had created uncertainty as to whether insurers, having fully complied with the requirements of Proposition 103 rate approval, could charge approved rates free from subsequent civil challenges. 

While Walker v. Allstate Indemnity Co, 77 Cal. App. 4th 750 (2000) held that approved rates could not thereafter be civilly challenged, Donabedian v. Mercury Ins. Co., 116 Cal. App. 4th 968 (2004) created confusion on this issue.

The MacKay decision resolves all prior confusion in declaring that approved rates and rating factors cannot thereafter be civilly challenged.

21st Century Insurance Company was represented in this action by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

Dismissal of Class Allegations at Pleading Stage Disallowed - Again

Another California appellate decision has restricted the ability to challenge class action allegations at the pleading stage, reiterating that the determination of class suitability in most instances should be made at the time of a motion for class certification.

In Gutierrez v. California Commerce Club, Inc. (published August 23, 2010), the class representative filed suit alleging the defendant unlawfully denied meal and rest breaks to hourly, non-union employees. After a challenge to the third amended complaint, the trial court sustained the demurrer to the class action allegation without leave to amend, observing that the plaintiffs had failed to “notify the court who is in the class, what they do, how they are related and why plaintiffs are the proper persons to represent this all-inclusive class.” 

Division One of the Court of Appeal reversed, finding the trial court’s dismissal of the class premature and that the allegations of the operative complaint adequate to move beyond the pleading stage. 

In so concluding the class could proceed, the court observed:

Judicial policy in California has long discouraged trial courts from determining class sufficiency at the pleading stage and directed that this issue be determined by a motion for class certification.

Quoting another recent decision from last year, the court explained that “the wisdom of permitting the action to survive a demurrer is elementary.” The court elaborated as follows:

It is clear that the more intimate the judge becomes with the character of the action, the more intelligently he may make the determination. If the judicial machinery encourages the decision to be made at the pleading stages and the judge decides against class litigation, he divests the court of the power to later alter that decision. . . . Therefore, because the sustaining of demurrers without leave to amend represents the earliest possible determination of the propriety of class action litigation, it should be looked upon with disfavor.

While the court did reference a number of California decision that had permitted class allegations to be dismissed or stricken at the pleading stage, it relegated those decisions to cases involving “mass torts or other actions in which individual issues predominate.” And, in the context of wage and hour cases (as was the situation in Gutierrez), the court explained that such cases “routinely proceed as class actions” since they “usually involve” a single set of facts that apply to all putative class members and a sole common question of law, usually involving “institutional practices.” The court then noted that “numerous courts” had “reached the same result in wage and hour cases.”

In light of this latest decision, defendants should consider very carefully the wisdom of challenging class allegations at the pleading stage of a lawsuit. Unless it is plainly evident from the allegations of the complaint that individual issues exists, the challenge to class allegations is more efficiently made at the time of a motion for class certification.

California Supreme Court Holds Treble Damages Not Permitted under the Unfair Competition Law - Restitution is the Sole Monetary Remedy

Earlier today, the California Supreme Court issued its unanimous opinion concluding that Civil Code section 3345, which allows treble damages to be awarded to seniors when a statute provides for a fine or penalty, is not permitted under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”)

The decision, Clark v. Superior Court (National Western Life Insurance Company), confirms that the only monetary remedy available under the UCL is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.

The plaintiffs in the case filed a class action lawsuit against National Western Life Insurance Company arising out of the sale of deferred annuities issued to California residents who were senior citizens. The trial court denied certification as to all claims except one under the UCL. In addition to seeking restitution in the UCL claim, the plaintiffs sought treble damages on their restitution claim under section 3345.

As reported in our earlier blog post last September when the Supreme Court accepted review, in the more than two decades since the enactment of section 3345, no case had ever permitted any sort of damages, be they compensatory, treble or punitive, under the UCL. The trial court dismissed the claim for treble damages, but the Court of Appeal reversed, finding that the plain meaning of section 3345 applied to a private action seeking restitution under the UCL.

In reversing the decision issued by the Court of Appeal, the Supreme Court focused on two issues. First, the Court considered whether a claim under section 3345 only applies to treble amounts awarded under the Consumer Legal Remedies Act (“CLRA”), since the first subsection of section 3345 makes reference to and cites language from the CLRA. The Court concluded that a claim under section 3345 is not so limited, observing that, if trebling was to apply only to a claim under the CLRA, there would have been no need for a separate statute (section 3345); the Legislature could have just amended the CLRA. Nevertheless, the Supreme Court did not articulate any other statutes that might be able to be trebled under section 3345.

After this, the Supreme Court specifically addressed whether section 3345 trebling was permitted under the UCL. The Court focused on the salient language of section 3345 where it requires the underlying statute to impose a “fine, or a civil penalty . . . or any other remedy the purpose of which is to punish or deter,” and found that it cannot refer to the UCL. First, citing to a number of its past decisions, the Court reiterated that the only monetary remedy under the UCL is restitution. 

Next, the Court relied on the well-established canon of statutory construction that when there is a general term followed by various specific terms, as is the case in the language of section 3345 just quoted, the general term must be limited to the nature of the specific terms. In other words, “any other remedy” must refer to a remedy in the nature of a penalty, and thus section 3345 trebling is only allowed when a statute permits a remedy that is in the nature of a penalty. The UCL, however, is not such a statute. Confirming that restitution only allows the restoration of something taken, or a return to the status quo, restitution under the UCL is not a penalty, which is a recovery without reference to the actual damage sustained. In sum, the Supreme Court concluded:

Because restitution in a private action brought under the unfair competition law is measured by what was taken from the plaintiff, that remedy is not a penalty and hence does not fall within the trebled recovery provision of Civil Code section 3345, subdivision (b).

Kent Keller and Larry Golub of Barger & Wolen represent National Western Life Insurance Company in the Clark case.

Court Offers Guidance as to Requirements for Alleging Harm to Establish UCL Standing

The California Court of Appeal, in Nelson v. Pearson Ford Co., issued a lengthy 50-page opinion on July 15 addressing numerous issues, including violations of the Automobile Sales Finance Act (“ASFA”), the Unfair Competition Law (“UCL”), the Consumer Legal Remedies Act (“CLRA”), class treatment and the right to recover fees in class actions.

Most poignant for insurers were the portions of the opinion addressing the UCL claim, and more specifically, the named plaintiff’s standing to pursue his UCL claim.

Reginald Nelson (“Plaintiff”) decided to purchase a used vehicle from Pearson Ford (“Pearson”) and executed a sales contract to that effect. Because, at the time of purchase, Plaintiff lacked auto insurance, an insurance broker was summoned to the dealership and sold Plaintiff an auto policy. A premium of $250 was added to the vehicle’s price. 

One week after the parties had completed the agreement, Pearson had additional paperwork for Plaintiff to sign. The new paperwork rescinded the original contract and entered the parties into a new agreement. The parties backdated the second contract to the date they signed the original contract. As a result of changing interest rates between the time the first and second contracts were entered, the backdating resulted in Plaintiff having to pay an additional $27 finance charge. The second contract disclosed the total finance charge, but the additional $27 was not separately itemized. Additionally, the second contract improperly added the $250 insurance premium to the cash price of the vehicle, which caused Plaintiff to pay $30 in additional sales tax and financing charges on the insurance premium.

Plaintiff later filed a class action complaint seeking to establish two distinct classes (both of which would ultimately be certified): (1) a class regarding the backdating of financing agreements (the “backdating class”); and (2) the improper inclusion of the price of insurance into the price of the vehicle (the “insurance class”). 

Following a bench trial, the court found Pearson had violated the UCL with regard to the backdating class, granting injunctive relief and setting restitution in the amount of $50 per class member. 

For the insurance class, the court found that Pearson violated the ASFA and the UCL by failing to disclose the cost of insurance and adding the insurance cost to the cash price of the car. It also enjoined Pearson from adding the price of insurance to the cash price of a vehicle in the future. Following the entry of judgment, Pearson appealed on numerous grounds. 

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California Court of Appeal Opinions Uphold Class Settlements Over Claims of Objectors

In a pair of decisions published this month by two separate Districts of the California Court of Appeal, the appellate panels upheld class action settlements and rejected numerous claims asserted by objectors. Both cases demonstrate that, when a class action settlement is well-documented, and the trial court carefully considers the requisite factors, a settlement will be approved as fair, adequate and reasonable.

In Nordstrom Commissions Cases, the class plaintiffs sued Nordstrom in 2004 over its alleged improper policy of paying net sales commissions in violation of the California Labor Code (the actual net sales commissions plan had been approved in a prior class action settlement).  In 2009 the parties reached a settlement in which Nordstrom would pay money, provide merchandise vouchers, and make prospective changes to its calculation, payment and reporting of commissions. After preliminary approval of the settlement by the trial court, an objector contended the settlement was unfair, which objection the trial court found to lack merit. The objector appealed.

After confirming that the role of the appellate court is not to make any independent determination as to whether the settlement terms are fair, adequate and reasonable, but merely to ensure that the trial court acted within its broad discretion, the Court of Appeal for the Fourth Appellate District (Division Three) proceeded to address each of the assertions raised by the objector. The basic theory of the objector was that the plaintiffs' case was strong and not properly considered by the trial court in approving the settlement.

However, the appellate court found that the evidence as to the purported "willfulness" of Nordstrom in its alleged improper commission payment practices was subject to a good faith dispute since, among other things, Nordstrom paid the plaintiffs according to its written commission agreements, the payment plan had been approved in a prior class action settlement, and the Labor Commissioner had refused to find a violation in two different cases raising similar issues. The court also rejected the objector's claims that the trial court had not properly considered the issue of penalties under the Private Attorneys General Act of 2004 (Labor Code Section 2699) and that the settlement was partially funded by in-store merchandise coupons. On the latter claim, the court cited a number of recent appellate decisions where settlements involving coupons or merchandise vouchers were upheld.

In another case involving alleged improper wage practices and violation of the Labor Code, the Second Appellate District (Division Eight) reached the same conclusion that a class settlement was properly approved within the trial court's discretion in Munoz v. BCI Coca-Cola Bottling Company of Los Angeles.   There, the plaintiffs contended that the defendant has allegedly misclassified production supervisors and merchandising supervisors as exempt employees. After the trial court preliminarily approved that settlement, one person objected, and when the objection was overruled, he appealed the finding of fairness. While asserting a panoply of claims against the settlement, the gist of the objector's claim was that the parties had not provided the trial court with adequate information to make a determination of fairness.

Like the Nordstrom case, this case also involved a prior class action settlement against the defendant, which resolution was used by the parties in support of the current proposed settlement. As such, the appellate court easily found that the trial court had an understanding as to the amount in controversy and the realistic range of outcomes of the litigation, "despite the absence of a statement of the maximum value of all claims." 

As concerns the contention that the parties in this second class action against the defendant had not conducted adequate discovery, the court found that the prior and ample discovery in the first class action, raising the same issues, could be used by the trial court to find that the factual record had been sufficiently developed to satisfy the trial court that the release of the class members' claims was reasonable in light of the strengths and weakness of the case. As such, and after rejecting a number of other issues raised by he objector, the Court of Appeal found there was no abuse of discretion in the trial court's approval of the settlement.

Class action settlements inevitably result in claims by objectors, whether in the form of "professional" objectors or persons who legitimately believe the settlement reached between the parties was "unfair." So long as the parties, in reaching and documenting their settlement, provide the trial court with the requisite data to find that the settlement was fair, adequate and reasonable, it will be the rare case in which appellate review will second-guess the broad discretion provided to trial courts to resolve these types of lawsuits.

Putative Class Action Lawsuits May Remain in Federal Court Even After Court Denies Class Certification

In United Steel et al. v. Shell Oil Co., et al., the Ninth Circuit Court of Appeals held that putative class action lawsuits properly removed to federal court under the Class Action Fairness Act of 2005 ("CAFA") [28 USC 1332(d), 1453 ] may remain in federal court even after the court denies class certification.

If the putative class action was properly removed to begin with, the subsequent denial of Rule 23 class certification does not divest the district court of jurisdiction. The case remains removed and is not to be remanded to state court."
In construing CAFA, the Ninth Circuit reasoned that if:
Congress intended that a properly removed class action be remanded if a class is not eventually certified, it could have said so." 
The Ninth Circuit joins the Seventh and Eleventh Circuits on this point.

Use of Credit-Scoring Factors in the Pricing of Homeowner's Insurance Under the FHA and the McCarran-Ferguson Act

by Gregory O. Eisenreich and Marina Karvelas

In a putative class action, Ojo v. Farmers Group, Inc., et al., Case No. 06-55522 (9th Cir. April 9, 2010), an en banc panel of the Ninth Circuit Court of Appeals decided a case where the Plaintiff alleged that the use of credit-scoring factors in the pricing of homeowner's insurance in Texas had a disparate impact on minorities in violation of the federal Fair Housing Act ("FHA"), 42 U.S.C. sections 3601-19.

The Ninth Circuit held that the FHA prohibits discrimination in the denial and pricing of homeowner's insurance. In doing so, it joined the Sixth and Seventh Circuits and disagreed with the Fourth Circuit on the issue of whether the FHA applied to homeowner's insurance.

It should be noted that the Court did not reach the issue of whether the use of credit-scoring factors actually violates the FHA, noting that there could be a "legally sufficient, nondiscriminatory reason" causing a disparate impact and that the defendant is also entitled to rebut the facts of an alleged prima facie case.  

After addressing whether the FHA applied to homeowner's insurance, the Court held that the McCarran-Ferguson Act may "reverse-preempt" claims under the FHA. However, the Ninth Circuit did not decide the critical question.

[B]ecause the issue's resolution will have pervasive implications for future claims brought against Texas insurers, we have concluded that the appropriate course of action is to certify the issue to the Supreme Court of Texas.

Under the McCarran-Ferguson Act, state law preempts a federal statute if:

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"Principal Place of Business" defined by Supreme Court in Hertz Corp vs. Melinda Friend

U.S. Supreme Court Holds "Principal Place of Business" for Federal Diversity of Citizenship Purposes Is Corporations' "Nerve Center"— Where Their Executives Direct and Control Corporate Activities

by Sandra I. Weishart

In a decision closely watched by multi-state corporations, including those in the insurance industry, the U.S. Supreme Court ruled today that a company’s “principal place of business” is where “a corporation’s officers direct, control, and coordinate the corporation’s activities.”  Hertz Corp vs. Melinda Friend et al., a class action which the corporate defendant wished to remove to federal court, presented the following issue:

[w]hether, for purposes of determining principal place of business for diversity jurisdiction citizenship under 28 U.S.C. § 1332, a court can disregard the location of a nationwide corporation’s headquarters – i.e., its nerve center.

In analyzing the issue, the Court first reviewed the history of Section 1332, noting the increasing difficulty, in modern times, of defining a corporation's "principal place of business," which resulted in the application of different criteria and inconsistent precedents among the federal Circuits. Accordingly, in an unanimous opinion authored by Justice Breyer, the Court held:

In an effort to find a single, more uniform interpretation of the statutory phrase [“principal place of business”] this Court returns to the “nerve center” approach: “[P]rincipal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice it should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.

This decision is of particular interest to insurance companies and other corporations with a "nerve center" in another state but which, nevertheless, conduct a significant amount of business in California. In recent years, the Ninth Circuit has imposed increasingly more onerous requirements on corporate entities' ability to remove actions to federal court, if the corporation has employees, offices or property or otherwise conducts business activities here in California. Now, in most cases, removal to federal court will be far more easily accomplished.

Unfair Competition Law Cases Still Occupy Numerous Spaces on the California Supreme Court's Docket


In November 2004, the voters of California passed Proposition 64, which was intended to rein in certain abuses in and bring some clarity to the Unfair Competition Law, California Business & Professions Code sections 17200 et. seq. (“the UCL”). Five years later, and after a number of decisions issued by the California Supreme Court construing the changes made by Prop 64, that clarity is still elusive.

Take, for example, the Court’s May 18, 2009 decision In re Tobacco II Cases, 46 Cal. 4th 298 (2009), which concluded that the new standing requirements for a UCL claim created by Prop 64 only require the named plaintiff/class representative to establish standing and not absent class members. In the months since the issuance of Tobacco II, a number of decisions have considered whether the Court’s conclusion as to “standing” applies to a trial court’s determination when it comes to considering the issue of “commonality” (i.e., whether common issues predominate over individual issues) for purposes of a class certification motion. Our firm’s blogs have reported on two intermediate appellate cases that found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’”  See Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009); Kaldenbach v. Mutual of Omaha Life Insurance Co., 178 Cal. App. 4th 830 (2009). 

Cohen is now the subject of a Petition for Review pending before the Supreme Court, along with several requests for depublication of the intermediate court’s opinion. The court is expected to decide whether the case is to be accepted for review or depublished by March 1, 2010.

But Cohen is just one case on the Supreme Court’s plate. The following are cases now actual pending before the Supreme Court that address issues relating to the UCL, along with the date the Court accepted review and the issue(s) presented on the Court’s website:

Loeffler v. Target Corporation, Case No. S173972 (June 19, 2009) 

Does article XIII, section 32 of the California Constitution or Revenue and Taxation Code section 6932 bar a consumer from filing a lawsuit against a retailer under the Unfair Competition Law (Bus. & Prof. Code sections 17200 et seq.) or the Consumers Legal Remedies Act (Civ. Code, section 1750 et seq.) alleging that the retailer charged sales tax on transactions that were not taxable?  [The Court also issued a “grant and hold” on November 19, 2009 in Yabsley v. Cingular Wireless, Case No. S173972, pending consideration and disposition of a related issue in Loeffler v. Target Corp.]

Clark v. Superior Court (National Western Life Insurance Co.), Case No. S174229 (September 9, 2009)

Is Civil Code section 3345, which permits an enhanced award of up to three times the amount of a fine, civil penalty, or “any other remedy the purpose or effect of which is to punish or deter” in actions brought by or on behalf of senior citizens or disabled persons seeking to “redress unfair or deceptive acts or practices or unfair methods of competition,” applicable in an action brought by senior citizens seeking restitution under the Unfair Competition Law?

Kwikset Corp. v. Superior Court, Case No. S171845 (June 10, 2009)

Does a plaintiff's allegation that he purchased a product in reliance on the product label's misrepresentation about a characteristic of the product satisfy the requirement for standing under the Unfair Competition Law that the plaintiff allege a loss of money or property, or is such a plaintiff unable to allege the required loss of money or property because he obtained the benefit of his bargain by receiving the product in exchange for the payment?

Pineda v. Bank of America, Case No. S170758 (April 22, 2009)

Can penalties under Labor Code section 203 (late payment of final wages) be recovered as restitution in an Unfair Competition Law action?

Sullivan v. Oracle Corp., Case No. S170577 (April 22, 2009)

Request that the Supreme Court deicide questions of California law presented in a matter pending in the United States Court of Appeals for the Ninth Circuit.  (Sullivan v. Oracle Corp., 547 F.3d 1177 (9th Cir. 2008) (now withdrawn))  The questions presented are: (1) Does the California Labor Code apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week? (2) Does the UCL apply to the overtime work described in question one? (3) Does the UCL apply to overtime work performed outside of California for a California-based employer by out-of-state plaintiffs in the circumstances of this case if the employer failed to comply with the overtime provisions of the federal Fair Labor Standards Act (29 U.S.C. section 207 et seq.)?

Clayworth v. Pfizer, Inc., Case No. S166435 (November 19, 2008)

This case presents the following issues: (1) When plaintiffs pay overcharges on goods or services as a result of the anticompetitive conduct of defendant sellers but recover the overcharges through increased prices at which the goods or services are sold to end users, may defendants assert a “pass-on” defense and argue that plaintiffs were not injured because they did not suffer financial loss as a result of the anticompetitive conduct? (2) Is restitution available under the Unfair Competition Law to plaintiffs who recovered from third persons the overcharges paid to defendants? (3) When plaintiffs recover from third persons the overcharges paid to defendants, have they suffered actual injury and lost money or property for purposes of establishing standing under the Unfair Competition Law, as amended by Proposition 64?

Federal Court Denies Class Certification Motion Involving Deferred Annuities

The United States District Court for the Southern District of California denied certification to a purported class of purchasers of deferred annuities. In a decision issued earlier today by United States District Judge Janis Sammartino in In re National Western Life Insurance Deferred Annuities Litigation, Case No. 05-CV-1018-JLS (JSP), the court denied certification as to a nationwide class alleging RICO violations and a California state class alleging multiple statutory violations, including claims under the Unfair Competition Law (California Business & Professions Code sections 17200 et seq.).

Plaintiffs claimed that National Western “orchestrated a nationwide scheme to target senior citizens and lure them into purchasing its high cost and illiquid deferred annuities,” basing their claim on three alleged misrepresentations and/or omissions – the failure to disclose the high commissions paid to agents, the presence of an illusory bonus on premiums paid, and the use of an increasing asset fee, each of which impacted the interest credited on the annuities. Focusing solely on the commonality and typicality requirements to establish a viable class, the court found that such requirements were lacking. For example, the court emphasized that none of the class representatives possessed an annuity with an asset fee that was increased. Moreover, the court found plaintiffs had not met their burden in demonstrating that all of National Western’s more than twenty annuity products contained the alleged same misrepresentations and omitted the same information.  While the court did observe that National Western used standardized forms, they were not identical, and the evidence presented by plaintiffs failed to support their contention that those materials contained the same alleged misrepresentations and omissions.

The court denied the motion for class certification without prejudice and also explained that its ruling did not address any of the numerous other arguments advanced by the parties.

Larry Golub and Kent Keller of Barger & Wolen were co-counsel for National Western Life Insurance Company.

Second District Court of Appeal Confirms That Plaintiff Must Prove Reliance When Bringing Misrepresentation Claim Under UCL, FAL and CLRA


In the recently issued decision Princess Cruise Lines, LTD v. Superior Court, plaintiffs sued Princess Cruise Lines, Ltd. (“Princess”) over charges added to the price of shore excursions taken during a cruise. They alleged causes of action for violation of California’s Unfair Competition Law (UCL), False Advertising Law (FAL), Consumers Legal Remedies Act (CLRA) and common law fraud and negligent misrepresentation.

Princess moved for summary judgment and summary adjudication. The trial court granted summary adjudication on the fraud and negligent misrepresentation claims because plaintiffs could not show they relied on Princess’ alleged misrepresentations. It denied summary judgment because it concluded that on the UCL, FAL and CLRA causes of action, plaintiffs did not have to show that they relied on Princess’ alleged misrepresentations.

Princess took a writ of mandate to the Court of Appeal. Citing to the recent California Supreme Court decision in In Re Tobacco II Cases, the Court of Appeal confirmed that

a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions.

Relying further on language from Tobacco II, the Court of Appeal specified that reliance must be proven only in situations where a UCL action is based on a fraud theory involving false advertising and misrepresentations to consumers. It further held that the Tobacco II’s analysis of the phrase “as a result” in the UCL was equally applicable to identical language in the CLRA statute.


Class Certification Can Properly be Denied When Individual Showings of Damages Predominate

A common perception in class action litigation is that, where damages are individualized, this will not usually mean that a class action cannot be certified. However, in certain cases, where individualized questions of damages exist – and indeed predominate over one or more common issues – a trial court may deny class certification and that denial should be upheld on appeal. The recent decision in Evans v. Lasco Bathware, Inc. presents such a case.

In Evans, the plaintiff brought suit against Lasco claiming that the shower pans that had been installed in thousands of residential showers were defectively designed, resulting in water leakage and consequential damages to adjacent components of the homes’ shower system. The plaintiff sought to certify a class alleging claims for strict products liability and negligence, and asserted that its expert had concluded that the shower pan design was defective (a common issue) and that damage could be resolved by calculating some formula to estimate the average cost to replace the shower pan with a new generation of shower pan and thereby avoid the need for class members to submit the individualized damage estimates.

The trial court denied class certification, holding that the need for individualized proof of the amount of damages for removing and replacing the shower pans predominated over the common questions. The Court of Appeal affirmed, explaining that while

a trial court has discretion to permit a class action to proceed where the damages recoverable by the class must necessarily be based on estimations, the trial court equally has discretion to deny certification when it concludes the fact and extent of each member’s injury requires individualized inquiries that defeat predominance.

On this basis, it asserted that the trial court did not abuse its discretion in declining to certify the class as to common issues of liability and causation since those issues required individualized proof from each class member.


California Appellate Court Clarifies Issues Raised in Tobacco II

A California Court of Appeal decision published on October 28, 2009, analyzes whether UCL “standing” rules announced by the California Supreme Court in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), carry over when a trial court considers the requisite elements to certify a class action. The answer, at least from the Eighth Appellate District, is that they do not. 

In Cohen v. DIRECTV, Inc., the plaintiff sued the satellite television company under both the Unfair Competition Law or “UCL” (Business & Professions Code sections 17200 et seq.) and the Consumers Legal Remedies Act or “CLRA” (Civil Code sections 1750 et seq.), claiming that the company falsely advertised the quality of the High Definition (“HD”) resolution that it was transmitting to its customers. Cohen sought to certify a nationwide class. In opposition to a motion for class certification, DIRECTV presented a number of declarations from its customers that explained that their individual decisions to purchase the HD upgraded system were not based on seeing any advertising or promotional materials from the company, but rather on word of mouth, lower prices, or just because they bought an HDTV. On those facts, the trial court denied certification, finding that common legal and factual issues did not predominate.

On appeal, the court first found that no common legal issues predominated, agreeing with the trial court that the subscribers’ legal rights would vary from state to state and that subscribers outside of California may not be protected by the UCL or the CLRA. It also rejected the plaintiff’s attempt to redefine the class to include only California residents, reasoning that, even with a California-only class, plaintiff still could not show that common factual issues would predominate over individual factual issues.

As for whether common issues predominated, the court concluded that there were myriad reasons why subscribers had purchased the HD upgrade that were far removed from the alleged misleading advertisements as to resolution of the HD transmission. More particularly, the court found commonality lacking since actual reliance would need to be shown for an award of damages under the CLRA and for restitution/injunctive relief under the UCL. As for the decision in Tobacco II, the court explained that the Supreme Court in that case had been concerned with the issue of standing under the UCL and that, in the context of standing, only the class representative needed to satisfy the requirement and that there was no need for the class members to show actual reliance.

However, at the time of considering class certification, the Cohen court found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’” Rather, at the time of considering class certification, the trial court was concerned that the UCL and CLRA claims alleged by plaintiff and the other class members “would involve factual questions associated with their reliance on DIRECTV’s alleged false representation,” which was a proper criterion to consider for commonality – “even after Tobacco II.”

Cohen is the second case published last week that affirmed the denial of class certification of a UCL claim and addressed the impact, or, more correctly, the lack of impact, of the decision in Tobacco II. The other decision is Kaldenbach v. Mutual of Omaha et al., published October 26, 2009, a decision in which Barger & Wolen represented the defendant, and is discussed in the Life, Health and Disability Insurance Law blog.

Ninth Circuit Overrules Denial of Class Certification Ruling in Annuity Litigation, Adopting a De Novo Standard of Review

On August 28, the Ninth Circuit Court of Appeals issued a decision that found the Hawaii District Court had erred in denying class certification in a case involving the sale of annuities to senior citizens. While expressing no opinion as to the merits of the case, the Court of Appeals concluded that the class in Yokoyama v. Midland National Life Insurance Company should have been certified.

According to the Ninth Circuit, the plaintiffs in Yokoyama limited their claim to one that specifically targeted the misrepresentations made by Midland National in its brochures that promoted the annuities as appropriate for seniors. (No actual brochure language is quoted in the case.) Significantly, the claim was alleged solely under the Hawaii Deceptive Practices Act (“DPA”), which appears to be similar to a claim under the Unfair Competition Law in California. 

The District Court’s opinion issued in 2007 found that each plaintiff would have to show subjective, individualized reliance on deceptive practices related to each plaintiff’s purchase of an annuity, and thus class certification was denied. In contrast, the Ninth Circuit found that the District Court had erred in denying class certification, based on the fact that “this action has been narrowly tailored to rely only on Hawaii law,” that the DPA only requires an objective test to determine reliance, and that the plaintiffs were not basing their claim on the individual solicitations by agents.

The Ninth Circuit concluded: “Accordingly, there is no reason to look at the circumstances of each individual purchase in this case, because the allegations of the complaint are narrowly focused on allegedly deceptive provisions of Midland’s own marketing brochures, and the fact-finder need only determine whether those brochures were capable of misleading a reasonable consumer.” 

In addition, the Ninth Circuit opinion also rejected Midland National’s argument (and the District Court’s holding) that the potential existence of individualized damage assessments made the action unsuitable for class treatment. The Court of Appeals explained that “[in] this circuit, however, damage calculations alone cannot defeat certification.”

Much of the Yokohama decision is focused on the standard of review for a district court’s ruling as to certification, with the Ninth Circuit announcing that the standard of review is de novo, rather than the accepted abuse of discretion standard typically used in reviewing class certification rulings on appeal, at least in situations where the underlying issue is purely one of law.  On this point, however, there was a split among the three-judge panel. 

The third judge on the panel forcefully rejected this de novo standard and observed that it is “an assault on Ninth Circuit precedent.” The Judge concluded his separate opinion by advising that it “is an en banc panel who should make this determination to depart from longstanding Circuit precedent, not two judges who would make the standard of review less deferential.” The third Judge nevertheless concurred in the Court’s ultimate conclusion that the denial of class certification was to be reversed even under the de novo standard. Whether Midland National will seek en banc review in the case is presently unknown.

Ultimately, the Yokoyama opinion sanctions that, if plaintiff’s counsel in a case can craft the claims asserted against the defendant in a narrow manner so as to avoid individual variance among the class members, then even in a situation where class certification would seem not to be appropriate due to the inherent individualized issues, certification may nevertheless be permitted on that narrowed claim.  

California Court of Appeal Issues Ruling on Class Certification: Conclusory Class Allegations Are Defeated

The pen is mightier than the sword, and a variation on that theme – the declaration is mightier than conclusory class action allegations – has just been embraced by the Fourth District California Court of Appeal in the case of Ali v. USA Cab Ltd. (August 24, 2009).

In Ali a putative class of drivers who leased taxis from USA Cab claimed the company wrongfully classified the drivers as independent contractors rather than employees.  As a result, plaintiffs claimed, USA Cab improperly withheld workers’ compensation insurance, minimum wages and meal/rest breaks.  Although the complaint asserted the drivers assumed no risk and provided no tools, USA Cab attacked plaintiffs’ motion for class certification by filing declarations showing the drivers were not subject to USA Cab’s control, that the drivers provided their own maps, cell phones, computers and GPS systems, and that they paid for their own advertising and business cards. 

The use of dozens of drivers’ declarations proved to be a powerful weapon against plaintiffs’ motion for class certification.  The trial court found common issues did not predominate, as putative class members presented a vast variety of factual circumstances not susceptible to class resolution.  Because proof of liability as to a sampling of class members would not establish proof of liability as to the class, the Court of Appeal affirmed the trial court’s denial of the certification motion.

The Court of Appeal also held the suit failed the superiority test, concluding plaintiffs failed to demonstrate class treatment would be superior to individual actions, because the putative class action would be “extremely difficult to manage.”  The opinion found that even if judgment were to be rendered for the class, the need to litigate each member’s right to recover would eliminate any efficiencies resulting from the class mechanism.

The lesson of the Ali case is clear:  The notion that common issues predominate is easy to assert, but if declarations can disprove commonality, they can be a devastating weapon in defeating a putative class action. 

Ninth Circuit Upholds Use of "Preemptive" Motion to Deny Class Certification

In most lawsuits seeking to certify a class action, the motion to determine whether a class can be certified is brought by the plaintiff(s). But not always. In a new case issued July 7 by the Ninth Circuit Court of Appeals, Vinole v. Countrywide Home Loans, Inc., (Case No. 08-55223), the Appellate Court found that the District Court had properly considered and granted the defendant’s motion to deny certification.

The Vinole action was brought by a proposed class of current and former Home Loan Consultant employees of Countrywide, who claimed they were misclassified as exempt employees and thus not paid overtime and other wages. While Countrywide applied a uniform wage exception to these employees and therefore contended it was not obligated to pay them overtime, Countrywide also presented evidence that it had no control over what the employees did on a daily basis and did not monitor their work performance. As a consequence, Countrywide contended that these employees were exempt from overtime under California and Federal law.

Ten months after the lawsuit was filed – and before plaintiffs moved to certify a class – Countrywide filed a motion to deny certification of the class. The District Court granted the motion and the plaintiffs took an interlocutory appeal to the Ninth Circuit. The primary argument raised on appeal was the assertion that it was per se procedurally improper for the District Court to have decided a motion to deny class certification, before the plaintiffs had brought their affirmative motion for class certification. The court advised, however, “[a]lthough we have not previously addressed this argument directly, we conclude that Rule 23 does not preclude a defendant from bringing a ‘preemptive’ motion to deny certification.” 

In support of that conclusion, the court first explained that nothing in Federal Rule of Civil Procedure 23 “either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question.” It then rejected plaintiffs’ argument that allowing such motions to deny certification would open “troubling new territory,” since federal courts have “repeatedly considered defendants’ motions to deny class certification.” It also rejected plaintiffs’ reliance on cases that plaintiffs claimed espoused a “per se rule” disallowing such preemptive motions.

The plaintiffs argued that it was procedurally unfair for Countrywide to move to deny class certification prior to the pre-trial motion deadline and before plaintiffs had sufficient time to conduct discovery. The Ninth Circuit quickly disposed of these assertions, finding that there was no timing restriction violated by Countrywide and the plaintiffs had nearly ten months to conduct informal and formal discovery to oppose Countrywide’s motion. In other words, there is no procedural unfairness in the trial court deciding Countrywide’s motion when it did.


Finally, plaintiffs argued that the District Court had abused its discretion by finding common issues did not predominate in light of the uniform wage exemption employed by Countrywide as to the plaintiffs. The Ninth Circuit found, however, that despite using such a uniform exemption, there were still individualized inquiries that would need to be made as to how each of the employees carried out his or her work, perhaps requiring “several hundred mini-trials” with respect to each employee’s actual work performance.


The lesson to be learned from Vinole is that, in the appropriate case, defendants should consider the filing of a motion to deny class certification, which may be an effective vehicle to short-circuit a putative class action.

California Supreme Court Further Clarifies Scope of UCL Claims Following Proposition 64

On June 29, 2009, the California Supreme Court issued two decisions that restrict the use of California Business & Professions Code section 17200, otherwise known as the Unfair Competition Law (UCL). Both cases addressed aspects of the UCL as it now exists since the passage of Proposition 64, which occurred in November 2004. 

In one case, the Court, relying on the ballot materials that accompanied the proposition, confirmed that a private party may only pursue a representative claim under the UCL if that party complies with class action requirements. In the other case, the Court held that a labor union, which itself has not suffered actual injury, may not bring a UCL claim on behalf of its members, even if such members have assigned their rights to the union or if those rights are based on the doctrine of “associational standing.” These two nearly unanimous decisions come just weeks after the Court, in a divided 4-3 decision, In Re Tobacco II Cases (decided May 18, 2009), found that following Proposition 64 only the class representatives (and not the absent class members) need to meet the “actual injury” standing requirement of the UCL.

The first decision, Arias v. Superior Court (Angelo Dairy) (pdf), involved a dairy employee who sued his former employer and others for a variety of California Labor Code violations and other labor regulatory violations. He also brought claims under the UCL on behalf of himself and other current and former employees of the defendants. The trial court struck the UCL claims on the grounds that plaintiff had failed to satisfy the pleading requirements for a class action.  The Court of Appeal agreed, and the Supreme Court accepted review. In affirming the judgment below, the Court reviewed the Proposition 64 portion of the Voter Information Guide prepared by the Secretary of State issued in connection with the November 2, 2004 election, observing that there is “no doubt” that “one purpose of Proposition 64 was to impose class action requirements on private plaintiffs’ representative actions brought under the” UCL. In California, those class action requirements arise out of California Code of Civil Procedure section 382.

The second decision, Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.) (pdf), also addressed another aspect of the UCL modified by the passage of Proposition 64, specifically the standing requirement under Business & Professions Code section 17203 that a private party claim may only be brought by a “person who has suffered injury in fact and has lost money or property as a result of the unfair competition.”


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