wage-and-hour

A Lodestar Off Our Mind!

** The California Supreme Court endorses the Percentage of Common Fund Approach for Class Action Settlements **                                                                                                                                                                                        

4427950_HiResIn a decision that consumer class action lawyers have been on pins and needles awaiting, the California Supreme Court just issued its opinion in Lafitte v. Robert Half Int’l Inc, Cal., No. S222996 (Aug. 11, 2016) regarding the proper way to determine attorney fee awards in common fund cases.  The Court concluded that the percentage of the fund method favored by plaintiffs’ class action lawyers (and, frankly, defense attorneys who settle consumer class actions by agreeing to a common fund) is alive and well.

For the past several years, objectors to class action settlements in California have become increasingly vocal with their criticism of this prevalent class action settlement device that creates a fund to compensate class members and pay class counsel (and sometimes claims administration costs as well).  In consumer fraud actions, after compensation to the class has been negotiated, additional money is placed in the common fund to compensate class counsel for their work on the case – typically 25% of the entire fund amount. Critics of the percentage of the common fund approach argue that it incentivizes plaintiffs’ counsel to put their interests ahead of class members (see e.g., Smith, Adam, The Wealth of Nations (1776)) and settle cases quickly in an amount that may not fully compensate class members in order to avoid otherwise needless effort in obtaining their fee.

Lafitte was a wage and hour case against Robert Half, the well-known staffing company.  The parties preliminarily settled the lawsuit by establishing a $19 million settlement fund that included a “clear sailing” provision for attorney fees of $6,333,333 – 33% of the common fund.  (Because courts must rule on the reasonableness of fees, a plaintiff and defendant settling a class action cannot agree on the plaintiff’s attorney’s fee award.  Instead, the defendant will sometimes agree that it will not oppose a specific fee award – giving plaintiff’s counsel “clear sailing” toward their requested fee.)

One of the class members in Lafitte thought the $6+ million award was a bit rich and believed it was not sufficiently justified or substantiated by class counsel, who relied primarily on the fact that 33% was within the range of typical class action settlement awards (20%-50%).  The class member filed an objection to that effect citing Serrano v. Priest (1977) 20 Cal.3d 25 (“Serrano III”) for the proposition that fee awards must be calculated on the basis of time spent by the attorneys on the case plus a multiplier.  The Los Angeles Superior Court denied the class member’s objection determining that a percentage of the common fund was the correct approach but double-checking it against the reasonable fee class counsel would have charged if it was a billable hour case – the “lodestar.”  The court analyzed plaintiff’s counsel’s billing records and concluded that the lodestar was between $2,968,620 and $3,118,620.  The gap between the lodestar amount and the $6,333,333 percentage fee was closed by applying a multiplier of between 2.03 and 2.13.  Why apply a multiplier?   To compensate class counsel “for the novelty and difficulty of the questions involved, (2) the skill displayed in presenting them, (3) the extent to which the nature of the litigation precluded other employment by the attorneys, (4) the contingent nature of the fee award.”  Ketchum v. Moses, 24 Cal.4th 1122, 1132 (2001) (citing Serrano III).

Viewing the “double check” methodology with Pope’s “jaundiced eye,” one might conclude that – because the multiplier is completely subjective – a court can always engineer a proposed percentage fee award in a class action settlement with the lodestar analysis.  This is precisely what the objector argued.  Any student of algebra can solve this simple equation where the contingent fee award and lodestar fee are known:

contingent fee award = lodestar fee x multiplier

In Lafitte, the California Supreme Court charted the birth, death and resurrection of the common fund percentage approach for attorney fee awards throughout legal history — at least from 1966 when Federal Rule of Civil Procedure 23 was amended so as to usher in the modern class action.  The Court also carefully analyzed the pros and cons of each approach.  For those keeping score:  Lodestar MethodPros:  (1) better accountability from class counsel for case handling, (2) encourages class counsel to pursue marginal increases in class recovery; Cons:  (1)  discourages early settlement, (2) consumes judicial resources in reviewing class counsel’s timesheets; Percentage MethodPros:  (1) easy to calculate, (2) creates reasonable expectations for class counsel in terms of recovery, (3) encourages early settlement; Cons:  (1) encourages class counsel to settle too early for a reduced amount, (2) may create a windfall when the common fund is very large.  After this detailed analysis, the Court concluded, “[W]e clarify today that use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion.”  Moreover, “[T]rial courts have discretion to conduct a lodestar cross-check on a percentage fee . . . [but]; they also retain the discretion to forgo a lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.”  The Lafitte Court acknowledged that Serrano III may have caused confusion on the issue, but limited Serrano III’s lodestar requirement to cases involving enforcement of statutes with fee-shifting provisions – for example, where prosecution of the case “has resulted in the enforcement of an important right affecting the public interest.”  Cal. Code Civ. Proc. §1021.5.

Before California consumer class action lawyers fire up their calculators, however, a few words of warning are in order.  First and foremost, the Lafitte Court did not dispense with the fundamental requirement that the fee award be reasonable.  While the Court’s opinion does not require a lodestar double check, it does mandate that the trial court use some means to evaluate the reasonableness of the fee.  Interestingly, the Court shied away from endorsing the “sliding scale” approach sometimes employed in class action settlements to promote reasonableness where the fee percentage decreases as the settlement increases in amount:  “[W]e do not mean to endorse the use of a sliding percentage scale. That issue is not before us and is not without controversy.” In addition, the California Supreme Court made clear that its ruling does not inform whether and how a contingent fee can be applied where there is no common fund – i.e., where class counsel argues for a “’constructive common fund’ created by the defendant‘s agreement to pay claims made by class members and, separately, to  pay class counsel a reasonable fee as determined by the court.”

Most importantly for counsel who settle consumer class actions, the Court stated that its decision does not apply to a case where “a settlement agreement establishes a fund but provides that portions not distributed in claims revert to the defendant or be distributed to a third party or the state, making the fund‘s value to the class depend on how many claims are made and allowed.”   Because it is often the case that the common fund settlement amount in a consumer class action includes more money (even minus class counsel fees and administration costs) than is needed to compensate class members’ claims, such settlements often include cy pres provisions requiring that left-over money not claimed by class members (or eaten up by fees and costs) be donated to a specific charity.  Cy pres provisions are employed to:  (1) convince the court deciding whether to approve the settlement that the amount is “real” in that the defendant isn’t getting any of it back; and (2) establish a concrete settlement number on which to apply the attorney fee percentage.  The Lafitte Court grounded its decision to approve the percentage of fund method on the basis that “the percentage of the fund method more accurately reflects the results achieved.”  But if cash in the settlement fund ends up going to a charity – no matter how worthy the cause – does this amount “reflect the results achieved” for the class?  No doubt, given the ever-increasing use of cy pres provisions in consumer class actions, we will almost certainly learn the answer to this question in the very near future.

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Will Trucking Case Drive New Federal Arbitration Act Case to the Supreme Court?

** Gas Company Looks for Post-Iskanian Certiorari After California Appeals Court Invalidates Arbitration and Class Waiver Provision in its Wage and Hour case with its Truck Drivers **                                                                                                                                                                                                                                                                                                                                                                             California courts are known for their distaste for arbitration provisions – and for butting heads with the Supreme Court who has (on a number of occasions now) made clear that that the Federal Arbitration Act (FAA) (9 U.S.C. § 1) preempts California judicial rulings regarding the unconscionability of class arbitration waivers.  See e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  The Supreme Court may get another chance to make the point, as courts in California continue with a “where there is a will – there is a way” approach to invalidating arbitration contracts.  See discussion, James v. Conceptus, Inc., 851 F. Supp. 2d 1020, 1036-37 (S.D. Tex. 2012) (concluding that, even after Concepcion, California courts continue to find arbitration forum-selection clauses unenforceable under far more stringent tests than other states).  One of the latest defendants to have their arbitration provision deemed unenforceable is Air Liquide in Garrido v. Air Liquide Indus. U.S. LP, 194 Cal. Rptr. 3d 297 (Cal. Ct. App. 2015).  However, Air Liquide has not taken it lying down – on May 3, 2016, it filed a writ of certiorari in the U.S. Supreme Court. Air Liquide Indus. U.S. LP v. Garrido, No. 15-1336, 2016 WL 2605541 (U.S.) (“Writ”).

A quick bit of history for context on the Garrido Court of Appeal decision.  Recall in Gentry v. Superior Court, 42 Cal. 4th 443 (Cal. 2007), the California Supreme Court held that a class-action waiver in an employment contract was unenforceable when the waiver would prevent employees from vindicating their rights.  The Gentry court concluded that even though individual arbitration could be a tool to enforce legal rights, in the context of the employment relationship – if each individual recovery would be modest, if an individual might be retaliated against if bringing a suit individually (rather than by merely joining a class) and if there are other real world obstacles in going it alone – then the provision would be invalid.  The practical effect of these Gentry factors made it highly unlikely that an employer arbitration provision would survive.  However, Gentry was overruled by Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (Cal. 2014) (applying the then new rule from Concepcion).  The finding of Iskanian was that any California law that invalidated an arbitration provision was contrary to the FAA and therefore preempted.

However, in Garrido, the Court of Appeals deftly side-stepped Iskanian.  First, it determined that the FAA did not even apply to the case at hand.  194 Cal. Rptr. 3d at 302. Citing Section 1 of the FAA, which states that the FAA does not cover “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” the California Court of Appeals held that “transportation workers” fell within this exception.  (Citing Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105, 109 (2001)).  More specifically, the Garrido court held that the FAA carve-out did not apply to interstate truck drivers. 194 Cal. Rptr. 3d at 303.  And second, the Court of Appeals held that because the basis of the Iskanian decision was its nexus to the FAA – with that connection severed – Gentry not Iskanian governed. 194 Cal. Rptr. 3d at 304.  Finally (and not surprisingly), after applying the factor test from Gentry, the court held that the arbitration provision failed.

Air Liquide’s certiorari writ notes that the Court of Appeal’s severing of the relevant employment contract from the FAA was improper – foremost because the contract itself says that the FAA applies.  Air Liquide’s briefing notes that “the application of the Section 1 exemption directly contradicted the parties’ clear and expressly-stated intent to apply the FAA to their dispute. The Court of Appeal’s conclusion that the parties somehow intended to apply an exemption to the FAA to vitiate the very choice of law provision that they entered into, when in fact their intention was directly opposite, defied reason.” Writ at 5 – 6.  Air Liquide also criticizes the Court of Appeals decision for applying the “transport worker” exception outside of the trucking industry to it – a gas company – that just happens to transport its material from time to time.  Writ at 18 – 19.

This latter point raises an important issue that will apply to all companies who move their own products around the country – are their employees “transport workers”?  The more interesting and broader question, however, arises if Air Liquide fails on that question:  Can parties force the FAA to apply where it otherwise has no force?  Does an agreement that says the FAA “governs” carry with it those circumstances where it otherwise wouldn’t (because the FAA exempts it)? Interesting questions . . . and again – as we have blogged in the past – one that will be a test of the legacy of the arbitration jurisprudence of which the late Justice Scalia was the chief architect.

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All Eyes on the Supreme Court for Consumer Class Action Lawyers

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**The Supreme Court’s 2015 Term Opens With a Series of Cases Important for Consumer Class Action Defendants: Campbell-Ewald v Gomez, Spokeo v Robins and Tyson Foods v Bouaphakeo** . . .                                                                                                                                                                                                                                                          

In recent years, the Supreme Court has handed down victories to the class action defense bar.  In Wal-Mart v. Dukes, 564 U.S. ___ (2011), the Court reversed a California district court certification of a gender discrimination class – raising the bar on commonality questions for plaintiffs.  In Comcast v. Behrend, 569 U.S. __ (2013), the Court again reversed a district court certification – heightening scrutiny on plaintiffs’ methods for alleging class wide damages.  As the 2015 term opens this week, defense counsel around the country eye further potential victories in three key cases.

The first case up is Campbell-Ewald Co. v. Gomez (No. 14-857) on appeal from the Ninth Circuit where the Court will deal with two frequently litigated questions as yet unresolved by the circuits.  Namely, does a Rule 68 offer of complete relief to a plaintiff moot his or her claim and, if so, does it also moot the resulting class claim under Rule 23?  The underlying case concerns unsolicited text messages prohibited by the Telephone Consumer Protection Act (TCPA) 47 U.S.C. § 227.  The TCPA contains a statutory remedy and defendants argued that, to the extent they had offered Plaintiff  the full amount of the statutory remedy (per Rule 68) as relief,  the plaintiff suffered no cognizable Article III damages.  Thus, defendants argue that because the plaintiff suffered no injury,  he has no right to represent a class of people who may have been damaged.  From a practical perspective, the case addresses the question:  Can a defendant “pick off” would be class representatives through Rule 68 offers of judgment thereby destroying the foundation of the class action claim?  As anyone who has defended corporations receiving required pre-litigation notices under consumer protection statutes has observed, plaintiff law firms have become increasingly reticent to disclose the identity of their clients at the notice stage in order to forestall Rule 68 offers of judgment until the putative class action lawsuit has been filed.

The second case is Spokeo Inc. v. Robins, (No. 13-1339) also on appeal from the Ninth Circuit.  This case involves a related question of Article III standing for class representatives.  Spokeo concerns the  Fair Credit Reporting Act, 15 U.S.C. § 1681 (FCRA), which requires consumer credit agencies to take reasonable steps to ensure the accuracy of their published reports.  Plaintiff in a putative class action argued in the Central District of California that results for his name on the Spokeo website contained inaccurate information about plaintiff’s education and professional experience – and that this inaccuracy harmed his employment prospects.   The District Court dismissed, finding that the alleged damages – based on hypothetical impact on his employment – were too speculative to satisfy Article III standing.  The Ninth Circuit reversed, holding that the statutory violation implicitly creates a private cause of action to enforce and that this violation of a statutory right was an “injury” sufficient to confer standing.  The Ninth Circuit Spokeo decision was the latest in a circuit split – on one side the Second and Fourth circuits, which have rejected standing arguments from plaintiffs who alleged bare statutory violations that did not result in any actual harm (Kendall v. Emps. Ret. Plan of Avon Prods., 561 F.3d 112 (2d Cir. 2009); David v. Alphin, 704 F.3d 327 (4th Cir. 2013)); and the Ninth Circuit joining the Sixth and Seventh Circuits, which have come out on the side of recognizing “damages” for private plaintiffs with respect to minor statutory violations.  Beaudry v. TeleCheck Servs, 579 F.3d 702 (6th Cir. 2009); Murray v. GMAC Mortg. Corp., 434 F.3d 948 (7th Cir, 2006).  If the Supreme Court recognizes damages irrespective of actual harm, the impact could be felt more broadly than FCRA – there are numerous similar statutory schemes, including truth-in-lending legislation (15 U.S.C. § 1640(a)); debt collection statutes, (15 U.S.C. § 1692k(a)); as well as various privacy laws (18 U.S.C. § 2710(c)(1); 47 U.S.C. § 551(f)(1)-(2)).

The third case is Tyson Foods v. Bouaphakeo (No. 14-1146) – a challenge to a $5.8 million wage-and-hour judgment in favor of a class of employees at Tyson’s meat packing plant in Iowa.  Tyson’s petition seeks a reversal of the district court and Eight Circuit’s decision to permit liability and damages verdicts to be based – not on an individual analysis of each purported class member – but by extrapolating a statistical average across the board based on the discrepancies observed in a sample class of workers’ hours and pay.  Tyson further appeals on the lack of ascertainability of the class itself – that is, that the certified group (even according to the Plaintiffs’ own expert) included a significant number of people who weren’t underpaid at all.  If successful, the Tyson case will build upon the Court’s disapproval in Wal-Mart of “trial by formula” and provide a significant bulwark against plaintiffs in putative class actions glossing over differences amongst their claimed class in order to achieve certification.

Not surprisingly, this trifecta of cases has generated a significant amount of interest, amicus briefing, and optimistic thinking from the defense bar that momentum is on its side.  The implications are not insubstantial if defendants prevail:  the type of de facto strict liability for statutory compliance created by such class actions will diminish, there will be new avenues to derail cases pre-certification, and the barrier of ascertainable and reliable class wide damages that plaintiff s must hurdle will be reinforced.

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