Articles from July 2012

Schwab v. FINRA: Federal Court Rebuffs Attempt to Block Class Actions

In an unexpected trend following on last year’s aggressively pro-arbitration ruling in AT&T Mobility v. Concepcion, which some predicted would prove to be the “death knell” for class actions, federal courts continue to deal defeats to defendants attempting to enforce class-action waivers.  In Schwab v. FINRA, the party arguing for a class action waiver has suffered an indirect, yet critical, defeat.  See Schwab v. Financial Indus. Regulatory Auth., No. 12-518 (N.D. Cal. May 11, 2012) (Order on Motion to Dismiss) (available here).  The brokerage firm Charles Schwab & Co. had sought a declaratory judgment to the effect that the Financial Industry Regulatory Authority (FINRA) could not prevent Schwab from adding a class action waiver to its customer account agreements.  Order at 1.  In a closely reasoned and complex 21-page decision, Magistrate Judge Elizabeth Laporte granted, without leave to amend, FINRA’s motion to dismiss the Schwab lawsuit against it, thus bolstering FINRA’s authority to bring an enforcement action against Schwab focused on the class action waiver in Schwab’s customer agreement.  Because FINRA maintains the arbitration forum in which customers and securities firms often resolve their disputes, it was expected that other firms would have followed Schwab’s lead, had Schwab’s attempt to bar class actions been successful. 

While the ruling is a victory for FINRA as well as Schwab’s investors, as a formal matter the FINRA disciplinary proceeding against Schwab must still be resolved. However, the ruling on FINRA’s motion to dismiss strongly suggests that the class action waiver is likely to be found invalid: “[Schwab] has allegedly already violated a rule by inserting the class action waiver into its account agreement. Regardless of where this dispute is heard, Plaintiff may face sanctions for that violation unless it succeeds in changing the interpretation of or invalidating FINRA Rule 2268(d).”  Order at 20.

Ellis v. Pacific Health: Absent Putative Class Members Not Bound By Collateral Estoppel

California’ Second Appellate District has issued a ruling underscoring the fact that orders denying class certification do not operate, by collateral estoppel, to prevent those other than the named plaintiffs from filing a subsequent class action alleging the same claims.  See Ellis v. Pacific Health Corp., No. B229609 (Cal. Ct. App. Jul. 24, 2012) (order re appeal from judgment of dismissal) (available here).

Ellis usefully summarizes and affirms the controlling authorities, foremost Bridgeford v. Pacific Health Corp., 202 Cal. App. 4th 1034 (2012).  In Bridgeford, the court adopted the United States Supreme Court’s holding in Smith v. Bayer Corp., “[n]either a proposed class action nor a rejected class action may bind nonparties.”  131 S.Ct. 2368, 2380 (2011).  Ellis demonstrates that the Bridgeford holding (“unnamed putative class members of a class that was never certified cannot be bound by collateral estoppel”) is not an idle doctrine.  Bridgeford at 1037.  In Ellis, the trial court had sustained Pacific Health’s demurrer on the ground that the plaintiff was within the class definition of an earlier putative class action (Larner v. Pacific Health Corp.), which alleged the same claims against the same defendant.  However, as to the pivotal privity requirement for the application of collateral estoppel, the unanimous three-judge panel held that the plaintiff, as merely one among the many unnamed prospective class members, was neither a party to the prior action nor represented by a party to the prior action.  Order at 7.  The court explained that, while the named plaintiffs in Ellis had economic interests that were “substantially aligned with Larner’s,” the prior decision cannot bind them; since the Larner case was never certified, the Ellis plaintiffs could not have been parties to it. Id.


Harris v. Superior Court: Court of Appeal Holds Insurance Adjusters Not Exempt

On remand from the California Supreme Court, the Second Appellate District has directed the trial court to recertify a class of Liberty Mutual insurance claims adjusters and has held that they are not exempt from overtime pay under California’s “administrative exemption.”  See Harris v. Super. Ct., ___ Cal. App. 4th ___ (Cal. Ct. App. 2012) (available here).  Defendants had presented an affirmative defense based on the administrative exemption, which the court rejected because the adjusters’ primary work duties were not directly related to either management policies or general business operations.  The decision is viewed as a clear victory for workers, and a sign that overtime exemption analysis is being revitalized to make it more difficult for employers to argue that they have no obligation to pay purportedly “exempt” employees for overtime work.

The ruling was preceded by a complex procedural history.  The trial court certified the class, whereupon Liberty Mutual put forth the affirmative defense that the adjusters were exempt under Wage Order No 4’s administrative exemption, and the plaintiffs moved for summary adjudication of the affirmative defense.  In addition to opposing the summary adjudication motion, Liberty Mutual also moved to decertify the class.  In a mixed ruling, the trial court decertified the class as to all claims arising after October 1, 2000, the effective date of the new Wage Order 4-2001, insofar as the adjusters were only exempt under an earlier version of Wage Order 4 (Wage Order 4-1998).  Liberty Mutual then sought decertification of the part of the class that remained certified, but the trial court denied the motion.  Subsequently, Liberty Mutual filed a Writ of Mandate Petition, which the Court of Appeal denied, holding the adjusters to be non-exempt.  Thereafter, the California Supreme Court reversed, holding that the Court of Appeal’s analysis of the amended wage order was flawed, since the court relied on case law that predated the most recent amendment to the applicable wage order and failed to consider the language of the amended order.

The matter was remanded to the Court of Appeal, which again denied the defendants’ writ petition, but with more thorough reasoning, per the direction of the Supreme Court.  In particular, the court further clarified the “directly related” requirement of the administrative exemption.  Harris at 25-26.  The court found that the primary responsibility of the Harris employees was adjusting individual insurance claims, a task which is not at the level of management policy or general operations.  Id.  Thus, their work was not directly related to administering the business and, as such, the administrative exemption did not apply.  Id. at 26. The Court of Appeal ordered the trial court to vacate its prior orders and deny defendants’ motion to decertify the post-2000 class, since the adjusters would be non-exempt under either Wage Order 4-1998 or Wage Order 4-2001.  Id.  The Court of Appeal’s reasoning is expected to be influential in other misclassification cases.

Capital One to Pay $210 Million in Restitution and Penalties in CFPB’s First Enforcement Action

The federal Consumer Financial Protection Bureau (CFPB) has announced that Capital One Bank will pay $210 million to resolve charges of deceptive marketing brought in the CFPB’s first enforcement action. The $150 million restitution component of the total payment will be in the form of refunds to customers who purchased “add-on” credit card services that were deceptively marketed. The remaining $60 million is to be paid in the form of penalties, $25 million to the CFPB and $35 million to the Office of the Comptroller of the Currency, which jointly brought the charges along with the CFPB. The CFPB press release announcing the resolution of the Capital One enforcement action is available here.

The action against Capital One alleged that the credit card giant contracted with vendors who deceptively marketed add-on services, including credit monitoring and payment protection plans, often to Capital One’s most vulnerable customers. The CFPB investigation determined that some consumers were made to believe that buying the optional services was essential to their credit cards being activated, while others were deceived into believing that the services were free, or would cause their credit scores to improve. Indeed, it appeared that the vendors targeted individuals with low credit scores. Particularly deceptive was the pitch for the “payment protection” service, which was purchased by unemployed individuals in the belief that their credit card minimum payments would be covered. However, such already unemployed individuals were ineligible for the payment protection service, which applied only to job loss or disability incurred after buying the service. Additionally, the CFPB found that consumers who attempted to cancel the add-on services were confronted by onerous procedures, and often gave up in frustration.

“Today’s action puts $140 million back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use,” said CFPB Director Richard Cordray. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.”  In addition to sending an advisory to Capital One customers as part of the resolution, the CFPB also drafted a generally applicable advisory, which is available here.  

Founded in 2011, the CFPB’s self-described mission is “to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”