Articles from April 2015

Last month, a Northern District of California judge finally approved an $8.5 million settlement of a class action challenging Google Inc.’s privacy policies. The plaintiffs alleged that Google invaded their and class members’ privacy rights by sharing personal information with third parties without authorization. Specifically, the plaintiffs alleged that Google improperly shared search terms—including credit card numbers, medical information, and other private data—with advertisers and other third parties. See Order Granting Motion for Final Approval, In re Google Referrer Header Privacy Litig., No. 10-4809 (N.D. Cal. March 31, 2015) (available here).

The settlement is notable in that Google is not required to compensate the class members directly. Rather, the company will distribute proceeds to the AARP Foundation, the World Privacy forum, and to four university-based, Internet-related foundations. The court justified its decision by noting that it would be impractical to distribute the settlement fund to the nearly 130 million class members affected by the challenged practices. Under these circumstances, the Court found that the proper approach would be to put the funds to the next best use (i.e., donating them to public interest organizations focusing on privacy issues) under the cy pres doctrine.

The cy pres doctrine provides a solution for cases where the class members are difficult to identify and/or where the individual class member damages are minimal. These cases include consumer class actions, because few class members maintain records of purchases of inexpensive goods, as well as cases where the costs of class settlement administration would exceed class members’ individual recoveries. In such instances, the obvious alternative to the defendant keeping its ill-gotten gains is for the court to award the settlement funds or judgment to non-profit organizations that promote the policies underlying the laws that the defendant violated. With a growing number of class actions brought on behalf of millions of affected class members, such as data breach cases, we expect cy pres awards to become increasingly common.

Authored by: 
Stan Karas, Senior Counsel
CAPSTONE LAW APC

The U.S. District Court for the Northern District of California recently held that an arbitration agreement in the “Performer Contracts” of exotic dancers was both procedurally and substantively unconscionable and denied a motion to compel arbitration brought by their employer nightclub operator, SFBSC Management, LLC (“BSC”).  See Roe v. SFBSC Management, LLC, No. 14-cv-03616-LB (N.D. Cal. March 2, 2015) (slip opinion available here).

While the Federal Arbitration Act (“FAA”) incorporates a strong federal policy of enforcing arbitration agreements, it “does not confer a right to compel arbitration of any dispute at any time.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Under the FAA, federal courts may refuse to enforce an arbitration agreement based on generally applicable state-law contract defenses, such as fraud, duress, or unconscionability. In particular, contractual unconscionability includes both a procedural and substantive component, analyzed by courts on a sliding scale wherein the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required and vice versa.

In Roe, the plaintiff exotic dancers had brought a collective and class action complaint alleging various state and federal wage-and-hour law violations, contending that BSC had misclassified them as independent contractors, rather than employees. BSC sought to compel these claims to arbitration pursuant to the agreement within the dancers’ Performer Contracts requiring that all disputes be decided by binding arbitration. Slip op. at 2.

The plaintiffs argued that the arbitration agreement was unconscionable, in part because of the coercive circumstances surrounding the signing of the agreements. Specifically, the plaintiffs presented evidence that the clubs’ management presented them with the contracts when they were “mostly naked” and then rushed them to sign. The dancers were told that they could not take the contracts home to review and believed they could not review prior to signing them. Id. at 4-5. The plaintiffs also contended that the option given on some of the contracts to “accept or reject” the terms was a sham, alleging that the club would purposely “lose” the agreement if a performer checked the “reject” checkbox and would present the performer with a new agreement to fill out “correctly,” or else management would find a reason not to hire the performer. Id. at 5. Management even presented the contracts for signing when performers were intoxicated, according to the plaintiffs. Based on these facts, Magistrate Judge Laurel Beeler found procedural unconscionability, which focuses on the circumstances surrounding the negotiation of the contract and arises from surprise or oppression.

Further, the court also found several terms of the agreement to be substantively unconscionable, focusing on the harshness and one-sidedness of the contract’s terms. The court found that the “one-way ban” on collective actions, barring the plaintiffs from consolidating claims, lacked mutuality as consolidation was forbidden only for the plaintiffs’ claims—even though defendants are also able to certify classes under Federal Rule of Civil Procedure 23. The court also found substantively unconscionable the cost-shifting and cost-sharing provisions of the arbitration agreement, which required, among other things, that the “costs of arbitration shall be borne equally by performer and owner unless the arbitrator concludes that a different allocation is required by law.” Id. at 16. The court noted that the Ninth Circuit has time and again rejected such cost-allocation terms requiring employees to split arbitrator’s fees–which can be exorbitantly high–with the employer. Id. at 16.

The court ultimately declined to sever the problematic provisions from the contract and deemed the entire arbitration agreement unenforceable. As a result, BSC’s motion to compel arbitration of the exotic dancers’ claims was denied. With this ruling, the court found it was “keeping in mind the ‘overarching’ concern to do justice, and the fact that arbitration, however valuable and strongly preferred, is meant only to provide an alternative forum to litigation, not to overstuff one party’s quiver.” Id. at 17.

BSC plans to appeal this decision to the Ninth Circuit Court of Appeals.

Authored by: 
Liana Carter, Senior Counsel
CAPSTONE LAW APC

On April 1, 2015, the California Supreme Court granted review of McGill v. Citibank to decide whether Citibank can use an arbitration clause to stymie a customer from pursuing public injunctive relief under California’s consumer protection statutes. If awarded, a public injunction allows a successful litigant to stop an unlawful business practice statewide. The stakes are high: if the Court sides with Citibank, this powerful tool for California consumers effectively will be eviscerated. However, many plaintiffs lawyers are hopeful that the California Supreme Court will demonstrate the same inclination to prevent the further erosion of public remedies in California as it did in Iskanian v. CLS Transportation (see infra). McGill v. Citibank N.A., 232 Cal. App. 4th 753 (2014), rev. granted, No. S224086 (Cal. April 1, 2015).

In McGill, the plaintiff (represented by Capstone Law APC) brought claims under California’s consumer protection statutes (the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law) against Citibank for misrepresenting its “Credit Protector” insurance program to its cardholders. Along with damages, Ms. McGill sought to enjoin Citibank from engaging in this unfair business practice. The trial court partially granted Citibank’s motion to compel arbitration, but kept the public injunction remedy in court pursuant to the holding of two earlier Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (together referred to as having established the “Broughton-Cruz rule”). The Broughton-Cruz rule holds that, to the extent they seek public injunctive relief under California’s consumer protection statutes, claims must remain in court, even if all the other claims are sent to arbitration.

The appellate court reversed, holding that the Broughton-Cruz rule had been preempted by “the sweeping directive” of the Federal Arbitration Act (“FAA”) as stated in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which struck down a California rule barring class action waivers. See McGill at 757. However, the intermediate court relied on passages from Concepcion that simply recited decades-old principles from Southland Corp. v. Keating, 465 U.S. 1 (1984) and Perry v. Thomas, 482 U.S. 483 (1987) precluding states from exempting private claims from being brought in the arbitral forum—cases that Broughton and Cruz carefully distinguished in lengthy analyses. In fact, the Court in Broughton and Cruz took its cue from a separate line of U.S. Supreme Court precedent meant to preclude an arbitration agreement from forcing a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 637 (1985); see also American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2310 (2013).

Importantly, Broughton and Cruz recognized that arbitrators have no power to issue public injunctions, as they have no jurisdiction over nonparties. See Broughton at 1081, Cruz at 312. This “institutional shortcoming” precludes public injunctions from being issued by arbitrators at all—even if the claimant were completely successful in proving the merits of her claims in arbitration. Id. In other words, a plaintiff would waive his or her right to pursue public injunctions if it were not preserved in court; the remedy itself would be extinguished simply by virtue of its transfer from court to arbitration.

Broughton and Cruz also held that the FAA did not preempt a state law rule preserving wholly public claims or remedies such as the public injunction, which is not aimed at “resolv[ing] a private dispute but to remedy a public wrong.” Broughton, 21 Cal. 4th at 1079-80. This principle was just recently reaffirmed in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348, 387-88 (2014), which held that the FAA did not preempt a state law protecting public enforcement action like the Private Attorneys General Act representative action from forfeiture. Iskanian embodies the Court’s recognition that the FAA, as intended by Congress and construed by the U.S. Supreme Court, does not have unlimited preemptive reach. A decision upholding the Broughton-Cruz rule would be consistent with both Iskanian and the non-waiver principle only recently reaffirmed by the U.S. Supreme Court in Italian Colors.

However, the fate of the Broughton-Cruz rule may not even be reached in McGill. Unlike the agreements in Broughton and Cruz, Citibank’s arbitration agreement contains a term expressly precluding an arbitrator from awarding public injunctions. Thus, the California Supreme Court may well strike the offending term on unconscionability grounds or as a clear violation of the non-waiver principle, without reaching the broader issue of whether an arbitration agreement can be invalidated due to the inherent unavailability of certain remedies in the arbitral forum.

Authored by: 
Ryan Wu, Senior Counsel
CAPSTONE LAW APC

The Ninth Circuit recently considered whether “Service Advisors” who work at car dealerships are exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements. In answering in the negative, the Ninth Circuit parted ways with the Fourth and Fifth Circuits and the Montana Supreme Court. See Navarro v. Encino Motorcars, LLC, No. 13-55323 (9th Cir. March 24, 2015) (slip opinion available here).

Service Advisors greet car owners, evaluate customers’ complaints about their cars, and suggest services to customers beyond what is necessary to remedy their complaints. Slip op. at 4. The plaintiffs were paid solely in commissions and sued for—among other claims—failure to pay overtime as required by the FLSA (29 U.S.C. § 207(a)(1)). See id. at 5. The defendant argued that Service Advisors are exempt from the overtime rule under § 213(b)(10)(A), which provides that the overtime provisions “shall not apply with respect to . . . any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles.” Id.

The plaintiffs urged the Ninth Circuit to follow the United States Department of Labor’s 2011 regulatory definitions of “salesman,” “partsman,” or “mechanic,” which “limit[] the exemption to salesmen who sell vehicles and partsmen and mechanics who service vehicles.” Id. at 6 (citing 76 Fed. Reg. at 18,838). It was undisputed that the Service Advisors do not meet these regulatory definitions, but the defendant argued that the court should not defer to them. Id. at 7.

The court therefore conducted a Chevron analysis to determine whether to follow the regulatory definitions. Under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), a court first determines “whether Congress has directly spoken to the precise question at issue.” Chevron at 842. If so, the court will implement the unambiguous intent of Congress. If not, the court must then determine what level of deference to apply to the statute. If Chevron deference applies, the court must defer to the agency’s interpretation if that interpretation is reasonable. Id. at 842-843.

Under the first step of the Chevron analysis, the Navarro court found the exemption to be ambiguous. Slip op. at 8. The statute does not define the terms salesman, partsman, or mechanic, and these terms can be interpreted broadly (salesmen involved in the general business of the servicing of cars) or narrowly (only salesmen who themselves sell cars). Id. The court therefore could not conclude that Service Advisors “plainly and unmistakably [fall within the FLSA’s] terms and spirit.” Id. (citing Solis v. Washington, 656 F.3d 1079, 1083).

Because the statute is ambiguous, the court then turned to whether Chevron deference is appropriate, concluding that “[b]ecause we consider here a regulation duly promulgated after a notice-and-comment period, Chevron’s ‘reasonableness’ standard applies.” Slip op. at 9. The court noted that the original 1970 version of the regulations contained the same narrow definitions of salesman, partsman, and mechanic as exist today and that those definitions have not changed in any relevant way since then. Id. at 10. The court further noted that the agency had specifically considered broadening the terms in a way that would encompass Service Advisors, but after considering comments and analyses from the public, the agency concluded that the statute should continue to use the narrow definition. Id. at 11.

The court then found the agency’s regulatory interpretation to be reasonable, while acknowledging that its decision to uphold the agency’s narrow interpretation of “salesman, partsman, or mechanic” conflicts with that of the Fourth Circuit (Walton v. Greenbrier Ford, Inc., 370 F.3d 446 (4th Cir. 2004)), the Fifth Circuit (Brennan v. Deel Motors, Inc., 475 F.2d 1095 (5th Cir. 1973)), and the Supreme Court of Montana (Thompson v. J.C. Billion, Inc., 294 P.3d 397 (Mont. 2013)), in addition to a number of federal district courts. Slip op. at 12-13.

In deferring to the agency’s regulatory definitions, the Ninth Circuit distinguished the Fifth Circuit case and district court opinions following it on the basis that they pre-date Chevron and the modern framework for analyzing whether deference is appropriate. See id. at 13. The Fifth Circuit did not look at whether the agency’s interpretation was reasonable, but whether there was a better interpretation—an analysis Chevron prohibits. Id.

In contrast, the Fourth Circuit and Montana found the agency’s interpretation to be unduly restrictive and thus unreasonable. See id. at 13-14. Those courts held that Service Advisors are salesmen because their job is to sell services for cars. Id. And because they sell services for cars, they are also involved in the general business of servicing automobiles. Id. While the Ninth Circuit acknowledged that there are good reasons for adopting the interpretation that the Fourth Circuit and the Montana Supreme Court accepted—in particular, grammatical arguments and non-textual indicators of congressional intent—the agency’s interpretation is nonetheless reasonable as well: while Service Advisors are salesmen in a generic sense, they do not personally sell or service cars and, therefore, are outside the statutory definition. Id. at 14-19. Indeed, there are other employees at dealerships who are involved in servicing cars in a very general sense—for example, receptionists and bookkeepers—who indisputably are not exempt. Id. at 9. As long as the agency’s interpretation is reasonable—it need not be the best or only interpretation—then it would be improper for the court to impose an alternate interpretation. Id. at 19 (citing Chevron, 467 U.S. at 844).

Authored by: 
Katherine Kehr, Senior Counsel
CAPSTONE LAW APC