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

The Restoration of Eggert by Hernandez v. Restoration Hardware

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California Code of Civil Procedure section 902 provides that “[a]ny party aggrieved” may appeal a judgment. For the past half century, courts and commentators have regarded settlement objectors as “aggrieved” parties with standing to appeal. See Trotsky v. Los Angeles Fed. Sav. & Loan Assn., 48 Cal. App. 3d 134, 139-40 (1975). This practice essentially tracked federal appellate procedure and appeared non-controversial; indeed, few would have foreseen this precedent would be overturned in favor of an even older, seemingly-forgotten precedent (see Eggert v. Pac. States S. & L. Co., 20 Cal. 2d 199 (1942)) by the California Supreme Court in Hernandez v. Restoration Hardware, Inc., No. S233983 (Jan. 29, 2018) (slip op. available here) (holding that unnamed class members may not appeal a class judgment, settlement, or attorney fees award unless they intervene in the action or move to vacate the judgment).

In Restoration Hardware, the plaintiffs in a class action alleged that the home furnishings store violated the Song-Beverly Credit Card Act by requesting and recording customer zip codes. After years of litigation, the court certified the class, and ordered the parties to notify class members that they had the option to remain in the certified class and be bound by the judgment, or to exclude themselves from the class and not be bound to the judgment. The notice also advised class members they had the option of appearing through counsel if they wished to remain in the class. In response, class member Francesca Muller appeared through her counsel, Lawrence W. Schonbrun (who also represented the objector in Laffitte v. Robert Half Intern. Inc., 1 Cal. 5th 480 (2016)). After a bench trial, the court awarded the class over $36 million in penalties and ordered the parties to meet and confer regarding an appropriate claims process to distribute the award to the class. The parties stipulated to treat the award as a common fund that included class member payments and any attorneys’ fees, costs, class representative enhancements, and administrative costs associated with administering the claims process. The plaintiffs then moved for attorneys’ fees equal to 25% of the total judgment recovered for the class. At the hearing, Muller (who was served with the moving papers) objected to the attorneys’ fees sought by class counsel. The court overruled her objection and entered a judgment that tracked the parties’ proposed claims procedure. Muller appealed.

Citing Eggert, the plaintiffs argued that Muller lacked standing to appeal because she had neither moved to intervene nor to vacate the judgment. Muller argued that Eggert should be disregarded because it was decided before the 1966 revisions to rule 23 of the Federal Rules of Civil Procedure—persuasive authority in modern California class action jurisprudence (see, e.g., Arias v. Superior Court, 46 Cal. 4th 969, 989 (2009)). She also relied on Trotsky and its progeny to support her contention that class members gain standing to appeal by objecting. The Court of Appeal disagreed and ruled that it was bound to follow Eggert, and that neither Trotsky, Consumer Cause, Inc., nor Wershba made any attempt to reconcile their opinions with Eggert.

On appeal to the California Supreme Court, Muller once again argued that she had standing to appeal under Trotsky, and that California law should be updated to mirror Rule 23 and federal appellate practice, which generally permit class member objectors to appeal. The state Supreme Court disagreed, finding that, first, the right to appeal judgments in state civil actions, including class actions, is entirely statutory, and, pursuant to California Code of Civil Procedure section 902 and Eggert, unnamed class members may only become parties of record to class actions by making a timely complaint in intervention before final judgment or by filing a motion to set aside and vacate the class judgment under section 663. Second, Trotsky’s failure to address section 902’s requirements for the right to appeal a settlement, or to distinguish or otherwise reconcile its holding with Eggert, renders the opinion unpersuasive. Third, California state common law, legislation, and procedural rules of court differ significantly from the federal common law and procedural rules, and California’s legislature has chosen to continue Eggert’s rule despite changes in federal class action rules.

In addition to the above rulings, the California Supreme Court also cited several policy reasons for upholding Eggert, including the public policy in favor of discouraging professional objectors: “Meritless objections can disrupt settlements by requiring class counsel to expend resources fighting appeals, and, more importantly, delaying the point at which settlements become final. These . . . professional objectors, are thought to harm the class members whose interests they claim to protect. . . . .  [B]y feeding off the fees earned by class counsel who took the risk of suing defendants on a purely contingent basis, . . . professional objectors create a disincentive for class counsel to take on such risky matters.” Slip op. at 15 (internal citations omitted).

This is the first of the state high court’s opinions to use the term “professional objector,” and its use suggests that the court is now taking proactive measures to curb the abuse of class action procedures by serial objectors, who have been, for too long, exploiting their appellate rights under Trotsky to extort generous side settlements.

Authored by:
Eduardo Santos, Senior Counsel