Proskauer on Class and Collective Actions

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.

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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Eleventh Circuit Adopts Second Circuit’s “Primary Beneficiary” Test for Unpaid Interns

On September 11, 2015, the Eleventh Circuit became the first appellate court to address the standard for lawful unpaid internships since the Second Circuit’s ruling in Glatt et al. v. Fox Searchlight Pictures, Inc. et al. (For more on Glatt, see our post here). The new decision adopts the Glatt test and reasoning wholesale, and provides helpful guidance on applying the Glatt factors. The case also strengthens the trend away from relying on the DOL’s Fact Sheet 71, which purports to provide restrictive guidance on unpaid internships.

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Fifth Circuit Tips Its Hand as to Analysis of FLSA’s Tip Credit

Restaurants throughout the Fifth Circuit, and even beyond, should review the recent decision of Montano v. Montrose Restaurant, which discusses the often tricky and always fact-intensive question of whether a restaurant employee is properly included in a tip pool.

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