Proskauer on Class and Collective Actions

Second Circuit Affirms Expansion of Gender Bias Class Action against Sterling Jewelers

On November 18, 2019, the United States Court of Appeals for the Second Circuit revived a potentially sweeping class action against Sterling Jewelers, Inc. (“Sterling”), holding that potentially tens of thousands of female employees could take part in an arbitration class involving claims of sex discrimination.  The Second Circuit’s holding is the latest in the case Jock v. Sterling Jewelers, Inc., an ongoing saga that has bounced between arbitration, the Southern District of New York, and the Second Circuit.

In 2008, a group of female Sterling employees brought claims alleging discrimination against female employees in pay and promotion opportunities.  Sterling successfully moved to compel arbitration, and in 2015, the arbitrator certified a class of approximately 44,000 employees, holding that the class would include all female employees of Sterling, and not just those who had asserted claims.  Sterling moved to vacate this determination, and in January 2018, District Court Judge Jed S. Rakoff held that the arbitrator exceed her powers by including in the class employees who had not affirmatively stated they wished to take part in it.

The Plaintiff class appealed, and on November 18, the Second Circuit reversed and remanded, holding that the arbitrator had the discretion to rule as she had.  Writing for the unanimous Panel, Circuit Judge Peter Hall stated that because all Sterling employees had signed arbitration agreements with the company (referred to as the “RESOLVE” Agreement), all employees had agreed to be bound by the arbitrator’s views of class membership.  The Court held “that the arbitrator’s determination that the [arbitration] agreement permits class arbitration binds the absent class members because, by signing the RESOLVE Agreement, they, no less than the parties, bargained for the arbitrator’s construction of that agreement with respect to class arbitrability.”

The Second Circuit followed the common doctrine requiring that arbitration decisions be reviewed under an extremely deferential standard.  As long as an arbitrator acts within the scope of her contractually delegated authority, her decision cannot be challenged, even if a court disagrees with it.  In other words, as the Second Circuit held, the District Court can only “decide that the arbitrator had the authority to reach such issues.”

In the case at hand, all Sterling employees, including absent class members, had authorized the arbitrator, by the terms of the RESOLVE Agreement, to determine whether claims could proceed on a class-wide basis, and if so, who would be included in the class.  The Agreement also stated that the arbitrator would determine all questions of arbitrability and procedural questions.  This determination was therefore a matter of contractual interpretation, and within the arbitrator’s discretion.

The case will now return to the District Court for a determination of whether the arbitrator acted within the scope of authority in certifying an opt-out rather than mandatory class, an issue that was not before the Second Circuit.  As this case has proceeded, the potential class of Sterling employees has grown as high as 70,000.  Accordingly, this recent decision will likely have strong implications for the parties’ next steps in this longstanding litigation.

Takeaway: Employers opting to permit class arbitration, and to defer questions of arbitrability to the arbitrator, should consider the consequences of that all-in approach.

Ninth Circuit Affirms Denial of Class Certification for Wage and Hour Claims on Predominance Grounds

On October 4, 2019, the Ninth Circuit Court of Appeals affirmed rulings by the District Court for the Northern District of California to decertify a rest break subclass and to deny class certification of meal break and off-the-clock subclasses in a long-running case brought by AutoZone employees.  In re: AutoZone, Inc., Wage and Hour Employment Practices Litigation, Case No. 3:10-md-02159-CRB.


Plaintiffs brought suit on behalf of a putative class of approximately 30,000 employees challenging AutoZone’s wage and hour practices for non-exempt employees in California.  On December 12, 2012, the district court granted plaintiffs’ motion for class certification as to the rest break subclass, but denied class certification as to all other subclasses. After three and a half years of discovery, on August 10, 2016, the district court decertified the rest break subclass.  The class representatives to the putative class subsequently settled their individual claims, but then appealed the district court’s class certification rulings to the Ninth Circuit.


The Ninth Circuit first rejected AutoZone’s challenge that the Court lacked jurisdiction over the named plaintiffs’ appeal because they had settled their individual claims against the Company.  The Court reasoned that because the parties’ settlement agreements expressly reserved claims for attorney’s fees and costs relating to class certification, the putative class representatives maintained a sufficient personal stake in the class litigation to appeal the district court’s denial of class certification.

Next, the Ninth Circuit affirmed the district court’s decision to decertify the rest break subclass because plaintiffs failed to show the existence of a uniform policy denying class members rest breaks. Specifically, the court highlighted the evidence submitted by AutoZone which called into question the existence of a uniform rest break policy that was consistently applied during the class period.  That evidence included: (1) statements in AutoZone’s employee handbooks that “[rest] breaks are scheduled in accordance with California law”; (2) declarations stating that California’s rest break law was posted in AutoZone’s stores throughout the class period; (3) a 2011 PowerPoint presentation informing employees of California’s rest break requirements; (4) a declaration describing AutoZone’s practice of encouraging employees to take breaks every two hours; and (5) declarations by putative class members attesting that they knew they were permitted to take their breaks in accordance with California law.  Without substantial evidence of a uniform policy, the Ninth Circuit reasoned that it would become necessary to determine in each individual case why a given employee missed a rest break, and that therefore individual, rather than common, questions would predominate.

The Ninth Circuit also determined that the district court did not abuse its discretion in denying certification of the meal break and off-the-clock subclasses on predominance grounds. With respect to the meal break subclass, the Court noted that plaintiffs’ failure to present any evidence of a uniform policy requiring employees to work through their meal periods meant that individualized determinations regarding why any given employee missed a meal period would predominate. With respect to the off-the-clock subclass, the Court similarly noted that because AutoZone had a written policy prohibiting off-the-clock work during the class period, a determination of why some employees were under-compensated would also have entailed an employee-by-employee analysis.


This decision is a valuable win for employers who are faced with class actions claims that are vulnerable to certification on predominance grounds.  It also serves as a cautious reminder to employers who are settling individual claims with a class representative to ensure that the settlement agreement does not leave the door open for the settling plaintiff to continue to challenge class certification rulings.

District of Massachusetts Grants Class Certification but denies Summary Judgment in Independent Contractor Misclassification Case

On September 13, 2019, the U.S. District Court for the District of Massachusetts granted certification of a class of independent contractor drivers who delivered packages through Dynamex Operations East for Google Express.  Ouadani v. Dynamex Operations East LLC, No. 16-12036, 2019 WL 4384061 (D. Mass. Sept. 13, 2019).  Ouadani, a delivery driver, sued Dynamex on behalf of himself and all others similarly situated, alleging he was misclassified as an independent contractor in violation of federal and state wage laws.  Ouadani sought class certification on two of those claims – improper deductions to drivers’ paychecks and misclassification under Massachusetts law – and sought partial summary judgment on the Massachusetts misclassification claim.  In its ruling, the Court refined and certified the plaintiff’s proposed class, holding that it would not be too taxing to resolve the workers’ claims on a class-wide basis despite variations in their work experiences.  The Court denied Ouadani’s partial summary judgment motion, holding that a jury should resolve the dispute as to whether Dynamex failed the control prong of the pertinent test under the Massachusetts Independent Contractor Statute.

From 2014-2016, Dynamex contracted with Google Express to supply drivers for same-day deliveries in various U.S. cities.  The contract required Dynamex to implement several quality control measures for drivers, including experience and appearance requirements, mandatory training and orientation, and performance monitoring.  To fulfill their obligations under the contract, Dynamex contracted with multiple third parties to procure drivers.  The process for driver scheduling, onboarding, and training as per Google’s requirements varied widely depending on how the driver’s contracts were set up.

At issue in the misclassification claim were two prongs of the Massachusetts Independent Contractor Statute regarding whether a worker has been properly classified as an independent contractor: (1) that the worker is free from the putative employer’s control both under contract and in fact (known as “Prong A”); and (2) that the worker is customarily engaged in an independently established business of the same nature (known as “Prong C”).  Dynamex argued that the proposed misclassification class could not meet the commonality and predominance requirements of Rule 23 given the multiple layers of contractual relationships for each putative class member, and their individualized experiences working for Dynamex.  Dynamex argued that the drivers in the proposed class worked for at least 21 different third party contractors, all with different contracts and different processes for recruiting, onboarding, orientation, uniforms, what types of vehicles they could drive and whether and how much they engaged in their own independently established driving businesses.  With respect to commonality, the Court held that Ouadani had presented evidence of Dynamex policies and practices that were common to all drivers sufficient to show commonality with respect to Dynamex’s control.  As to predominance, the Court noted that it was a closer call but for Prong A, it could resolve the issue of individualized control by narrowing the class and for Prong C, it could look at the drivers’ hourly statistics as a form of common proof amenable to class determination.

Dynamex also argued that the complexity in calculating damages precluded class treatment, given Dynamex made no payments directly to any member of the class and had no knowledge of how they were paid.  The Court noted that in the absence of any evidence in the record of how drivers were paid, it would accept the plaintiff’s proposed inference that the third party contractors merely passed through Dynamex’s payments to the drivers.  The Court conceded that if this inference proved wrong after further discovery it would consider decertification.

Ouadani’s summary judgment arguments on misclassification were similar to his arguments for class certification – i.e., that the issue of control was satisfied as a matter of law by Dynamex’s contract with Google requiring that Dynamex implement policies that applied to all drivers in the class.  The Court denied summary judgment and held that Ouadani could not show as a matter of law that Dynamex had contractual control over the drivers because he did not analyze or include as evidence the individual third party driver contracts, the operative contracts to examine control under Massachusetts law.  Notably, the Court’s discussion that each individual driver contract must be looked at to determine control on the merits appears to conflict with the Court’s holding that Dynamex’s policies and procedures are sufficient common proof for class members to show control. We will continue to watch and report on this case as it develops.

**For more discussion of Dynamex’s staffing model and the impact on independent contractor analysis, we previously reported on the California Supreme Court’s unanimous decision against Dynamex Operations West, making it even harder for companies to classify workers as independent contractors (rather than employees.)  This set off a series of related rulings that have the potential to change the landscape for employee classification claims in California.  (We have written about this extensively on our California Employment Law Update here, here, here, and here; our California Employment Law Notes newsletter; and discussed the matter in a recent Employee Benefits podcast).

California Supreme Court Hands Employers A Rare Victory, Trims Bloated PAGA Claims

Last week, the California Supreme Court held that private litigants may not recover unpaid wages under the Labor Code Private Attorneys General Act (“PAGA”).  See ZB, N.A. v. Superior Court (Lawson) (Cal. S. Ct. Sept. 12, 2019).

In a rearguard effort to fight employment arbitration agreements, which usually include class action waivers, plaintiffs’ lawyers have been routinely filing PAGA representative actions in an effort to stay in court and out of arbitration.  Plaintiffs relied on Thurman v. Bayshore Transit Management, Inc., 203 Cal. App. 4th 1112 (2012), to argue that, in addition to obtaining the PAGA penalties, they also could recover underlying unpaid wages under Section 558 of the Labor Code.  Essentially, Plaintiffs have been seeking the same recovery they otherwise would have obtained through a class action.

By circumventing their class action waivers and seeking unpaid wages in the PAGA action, Plaintiffs have attempted to revive class action claims for unpaid wages and turned PAGA claims into “sloppy class actions.”  The result has been grossly inflated settlement demands—and higher potential verdicts.  Happily, Lawson forecloses this attempted end-run around class action waivers and the misinterpretation of Labor Code Section 558.

In last week’s ruling, the Supreme Court rejected Thurman’s conclusion and noted that “[d]eeming … unpaid wages … to be a civil penalty … cannot be squared with the understanding of that term under the PAGA.”  The Court held that “the civil penalties a plaintiff may seek under … [the Labor Code] through the PAGA do not include the ‘amount sufficient to recover underpaid wages.’”

Lawson therefore significantly reduces the amount of potential exposure employers face in lawsuits brought under the PAGA.  Although PAGA penalties often far eclipse the potential underlying wage liability, Lawson restricts recovery to actual civil penalties—not unpaid wages—and deprives plaintiffs’ lawyers of a workaround to class action waivers in arbitration agreements.

NLRB Greenlights Aggressive Response to Class Action Filings

On August 14, 2019, the National Labor Relations Board (the “Board”) held that employers may require employees to waive their right to join class and collective actions – even after a claim has been filed in court – without running afoul of federal labor law.  Cordua Restaurants, Inc., Cases 16-CA-160901, 16-CA-161380, 16-CA-170940, and 16-CA-173451.


Cordua Restaurants had an arbitration agreement in its employment contracts that required employees to waive their right to pursue class or collective claims against the company.  In early 2015, seven employees nevertheless filed a collective action against the company, alleging violations of the Fair Labor Standards Act and the Texas Minimum Wage Act.  In response, Cordua circulated a revised arbitration agreement to its workforce prohibiting employees from joining any collective action without the company’s written consent.  Although the Administrative Law Judge initially found that Cordua had violated the Act based on this conduct, the Supreme Court’s subsequent Epic Systems decision required that the case be revisited.

In Epic Systems Corp. v. Lewis, 584 U.S. __ (2018), the Supreme Court held that individualized arbitration agreements containing class and collective action waivers were lawful under the National Labor Relations Act and should be fully enforced pursuant to the Federal Arbitration Act.

The Board’s Decision

This case presented two issues of first impression in the wake of Epic Systems.  First, can an employer issue a mandatory arbitration agreement in response to protected concerted activity?  And second, can an employer threaten to discharge an employee who refuses to sign such a mandatory arbitration agreement?  In a major win for employers on these contentious issues, the Board answered both questions in the affirmative.

Although the Board found that opting in to a collective wage and hour suit constitutes protected concerted activity, it explained that an employer’s response, requiring the waiver of opt in rights for such actions, is lawful.  As the Board explained, Epic Systems clarified that compelling employment law claims to be resolved through individual arbitration, as opposed to a class or collective suit, does not restrict employee rights under the Act.  Therefore, the Board reasoned that, as long as the revised arbitration agreement at issue did not restrict employee rights under the Act in some distinguishable way, no violation should be found.  After all, adherence to the revised arbitration agreement would not prevent any employee from vindicating any rights via arbitration, and nothing in the agreement language implied that employees would be disciplined for any failure to abide by its terms.

With regard to the second issue – whether an employer can threaten to discharge an employee who refuses to sign a revised arbitration agreement – the record showed that Cordua’s Assistant Manager explicitly warned employees apprehensive of the new agreement that it would be a bad idea “to bite the hand that feeds” them and that he would instead “go ahead and sign” the revised agreement.  The Board reasoned that, because Epic Systems affords employers the right to condition employment on acceptance of a class or collective action waiver, these statements – although threatening – were an accurate description of the lawful consequences of failing to sign the revised agreement.  While employees are permitted to raise concerns with regard to what they are being asked to sign, they could nonetheless be disciplined for refusing to waive their collective action opt in rights.

Although the decision represents a positive outcome for employers, it was not a complete victory.  While the conduct described above was not found to violate the Act, the Board did find that Respondent unlawfully discharged one employee for having joined the collective action.  The Board explained that:

“while Epic Systems entitled the Respondent to promulgate and maintain individual arbitration agreements, including promulgating such agreements in response to opt-in activity, and to enforce those agreements in court by seeking individual arbitration of the employees’ wage-and-hour claims pursuant to those agreements, it did not similarly entitle the Respondent to discharge [an employee] for joining with his coworkers in filing a collective action to pursue those claims.”


This decision provides yet another much needed clarification on the impact of last year’s Supreme Court’s decision in Epic Systems.  The current Board appears committed to an aggressive interpretation of that decision: that employers should be permitted to condition employment on an employee’s waiver of the right to file or join class and collective actions against an employer, even after such litigation has begun.

Second Circuit Compels Individual Arbitration of Putative Class FLSA and State Labor Law Claims

On July 2, 2019, a three-judge panel of the Second Circuit reversed the lower court’s denial of a motion to compel individual arbitration of a putative class action suit brought under the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”). Abdullayeva v. Attending Homecare Services, LLC, d/b/a Attending Home Care, No. 18-651. The decision is significant in that it furthers a trend in favor of enforcing individual arbitration agreements that have the effect of precluding costly class action litigation.


The Plaintiff, Abdullayeva, is one of many employees of Attending Home Care (“Attending”) providing home healthcare services to elderly residents in the greater New York City area. She is a member of the Local 1660 chapter of the Home Healthcare Workers of America, the union she was required to join as a condition of her employment. Attending and the union entered into a collective bargaining agreement (“CBA”) that was binding on Attending’s employees from May 2016 to April 2019. An amendment to the CBA’s “Adjustment of Disputes” provision stated that “all claims brought by either the Union or Employees, asserting violations of or arising under the [FLSA] . . . , New York Home Care Worker Wage Parity Law, or [NYLL] . . . shall be subject exclusively, to the grievance and arbitration procedures” outlined in the agreement. The amendment also provided the name of the arbitrator who would handle these arbitrations.

In October 2017, Abdullayeva filed suit, on behalf of herself and all similarly situated employees, alleging overtime and spread-of-hours violations pursuant to the FLSA and NYLL. Attending moved to compel arbitration. The United States District Court for the Eastern District of New York denied Attending’s motion for two reasons. First, the court held that the CBA permitted, but did not mandate, arbitration of Abdullayeva’s claims. Second, the court found that the CBA violated Abdullayeva’s due process rights because the union preselected an arbitrator without her input. In making its decision, the district court determined that the arbitration clause at issue was “at best ambiguous” and did not satisfy the “clear and unmistakable” test used in analyzing purported waivers of union members’ right to bring statutory claims in court.

The Second Circuit’s Decision

Attending appealed the district court’s denial of its motion to compel arbitration. The Second Circuit focused its inquiry on whether the parties agreed to arbitrate and the scope of the arbitration agreement. The Second Circuit held that the arbitration clause in the CBA (i) mandated, rather than permitted, arbitration of Abdullayeva’s FLSA and NYLL claims, and (ii) did not deny due process to Attending’s employees.

First, the Court concluded that “the Union agreed to mandatory arbitration in the CBA on behalf of its members and that the arbitration agreement at issue clearly and unmistakably encompasses Abdullayeva’s FLSA and NYLL claims.” In making this finding, the Second Circuit noted that the district court had improperly applied the Supreme Court’s “clear and unmistakable” standard to the question of whether an arbitration agreement existed in the first instance between the union and Attending. According to the Court, that standard is applicable at the next step of inquiry, which asks whether the “agreement clearly and unmistakably encompasses the plaintiff’s statutory claims.” Abdullayeva’s FLSA and NYLL claims were explicitly included in the CBA’s list of statutory claims subject to mandatory arbitration, which lead the Court to conclude that her claims must be arbitrated on an individual basis.

Second, the Second Circuit held that the fact that Abdullayeva did not personally select the arbitrator did not violate due process because the union was authorized to do so on her behalf. The court stated that the union, “[a]s Abdullayeva’s bargaining representative . . . was authorized to negotiate ‘conditions of employment,’ including arbitration clauses, with Attending on behalf of Attending’s employees.” The court hinted that it might have concluded otherwise if Abdullayeva had demonstrated that the arbitration agreement’s procedures provided inadequate notice, or that the selected arbitrator was biased.

The Court directed the district court to compel arbitration of Abdullayeva’s individual claims and stay further proceedings pending arbitration.


Considering that the original complaint sought a minimum of $500 million in relief on behalf of over 100 potential class members, the Second Circuit’s decision had the effect of substantially reducing Attending’s liability exposure. Other home health agencies within the Second Circuit’s jurisdiction that have entered into similar CBAs are likely to be similarly insulated from large liability exposures from suits brought by individual plaintiffs. More broadly, the decision bodes well for other employers who seek to reduce exposure to class action litigation by entering into individual arbitration agreements. Employers choosing this route should exercise care in insuring that the scope of the arbitration clause is clear and that employees are effectively bound to the agreement, either directly or through their union representation.

How Do Individualized Issues Impact a Class Action Settlement?

The Ninth Circuit went a long way towards answering that question in an en banc decision last week. The key takeaway is that a district court certifying a class for settlement purposes does not have to conduct the same “rigorous analysis” of manageability considerations required when certifying a class for litigation. The decision has major implications, not only for class action settlements but also for cases where class certification is contested.

The In re Hyundai and Kia Fuel Economy Litigation decision was the latest turn in a lengthy settlement approval process. The two car makers had settled in early 2013 with a nationwide class of car buyers who claimed they were misled by inflated representations about the miles per gallon they could expect from their vehicles. The opinion describes in great detail the district court’s exhaustive analysis of the settlement before approving it nearly three years later.

Last year, a divided Ninth Circuit panel reversed, holding that the district court, at the urging of objectors to the settlement, should have analyzed differences among state consumer protection laws before certifying a nationwide settlement class based on California law.

The full Ninth Circuit disagreed. Among the principles it articulated are:

  • A district court certifying a litigation class “must be concerned with manageability at trial,” but “manageability is not a concern in certifying a settlement class where, by definition, there will be no trial.”
  • As a result, “[a] class that is certifiable for settlement may not be certifiable for litigation if the settlement obviates the need to litigate individualized issues that would make a trial unmanageable.”
  • Rather than strict “predominance” (whether questions common to class members’ claims are a significant aspect of the case that can be resolved at the same time), a district court asked to approve a class settlement should focus on “unity” (whether class members suffered the same harm in the same way).

Applying those principles, the court endorsed the district court’s certification of a nationwide class of car buyers. The supposed “variations” in state law were not an obstacle to certification, as the earlier panel had concluded. The settlement objectors, the court noted, had not demonstrated how California’s choice-of-law test (applicable because California was the forum state) required application of another state’s law. Absent that showing, and absent any constitutional problems created by applying California law to all class members’ claims, the district court properly certified the class for settlement.

Other courts, including the Supreme Court in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), have recognized that certifying a class for settlement is different and potentially less onerous than certifying it for litigation. The real innovation from the Ninth Circuit’s decision is treating individualized issues that could defeat predominance as factors that might create “intractable management problems” at trial. Amchem authorizes courts to ignore those “when settlement-only certification is requested.”

The decision clears the way for district courts, at least in the Ninth Circuit, to take a practical approach to class settlements. If the parties litigate class certification, individualized issues may very well prevent the district court from certifying a class because of the “rigorous analysis” required at that stage. But if the parties opt for settlement, the same issues may be no obstacle at all—precisely because they won’t be litigated.

U. S. Supreme Court Holds that Third-Party Defendants to Counterclaims Cannot Remove Class Actions to Federal Court

In a 5-4 decision in Home Depot U.S.A. Inc., v. Jackson, 587 U.S. __ (2019), the United States Supreme Court held that a third-party counterclaim defendant does not qualify as a “defendant” under the general removal statute, 28 U.S.C. § 1441(a) or under the Class Action Fairness Act of 2005 (“CAFA”) and therefore cannot remove class action claims to federal court under either statute.

Brief Background

This case started when a bank filed a debt collection action against George Jackson in state court for charges that Jackson incurred on a Home Depot credit card. Jackson then filed an individual counterclaim against the bank and third-party class action claims against Home Depot U.S.A., Inc. and Carolina Water Systems, Inc. alleging that Home Depot and Carolina Water Systems improperly induced homeowners to buy water treatment systems at inflated prices.

After the bank dismissed its claims against Jackson, Home Depot filed a notice of removal to federal court under both the general removal statute and CAFA. Jackson moved to remand to state court. The district court granted his motion, and the United States Court of Appeal for the Fourth Circuit granted Home Depot permission to appeal and affirmed the district court’s decision remanding the case to state court.

Home Depot filed a petition for a writ of certiorari with the Supreme Court, which the Court granted.

The Supreme Court’s Decision

The Supreme Court analyzed the text of both the general removal statute and CAFA and concluded that both statutes only intended for defendants sued by the original plaintiff to an action to be able to remove the case to federal court.

The general removal statute provides that “the defendant or the defendants” in a “civil action” may remove to federal court.   As a result, the Court held that it did not matter that Home Depot was a defendant to a claim asserted against it because the statute refers to “civil actions, not claims.” Id. at 6. The Court acknowledged that the dissent’s view that the term “defendant” is a “person sued in a civil proceeding” was a plausible reading of the statute but concluded that it was not the best interpretation.

The Court found that whether CAFA permitted a counterclaim defendant to remove was a closer question because CAFA allows “any defendant” to a “class action” to remove to federal court.   Despite the seemingly broader language, the Court concluded that the definition of “defendant” under CAFA was no different than under the general removal statute. The Court explained that while CAFA modified other provisions of the general removal statute by allowing a defendant to remove without the consent of other defendants and relaxing the diversity requirement, CAFA did not expand the types of parties eligible to remove a class action.

The majority opinion was written by Justice Thomas and joined by Justices Breyer, Ginsburg, Kagan, and Sotomayor and the dissent was written by Justice Alito and joined by Chief Justice Roberts and Justices Gorsuch and Kavanaugh.


As the majority tacitly acknowledged and the dissent vigorously argued, limiting the definition of “defendant” in this manner could lessen the impact of CAFA. As the dissent points out, theoretically a plaintiff could prevent a defendant from removing a class action to federal court if the plaintiff asserts the class claims as a counterclaim in a pre-existing lawsuit. That being said, if such tactics are used to prevent removal, the Court was clear that it will be up to Congress to amend the statute.

Northern District of New York Denies Class Certification and Decertifies Collective, Confirming Common Answers Not Common Questions Are Required

On April 26, 2019, the Northern District of New York held that a group of Plaintiffs failed to satisfy their burden to establish commonality and predominance under Fed. R. Civ. P. 23 and failed to sustain their burden that they were similarly situated to continue as a FLSA collective with respect to their misclassification claims under state and federal law. Jan P. Holick Jr., et al. v. Cellular Sales of New York, LLC, Case No. 1:12 CV-584 (NAM/DJS), 2019 WL 1877176 (N.D.N.Y. Apr. 26, 2019). The Court determined that individualized issues predominated the resolution of the question as to whether a group of merchants, who contracted with Cellular Sales of New York to sell cellular service plans, devices, and accessories through various corporate entities, were independent contractors under New York law and the FLSA.

In 2010 and 2011, Cellular Sales of New York (CSNY), an authorized dealer that markets and sells cellular phone products and services in New York State, contracted with more than three hundred corporate entities, owned by many of the Named and Opt-in Plaintiffs, to sell cell phone service plans, devices, and accessories. These corporate entities and individuals who performed services for those entities were classified as independent contractors. CSNY paid commissions to those corporate entities for products and services sold under the contracts. Plaintiffs’ claimed that they were incorrectly classified as independent contractors. In order to determine whether the merchants had indeed been misclassified, discovery was conducted into the degree of control, if any, CSNY exercised over the Plaintiffs. Plaintiffs gave varying accounts of their ability to set their own work schedules, ability to work outside the retail stores, tax classifications, investment in equipment, supplies, and advertising, and use and hiring of other individuals.

In resolving Plaintiffs’ motion for class certification and CSNY’s motion to decertify the collective, the Court held that Plaintiffs could not satisfy the commonality requirement of Rule 23 of the Federal Rules of Civil Procedure because the amount of control CSNY exerted over each Plaintiff was highly individualized. Although the Court noted that Plaintiffs’ failure to satisfy Rule 23(a)’s commonality requirement was lethal to Plaintiffs’ motion, the Court also held that Plaintiffs’ individualized proof failed to satisfy Rule 23(b)’s predominance requirement. The Court then turned to whether Plaintiffs could sustain their FLSA collective action, determining that in light of the highly individualized, plaintiff-specific analysis required to adjudicate each claim, Plaintiffs and the collective were not similarly situated. The Court rejected Plaintiffs’ arguments that a common scheme of uniform classification under the Sales Agreements was enough to satisfy the FLSA’s similarly situated standard. The Court stated: “[B]lanket classification decisions and uniform corporate policies do not on their own render plaintiffs similarly situated.”

The Court’s ruling underscores the necessity of class discovery, even following an initial collective certification under FLSA §216(b). It is plaintiffs’ burden to show that class and collective certification are warranted. As the Supreme Court stated in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011): “[t]he class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties.”

United States Supreme Court Says Courts Cannot Compel Classwide Arbitration Absent Affirmative Contractual Agreement

In a 5-4 decision authored by Chief Justice Roberts on April 24, 2019, the United States Supreme Court held that the Federal Arbitration Act (“FAA”) precludes a court from compelling class arbitration when an agreement is ambiguous on the availability of such arbitration. Lamps Plus Inc. et al. v. Varela, No. 17-988, 587 U.S. ___ (2019). In doing so, the Court reversed a decision by the United States Court of Appeals for the Ninth Circuit that applied California law to construe an ambiguity against the drafter (Lamps Plus) and permit class arbitration. The Court held that the FAA requires an affirmative contractual basis to compel class arbitration, which was indisputably absent here, and that a state law contract principle could not be applied to the extent it was inconsistent with FAA principles.

Relevant Background

A Lamps Plus employee, Frank Varela, filed a putative class action, on behalf of himself and other “similarly situated” employees whose tax information had allegedly been compromised by Lamps Plus, in federal court. Because Varela’s employment agreement contained an arbitration provision with no mention of class proceedings, Lamps Plus sought to compel arbitration on an individual basis. The district court, however, compelled classwide arbitration. Lamps Plus appealed that decision, but the Ninth Circuit affirmed (in a 2-1 decision), relying on state contract principles to hold that an ambiguity in the parties’ arbitration agreement as to class arbitration should be construed against the drafter (here, Lamps Plus). Lamps Plus then filed a petition for a writ of certiorari with the United States Supreme Court.

The Supreme Court’s Decision

The Supreme Court agreed with Lamps Plus and held that a court may not compel classwide arbitration when an agreement is ambiguous on its availability. The Court reiterated its reasoning in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), that the FAA bars courts from inferring “consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so.” Although Stolt-Nielsen involved an arbitration agreement that was silent on the issue of class arbitration, the Court found that the same reasoning controlled here.

The Court’s rationale was driven, in part, by the critical differences between class arbitration and the individualized form of arbitration envisioned by the FAA. The Court explained that individual arbitration boasts lower costs, greater efficiency and speed, and the ability to select expert arbitrators to resolve each dispute. On the other hand, class arbitration is slower, more costly, and can raise significant due process concerns, such as litigating the rights of absent class members without the right to full appellate review. The Court concluded that neither silence nor ambiguity provides a sufficient basis to conclude that the parties agreed to forego the central benefits of individual arbitration in favor of a classwide proceeding.

It is also significant that the Court rejected the Ninth Circuit’s application of the California contract-law principle that courts should construe an ambiguity against the drafter. To the extent the application of that principle permitted classwide arbitration, a term that was not contained in the arbitration agreement, the Court held that such a principle was inconsistent with the FAA. The Court disclaimed that its holding was new or novel and said that it was “consistent with a long line of cases holding that the FAA provides the default rule for resolving certain ambiguities in arbitration agreements.”

The Court also confirmed that parties to an arbitration agreement are free to authorize arbitrators to resolve “gateway” issues, such as whether the parties have a valid arbitration agreement and whether a specific dispute is covered by the arbitration agreement. The parties to the agreement in this case, however, did not so authorize. As a result, the Court did not decide whether the issue of “class arbitration” falls into this category.

It is also of note that the Court confirmed its jurisdiction under 9 U.S.C. § 16(a)(3) to hear appeals of any final order that both compels arbitration and dismisses the underlying claims. But in a footnote, the Court distinguished cases wherein the District Court has compelled arbitration and entered a stay, as is often the case.

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The Supreme Court’s decision reaffirms the force of the FAA in interpreting arbitration agreements and solidifies its importance over state-law principles that conflict with its fundamental principles, at least in the context of class arbitration. As a result, the decision likely presents an obstacle to those who seek to invoke state-law contract principles in an attempt to modify or invalidate arbitration agreements. Although the outcome will likely depend on the language in the arbitration agreement, the issue being challenged, and the state-law principle being invoked, it is clear that, at least where the dispute involves classwide arbitration, the FAA will govern and require an affirmative contractual basis before such arbitration can proceed.

Notably, in arriving at its ultimate holding that the FAA requires an affirmative contractual basis to compel class arbitration, the Court accepted without deciding that the agreement in Lamps Plus should be regarded as ambiguous. The Court did not analyze what language constitutes an affirmative contractual basis sufficient to allow for class arbitration. It is thus for future courts to consider what language might satisfy that standard.

Justice Thomas filed a concurring opinion, and Justices Ginsburg, Breyer, Sotomayor, and Kagan filed dissenting opinions.