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Employee Attempt to Pursue Class Action Lawsuit Despite Having Agreed to Individually Arbitrate Any Disputes with Employer Fails as Supreme Court Rejects NLRB’s Effort to Carve Out Labor Law Class Actions from FAA Requirement that Arbitration Agreements be Enforced

The Supreme Court issued a seminal decision yesterday in Epic Systems Corp. v. Lewis, 584 U.S. ___ (May 21, 2018), ruling 5-4 that the Federal Arbitration Act (FAA) compels enforcement of an employer-employee arbitration agreement to resolve disputes on an individual basis, rejecting the employees’ claim that the National Labor Relations Act (NLRA) authorizes the utilization of the class action procedure to resolve employee complaints.

The Supreme Court’s decision affects three consolidated appeals – out of the Fifth Circuit, the Seventh Circuit and the Ninth Circuit.  Justice Gorsuch concisely summarized the central issue as follows: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employer?” (Slip Opn., at 1.)

Yet again, consistent with well-settled Supreme Court precedent on the FAA, the Supreme Court held that the arbitration clause prevails.  Importantly for class action counsel in California, language in the Supreme Court opinion suggests that the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 383, 327 P.3d 129, 148 (Cal. 2014), which held that an employee’s right to bring a Private Attorney General Act (PAGA) class action asserting labor law claims cannot be waived, may not withstand a federal court challenge.

The Supreme Court used the Ninth Circuit case of Ernst & Young LLP v. Morris, where the employer and an employee (Stephen Morris) agreed to resolve on an individual basis through arbitration any disputes that may arise out of Morris’s employment. Morris later filed a putative class action against Ernst & Young alleging violations of the federal Fair Labor Standards Act (FLSA) and California labor laws claiming that he had been misclassified as exempt. Ernst & Young successfully moved to compel arbitration of Morris’s individual claims, but the Ninth Circuit reversed on the grounds that the FAA’s “saving clause” (9 U.S.C. §2) exempted from arbitration lawsuits that other federal laws permit to be brought as class actions. In the Ninth Circuit’s view, the NLRA expressly authorized “concerted activities” by employees (29 U.S.C. §157), which it believed included class actions or collective actions.

The Supreme Court disagreed. Historically, the High Court observed, the FAA (which dates to 1925) and the NLRA (which dates to 1935) have coexisted. Indeed, in 2010 the NLRB’s General Counsel remarked that “employees and employers ‘can benefit from the relative simplicity and informality of resolving claims before arbitrators,’ [and] … opined that the validity of such agreements ‘does not involve consideration of the policies of the National Labor Relations Act.’” (Slip Opn., at 4, citation omitted.) It was not until 2012 that the NLRB concluded that the NLRA’s right to concerted activity supercedes the FAA’s power to enforce arbitration agreements. (Id.)

In rejecting this position, the Supreme Court summarized the employees’ argument as follows: The FAA’s saving clause “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract’” and this provision applies “because the NLRA renders their particular class and collective action waivers illegal.” (Slip Opn., at 6.) The Supreme Court rejected this argument due to a “fundamental” flaw – viz., “the saving clause recognizes only defense apply to ‘any’ contract” – thereby “establish[ing] a sort of ‘equal treatment’ rule for arbitration” – but “the clause offers no refuge for ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” (Id., at 7, citations omitted.) In other words, “the saving clause does not save defenses that target arbitration either by name or more subtle methods, such as by ‘interfer[ing] with fundamental attributes of arbitration.’” (Id., citations omitted.)

This is where the employees’ argument stumbles. They don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes. (Slip Opn., at 7.)

The Supreme Court further held that the purpose of Section 7 of the NLRA is to allow employees “to organize unions and bargain collectively.” (Slip Opn., at 11.) It does not concern arbitration or resolution of disputes (id.), and could not have been intended to address class actions as Rule 23 “didn’t create the modern class action until 1966” (id.).

NOTE: The Supreme Court’s analysis, set forth in the indented quote above, casts doubt on whether the High Court would allow the California Supreme Court’s analysis in Iskanian – exempting PAGA labor law class actions from the reach of the FAA – to survive, and is likely to give birth to a new wave of challenges to PAGA class action lawsuits.

Download PDF of Epic System v. Lewis

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I recently contributed an article to Thomson Reuters’ Legal Current on Practical Considerations Regarding Class Action Waivers in Arbitration Agreements:

After the Supreme Court decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) – which held that class action waivers in arbitration agreements are valid under the Federal Arbitration Act (“FAA”) – companies rushed into class action waiver arbitration agreements without heeding the proverb, “Look before you leap.” While avoiding class actions is an admirable goal, doing so through arbitration agreements may lead to unintended and painful consequences.  In addition, many companies have found courts reluctant to enforce the class action waiver and/or the arbitration clause, which can cost tens of thousands of dollars in law and motion practice only for the case to remain in state or federal court.  Read the full article here.

As I state in the article, “If it is advisable to adopt an arbitration clause with a class action waiver, a company should be aware that arbitration agreements are not widgets: one size does not fit all.” It is always advisable to have legal counsel draft agreements that are specific to your company and its intended goals.

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Plaintiff’s Pre-Class Certification Discovery Request for Contact Information of Putative Class Members Properly Limited to Employees who Worked in the Same Store Location as Plaintiff California Court of Appeal Holds

The decision of the California Court of Appeal in Williams v. Superior Court (Marshalls), No. B259967 (Cal. Ct. App. May 15, 2015) will have California employers breathing a sigh of relief, at least for representative actions involving multiple locations.

In Williams, the California Court of Appeals for the Second Appellate District (which includes Los Angeles County) upheld the decision of the trial court denying Plaintiff’s motion to compel the disclosure of the names and contact information for all putative class members in a representative wage and hour action brought under California’s Private Attorney General Act (“PAGA”).

Plaintiff Michael Williams alleged in his PAGA action that Marshalls failed to provide its employees with meal and rest breaks, accurate wage statements, reimbursement for business-related expenses, and earned wages as required by California law.

At the outset of the case and prior to Plaintiff sitting for his own deposition, Plaintiff served interrogatories seeking production of the names and contact information for all non-exempt employees of Marshalls. Defendant objected to the requests and Plaintiff moved to compel.

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Federal Arbitration Act (FAA) Compels Enforcement of Class Action Waiver in Contract Even if Cost of Pursuing Federal Claim will be Prohibitively Expensive to Arbitrate U.S. Supreme Court Holds

Plaintiffs – a group of merchants who accept American Express cards – filed a putative class action against American Express alleging of the Sherman Act and seeking treble damages under the Clayton Act; the class action complaint alleged that American Express violated federal antitrust laws by “us[ing] its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.” American Express Co. v. Italian Colors Restaurant, __ U.S. __, __ S.Ct. __, 2013 WL 3064410, *1-2 (June 20, 2013). Plaintiffs’ contract with American Express “contains a clause that requires all disputes between the parties to be resolved by arbitration” and further provides that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Id., at *1 (citing In re American Express Merchants’ Litig., 667 F. 3d 204, 209 (2d Cir. 2012)). Accordingly, American Express moved under the Federal Arbitration Act (FAA) to compel arbitration of Plaintiffs’ individual claims, id., at *2. Plaintiffs opposed dismissal of their class action complaint, submitting an expert witness declaration that estimated the cost of proving Plaintiffs’ antitrust claims could “exceed $1 million,” while the maximum recovery for any individual plaintiff would be less than $40,000. Id. The district court rejected Plaintiffs’ argument, granted the motion to compel arbitration of the individual claims and dismissed the class action complaint. Id. The Second Circuit reversed, holding that because pursuit of Plaintiffs’ antitrust claims would be prohibitively expensive if pursued individually, the class action waiver was unenforceable. Id. (citing In re American Express Merchants’ Litig., 554 F. 3d 300, 315-16 (2d Cir. 2009)). The Supreme Court reversed.

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In Considering Class Action Certification Order in Labor Law Class Action, California Supreme Court Holds Rest Periods Not Mandated Prior to Meal Periods, and Employer must Provide Meal Breaks but need not Ensure Employee Takes Meal Breaks

Plaintiffs filed a putative class action in California state court against their employer, Brinker Restaurant, alleging various labor law violations; specifically, the class action complaint alleged that Brinker failed to provide employees with rest breaks, failed to provide employees with meal breaks, and that Brinker required employees to work “off-the-clock.” Brinker Restaurant Corp. v. Superior Court, ___ Cal.4th ___ (April 12, 2012) [Slip Opn., at 1, 4]. With respect to the meal period claim, plaintiffs argued that state law requires employers “to provide a 30-minute meal period at least once every five hours.” Id., at 5. Defense attorneys argued that state law does not so long as it provides one meal period for work shifts exceeding 5 hours and two meal periods for work shifts exceeding 10 hours, then it has complied with state law. Id. Brinker also argued that individual issues predominated so that class action treatment would be inappropriate, id. Specifically, Brinker argued that it was required only to permit its employees to take meal and rest breaks, but it was under no legal obligation to ensure that its employees take such breaks. Id., at 6. Plaintiffs moved the trial court to certify the litigation as a class action, id., at 5. The trial court agreed with plaintiffs, and granted plaintiffs’ motion to certify the lawsuit as a class action. Id., at 7. The Court of Appeal granted Brinker’s petition for writ relief and reversed. The Court of Appeal concluded that common issues did not predominate as a matter of law, and therefore the trial court erred in certifying the claims for class action treatment. Id., at 15. The California Supreme Court granted review and held (1) the trial court properly certified the rest break claim for class action treatment, (2) improperly certified the “off-the-clock” claim, and (3) needed to reconsider the meal period claim. Id., at 1-2. Importantly, with respect to the meal break claim, the Supreme Court held that “an employer’s obligation is to relieve its employee of all duty, with the employee thereafter at liberty to use the meal period for whatever purpose he or she desires, but the employer need not ensure that no work is done.” Id., at 2.

The Supreme Court decision in Brinker has been awaited by both sides of the class action bar. Unfortunately, the decision creates as many questions as it solves. For example, with respect to the general rules governing class certification, the Supreme Court recognized that both state and federal decisions hold that consideration of the merits may overlap class certification issues. See Brinker, at 10-12. The Court also held that “[t]o the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them.” Id., at 13. However, in the next breath, the Supreme Court stated that “a court generally should eschew resolution of such issues unless necessary,” id. And relying on its prior decisions, the Court strongly discouraged trial courts from considering the merits of a claim in determining class certification. See id., at 11. But the Court summarized its holding as follows: “if the presence of an element necessary to certification, such as predominance, cannot be determined without resolving a potential legal issue, the trial court must resolve that issue at the certification stage.” Id., at 14. So precisely when trial court consideration of the merits is necessary or prohibited is less clear post-Brinker.

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State Courts Erred in Denying Defense Motion to Compel Arbitration Under FAA (Federal Arbitration Act) because They Failed to Consider Whether Any Claims were Subject to Arbitration

Plaintiffs filed a putative class action in Florida state court against various defendants, including KPMG LLP, for damages suffered as a result of investments made with Bernard Madoff; the class action named the investment funds, the entity that managed the funds, and KPMG as auditor. KPMG LLP v. Cocchi, 565 U.S. ___ (November 7, 2011) [Slip Opn., at 1-2]. With respect to KPMG, the class action alleged negligent misrepresentation, professional malpractice, aiding and abetting a breach of fiduciary duty, and violation of Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA). Id., at 2. KPMG moved to compel arbitration under the Federal Arbitration Act (FAA) on the grounds that the audit services agreement between it and the funds’ management company contained an arbitration clause. Id. The trial court denied the motion, and the state appellate court affirmed on the ground that “‘[n]one of the plaintiffs…expressly assented in any fashion to [the audit services agreement] or the arbitration provision.’” Id., at 2-3 (citation omitted). However, the state courts apparently found it sufficient to conclude that neither the FDUTPA claim nor the negligent misrepresentation claim were subject to arbitration, without analyzing whether the professional malpractice or breach of fiduciary duty claim were subject to arbitration. Id., at 3. The Supreme Court granted certiorari and reversed.

Despite its April 27, 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), some state courts have continued to find “creative” ways to avoid its mandate. “The Federal Arbitration Act reflects an ‘emphatic federal policy in favor of arbitral dispute resolution.’” KPMG, at 3 (citations omitted, italics added). “Agreements to arbitrate that fall within the scope and coverage of the [FAA]…must be enforced in state and federal courts.” Id., at 1 (italics added). Thus, “State courts…‘have a prominent role to play as enforcers of agreements to arbitrate.’” Id. (citation omitted). And because the FAA “has been interpreted to require that if a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation,” id. (citation omitted), “[a] court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration,” id. (citation omitted).

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California Attorney Richard Watts Publishes Book Based On His Experience In Representing The “Super-Wealthy”

Richard Watts, a personal friend of the author and a superb lawyer, has published a book based on his 30-year career representing individuals with a net worth in excess of $100 million. The book is entitled, “Fables of Fortune: What Rich People Have That You Don’t Want.”

The author of the Class Action Defense Blog found Rich’s book to be a great read, particularly in its ability to illustrate through real-life examples the proverb that “the grass is always greener.” Rich does a great job weaving in experiences with his own family to show that one need not be super wealthy to experience the joy of true friendship or the treasure of a close-knit family.

For more information about Rich Watts, please visit his website

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District Court Applied Wrong Legal Criteria in Certifying Gender Discrimination Class Action Requiring Remand for Reconsideration based on Standards Enunciated in Wal-Mart v. Dukes Ninth Circuit Holds

Plaintiffs filed a putative class action against Costco Wholesale alleging that it discriminates in its promotional practices based on gender. Ellis v. Costco Wholesale Corp., ___ F.3d ___, 2011 WL 4336668 (9th Cir. September 16, 2011) [Slip Opn., at 17693, 17697]. The class action complaint was filed after the Equal Employment Opportunity Commission (EEOC) dismissed a charge that Costco engaged in gender discrimination in its practice of promoting employees. The class action complaint alleges violations of Title VII, and sought to be brought on behalf “of a Title VII class of all women employed by Costco in the United States denied promotion to [assistant general managers] and/or [general managers] positions.” Id., at 17702-03. The class action “sought class-wide injunctive relief, lost pay, and compensatory and punitive damages.” Id., at 17703. Plaintiffs moved the district court to certify the lawsuit as a class action based, in part, on the declarations of three experts – a statistician, a labor economist, and a sociologist – who opined that Costco’s female employees were “promoted at a slower rate” and were “underrepresented” in management positions relative to their male peers. Id. Costco opposed class action treatment, based in part on the declarations of 200 employees and the declarations of its own experts. Id. The district court granted class certification, id., at 17703-04. The Ninth Circuit granted Costco’s request for leave to file an interlocutory appeal, and proceeded to affirm in part, vacate in part, and remand the matter for further proceedings. Id., at 17697.

Briefly, Costco operates 350 warehouses, each containing a general manager (GM), two or three assistant general managers (AGM), and three or four senior staff managers (who are themselves divided into four categories consisting of front end managers, administration managers, receiving managers, and merchandise managers). Ellis, at 17699. The company “promotes almost entirely from within its organization” and “[o]nly current Costco AGMs are eligible for GM positions.” Id. No written policy exists explaining the criteria that Costco considers in selecting employees for consideration or in making its promotion decisions. Id., at 17699-700. Among senior staff managers, however, Costco generally rotates managers among the various categories as part of its belief that this exposure trains and develops employees for future positions as AGMs and GMs. Id., at 17700.

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The California Supreme Court will hear oral argument in Brinker Restaurant v. Superior Court (Hohnbaum, et al., real parties in interest) on November 8, 2011, according to the Court docket issued recently. The Court generally issues decisions within 90 days after completion of oral argument and submission of post-argument briefs, if any. A decision is expected by mid-February, 2012.

At issue in the case is whether California employers must ensure that their employees actually take their meal and rest periods or merely make them available. Guidance is also anticipated regarding the time in the workday in which meal and rest periods must be taken and whether or not legally-compliant meal and rest period policies can protect an employer against class actions even when these policies are unevenly enforced.

The decision is extremely important to California employers because meal and rest period claims have been the basis of hundreds of class action lawsuits in California. The Court’s decision could make it more difficult for plaintiffs to bring these claims as class actions, or, depending on the ruling, could establish rigid guidelines which may foster more class actions. Either way, California employers and Plaintiffs class action lawyers alike have eagerly awaited this decision since the Supreme Court took up the case in October, 2008 and look forward to receiving guidance from the high court.

Under California law, nonexempt employees are entitled to uninterrupted, off-duty meal periods of at least 30 minutes for every five hours worked. While there are certain limited exceptions to this rule (such as a revocable written waiver of the meal period in limited circumstances), employers are required to compensate employees for on-duty meal periods. In addition, California law assesses employers a penalty equal to one hour of pay at the employee’s regular rate for every day there is a meal period violation.

The lower court in the Brinker case held that California law requires employers only to “supply or make available” meal periods. This view is consistent with several Federal District Court decisions as well as the California Court of Appeals decision in Brinkley v. Public Storage. The California administrative entity charged with enforcing wage and hour laws, the Division of Labor Standards Enforcement, takes the position that employers have “an affirmative obligation to ensure the workers are actually relieved of all duty” during meal breaks. The California Supreme Court’s decision in Brinker should put this dispute to rest.

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Supreme Court Decision in Concepcion Compelled Granting AT&T’s Motion to Compel Arbitration of Individual Claims because FAA Preempts California Laws Barring Class Action Arbitration Waivers

Plaintiff filed a putative class action against cellular telephone service provider, AT&T Mobility, alleging violations of California’s Unfair Competition Law (UCL), False Advertising Law (FAL), Consumer Legal Remedies Act (CLRA) and breach of contract. Kaltwasser v. AT&T Mobility LLC, ___ F.Supp.2d ___, 2011 WL 4381748 (N.D.Cal. September 20, 2011) [Slip Opn., at 1-2]. According to the allegations underlying the class action complaint, plaintiff renewed his cell service with AT&T based on the company’s representations that it had the “fewest dropped calls.” Id., at 2. Because he alleges that this representation was false, plaintiff filed this lawsuit. AT&T moved to compel arbitration and to dismiss the class claims on the grounds that the service contract included an arbitration clause with a class action waiver. Id. In April 2008, the district court denied AT&T’s motion finding the class action waiver unconscionable under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). Id., at 2-3. Plaintiff subsequently filed a motion to have his lawsuit certified as a class action; the district court delayed ruling on the motion pending the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). Id., at 1. Based on Concepcion, the federal court denied plaintiff’s motion and ordered his claims to be arbitrated on an individual basis. Id., at 1-2.

After providing a general discussion of the FAA and Concepcion, the district court noted Concepcion’s holding that “California’s Discover Bank rule is preempted by the FAA.” Kaltwasser, at 5 (quoting Concepcion, at 1753). Plaintiff, however, argued that Concepcion did not require reconsideration of the district court’s prior order denying AT&T’ s motion to compel arbitration because (1) “Concepcion left intact a vindication-of-rights doctrine under federal common law” permitting him to avoid arbitration “if he can show that the costs involved in proving his claims exceed the damages he can potentially recover”; (2) “Concepcion did not affect public policy principles of contract law” which hold that “‘a law established for a public reason cannot be contravened by a private agreement’”; and (3) AT&T waived its right to arbitration. Id., at 5-6. The district court disagreed.

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