Articles from September 2013

Several weeks after reinstating certification of two multistate consumer class actions involving defective, moldy washing machines in Butler v. Sears, Roebuck & Co., the Seventh Circuit has again upheld the viability and desirability of consumer class actions in another opinion authored by Judge Richard Posner, Hughes v. Kore of Indiana Enterprise Inc. (slip opinion available here). In Hughes, the Seventh Circuit reaffirmed some basic principles of class actions that seem to have been obscured of late, including the utility of class actions for prosecuting small value claims and the propriety of deterrence as a goal for class actions.

The conduct at issue in Hughes was the defendant’s alleged failure to post the required notice of a $3 transaction fee that its ATMs charged to users (over 2800 times during the class period). The district court held that the plaintiffs would be better off forgoing class certification, since class members would receive only a few dollars each, but could receive statutory damages of between $100 and $1000 for individual suits.

The Seventh Circuit reversed, observing that individual actions would be extremely unlikely due to the inability of a plaintiff to enlist a competent attorney to press such an action: “What lawyer could expect the court to award an attorney’s fee commensurate with his efforts in the case, if the client recovered only $100?” Instead, the court indicated that the better course would be to proceed with a class action, and instead of attempting to distribute very small awards to individual class members, to disburse the recovery to a charity under the cy pres doctrine. Even if the remedy were thus “purely punitive,” the court held that would be better than individual suits, as one of the proper goals of a class action is to prevent the defendant from “walking away from the litigation scot-free.”

In the first Ninth Circuit decision relating to the Private Attorneys General Act of 2004 (“PAGA”), a panel held in Urbino v. Orkin Services of Calif., No. 11-56944, 11-57002 (9th Cir. Aug. 13th, 2013) (slip opinion available here) that federal diversity jurisdiction cannot be exercised over California’s unique PAGA enforcement action. At the same time, the panel stayed its decision in Baumann v. Chase Investment Services, No. 12-55644 (Mr. Baumann is represented by Capstone Law APC), heard concurrently with Urbino and which presented an additional, closely-related issue as to whether a PAGA action is removable under the Class Action Fairness Act (“CAFA”).

First, Urbino prohibits district courts from aggregating PAGA civil penalties to establish the amount in controversy for diversity jurisdiction. Under the PAGA statute, civil penalties are measured by the number of violations against an employer’s current and former employees. If penalties for all aggrieved employees could be aggregated to meet the $75,000 amount in controversy threshold, most PAGA actions would be subject to federal jurisdiction. Urbino holds that aggregation is improper because, although a PAGA action unites aggrieved employees’ claims into one action, their underlying interests are not “common and undivided,” and thus do not fall within the narrow exception to the prevailing non-aggregation principle. Rather, in a PAGA action “[e]ach employee suffers a unique injury… [and therefore] Defendants’ obligation to them is not ‘as a group,’ but as ‘individuals severally.’” Slip op. at 8 (quoting Gibson v. Chrysler Corp., 261 F.3d 927, 944 (9th Cir. 2001)). Second, and separately, Urbino holds that because the benefits of PAGA inure primarily to the state, “[t]he state [is] the real party in interest [and] is not a ‘citizen’ for diversity purposes.” Slip op. at 9.

The main result of Urbino is that pure PAGA actions will not be removable under 28 U.S.C. §1332 (the statutory basis for diversity jurisdiction), since “federal courts lack subject matter over this quintessentially California dispute.” Slip op. at 9. But Urbino leaves open the question of whether PAGA actions are subject to removal under CAFA. That question will be settled by Baumann, which has been stayed pending the U.S. Supreme Court’s decision in Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796 (5th Cir. 2012), cert. granted, 133 S. Ct. 2736 (May 28, 2013). However, it is unlikely that Hood, which addresses the “mass action” provision of CAFA, will affect the analysis. CAFA excludes from its definition of “mass action” any action where “all of the claims in the action arise from an event or occurrence in the state” where the action was filed. 8 U.S.C. § 1332(d)(11)(B)(ii). Because a PAGA action is limited to collecting penalties arising from labor law violations that occurred in California, it cannot be defined as a “mass action” for CAFA purposes. In the meantime, PAGA plaintiffs faced with a removal under CAFA should continue to rely on Washington v. Chimei Innolux Corp., 659 F.3d 842 (9th Cir. 2011), which makes clear that only class actions — and not actions “resembling” class actions — are removable under the class action provision of CAFA. Baumann is unlikely to upend the reasoning of Chimei.

Finally, by identifying the state as “the real party in interest,” Urbino also bolsters recent scholarship and case law drawing a close analogy between PAGA and the qui tam action. See, e.g., Cunningham v. Leslie’s Poolmart, 2013 U.S. Dist. LEXIS 90256 (C.D. Cal. June 25, 2013); Janet Alexander, To Skin a Cat: Qui Tam Actions as a State Legislative Response to Concepcion, 46 U. Mich. J. L. Reform 1203 (Summer 2013).

There was some question whether the National Labor Relations Board’s landmark D.R. Horton, 357 NLRB No. 184 (Jan. 3, 2012) decision would survive American Express v. Italian Colors Rest., 133 S. Ct. 2304 (2013), which narrowed the “effective vindication” limitation to the Federal Arbitration Act. However, the Administrative Law Judge deciding a Board charge in Cellular Sales of Missouri, LLC, held that D.R. Horton’s holding is unaltered by American Express:

I find that the Supreme Court does not expressly overrule the finding in D.R. Horton. The case at issue is distinguishable because the arbitration agreement precludes employees from exercising their substantive rights protected by Section 7 of the [National Labor Relations] Act. The NLRA “protects employees’ ability to join together to pursue workplace grievances, including through litigation. Id., slip op. at 2. By initiating arbitration on a classwide basis and filing a class action lawsuit in district court, both Bauer and the charging party in D.R. Horton were engaging in conduct that the Board has noted is “not peripheral but central to the Act’s purposes.” D.R. Horton, supra at 4. The Board went on to find that there was no conflict between the NLRA and the FAA “[s]o long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of class-wide arbitration.” D.R. Horton, slip op. at 16. The agreement in this matter does not provide for such an option.

The claim brought by the merchants in American Express Co., is distinguishable in that it was for a violation of antitrust laws. Unlike D.R. Horton and the case at issue, the merchants were alleging not that they were precluded from pursuing their claim but rather the cost to do so individually would be prohibitive. Id. at 2309. However, the Supreme Court noted “antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” American Express Co., supra at 2309.

Cellular Sales, slip op. at 7-8.

This decision comports with a recent administrative decision in Ralph’s Grocery Co., where D.R. Horton was harmonized with American Express. (This decision arose from a charge brought by Terri Brown, who is also the plaintiff in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011) and is represented by Capstone Law APC in both state court and before the Board.)

Although D.R. Horton’s impact has thus far been limited, its reasoning is very powerful and may yet prove persuasive to higher courts. The D.R. Horton Board explained, in considerable detail, that an employee’s right to collective legal action, including filing of putative class actions, has long been considered a “concerted activity”— the core right protected by the NLRA and the Norris-LaGuardia Act (NLA). The Board found that a forced waiver of that right, whether in an ordinary agreement or tied to an arbitration clause — is an unfair labor practice under Section 8(a) of the NLRA.

In a particularly well-reasoned section, D.R. Horton harmonized its decision with the FAA, explaining that the Supreme Court has long held that an arbitration agreement cannot be enforced if it extinguishes a core substantive right. Also, the NLA, enacted in 1932, expressly supersedes any conflicting prior-enacted law, which would include the FAA, which was signed into law in 1925.

Thus far, employees taking collective action against their employer in the face of a mandatory class action waiver have had much greater success filing charges with the Board than by invoking D.R. Horton in court. In refusing to accept D.R. Horton, many courts have relied on an inapposite case called CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), where the Court held that a claim under the Credit Repair Organization Act cannot be exempted from arbitration absent an explicit congressional command.

This appears to reflect a common confusion between arbitrability and the effect of an illegal waiver. D.R. Horton did not hold that employment class actions are exempt from arbitration, since a statutory claim can be exempt from arbitration only when the statutory language expressly provides. Rather, the Board held that a mandatory waiver of a core federal substantive right is not enforceable, whether the illegal waiver is tied to an arbitration clause or not. D.R. Horton’s reasoning is entirely consistent with American Express, which stated that an arbitration agreement cannot be enforced if it “forbid[s] the assertion of certain statutory rights.” American Express, 133 S. Ct. at 2310. As these administrative decisions move forward, courts should take a second look at the well-reasoned D.R. Horton and look to balance core substantive rights protected by the NLRA with the FAA.