McGill v. Citibank: Consumer Attorneys Buoyed by Grant of Review

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On April 1, 2015, the California Supreme Court granted review of McGill v. Citibank to decide whether Citibank can use an arbitration clause to stymie a customer from pursuing public injunctive relief under California’s consumer protection statutes. If awarded, a public injunction allows a successful litigant to stop an unlawful business practice statewide. The stakes are high: if the Court sides with Citibank, this powerful tool for California consumers effectively will be eviscerated. However, many plaintiffs lawyers are hopeful that the California Supreme Court will demonstrate the same inclination to prevent the further erosion of public remedies in California as it did in Iskanian v. CLS Transportation (see infra). McGill v. Citibank N.A.232 Cal. App. 4th 753 (2014), rev. granted, No. S224086 (Cal. April 1, 2015).

In McGill, the plaintiff (represented by Capstone Law APC) brought claims under California’s consumer protection statutes (the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law) against Citibank for misrepresenting its “Credit Protector” insurance program to its cardholders. Along with damages, Ms. McGill sought to enjoin Citibank from engaging in this unfair business practice. The trial court partially granted Citibank’s motion to compel arbitration, but kept the public injunction remedy in court pursuant to the holding of two earlier Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (together referred to as having established the “Broughton-Cruz rule”). The Broughton-Cruz rule holds that, to the extent they seek public injunctive relief under California’s consumer protection statutes, claims must remain in court, even if all the other claims are sent to arbitration.

The appellate court reversed, holding that the Broughton-Cruz rule had been preempted by “the sweeping directive” of the Federal Arbitration Act (“FAA”) as stated in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which struck down a California rule barring class action waivers. See McGill at 757. However, the intermediate court relied on passages from Concepcion that simply recited decades-old principles from Southland Corp. v. Keating, 465 U.S. 1 (1984) and Perry v. Thomas, 482 U.S. 483 (1987) precluding states from exempting private claims from being brought in the arbitral forum—cases that Broughton and Cruz carefully distinguished in lengthy analyses. In fact, the Court in Broughton and Cruz took its cue from a separate line of U.S. Supreme Court precedent meant to preclude an arbitration agreement from forcing a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 637 (1985); see also American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2310 (2013).

Importantly, Broughton and Cruz recognized that arbitrators have no power to issue public injunctions, as they have no jurisdiction over nonparties. See Broughton at 1081, Cruz at 312. This “institutional shortcoming” precludes public injunctions from being issued by arbitrators at all—even if the claimant were completely successful in proving the merits of her claims in arbitration. Id. In other words, a plaintiff would waive his or her right to pursue public injunctions if it were not preserved in court; the remedy itself would be extinguished simply by virtue of its transfer from court to arbitration.

Broughton and Cruz also held that the FAA did not preempt a state law rule preserving wholly public claims or remedies such as the public injunction, which is not aimed at “resolv[ing] a private dispute but to remedy a public wrong.” Broughton, 21 Cal. 4th at 1079-80. This principle was just recently reaffirmed in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348, 387-88 (2014), which held that the FAA did not preempt a state law protecting public enforcement action like the Private Attorneys General Act representative action from forfeiture. Iskanian embodies the Court’s recognition that the FAA, as intended by Congress and construed by the U.S. Supreme Court, does not have unlimited preemptive reach. A decision upholding the Broughton-Cruz rule would be consistent with both Iskanian and the non-waiver principle only recently reaffirmed by the U.S. Supreme Court in Italian Colors.

However, the fate of the Broughton-Cruz rule may not even be reached in McGill. Unlike the agreements in Broughton and Cruz, Citibank’s arbitration agreement contains a term expressly precluding an arbitrator from awarding public injunctions. Thus, the California Supreme Court may well strike the offending term on unconscionability grounds or as a clear violation of the non-waiver principle, without reaching the broader issue of whether an arbitration agreement can be invalidated due to the inherent unavailability of certain remedies in the arbitral forum.

Authored by: 
Ryan Wu, Senior Counsel

Ninth Circuit Finds “Service Advisors” Not Exempt from FLSA OT

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The Ninth Circuit recently considered whether “Service Advisors” who work at car dealerships are exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements. In answering in the negative, the Ninth Circuit parted ways with the Fourth and Fifth Circuits and the Montana Supreme Court. See Navarro v. Encino Motorcars, LLC, No. 13-55323 (9th Cir. March 24, 2015) (slip opinion available here).

Service Advisors greet car owners, evaluate customers’ complaints about their cars, and suggest services to customers beyond what is necessary to remedy their complaints. Slip op. at 4. The plaintiffs were paid solely in commissions and sued for—among other claims—failure to pay overtime as required by the FLSA (29 U.S.C. § 207(a)(1)). See id. at 5. The defendant argued that Service Advisors are exempt from the overtime rule under § 213(b)(10)(A), which provides that the overtime provisions “shall not apply with respect to . . . any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” Id.

The plaintiffs urged the Ninth Circuit to follow the United States Department of Labor’s 2011 regulatory definitions of “salesman,” “partsman,” or “mechanic,” which “limit[] the exemption to salesmen who sell vehicles and partsmen and mechanics who service vehicles.” Id. at 6 (citing 76 Fed. Reg. at 18,838). It was undisputed that the Service Advisors do not meet these regulatory definitions, but the defendant argued that the court should not defer to them. Id. at 7.

The court therefore conducted a Chevron analysis to determine whether to follow the regulatory definitions. Under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), a court first determines “whether Congress has directly spoken to the precise question at issue.” Chevron at 842. If so, the court will implement the unambiguous intent of Congress. If not, the court must then determine what level of deference to apply to the statute. If Chevron deference applies, the court must defer to the agency’s interpretation if that interpretation is reasonable. Id. at 842-843.

Under the first step of the Chevron analysis, the Navarro court found the exemption to be ambiguous. Slip op. at 8. The statute does not define the terms salesman, partsman, or mechanic, and these terms can be interpreted broadly (salesmen involved in the general business of the servicing of cars) or narrowly (only salesmen who themselves sell cars). Id. The court therefore could not conclude that Service Advisors “plainly and unmistakably [fall within the FLSA’s] terms and spirit.” Id. (citing Solis v. Washington, 656 F.3d 1079, 1083).

Because the statute is ambiguous, the court then turned to whether Chevron deference is appropriate, concluding that “[b]ecause we consider here a regulation duly promulgated after a notice-and-comment period, Chevron’s ‘reasonableness’ standard applies.” Slip op. at 9. The court noted that the original 1970 version of the regulations contained the same narrow definitions of salesman, partsman, and mechanic as exist today and that those definitions have not changed in any relevant way since then. Id. at 10. The court further noted that the agency had specifically considered broadening the terms in a way that would encompass Service Advisors, but after considering comments and analyses from the public, the agency concluded that the statute should continue to use the narrow definition. Id. at 11.

The court then found the agency’s regulatory interpretation to be reasonable, while acknowledging that its decision to uphold the agency’s narrow interpretation of “salesman, partsman, or mechanic” conflicts with that of the Fourth Circuit (Walton v. Greenbrier Ford, Inc., 370 F.3d 446 (4th Cir. 2004)), the Fifth Circuit (Brennan v. Deel Motors, Inc., 475 F.2d 1095 (5th Cir. 1973)), and the Supreme Court of Montana (Thompson v. J.C. Billion, Inc., 294 P.3d 397 (Mont. 2013)), in addition to a number of federal district courts. Slip op. at 12-13.

In deferring to the agency’s regulatory definitions, the Ninth Circuit distinguished the Fifth Circuit case and district court opinions following it on the basis that they pre-date Chevron and the modern framework for analyzing whether deference is appropriate. See id. at 13. The Fifth Circuit did not look at whether the agency’s interpretation was reasonable, but whether there was a better interpretation—an analysis Chevron prohibits. Id.

In contrast, the Fourth Circuit and Montana found the agency’s interpretation to be unduly restrictive and thus unreasonable. See id. at 13-14. Those courts held that Service Advisors are salesmen because their job is to sell services for cars. Id. And because they sell services for cars, they are also involved in the general business of servicing automobiles. Id. While the Ninth Circuit acknowledged that there are good reasons for adopting the interpretation that the Fourth Circuit and the Montana Supreme Court accepted—in particular, grammatical arguments and non-textual indicators of congressional intent—the agency’s interpretation is nonetheless reasonable as well: while Service Advisors are salesmen in a generic sense, they do not personally sell or service cars and, therefore, are outside the statutory definition. Id. at 14-19. Indeed, there are other employees at dealerships who are involved in servicing cars in a very general sense—for example, receptionists and bookkeepers—who indisputably are not exempt. Id. at 9. As long as the agency’s interpretation is reasonable—it need not be the best or only interpretation—then it would be improper for the court to impose an alternate interpretation. Id. at 19 (citing Chevron, 467 U.S. at 844).

Authored by: 
Katherine Kehr, Senior Counsel

Settlement Process Speeds Along in Toyota Unintended Acceleration Litigation

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In a Joint Status Report filed on March 17, 2015, with Judge James V. Selna in the Central District of California, the parties informed the court that settlement deals continue to be made at a steady pace in In Re: Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices, and Products Liability Litigation (“In Re: Toyota”). In Re: Toyota, No. 10-2151, Dkt. No. 4932 (C.D. Cal. March 16, 2015) (Joint Status Report, available here).

This multidistrict litigation (“MDL”) is made up of hundreds of individual suits alleging negligence and product liability based on a defect in some Toyota models which caused the vehicles to accelerate suddenly, leading to numerous accidents. Plaintiffs are seeking compensatory and punitive damages for injuries and/or deaths caused by the unintended acceleration. So far, a total of 289 cases have either settled or reached an agreement to settle in principle, including: 132 of 171 cases consolidated in the MDL; 45 of 84 cases consolidated in the Judicial Council Coordinated Proceeding (“JCCP”); and 112 individual cases litigated outside of the consolidated proceedings.

In the Joint Status Report, the parties attribute the efficacy of the litigation to the Intensive Settlement Process (“ISP”), which was confirmed and adopted on January 14, 2014, stating that the “ISP is continuing to make good progress.” Report at 2. Case in point, of the 39 unintended acceleration lawsuits still pending in the MDL, all but four have requested ISP, and of the 39 cases remaining in the JCCP, all but two have requested it.

These settlements come more than five years after Toyota began recalling millions of vehicles for the unintended acceleration defect and more than thirteen months after counsel for Toyota contacted the 300+ plaintiffs’ attorneys to inform them of the proposed settlement process. Since each case is being negotiated separately, the total value of the settlement will not be clear until all of the cases are resolved. In a related class action settlement that won final approval before Judge Selna in July of 2013, Toyota agreed to pay an estimated $1.1 billion to settle a claim that the unintended acceleration defect diminished the value of the class vehicles. The settlement also provided for $200 million in plaintiffs’ attorney fees and up to $27 million in expenses.

In addition to over a billion dollars in legal settlements so far, Toyota was also hit with a $1.2 billion criminal penalty by the United States Department of Justice in March of 2014. U.S. Attorney General Eric Holder described Toyota’s actions as “shameful” and a “blatant disregard” for the law. He went on to warn that “other car companies should not repeat Toyota’s mistake.” U.S. Attorney General Eric Holder, Press Conference at the Department of Justice (March 19, 2014).

Thus, while Toyota may be nearing the end of its civil litigation involving the unintended acceleration defect, the automotive and legal industries will feel its effects for years to come.

Authored by: 
Lucas Rogers, Associate

Ninth Circuit Affirms Final Approval of Walmart Gift Card Settlement

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The Ninth Circuit’s recent decision in In re Online DVD-Rental Antitrust Litig., 12-15705 (9th Cir. Feb. 27, 2015) (“Online DVD-Rental”), which affirmed an order granting final approval of a class action settlement totaling more than $27 million in cash and gift cards for a class of over 35 million DVD rental subscribers, will likely become one of this circuit’s leading cases in support of common-fund attorneys’ fees and incentive awards (slip opinion available here).

In Online DVD-Rental, the plaintiffs alleged that Defendants Walmart and Netflix violated federal antitrust laws by entering into an anticompetitive agreement under which Netflix would stop selling DVDs and focus instead on DVD rentals, and Walmart would discontinue its own rental service and concentrate on DVD sales. In exchange for a dismissal with prejudice of all claims alleged on behalf of a class of Netflix subscribers, Walmart agreed to pay a total of $27.25 million, inclusive of attorneys’ fees and litigation costs, incentive awards to each of the nine plaintiffs, and administration costs. The balance was to be divided evenly among all class members who submitted claims for payment, with class members having the option to claim their payments either in the form of gift cards or the cash equivalent. Over 1.18 million class members submitted claims (of whom 744,202 requested gift cards), 722 opted out, and 30 objected. The district court overruled all objections, finding that “not one objection was sufficient . . . singular or in the aggregate . . . to preclude [the court] from approving [the] settlement.” Slip op. at 13.

Six objectors appealed the order granting final approval, largely on the grounds that the attorneys’ fees and incentive awards were excessive. With respect to attorneys’ fees, several of the objectors argued that the district court should have characterized the settlement as a “coupon settlement” under the Class Action Fairness Act of 2005 (“CAFA”), which provides in relevant part that the “portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed.” Slip op. at 29-30. The objectors thus argued that the district court erred by calculating the fee award as a percentage (25%) of the overall settlement fund, including the total dollar value of the gift cards, rather than only as a percentage of the gift cards that were actually redeemed.

In rejecting this argument, the Ninth Circuit noted that several district courts have declined to classify gift card settlements as coupon settlements under CAFA. Slip op. at 33-34. Moreover, unlike coupon settlements, which require “class members to hand over more of their own money before they can take advantage of the coupon,” the Walmart gift cards could be spent on any item carried on the “website of [the] giant, low-cost retailer,” and without the need for class members to spend any of their own money, which “gives class members considerably more flexibility than [coupon settlements].” Slip op. at 32-33. The Ninth Circuit also found that the district court did not err in calculating the fee award as a percentage of the total settlement fund:

We have repeatedly held that the reasonableness of attorneys’ fees is not measured by the choice of the denominator . . . Here, the district court concluded that class counsels’ fee request, which applied the 25% benchmark percentage to the entire common fund, was reasonable. Indeed, the court explicitly explained how administrative costs in particular make it possible to distribute a settlement award in a meaningful and significant way. Similarly, notice costs allow class members to learn about a settlement and litigation expenses make the entire action possible.

Slip op. at 37-38 (internal citations and quotations omitted).

The Ninth Circuit also soundly rejected an objector’s argument, based chiefly on Staton v. Boeing Co., 327 F.3d 938 (9th Cir. 2003), that the incentive awards distributed in Online DVD-Rental were so out of proportion to the average class member recovery ($12 per claimant) as to create a conflict of interest between the representatives and the class. Slip op. at 25. In distinguishing the Staton settlement from the Walmart settlement, the Ninth Circuit held that “[i]ncentive payments to class representatives do not, by themselves, create an impermissible conflict between class members and their representatives” and “the $45,000 in incentive awards [divided equally between the 9 named plaintiffs] makes up a mere .17% of the total settlement fund of $27,250,000, which is far less than the 6% of the settlement fund in Staton that went to incentive awards.” Slip op. at 16, 26.

Tellingly, the Ninth Circuit seems to have distanced itself from some of its reasoning in Radcliffe v. Experian Info. Solutions, 715 F.3d 1157 (9th Cir. Cal. 2013), where the Court noted that, “concerns over potential conflicts may be especially pressing where, as here, the proposed service fees greatly exceed the payments to absent class members . . . There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards.” Radcliffe at 1165 (internal citations and quotations omitted). But presumably if, as echoed in Amchem Prods. v. Windsor, 521 U.S. 591, 617 (1997), the “policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights,” then surely the ratio between the incentive awards and the average class member recovery should not—in itself—raise “serious question [about] whether class representatives [can] be expected to fairly evaluate” the reasonableness of their settlements. Indeed, if class representative incentive awards are meant to incentivize the filing of class actions that might not otherwise have been brought given the relatively modest individual amounts in controversy, then comparable proportions between class member recoveries and incentive awards are to be expected and tolerated.

Authored by: 
Eduardo Santos, Associate