Proskauer on Class and Collective Actions

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.

Background

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.

Implications

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.

Implications

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.

* * *

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.

United States Supreme Court Says that Equitable Tolling Cannot Extend Deadline to Appeal Class Certification Decisions Under Rule 23(f)

In a unanimous decision authored by Justice Sotomayor on February 26, 2019, the Supreme Court held that the 14-day deadline to seek permission to appeal a decision granting or denying class certification under Federal Rule of Civil Procedure 23(f) cannot be extended through the doctrine of equitable tolling. Nutraceutical Corp. v. Lambert, No. 17-1094, 586 U.S. ___ (2019).

The Court reversed the Ninth Circuit’s decision, which had accepted a petition filed more than 14 days after the trial court’s decertification order, because the plaintiff had “acted diligently.”

Although the Supreme Court confirmed that Rule 23(f)’s time limitation is not jurisdictional in nature, the Court held that it is a claim-processing rule that is “unalterable” if properly raised by an opposing party. The Court then examined the text of the governing rules and concluded that the Federal Rules of Appellate Procedure, particularly, Appellate Rule 26(b), express “a clear intent to compel rigorous enforcement of Rule 23(f)’s deadline, even where good cause for equitable tolling might otherwise exist.”

As a result, the Supreme Court held that equitable tolling could not salvage the plaintiff’s untimely Rule 23(f) petition and reversed the Ninth Circuit’s decision on the underlying appeal. This decision confirms what attorneys have generally understood the rule to be pertaining to deadlines for Rule 23(f) petitions, but nonetheless conclusively resolves any question as to whether equitable tolling may extend that deadline.

Ninth Circuit Holds that Last-Known Addresses of Putative Class Members Are Insufficient To Satisfy CAFA Exceptions

The Class Action Fairness Act (“CAFA”) permits removal of many class actions from state to federal court, but includes a “local controversy” exception that forbids removal where two-thirds or more of the proposed class resides in the state where the action is brought. In disputes over efforts to use CAFA to remove class actions, the residence of the class members often is difficult to assess. Earlier this month, in King v. Great American Chicken Corp., Inc., d/b/a Kentucky Fried Chicken, No. 18-55911, the Ninth Circuit reversed the district court’s order remanding a California wage-and-hour putative class action to state court, holding that the district court improperly relied on the last-known addresses of current and former employees to find that most of them were likely citizens of California and the United States. The Ninth Circuit’s holding may prove very helpful to defendants removing class actions to federal court.

The Ninth Circuit’s Decision

Plaintiff-Appellee Celena King filed a putative class action in California state court on behalf of approximately 6,000 current and former non-exempt employees of Defendant-Appellant Great American Chicken Corp., Inc. d/b/a Kentucky Fried Chicken (“GAC”) who were employed in California. King alleged that GAC violated various provisions of California’s wage-and-hour law.   GAC removed the case to the United States District Court for the Central District of California pursuant to CAFA, which requires that the amount in controversy be greater than $5 million; that the putative class size be greater than 100 members; and that any member of the class of plaintiffs be a citizen of a state different from any defendant. There are several exceptions to CAFA that deprive a federal court of jurisdiction, including the local controversy exception, which requires that the party opposing removal prove, by a preponderance of the evidence, that more than two-thirds of the putative class are citizens of the state in which the action was originally filed and the home state exception, which requires that the party opposing removal prove that at least two-thirds of the putative class (and the primary defendants) are citizens of that state.

To avoid conducting jurisdictional discovery, the parties agreed to stipulate that at least 67% of the last known addresses of the putative class members were in California. The Ninth Circuit was skeptical of the stipulation because a figure of “at least 67%” would only produce a figure “greater than two-thirds” by an extremely narrow margin. In light of GAC’s evidence that former employees had moved to other states, and because the last-known addresses were several years old, the Court determined that it was likely that other employees had done the same. The Ninth Circuit also held that it was “very likely that some putative class members were not United States citizens” and therefore were not citizens of California. The Court explained that it could not be assumed that all residents of California were citizens of the United States. Accordingly, the Court indicated that it would have to consider the proportion of California residents who are not U.S. citizens and extrapolate that to the putative class in determining whether the CAFA exceptions has been satisfied. The Court then ordered that King be permitted to conduct jurisdictional discovery if she wished to renew her motion to remand.

Implications

While federal courts have consistently placed the burden of establishing the CAFA exceptions on the party seeking to remand, the Ninth Circuit has taken this burden a step further. Now, if a party wants to successfully oppose a motion to remand based on the local controversy or home state exceptions, it will need to prove not only that more than or at least two-thirds of the putative class members are citizens of the state in question but also that they are citizens of the United States. A party’s ability to satisfy this burden will likely depend on the class of workers involved, as well as on the state in question. In short, the Ninth Circuit’s decision signals that plaintiffs who attempt to bring class actions on behalf of classes comprised of non-U.S. citizens and/or in states with a higher proportion of residents who are not U.S. citizens may have a more difficult time availing themselves of CAFA’s local controversy and home state exceptions and may be required to proceed in federal court.

 

 

Seventh Circuit Affirms Denial of Class Certification for Failure to Show Commonality under Dukes in Vacation Pay Suit

Last week, in McCaster et al. v. Darden Restaurants, Inc. et al., No. 15-3258 (7th Cir. Jan. 5, 2017), the Seventh Circuit relied on Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) and affirmed the district court’s denial of class certification of Plaintiffs’ claims for vacation pay under state law.  The Seventh Circuit’s reliance on Dukes demonstrates that the Supreme Court’s holding extends beyond the discrimination context and applies with equal force in wage and hour class actions (at least within the Seventh Circuit).  The Court concluded that Plaintiffs’ proposed class definition constituted an impermissible “fail safe” class because an individual’s membership in the class turned on the merits of his or her claim, and that Plaintiffs’ alternative class definition did not satisfy the commonality requirement of Rule 23 under Dukes. This decision exemplifies the critical balance plaintiffs must strike in defining their proposed classes; while a “fail safe” class will not be permitted, a class definition that is too broad will not satisfy the requirements of Rule 23. Continue Reading

Fifth Circuit Addresses FLSA Tip Credits Once Again

The Fifth Circuit has had tipping on its mind, as the decision of Steele v. Leasing Enterprises, Ltd., represents its second opinion within ten months addressing this pay practice. On the heels of Montano v. Montrose, the Steele decision tackles the question of whether an employer violates 29 U.S.C §203(m) of the Fair Labor Standards Act (FLSA) when it offsets tip credits to recover costs related to processing credit card transactions – essentially passing on some of those costs to the tipped employee. (No. 15-20139), 2016 WL 3268996, (5th Cir. June 14, 2016).

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Supreme Court Takes Away a Class Action Defense Tool That We Couldn’t Really Use Anyway

Yesterday, the Supreme Court held in Campbell-Ewald Co. v. Gomez, No. 14-857 (U.S. Jan. 20, 2016), that when a defendant makes an offer to resolve the named plaintiff’s claim for full value, but the plaintiff turns it down, the case is not moot, and simply proceeds. Campbell-Ewald had argued that since it had offered to pay everything the plaintiff demanded, there was no longer any live controversy for the court to adjudicate, and the case should be dismissed. The Supreme Court disagreed, in a 6-3 decision authored by Justice Ginsburg.

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