Articles from August 2016

In Martin, et al. v. Yasuda, et al., No. 15-55696 (9th Cir. July 21, 2016) (slip op. available here), the Ninth Circuit Court of Appeals reaffirmed its holding that a court—not the arbitrator—determines whether arbitration has been waived, unless the arbitration agreement specifically reserves that task for the arbitrator, and found that the defendants’ litigation conduct over a seventeen-month period resulted in a waiver of the defendants’ right to arbitrate. This important ruling rejects the defendants’ attempt to manipulate the judicial and arbitral systems to gain an unfair advantage due to their litigation conduct. Slip op. at 21.

In Martin, students of the Milan Institute of Cosmetology (“Milan”) sued the school in federal court alleging that Milan was, in fact, their “employer” because they were required to perform unpaid work to graduate from Milan’s cosmetology program, including cleaning, sweeping, selling retail products, and promoting Milan’s services. Slip op. at 4. The students’ Enrollment Agreement contained an arbitration agreement that stated, “[a]ll determinations as to the scope, enforceability and effect of this arbitration agreement shall be decided by the arbitrator and not by a court.” Id. The plaintiffs filed their complaint on October 28, 2013, and the following events transpired during litigation: (1) the parties filed a Joint Stipulation to extend the time to file a motion for conditional and class certification, noting the considerable time and effort spent by the parties to conduct discovery to focus on the issue of whether Milan employed the students; (2) the court denied in part and granted in part the defendants’ motion to dismiss the plaintiffs’ First Amended Complaint, holding the plaintiffs could assert California state law claims; (3) the defendants answered a Second Amended Complaint and asserted arbitration as an affirmative defense; (4) the parties submitted a Joint Rule 26(f) Report detailing an eight-month period of discovery related to the “employee” issue and, at the scheduling conference, the court warned defense counsel about possibly waiving their right to arbitrate; (5) written discovery occurred and the deposition of Milan’s CEO was taken; and (6) seventeen months after the start of the case, the defendant moved to compel arbitration. Id. 5-9. The district court denied the defendant’s motion to compel arbitration, finding that the defendant had waived its right to arbitrate. The defendants then appealed.

The Ninth Circuit first held that there is a presumption that that the court, and not the arbitrator, should decide the waiver issue. Citing the Ninth Circuit’s decision in Cox v. Ocean View Hotel Corp., 533 F. 3d 1114, 1120-21 (9th Cir. 2008), the panel stated that waiver by litigation conduct is a gateway issue to be decided by the court, not the arbitrator, under the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Slip op. at 10-11. The broad language in Milan’s arbitration agreement assigning duties to the arbitrator does not overcome the presumption because the clause did not contain “clear and unmistakable language” that the arbitrator may decide the waiver issue. Id. at 12-13. Presumably, the arbitration agreement must clearly and specifically provide that only the arbitrator can determine whether litigation conduct waives the right to arbitrate. But, the court reasoned, such a provision would place this decision in the hands of the arbitrator, who is less familiar with the litigation than the court and with someone who has a financial interest in finding no waiver so that the arbitrator may keep the case. See id. at 12 n3.

The Court of Appeals, applying its arbitration waiver test announced in Fisher v. A.G. Becker Paribas, Inc., 791 F.2d. 691, 694 (9th Cir. 1986), then found that the defendants waived the right to arbitrate because they had engaged in conduct inconsistent with the right to arbitrate that prejudiced the plaintiffs. In so doing, the appeals court held that a statement by a party that is has the right to arbitration in the pleadings or motions is not enough to defeat a claim of waiver. Further, the court found it particularly key that the defendants had structured discovery, including a deposition, so that the trial court could rule on the defendants’ motion to dismiss on a key merits issue: whether the Cosmetology Act legally precluded the students from being classified as employees. Because the court found for the plaintiffs on the issue, the plaintiffs would be prejudiced by the delay in moving to arbitrate because they would be forced to re-litigate an issue on the merits on which they had already prevailed in court. Slip op. at 17. Finally, spending a lengthy amount of time litigating in the more complex federal court system inevitably causes the parties to spend more time, money, and effort than had they proceeded to arbitration. Id. at 18.

In affirming the district court’s decision, the Ninth Circuit agreed that the defendants couldn’t have their cake and eat it too: a party that signed a binding arbitration agreement and then is sued “can either seek to compel arbitration or agree to litigate in court. It cannot choose both.” Slip op. at 21 (emphasis added).

Authored By:
Robert Drexler, Senior Counsel
CAPSTONE LAW APC

In June, U.S. District Judge Edward M. Chen granted preliminary approval of a $6.75 million settlement between Vector Marketing Corporation and sales representatives for alleged violations of California, Florida, Illinois, Michigan, and New York state wage and hour laws and the national Fair Labor Standards Act. See Woods, et al. v. Vector Marketing Corp., No. 14-CV-00264 (N.D. Cal. June 30, 2016), Third Revised Order Granting Plaintiff’s Motion for Preliminary Approval of Class and Collective Action Settlement (slip op. available here). Before becoming sales representatives, the plaintiffs had been trainees who attended a mandatory training program over the course of three days to learn how to sell Cutco products through in-home demonstrations. The training lasted for five hours each day, and at some point during the three-day training, recruits were required to create lists of potential customers who might want to buy Cutco products after the training ended. Vector did not pay recruits for the training time and the plaintiffs filed a lawsuit in January 2014 alleging that they qualified as employees under the respective state laws and the FLSA.

The class and collective action covered recruits who either had completed all three days of training or who partially completed training and created the customer lists. Vector had challenged the certification of these classes in 2015, arguing that the recruits were not employees and that there were significant dissimilarities between those who completed all the days but did not create customer lists and those who did create lists. Both parties agreed that application of the Portland Terminal test would resolve the question of whether the trainees were employees. Under this test, the following factors are considered:

(1) the “training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school”; (2) the “training is for the benefit of the trainee”; (3) the “trainees do not displace regular employees, but work under close observation”; (4) the “employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion his operations may actually be impeded”; (5) the “trainees are not necessarily entitled to a job at the completion of the training period”; and (6) the “employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.”

Order (1) Granting in Part and Denying in Part Plaintiffs’ Motion for Class Certification; and (2) Denying Defendant’s Motion to Partially Decertify FLSA Collective Action (N.D. Cal. Sept. 4, 2015) (quoting Harris II, 753 F. Supp. 2d 1006). Although the court did not decide whether the plaintiffs had been “employees” under the Portland Terminal test, Judge Chen granted class certification, holding that five of the six factors could be decided collectively and any dissimilarities could be addressed in a trial. Following certification, the plaintiffs and Vector engaged in extensive negotiations and eventually reached a settlement in December 2015.

Court papers indicate there are approximately 91,000 putative class members. The average recovery is estimated to be $42.50 per recruit after factoring in fees, costs, and enhancements. The final approval hearing of the settlement is scheduled for October 6, 2016.

Authored by: 
Anthony Castillo, Associate
CAPSTONE LAW APC

In June, the Ninth Circuit Court of Appeals issued a ruling that could provide a significant boon to class action plaintiffs. In Vaquero v. Ashley Furniture Industries, Inc., et al. (9th Cir. June 8, 2016) (slip op. available here), the appellate panel affirmed a district court order granting certification in a wage and hour class action. In doing so, the court considered the applicability of several United States Supreme Court opinions from recent years, finding in favor of the Vaquero plaintiffs in each instance.

The Vaquero plaintiffs were commission-only salespeople who alleged that they were required to perform additional, non-sales work without being paid the requisite minimum wage for these tasks. The lower court certified the class, and the defendant-employer appealed, citing landmark U.S. Supreme Court cases Wal-Mart Stores, Inc. v. Dukes (564 U.S. 338 (2011)) and Comcast Corp. v. Behrend (133 S. Ct. 1426 (2013)), neither of which involved wage and hour issues.

Examining the commonality requirement, which requires that plaintiffs’ claims be capable of classwide resolution, the Ninth Circuit rejected the defendants’ reliance on Dukes. The appeals court distinguished Dukes from Vaquero, pointing out that the former was a Title VII discrimination case involving millions of employees and innumerable managerial decisions across thousands of store locations, while the present case has a proposed class of 600 employees who perform the same work, and whose injury is focused and objective as compared to Dukes. Thus, the Ninth Circuit in Vaquero limited the impact of Dukes on wage and hour commonality analyses.

As for the predominance requirement (that issues of law and fact predominate over individual issues), the court again shot down the defendants’ reasoning, this time with regard to Comcast, a consumer antitrust class action where the Supreme Court found a lack of predominance because the plaintiffs used a faulty damages model and were unable to demonstrate that their damages could be determined on a classwide basis. The panel concluded that the defendants’ interpretation of Comcast—that predominance cannot be found unless damages can be determined on a classwide basis—was too broad, and instead held that the plaintiffs need only “prove that damages resulted from the defendant’s conduct” in order to prevail. Slip op. at 8. Here, there was no doubt that the class members’ injuries had been caused by the employer’s conduct, unlike in the much more attenuated context of an antitrust action in Comcast. Id. at 9.

Finally, Vaquero references the recent Supreme Court decision in Tyson Foods v. Bouaphakeo, 136 S. Ct. 1036 (2016) (finding that representative evidence can be used to show both damages and liability) (previously covered on the ILJ here), noting that: “[t]he Supreme Court has not disturbed our precedent” and “the need for individual damages calculations does not, alone, defeat class certification.” Slip op. at 10. The Vaquero ruling not only paves the way for certification of this class of 600 Ashley Furniture employees, but will no doubt be helpful to many more California employees in the future.

Authored by: 
Robin Hall, Associate
CAPSTONE LAW APC