Sprunk v. Prisma LLC: Strategic Delay by Defendant Risks Arbitration Waiver

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In a decision likely to spur defendants to make immediate motions to compel arbitration in class actions, the California Court of Appeal, Second District, found that a defendant who chose to wait for class certification before seeking arbitration had waived the right to arbitrate. Sprunk v. Prisma LLC, No. B268755 (2nd Dist. Div. 1 Aug. 23, 2017) (slip op. available here). In Sprunk, the plaintiff filed a wage-and-hour class action in October 2011, alleging she and a class of exotic dancers had been misclassified as independent contractors and had consequently been denied wages, meal periods, and reimbursement of business expenses. The plaintiff and all putative class members had signed arbitration agreements.

Sprunk moved for class certification in September 2014. In opposing the motion, Prisma argued that a class action was not superior to other forms of litigation because the class members had signed arbitration agreements. The trial court granted class certification in April 2015, rejecting Prisma’s “superiority” argument. In August of 2015, Prisma filed two motions to compel arbitration, seeking to enforce two different arbitration clauses. By that time, Sprunk and Prisma had litigated for four years, during which time discovery was conducted, depositions were taken, and defendant moved for arbitration, then withdrew the motion, and ultimately renewed its motion to compel arbitration. In October of 2015, the trial court denied the motions. Prisma appealed.

On appeal, Prisma relied upon Sky Sports, Inc. v. Superior Court, 201 Cal.App.4th 1363 (2011), for the proposition that it would have been premature to have filed its motion to compel arbitration prior to class certification. However, the Court of Appeal cited a critical distinction: in Sky Sports, the plaintiff had not signed an arbitration agreement although other members of the class had. In Prisma, the class representative (Sprunk) and all putative class members had signed arbitration agreements, giving Prisma the right to have sought to compel arbitration at the outset of litigation.

Noting that the trial court found Prisma had engaged in a strategic delay to give itself an opportunity to defeat the class, the Court of Appeal warned, “[a]n attempt to gain a strategic advantage through litigation in court before seeking to compel arbitration is a paradigm of conduct that is inconsistent with the right to arbitrate” and supports a finding of waiver. Slip op. at 18. The court also found Sprunk was prejudiced by the delay—had Prisma timely moved to compel arbitration, it could, “as a practical matter[,] have resolved the judicial proceedings with respect to the class” and could have “settled the question of whether the claims . . . should be adjudicated in a court or through arbitration.” Id. at 16-17.

This class action involving exotic dancers has clarified that a defendant wishing to compel arbitration must do so before the parties have invested time and energy in litigation, or risk waiver. Going forward, defendants must therefore dance quickly, or get off the table.

Authored by:
Arlene Turinchak, Senior Counsel
CAPSTONE LAW APC

9th Cir. Shuts Down Finish Line’s Attempt to Arbitrate Pregnancy Suit

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In an unpublished decision, the Ninth Circuit Court of Appeals recently determined that The Finish Line, Inc., an athletic retailer, cannot arbitrate a former associate’s pregnancy discrimination claim, finding the company’s arbitration agreement to be both procedurally and substantively unconscionable. Capili v. The Finish Line, Inc., No. 15-16657 (9th Cir. July 3, 2017) (slip op. available here).

Capili alleges that she was fired by the company because she took a leave of absence to manage her pregnancy-related health issues. Upon hire in 2013, Capili was required to sign an arbitration agreement that required her to arbitrate any future employment-related disputes with Finish Line. On July 22, 2015, U.S. District Court Judge Haywood S. Gilliam denied Finish Line’s motion to compel arbitration in the suit, finding the cost-sharing provision in Finish Line’s arbitration agreement unconscionable. Capili v. The Finish Line, Inc., No. 3:15-cv-01158-HSG (N.D. Cal. July 22, 2015). The defendant appealed this decision. On July 3, 2017, the Ninth Circuit affirmed Judge Gilliam’s order.

Under the agreement, the plaintiff, a retail employee earning $15 per hour, would have to pay up to $10,000 at the outset of arbitration, not including fees and costs for legal representation—a provision that the three-judge panel found to be “substantively unconscionable.” The court determined that the provision imposes substantial non-recoverable costs on entry-level employees just to get their foot in the door in arbitration, essentially foreclosing vindication of employees’ rights. Slip op. at 3.

The court further concluded that the arbitration agreement allowed the company, but not Capili, to seek judicial resolution of certain claims, another provision that the panel found unconscionable. While judicial carveouts alone are not necessarily unconscionable, “exemptions must still have a modicum of bilaterality,” the panel stated. Slip op. at 3-4. While Capili acknowledged that her claims fell under the scope of Finish Line’s arbitration agreement, the plaintiff argued that the agreement itself was “an unenforceable contract of adhesion” and both procedurally and substantively unconscionable. The Ninth Circuit panel agreed, determining the agreement was “adhesive” because it was offered “on essentially a ‘take it or leave it’ basis.” Id. at 2-3.

While both elements of procedural and substantive unconscionability must be present for the court to find unconscionability, they need not be present in the same degree. Slip op. at 2. And while the Federal Arbitration Act endorses the enforcement of arbitration agreements, “employers may not stack the deck unconscionability in their favor to discourage claims.” Id. at 5. Thus, the Ninth Circuit affirmed, holding that the lower court had properly denied the employer’s motion to compel arbitration.

Authored by:
Natalie Torbati, Associate
CAPSTONE LAW APC

Williams v. Marshalls of CA: PAGA Plaintiffs Entitled to Broad Discovery Rights

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On July 13, 2017, in a unanimous opinion, the California Supreme Court affirmed PAGA plaintiffs’ broad rights to discovery under the Civil Discovery Act. Williams v. Marshalls of CA, LLC, No. S227228 __ Cal.5th __ (July 13, 2017) (slip op. available here) (Mr. Williams is represented by Capstone Law APC). In so doing, California’s highest court reversed the trial court’s imposition of additional restrictions on PAGA discovery. The Williams opinion not only reaffirmed that the right to discovery for all plaintiffs in civil litigation is broad, but also that there is no requirement that plaintiffs make a preliminary showing of “good cause” before being able to obtain contact information of fellow employees.

Williams’ lawsuit alleges that he worked for Marshalls at their store in Costa Mesa, California, as a non-exempt, hourly employee, and asserts only a PAGA claim based on various underlying wage-and-hour violations. Slip op. at 2. Early in the action, Williams had propounded discovery requests seeking, among other pieces of information, the names and contact information for all of Marshalls’ California employees. The trial court mostly denied the request, though it ordered Marshalls to produce the names and contact information for the single store where Williams worked. The trial court further conditioned any renewed discovery motion on Williams sitting for a deposition and making a showing of proof as to the merits of the allegations in his complaint.

Williams filed a petition for a writ, on which the Court of Appeal took full briefing and oral argument.  However, the Court of Appeal ultimately denied Williams’ writ petition, and effectively affirmed the trial court order. The Court of Appeal held that the trial court was within its discretion to deny the discovery Williams sought because Williams had failed to establish “good cause” for the non-party aggrieved employees’ contact information. Slip op. at 4. The Court of Appeal alternatively held that the employees’ privacy interests under the California Constitution were implicated and that, therefore, Williams was required to show a “compelling need” for the discovery. Williams then filed a petition for review, which the Supreme Court granted to decide two issues: (1) whether the plaintiff in a PAGA action is entitled to discovery of the names and contact information of other “aggrieved employees” at the start of the proceeding or whether the plaintiff is initially required to show good cause in order to gain access to that information; and (2) in ruling on such a request for employee contact information, should the trial court first determine whether the employees have a protectable privacy interest and, if so, balance that privacy interest against other interests, or is a protectable privacy interest assumed?

In a unanimous decision, the California Supreme Court reversed the lower court entirely, and issued a broad decision affirming the applicability of the Civil Discovery Act to PAGA cases, further cementing PAGA as a robust vehicle for enforcing the Labor Code. In its decision, the state Supreme Court first clarified the moving party’s burden when moving to compel interrogatory responses. Citing the Civil Discovery Act, the court explained that “a litigant[] is entitled to demand answers to its interrogatories[] as a matter of right, and without a prior showing, unless the party on whom those interrogatories are served objects and shows cause why the questions are not within the purview of the code section.” Slip op. at 6-7 (internal citations omitted).  Thus, it is the burden of the party resisting discovery to justify any objection. Id. at 7.

The court then addressed Marshalls’ objections to the discovery in turn, first looking to the relevance of the information sought by the plaintiff: the identities and contact information of other employees. Relying on opinions issued in putative wage-and-hour class actions, the court explained that “Courts of Appeal have . . . uniformly treated such a request as clearly within the scope of discovery permitted under Code of Civil Procedure section 2017.010.[,]” “an essential first step to prosecution of any representative action.” Slip op. at 9, 11. Marshalls had argued that these principles are not applicable to PAGA actions, relying both on the text of the PAGA statute and on differences between class actions and PAGA actions.  But the state Supreme Court held that there is nothing in the PAGA statute that supports a “heightened preliminary proof requirement,” a requirement which would undermine PAGA’s legislative purpose of advancing the state’s public policy of protecting employees against Labor Code violations in their workplaces. Id. at 13. The court also rejected the argument that the nature of a PAGA action, as opposed to a class action, supports conditioning discovery on a showing of proof. While there are procedural differences between class actions and PAGA actions, the two types of suits also bear some similarities, including overlapping policy considerations such as the robust protection of workers’ rights, which support an equally broad right to discovery. Slip op. at 15.

The California Supreme Court also rejected Marshalls’ objection of “undue burden.” The Code of Civil Procedure does not authorize the trial court to require a showing of proof before ordering discovery “in the absence of any evidence of the burden responding would entail.” Slip op. at 19. Marshalls made no showing of the burden of responding beyond stating the number of employees whose names and contact information were sought. And while the Court of Appeal had “justified the trial court’s good cause requirement” by referring to the rules governing inspection demands, the discovery at issue below were interrogatories, which do not include such a requirement under the Discovery Act. Id. at 19-20. Finally, examining the non-party employees’ constitutional privacy interests, the court explained that the relevant test for evaluating Marshalls’ privacy objection was the Hill test initially applied to the wage-and-hour class action context in Belaire-West Landscape, Inc. v. Superior Court, 149 Cal.App.4th 554. This three-part test requires: (1) a legally recognized privacy interest, (2) a reasonable expectation of privacy in the circumstances, and (3) a serious invasion of privacy. Hill v. National Collegiate Athletic Assn., 7 Cal.4th 1 (1994). If all requirements are met, the court moves on to a balancing test. Here, the court concluded that the second and third requirements were not met. Slip op. at 25-26.

Additionally, the court disapproved of the Court of Appeal’s reliance on other appellate cases that “stand for the proposition that whenever discovery of facially private information is sought, the party seeking discovery must demonstrate a ‘compelling state interest.’” Slip op. at 27. The court explained that a compelling interest is only required to justify “an obvious invasion of an interest fundamental to personal autonomy,” not to lesser interests. Id. at 28. The California Supreme Court disapproved of a long line of cases “to the extent they assume, without conducting the inquiry Hill requires, that a compelling interest or compelling need automatically is required.” Id. at 29, n.8.

The California Supreme Court also disagreed with certain considerations it deemed relevant to the balancing test it performed. The Court of Appeal had bizarrely found the potential for an employer illegally to retaliate against an employee for participating in the lawsuit as weighing against discovery, but the California Supreme Court instead found this to weigh in favor of discovery and in favor of “facilitating collective action so that individuals need not run the risk of individual suits.” Slip op. at 30-31. Further, the Supreme Court disagreed with the Court of Appeal’s indication that discovery should be contingent on a showing of a uniform, companywide policy, explaining that a uniform policy is not a condition for discovery—nor even for eventual success—in a PAGA action, although the court did note that Williams had, in fact, submitted documents purporting to describe the company’s uniform, unlawful statewide meal and rest period policies. Id. at 32, n.9.

With the Williams ruling, PAGA plaintiffs’ broad rights to discovery have been affirmed. The California Supreme Court also emphasized that the “facts and theories” that must be included in PAGA notice letters to the LWDA need only satisfy a low bar of “nonfrivolousness,” a minimal threshold that exists merely to afford the LWDA an opportunity to decide whether to allocate its resources to investigating the claims and the employer a chance to submit a response to the agency.

Authored by:
Katherine Kehr, Senior Counsel
CAPSTONE LAW APC

McKeen-Chaplin v. Provident Savings Bank: 9th Cir. Finds Mortgage Underwriters Not Exempt from FLSA OT

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On July 5, 2017, in a decision which deepens a split among the Circuits, McKeen-Chaplin v. Provident Savings Bank, FSB, the Ninth Circuit Court of Appeals held that mortgage underwriters are not exempt from FLSA overtime requirements. No. 15-16758 (9th Cir. July 5, 2017) (slip op. available here). The panel found that Provident Savings Bank’s mortgage underwriters qualify for neither the “administrative exemption” nor the “white-collar exemption” from the FLSA overtime requirements, reversing the district court’s grant of summary judgment in favor of the bank.

Provident sells mortgage loans to consumers purchasing or refinancing homes and then resells those funded loans on the secondary market. Underwriters at Provident apply guidelines established by the bank in analyzing loan applications to determine prospective borrowers’ creditworthiness and could impose conditions on loan applications based on the underwriter’s analysis or request that Provident make exceptions to its guidelines in certain cases. However, Provident’s underwriters were not responsible for finalizing loan funding or the sale of approved loans, or for selling approved loans on the secondary market. Provident’s underwriters often worked more than 40 hours in a workweek but were never provided overtime compensation, as they were classified as exempt.

In 2012, McKeen-Chaplin filed suit against Provident on behalf of herself and other mortgage underwriters, alleging overtime violations. Provident moved for summary judgment, arguing that the underwriters are exempt from FLSA overtime pay requirements under the administrative exemption, which is reserved for employees whose primary duties involve the exercise of discretion and independent judgment on matters of significance to the business. The plaintiff asserted that an employee’s work must relate to a company’s management or general business operations for the “administrative exemption” to apply, and that here, the employees’ work did not relate to Provident’s management or general business operations because underwriting home mortgage applications was more akin to being a part of a production line, generating a product or service offered by the business, rather than running or servicing the business.  However, the district court ruled that the underwriters’ primary duties qualified them as exempt under the “administrative exemption” because Provident’s underwriters were primarily providing “quality control” assurances to their employer that directly related to the employer’s business operations. Slip op. at 5.

The Ninth Circuit reversed the district court, focusing its analysis on the fact that Prudential’s mortgage underwriters had no authority to decide whether to “take on risk, but instead assessed whether . . . the particular loans at issue fall within the range of risk Provident has determined it is willing to take.” Slip op. at 10. Analyzing the issue under the Department of Labor’s “short duties” test set forth in 29 C.F.R. section 541.700(a), the Court of Appeals reasoned that Provident’s underwriters fell on the “production” side of the “administrative-production dichotomy” because their duties relate more to the creation and sale of the bank’s products than to the actual, general operation of the bank itself. In so ruling, the Ninth Circuit avoided finding that, as a matter of law, mortgage underwriters could never qualify for the administrative exemption because an underwriter who has more authority to set policy for its employer could arguably meet the “administrative exemption.” The Court of Appeals’ ruling also affirmed a long-standing Ninth Circuit precedent that an employee’s work must relate to company management or general business operations for this exemption to apply.

In McKeen-Chaplin, the Ninth Circuit sided with the Second Circuit, which, in 2009, held that the administrative exemption did not apply to underwriters at J.P. Morgan Chase. Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009). More recently, the Sixth Circuit rejected the Second Circuit’s analysis in reaching the opposite conclusion in a case involving underwriters with Huntington Bancshares. See Lutz v. Huntington Bancshares, Inc., 815 F.3d 988, 995 (6th Cir. 2016). Until this circuit split is taken up and resolved by the U.S. Supreme Court, employers of mortgage underwriters will need to carefully review underwriters’ duties to determine whether they are properly classified as exempt under the FLSA.

Authored by:
Jordan Carlson, Associate
CAPSTONE LAW APC