McGill v. Citibank Breathes New Life into Roberts v. AT&T Mobility

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A consumer class action against AT&T Mobility for cell phone data “throttling” was revived on March 14, 2018, by the Northern District of California, courtesy of a motion to reconsider and subsequent denial of a motion to compel arbitration (as to all but one of the plaintiffs) in Roberts v. AT&T Mobility, No. 15-cv-03418-EMC (slip op. available here). The case was on remand from the Ninth Circuit after it affirmed the district court’s order compelling arbitration. Roberts v. AT&T Mobility LLC, 877 F.3d 833 (9th Cir. Dec. 11, 2017), petition for cert. filed (U.S. March 9, 2018) (No. 17-1287). While Roberts was on appeal, the California Supreme Court handed down its decision in McGill v. Citibank, 2 Cal.5th 945 (2017), holding that an arbitration agreement that waives the right to seek the statutory remedy of public injunctive relief in any forum is contrary to California public policy and therefore unenforceable. On reconsideration, the district court relied on McGill to deny AT&T’s motion to compel arbitration because it contained a pre-dispute waiver of public injunctive relief.

The Roberts arbitration saga began in April 2016 when the district court compelled arbitration, rejecting the plaintiffs’ First Amendment challenge to the Federal Arbitration Act (FAA). On appeal, the plaintiffs argued that an order forcing arbitration would violate the Constitution’s Petition Clause because the plaintiffs had not “knowingly and voluntarily give[n] up their right to have a court adjudicate their claims.” Roberts v. AT&T Mobility LLC, 877 F.3d 833, 836 (9th Cir. 2017). However, the First Amendment right to petition is a guarantee only against abridgment by the government, and a plaintiff must get over the threshold showing of a state action to make a valid Petition Clause claim. Id. at p. 837. The Ninth Circuit shot down the plaintiffs’ constitutional argument primarily because AT&T’s conduct was not fairly attributable to the state. Id. at 839.

One month after Roberts was remanded to the district court, the plaintiffs filed for reconsideration of the district court’s order compelling arbitration based on McGill. In granting reconsideration, Judge Edward Chen noted that two other judges in the Northern District already had relied on McGill to deny motions to compel arbitration in similar circumstances. See McArdel v. AT&T Mobility LLC, 2017 WL 4354998 (N.D. Cal. Oct. 2, 2017), appeal docketed, No. 17-17246 (Nov. 2, 2017); Blair v. Rent-A-Center, Inc., No. C-17-2335 WHA (Oct. 25, 2017), appeal docketed, No. 17-17221 (Oct. 30, 2017).

Procedurally, the district court rejected AT&T’s argument that the plaintiffs had delayed in bringing the motion to reconsider, finding that the plaintiffs had exercised “reasonable diligence.” Slip op. at 3. On the merits, the district court examined the California Supreme Court’s rationale in McGill. Id. at 6. The court noted that McGill had not held that public injunctive relief claims are inarbitrable, but rather that the at-issue agreement in that case was “unenforceable because it prohibited her from pursuing public injunctive relief in any forum—arbitration or otherwise.” Id. This distinction is important as it avoids potential preemption by the FAA. See, e.g., Ferguson v. Corinthian College, 733 F.3d 928, 929 (9th. Cir. 2013) (noting that the Broughton-Cruz rule exempting claims for “public injunctive relief” from arbitration is preempted by the FAA). The district court also noted that the anti-waiver defense adopted in McGill applied to contract formation in general, not just arbitration contracts. Slip op. at 7. As such, it met the U.S. Supreme Court’s mandate that courts place arbitration agreements on equal footing with other contracts. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Finally, the district court rejected AT&T’s preemption argument, that claims for public injunctive relief interfere with the fundamental attributes of arbitration because they are “indistinguishable” from class-wide injunctive relief, which can be forcibly waived via an arbitration agreement consistent with the FAA. Slip op. at 9. The court analogized claims for public injunctive relief under the consumer protection statutes to representative actions under the California Private Attorneys General Act (PAGA), which the California Supreme Court has likewise held to be unwaivable. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348, 381 (2014), accord Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015).

It can reasonably be expected that Roberts will return to the Ninth Circuit. However, given the logical parallels between claims for public injunctive relief and PAGA, there is a good chance of another opinion like Sakkab upholding the California Supreme Court’s analysis, including with respect to FAA preemption. In any event, Roberts stands as a good reminder to the plaintiffs’ bar to be aware of the evolving law involving arbitration; a favorable decision in a recently-decided case may revive a class action from an order compelling arbitration.

Authored By:
John Stobart, Senior Counsel

Turman v. Superior Court: Alter Ego & Joint Employer Liability Clarified by CA Ct. of Appeal

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On November 29, 2017, the California Court of Appeal, Fourth District, addressed when the corporate veil can be pierced for wage-and-hour violations. Turman, et al. v. Superior Court of Orange County, No. G051871 (4th Dist. Div. 3 Nov. 7, 2017) (slip op. available here). The plaintiffs sued their former employer, Koji’s Japan, Inc. (“Koji’s”), along with A.J. Parent Company, Inc. a.k.a. “America’s Printer,” and Arthur Parent, who was the president, sole shareholder, and director of Koji’s and America’s Printer, in a class and collective action lawsuit. Among other rulings, the former restaurant employees appealed the trial court’s decision that Mr. Parent and America’s Printer were not alter egos of Koji, and that Mr. Parent was not liable as a joint employer for their state labor law claims.

The Turman plaintiffs initiated the underlying lawsuit in 2010 against Koji’s and Mr. Parent (as an individual). Each plaintiff was employed by the Koji’s entity and worked at one or both of its restaurants at some point between 2006 until early 2012, when Mr. Parent closed the restaurants. In 2012, the plaintiffs filed their third amended complaint against Koji’s and Mr. Parent, and added America’s Printer as a defendant.

In 2010, in Martinez v. Combs, 49 Cal.4th 35 (2010), the California Supreme Court set forth three alternative definitions of “employer” derived from the Industrial Wage Commission’s (IWC) Wage Orders that apply to wage-and-hour actions: to employ is to “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” Martinez, 49 Cal.4th at 64. In Turman, the plaintiffs argued that under Martinez, Mr. Parent was a joint employer because he exercised significant control over Koji’s restaurant employees, including hiring and firing non-exempt managers, instructing his managers to fire one of the plaintiffs who initiated the lawsuit, and laying off all employees when he closed the restaurants. The trial court was concerned that, under this argument, all owners of closely-held corporations would be liable as joint employers because of their ultimate control of their businesses. Thus, rather than following Martinez (by distinguishing it as applicable to corporate joint employers), the trial court turned to the common law rule that corporate agents acting within the scope of their agency are not personally liable for a corporate employer’s failure to pay its employees.

In late 2017, the Court of Appeal held that the trial court should have followed Martinez, and therefore the IWC Wage Orders, as controlling authority for defining an employer because, “[w]ere we to define employment exclusively according to the common law in civil actions for unpaid wages[,] we would render the commission’s definitions effectively meaningless.” Slip op. at 27 (quoting Martinez, 49 Cal.4th at 65). Turning to the facts of the underlying case, this court noted that, per the trial court’s statement of decision, Mr. Parent was not a remote shareholder, but was the “big boss” who “had the ability to control [Koji’s and America’s Printer], whether he chose to delegate that responsibility or not.” Slip op. at 28. Thus, the appellate court directed the trial court to reconsider the issue of Mr. Parent’s joint liability by applying the three possible definitions of an employer from Martinez. Under this analysis, owners of closely-held corporations are not presumed to be immune from personal liability as corporate agents, but instead, courts will look to their activities with employees and/or business operations.

Additionally, the trial court had found that the plaintiffs did not prove that “failure to disregard the corporate entity would sanction a fraud or an injustice,” citing that Koji’s was a real business that was not “formed for the purpose to commit fraud or other misdeeds.” Slip op. at 22. The Court of Appeal held this was a misapplication of California law, which states there are only two requirements that must be met to invoke the alter ego doctrine: “a unity of interest and ownership between the corporation and its equitable owner [such] that the separate personalities of the corporation and the shareholder do not in reality exist; and . . . an inequitable result if the acts in question are treated as those of the corporation alone.” Slip op. at 21 (emphasis in original; quoting Sonora Diamond Corp v. Superior Court, 83 Cal.App.4th 523, 538 (2000)). Thus, the question is not whether the corporate entity was formed for a fraudulent purpose, but whether removing the entity from the equation would lead to an inequitable result. As with the joint-employer analysis, this alter ego analysis can be helpful for potential employee-plaintiffs because under this formulation, courts must look at the facts at hand instead of the more detached incorporation process.

Authored by:
Anthony Castillo, Associate

Chase v. Hobby Lobby: Court Takes Consumers’ POV on False Discounts

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In Chase v. Hobby Lobby Stores, Inc., No. 17-00881 (S.D. Cal. Feb. 8, 2018) (slip op. available here), the plaintiff alleged that Hobby Lobby engages in a scheme to defraud consumers by advertising fake discounts, using false reference pricing, on its store merchandise. For example, Hobby Lobby places price tags on individual store products stating their “Marked” price, such as $17.99 for a photo frame. In the store aisles, amongst other photo frames, Hobby Lobby also advertises on an 8”x11” placard, “Photo Frames 50% OFF the Marked Price” in large boldface type, and sells the product to the customer at half of the “Marked” price, or $8.99. As a result of what she saw on the placard, the plaintiff purchased the frame believing it was worth significantly more than the $8.99 that she paid. Slip op. at 2-3. However, the plaintiff contends that this “Marked” price is fictitious, because the frame never sold for the “Marked” price of $17.99 during the 90-day period preceding her purchase nor was it offered for sale. Chase filed a class action based on this practice alleging violations of California’s consumer protection statutes, including the Unfair Competition Law (“UCL”), False Advertising Law (“FAL”), and the Consumers Legal Remedies Act (“CLRA”). Id. at 3.

On February 8, 2018, Hobby Lobby moved to dismiss the class complaint. It argued that reasonable consumers would not be deceived into believing the discounted price represented a reduction from Hobby Lobby’s own “marked” price because the placards contained disclaimers in small print. Specifically, the word “always” appeared in small print sandwiched between the words “Photo Frames” (below) and “50% OFF” (above) in larger font, and the term “the Marked Price” was followed by an asterisk directing the reader to more fine print, stating “discounts provided every day; marked prices reflect general U.S. market value for similar products.” Slip op. at 5 (attached as Exhibit B to the First Amended Complaint). The plaintiff alleged she did not notice these disclaimers at the time of her purchase. Id. at 8, 10 n.7. Nevertheless, Hobby Lobby relied on Freeman v. Time Inc., 68 F.3d. 285 (9th Cir. 1995) to argue that a reasonable consumer would have read and understood the disclaimers to mean that Hobby Lobby had not previously sold the merchandise at the “Marked” price. Id. at 9. See Freeman, 68 F.3d at 289-90 (holding, unremarkably, that no reasonable recipient of a sweepstakes offer would be deceived by language in large print that he or she had won the sweepstakes where adjacent language in small print expressly and repeatedly stated, “[i]f you return the grand prizewinning entry”).

The court rejected the application of Freeman and held that, under the reasonable consumer standard, Hobby Lobby’s “disclaimers” did not immunize it from liability for its deceptive pricing scheme. In doing so, the court considered Hobby Lobby’s representations from the point of view of the consumer. It stated, “there is a significant difference between viewing a . . . mailed advertisement [distinguishing Freeman] and viewing a placard in a store aisle amidst a sea of photo frames.” Slip op. at 10. “[I]t is plausible that a reasonable consumer—viewing the [in-store] ad from a distance—could have failed to take note of the word ‘ALWAYS’ and ignored disclaimers in light of the size and bolded font of the ‘50 % off’ language in the overall context of the advertisement.” Id. In the context of food labeling, the Ninth Circuit had previously stated, “[w]e disagree . . . that reasonable consumers should be expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list in small print on the side of the box.” Williams v. Gerber Prods., 552 F.3d 934, 939 (9th Cir. 2008). Hobby Lobby extends this analysis to in-store advertising, where consumers cannot be expected to search for small print to discover whether discounts that they have been promised are truthful.

Authored By:
Robert Friedl, Senior Counsel

Edwards v. Ford: 9th Cir. Affirms Award of “Catalyst” Attorney’s Fees in Auto Defect Class Action

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In February, the Ninth Circuit issued an unpublished decision that bodes well for consumer-plaintiffs seeking to recover attorney’s fees under a “catalyst” theory in automotive defect class actions. See Edwards v. Ford Motor Company, No. 16-55868 (9th Cir., Feb. 22, 2018) (slip op. available here). The three-judge panel affirmed the Southern District of California’s finding that the plaintiff’s lawsuit was a substantial factor in Ford’s decision to issue “voluntary” relief to the class, as well as its award of $1.5 million in attorney’s fees and costs. However, the Ninth Circuit also upheld the district court’s decision not to apply a fee multiplier, reasoning that the $1.5 million award already accounted for the contingent risks the plaintiff faced. The decision will make it more difficult for automakers to sidestep drivers’ lawsuits by issuing a “voluntary” customer satisfaction program.

California’s Code of Civil Procedure section 1021.5, known as California’s Private Attorney General statute, provides that a court may award attorney’s fees to a “successful party” when the action has resulted in the enforcement of an important right affecting the public interest. See Graham v. DaimlerChrysler Corp., 34 Cal. 4th 553, 565 (2004). The statute “provides an exception to the general rule that each party to a lawsuit bears its own attorneys’ fees.” MacDonald v. Ford Motor Company, 142 F. Supp. 3d 884, 890 (N.D. Cal. Nov. 2, 2015) (Capstone Law APC represented Ms. MacDonald). To be a “successful party,” a plaintiff need not obtain a court-ordered change in the defendant’s behavior; it is enough for the plaintiff’s lawsuit to have catalyzed, or motivated, the defendant to provide the primary relief sought. Graham, 24 Cal. 4th at 567. The plaintiff bears the burden of proving he or she catalyzed the relief.

On appeal, Ford argued the district court improperly applied a “presumption” in the plaintiff’s favor, giving undue weight to the plaintiff’s circumstantial evidence. The plaintiff argued that the chronology of the events in the litigation, compared with the timing of Ford’s decision to offer free repairs to its customers, proved the plaintiff had motivated the automaker’s actions. A review of the case and relevant factual chronology clearly supported the plaintiff’s argument: in May 2011, Plaintiff Gene Edwards sued Ford on behalf of Ford Freestyle owners, alleging Ford knew that her 2006 Ford Freestyle vehicle—which repeatedly surged forward, stalled, and required a $900 repair—had an “Electronic Throttle Control [ETC] Defect.” That same month, the National Traffic Highway Safety Administration (“NHTSA”) opened a “Preliminary Evaluation” into the ETC defect. The case was being actively litigated in 2012, when the plaintiff defeated a motion for summary judgment and Ford defeated the plaintiff’s motion for class certification. In October 2012, an internal Ford review group recommended that the company implement a Customer Satisfaction Program providing free repairs to the class. Ford implemented the program on November 29, 2012. NHTSA closed its investigation on February 7, 2013. In January 2016, in ruling on the plaintiff’s motion for attorney’s fees, the district court found that the chronology of the events raised an inference that the plaintiff’s lawsuit catalyzed Ford’s customer service program.

Following an unsuccessful motion for reconsideration, Ford appealed, arguing the district court applied the wrong burden of proof in its analysis. Slip op. at 2. Under Ford’s view, the declaration it submitted attesting that NHTSA had motivated Ford to issue the customer service program—not the plaintiff’s lawsuit—should have been enough to rebut the plaintiff’s circumstantial evidence. The Ninth Circuit disagreed, stating: “In California, the inference from the chronology of events does not evaporate when the defendant introduces relevant and credible evidence to the contrary; rather, the trial court must weigh the evidence and determine on all the evidence, including any inference arising from the chronology, if the plaintiff’s story is persuasive. See Hogar v. Cmty. Dev. Comm’n of City of Escondido, 157 Cal. App. 4Th 1358, 1367 (2008).” Id. at 3. This finding was not a first for Ford. In 2015, Judge Tigar of the Northern District of California came to a similar conclusion in a different case, holding that a declaration from a Ford employee was insufficient to overcome the inference of remedial conduct having been catalyzed by the plaintiff’s litigation established through the plaintiff’s chronology of the events. See MacDonald, 142 F.Supp.3d 884 (N.D. Cal. Nov. 2, 2015).

In a cross-appeal, the Edwards plaintiff challenged the district court’s decision to reject the plaintiff’s requested 1.5x fee multiplier. The district court had held that the contingent risk borne by the plaintiff was already compensated adequately through her counsel’s hourly rates. The Ninth Circuit affirmed, finding no clear error. Slip op. at 6.

The Edwards case shows that a compelling chronology of events, even absent a “smoking gun,” can establish that consumer-plaintiffs are entitled to attorney’s fees for causing a manufacturer to act in the public interest.

Authored by:
Cody Padgett, Associate