Articles from March 2011

Seeking to ensure that California’s Labor Code protections be interpreted and enforced by California courts, the California Legislature is considering Assembly Bill 267, which would amend the Labor Code with the creation of Section 924. If passed and signed into law by newly-inaugurated California Governor Jerry Brown, Section 924 will invalidate any clause in an employment contract requiring that an employee, as a condition of obtaining or continuing employment, agree to a forum or choice of law other than California to resolve a dispute with his or her employer regarding employment issues that arise in California. Former Governor Arnold Schwarzenegger twice vetoed similar legislation. However, considering Governor Brown’s distinctly pro-labor record, it appears more likely than not that Section 924 will become law, possibly by January 1, 2012.

In the spate of recent articles about Howrey, which formally ceased operations this week, were the familiar causes of law firm financial catastrophes: partner defections, decline of a once-thriving practice area, and internal squabbling. Less familiar among BigLaw firms, which chiefly generate revenue by hourly billing, is the risk of relying on contingency fees. In a recent interview with the Wall Street Journal, Howrey CEO Robert Ruyak cited contingency fee arrangements as having contributed to Howrey’s financial difficulties. The full article is available here. Howrey’s fall is thus a reminder of the truly contingent nature of contingent fees—even more so among firms that rely on contingent fees and judicial approval of fees, such as in class actions, which creates a unique kind of double contingency.

The California Supreme Court has recognized this, citing favorably from Judge Richard Posner’s landmark ECONOMIC ANALYSIS OF LAW: “‘A contingent fee must be higher than a fee for the same legal services paid as they are performed. The contingent fee compensates the lawyer not only for the legal services he renders but for the loan of those services. The implicit interest rate on such a loan is higher because the risk of default (the loss of the case, which cancels the debt of the client to the lawyer) is much higher than that of conventional loans.’” Ketchum v. Moses, 17 P.3d 735, 742 (Cal. 2001) (citing RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 534, 567 (4th ed. 1992)). Even so, a handful of trial court judges seem predisposed to reduce negotiated class action fees (and in doing so, no doubt unwittingly, exemplify Judge Posner’s observation). Posner’s Seventh Circuit colleague, Judge Frank Easterbrook, explains that far from being the boondoggle that these judges apparently presume contingent fees to be, “[t]he contingent fee uses private incentives rather than careful monitoring to align the interests of lawyer and client. The lawyer gains only to the extent his client gains. This interest-alignment device is not perfect. . . . [b]ut [an] imperfect alignment of interests is better than a conflict of interests, which hourly fees may create.” Kirchoff v. Flynn, 786 F.2d 320, 325 (7th Cir. 1986).

In other words, contingent fee awards, and the routine application of multipliers, replicate market forces for legal services so that plaintiffs who cannot otherwise afford a lawyer have access to the courts.

Infusing prosecutorial zeal with tiger’s blood and the bombast of an F-18, actor Charlie Sheen has included claims arising under the California Labor Code’s Private Attorneys General Act of 2004 (PAGA), Cal. Lab. Code §§ 2698-99.5, in his recently filed complaint against Warner Brothers, producer Chuck Lorre, and Lorre’s production company.  (Read the full complaint here)  Mirroring Sheen’s undeniably compelling expressive gifts, the complaint concedes and candidly recounts Sheen’s long history of public misbehavior and felonious law breaking, noting that “none of this resulted in Warner Bros. suspending Mr. Sheen.”  Complaint at ¶ 3, Sheen v. Lorre, No. SC111794 (L.A. Sup. Ct. March 10, 2011).  With unusual attention to story and suspense, the complaint then posits “What did?” (id.), and proceeds to theorize that what Mr. Lorre took as public affronts prompted him and Warner Bros. to breach their contract with Sheen and to effectively impose punitive consequences on him.  The PAGA liability is premised on Warner Bros. having failed to pay Sheen all wages owed on termination, and the complaint’s PAGA allegations twice reference those “similarly situated” to Sheen, suggesting the prospect of a representative action, akin to a class action.  See id. at ¶¶ 70-75.  Although PAGA representative actions need not satisfy the familiar class certification criteria (numerosity, commonality, and so on), it is doubtful that a great many current or former Warner Bros. employees are “similarly situated” to Sheen.

The lawsuit follows the termination of Sheen’s Two and a Half Men contract, a result of Sheen’s increasingly acerbic daily salvos against Warner Bros. and Lorre and protracted verbal riffs, often on drive-time morning radio shows and typically including boasts of sexual and drug-using prowess.  Sheen, who is represented by Martin Singer of the Century City-based Lavely & Singer firm, is seeking PAGA civil penalties in addition to compensatory and punitive damages under business tort and breach of contract claims.  If the PAGA claims are successful, three-quarters of any recovery is required by statute be paid to the State (see Cal. Lab. Code § 2699 (2)(i)).  While Sheen has not yet complied with PAGA’s notice requirements (see Cal. Lab. Code § 2699.3 (1)-(2)), there is the attestation in the unverified complaint that Sheen “intends to comply.”  Sheen Complaint at ¶ 71.  Sheen’s notification letter to the Labor and Workforce Development Agency (LWDA) will certainly be the most scrutinized PAGA notification letter of all time.

The complaint was filed in Los Angeles Superior Court’s tiny West District courthouse.  Were the case to go to trial, it would be this courthouse’s first high-profile trial, in contrast to the downtown and Santa Monica state and federal courts that have been the sites for the famous trials of Charles Manson, John DeLorean, and O.J. Simpson (both criminal and civil).

Despite a compelling dissent by Justice Victoria Chaney, the California Supreme Court has decided not to grant the Petition for Review in the closely watched Villacres v. ABM Indus., Inc., 117 Cal. Rptr. 3d 398 (Cal. Ct. App. 2010). In Villacres, a divided Second Appellate District panel held that res judicata barred the plaintiff’s claims under the Private Attorneys General Act of 2004 (PAGA), CAL. LAB. CODE §§ 2698-99.5, even though the settlement agreement and release in the preceding class action (of which the plaintiff was a class member) did not list PAGA claims among those released. In fact, no PAGA claims were ever pleaded or litigated in the previous class action. The Villacres majority reasoned that what “could have” been pleaded and litigated, or “could have” been settled and released controls over the actual settled and released claims that parties list in their settlement agreements. See Villacres at 409.

The Supreme Court’s denial of review was thus met with some surprise, particularly after the Court had extended its deliberations (see Villacres v. ABM Indus., Inc., No. S188659, 2011 Cal. LEXIS 1301 (Cal. Jan. 24, 2011)) and the decision continued to attract considerable coverage and interest from journalists, bloggers, and non-parties. Capturing the broad sentiment, the Villacres decision was characterized as “unprecedented” and a “threat[]” to “all class action settlement[s].” Amicus letter from Michael D. Singer, of Cohelan Khoury & Singer, to the California Supreme Court, on behalf of the California Employment Lawyers Association (CELA) (Jan. 4, 2011) (available here).

Given the infinitely elastic “could have” standard adopted by the Villacres majority, it is inevitable that another employer that has settled, say, a back overtime claim based on a theory of misclassification will posit that it cannot owe PAGA civil penalties for unreimbursed business expenses because such claims certainly “could have” been a part of the case that settled the misclassification/overtime claims. However, that same enticement might operate to cause the Supreme Court to choose the right case, at the right time, to articulate the rule of law advocated by Justice Chaney: that it is the claims listed in parties’ operative settlement agreements—not what might be conceived in an ex post “could have” exercise—that determines what has or has not been released in a class action settlement.

The Villacres petition was denied; formally, its status is “case closed.” However, the scope and definition of class action releases remains very much an open issue. Plaintiff practitioners would be well-advised to craft releases that clearly delimit the boundaries of the release and avoid any language similar to the “could have been” clause in Villacres.