Articles from September 2016

Cal. Supreme Court to Hear Hernandez v. Restoration Hardware Appeal

Professional objectors make a handsome living exploiting the flaws in class action rules, particularly regarding the objector’s right to appeal. While well-taken objections focus on deficiencies in a settlement that the court may have missed, often forcing parties to return to renegotiate terms more favorable to the class, professional objectors specialize in boilerplate filings that will likely be denied but that the objector then may appeal, often holding up the class settlement for years. This is the source of leverage for professional objectors. To avoid a protracted appeal, the class or class counsel will sometimes pay what amounts to a ransom to these unscrupulous objectors. Even if class counsel refuses to give in and defeats the objector on appeal, the ensuing delay causes substantial harm to class members.

However, professional objectors may soon see their leverage substantially reduced. In June of 2016, the California Supreme Court granted review in Hernandez v. Restoration Hardware, Inc., No. S233983, to decide the broad question of whether an objector must first intervene before having standing to appeal. The court below dismissed Francesca Muller’s appeal because she had not attempted to intervene but merely interposed an objection to a fee award. See Hernandez v. Restoration Hardware, Inc., 245 Cal. App. 4th 651, 662-63 (2016) (slip op. available here, superseded by grant of review). Muller had ample opportunity to participate as a party. Upon receipt of the class notice (after a contested certification motion), Muller had filed a notice of appearance for her attorney, Lawrence Schonbrun, who represented the objector-appellant in the recently-issued Laffitte v. Robert Half Int’l, Inc., 1 Cal. 5th 480 (2016), among other objectors. Slip op. at 3. She was thereafter represented in the case, but she did not move to intervene or move to join in the action or replace the existing class representative. Id. Only after the Hernandez plaintiffs obtained a verdict for $36.4 million on Song-Beverly Credit Card claims after a bench trial —and only after the plaintiffs moved for attorneys’ fees—did Muller object. At the hearing, she marshalled many of the same objections raised by Mr. Schonbrun in Laffitte—that class members should have been given notice of the fee application, and that attorneys’ fees must be calculated under the lodestar-multiplier method—all of which were overruled. Id. at 3-7. She then appealed.

The intermediate appellate court dismissed Muller’s appeal for lack of appellate standing, relying on a decades-old high court decision, Eggert v. Pac. States S. & L. Co., 20 Cal.2d 199 (1942). Eggert, like this case, involved an appeal by a class member who objected to a fee award in a case litigated to judgment, without having moved to intervene. Slip op. at 11. Although it recognized that a different rule may apply to settlements (see id. at 14 n.6), the intermediate court passed up an opportunity to craft a narrow opinion limited to cases litigated to judgment. Instead, the court expressly disapproved of the influential Trotsky v. Los Angeles Fed. Sav. & Loan Assn., 48 Cal.App.3d 134 (1975), its progeny and its federal analogues, all of which conferred appellate standing on absent class members who filed timely objections to a class action settlement. Id. at 13-16. The intermediate court further reasoned that even if Eggert did not apply, California policy and the objectives of the class action device are better served by a rule that limits appellate standing to class members who tried to intervene. Id. at 16. The contrary rule, allowing each class member to individually appeal, would result in class actions that are “unmanageable and unproductive.” Id.

However, given the prevailing trend in favor of conferring appellate standing to objectors (see, e.g., Devlin v. Scardelletti, 536 U.S. 1 (2002), Powers v. Eichen, 229 F.3d 1249 (9th Cir. 2000)), the California Supreme Court is unlikely to fully endorse the decision below. More likely, the California Supreme Court will affirm on narrow grounds, restricting objectors’ appellate standing only in actions litigated to judgment.

Authored By:
Ryan Wu, Senior Counsel

McLean v. State of CA: Prompt Payment of Final Wages Required for Employees Who Retire

On August 18, 2016, the California Supreme Court unanimously held that the statutory provisions requiring the prompt payment of final wages apply not only to employees who quit their employment, but also employees who retire. McLean v. State of California, et al., No. S221554 (Cal. Aug. 18, 2016) (slip op. available here). The court rejected arguments suggesting that the Legislature intended to exclude employees whose employment is terminated by retirement from seeking prompt payment of final wages.

In McLean, the plaintiff Janis S. McLean, a retired deputy attorney general, sued the State of California and the State Controller’s Office on behalf of herself and a class of former state employees who had resigned or retired and did not receive their final wages within the time periods set forth in the prompt payment provisions of Labor Code sections 202 and 203. Section 202 applies to employees who have no written contracts for a definite period and generally provides that when such employees quit their employment, their wages shall be paid within 72 hours. Section 203 requires employers to pay waiting time penalties of up to 30 days’ wages if they willfully fail to pay wages of their employees who are discharged or quit.

The plaintiff in McLean alleged that the defendants violated section 202 by failing to pay her final wages on her last day of employment or within 72 hours after her last day and failed to make full and prompt payment under section 202 to other members of the proposed class. The defendants filed a demurrer, and the trial court sustained the demurrer, finding that because the plaintiff had “retired,” she had not stated a claim for statutory penalties pursuant to section 203, which applies only when an employee “quit[s]” or is “discharged.” Slip op. at 4. The Court of Appeal reversed in part, finding that the statutory provisions apply when an employee “quits to retire.” Id. at 5.

The California Supreme Court granted review and affirmed. The court found that “retirees fall into the broader category of employees who have ‘quit’ their employment within the meaning of the general prompt payment rule of section 202(a) and section 203.” Slip op. at 9. The court found no reason to conclude that retirees would be specially disqualified from seeking prompt payment of final wages and rejected arguments that the Legislature impliedly excluded retirees from the benefit of the long-standing general rule entitling employees to prompt payment of wages upon “quitting” their employment. Id. at 7-9. Sections 202 and 203 thus “apply to persons who retire from their employment, just as they apply to those who voluntarily leave their employment for other reasons.” Id. at 14.

This comports with the purposes of the prompt payment provisions, as “California has long regarded the timely payment of employee wage claims as indispensable to the public welfare.” Smith v. Super. Ct., 39 Cal. 4th 77, 82 (2006). As a result, employers should be mindful to promptly issue final pay to retirees.

Authored By:
Liana Carter, Senior Counsel

9th Cir. Passes on Opportunity to Clarify Tobacco II Pleading Requirements

In Haskins v. Symantec Corp., No. 14-16141 (9th Cir. June 20, 2016) (slip op. available here), a three-page unpublished opinion, the Ninth Circuit came to the unremarkable conclusion that a plaintiff bringing fraudulent advertising claims under the Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) who “did not allege that she read and relied on a specific misrepresentation” by the defendant has failed to plead her fraud claims with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. Slip op. at 2. What is perhaps notable is that the court did not engage with the important issue of how the California Supreme Court’s decision in In re Tobacco II Cases, 46 Cal.4th 298, 328 (2009) (“Tobacco II”) factors into the federal rules for pleading UCL and CLRA claims sounding in fraud.

In Haskins, the plaintiff could not plead that she relied on a specific advertisement when she purchased Symantec’s Norton Antivirus software online, although she alleged her belief that the product would protect her from malware, viruses, and hackers. In fact, the software was compromised by hackers in 2006. Haskins v. Symantec Corp., 2013 WL 6234610, at *1 (N.D. Cal. Dec. 2, 2013). Accordingly, she sought to plead her claim under Tobacco II, in which the California Supreme Court relaxed the requirements for pleading reliance on specific misrepresentations where “those misrepresentations and false statements were part of an extensive and long-term advertising campaign.” Id. at *4. In an effort to plead a Tobacco II-type campaign, in the third amended complaint, she added allegations regarding the scope of the advertising campaign in the case. Haskins v. Symantec Corp., 2014 WL 2450996, at *2 (N.D. Cal. June 2, 2014). However, District Judge Jon Tigar, who has attempted to bring clarity to the requirements for pleading a Tobacco II-type campaign in prior federal cases (see Opperman v. Path, Inc., 84 F.Supp.3d 962 (N.D. Cal. 2015)), found those allegations did not pass muster because the at-issue advertising campaign “does not fall within the ambit of the Tobacco II exception.” Id.

On appeal, the Ninth Circuit agreed with Judge Tigar’s conclusion, but stated,

Even assuming [that the argument that a plaintiff need not allege reliance on a specific misrepresentation to meet the pleading requirements of Rule 9(b)] is correct as a matter of federal procedural requirements, Haskins failed to establish that the Tobacco II standard is applicable to her pleadings because the misrepresentations at issue here were not part of an extensive and long-term advertising campaign like the decades-long campaign engaging in saturation advertising targeting adolescents in Tobacco II.

Haskins, No. 14-16141, slip op. at 2 (emphasis added).

The Ninth Circuit’s tentative language, which appears to question the application of Tobacco II to federal pleadings standards, reflects an unresolved tension among the district courts within the Ninth Circuit regarding the requirements for pleading fraud under Rule 9(b) and the California Supreme Court’s decision in Tobacco II. On the one hand, as Judge Tigar stated, “[i]f Plaintiff can prevail at trial without demonstrating that she saw any specific advertisement, it would make little sense to interpret Rule 9(b) to require dismissal of her claim at the pleading stage for failing to include a specific allegation that she saw a specific advertisement.” Haskins, 2013 WL 6234610, at *5. While some district courts follow Judge Tigar’s approach in Opperman, other district courts disagree with what they perceive to be an overly lax application of Rule 9(b) in the context of allegations purporting to fall within the Tobacco II exception. See Yastrab v. Apple Inc., 2016 WL 1169424, at *6 (N.D. Cal. March 25, 2016) (“[T]he court disagrees with Opperman to the extent it holds that a . . . plaintiff is . . . excused from complying with Rule 9(b) when pleading a long-term advertising campaign.”).

While Haskins did not resolve this conflict, this is certainly an issue to watch. Plaintiffs have a substantive right to proceed under the UCL and CLRA when they have been deceived by the type of advertising campaign described in Tobacco II and its progeny in California courts and federal courts applying California substantive law. Federal deference is required to opinions of the California Supreme Court on issues of state law and Federal Rule of Civil Procedure 9 should not be construed to abridge or modify those rights under the guise of “procedural rules of pleading.” See Haskins, 2013 WL 6234610, at *5.

Authored By:
Robert Friedl, Senior Counsel

Cohen v. Donald J. Trump: Judge Permits Trump U. RICO Class Action to Proceed to Trial

This month, Judge Gonzalo P. Curiel of the Southern District of California issued a decision that bodes well for consumers seeking relief under the Rackateer Influenced and Corrupt Organizations Act’s (“RICO”) civil action provision. See Cohen v. Donald J. Trump, No. 3:13-cv-02519 (S.D. Cal. Aug. 2, 2016) (slip op. available here). The consumer class action, brought by former attendees of Donald Trump’s “Trump University,” gained national attention after Trump questioned the court’s impartiality given Judge Curiel’s Mexican heritage. Notwithstanding the hype, Judge Curiel’s order denying Trump’s Motion for Summary Judgment offers consumer plaintiffs a roadmap in the sometimes murky landscape surrounding RICO-based class actions.

RICO, enacted in 1970, contains a civil provision providing for treble damages and a private right of action, against certain fraudulent conduct. 18 U.S.C. § 1964(c). Liability under § 1962(c) requires (1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985). “Racketeering activity” can include fraud with intent, including misrepresentations and material omissions, made over the mails or “wires.” Slip op. at 7.

The class, certified in 2014, alleged that Trump had violated RICO’s civil provision by portraying Trump University (“TU”) as a “university,” with instructors personally “handpicked” by Donald Trump himself. Slip op. at 2. TU sent consumers “Special Invitation[s] from Donald J. Trump” stating, “[m]y handpicked instructors and mentors will show you how to use real estate strategies,” and that “I can turn anyone into a successful real estate investor, including you.” Id. Discovery revealed an internal TU’s policy encouraging TU employees to “[t]hink[] of Trump University as a real University, with a real admissions process” and encouraging TU employees to “[u]se terminology such as ‘Enroll,’ ‘Register,’ and ‘Apply.’” Id. at 3.

In its motion, Trump argued that the plaintiffs sought “an unprecedented expansion of RICO law” by allowing civil RICO to become “a federal cause of action and treble damages” for every plaintiff in “garden-variety business disputes.” Slip op. at 7. Trump also argued policy dictated against applying civil RICO to consumer class action cases (a false advertising class action, Low, et al. v. Trump University, LLC, et al., No. 3:10-cv-00940, had already been filed; this Cohen RICO action was separately filed and litigated to address different harms). Id. at 10. Judge Curiel noted that while courts have often struggled with the scope of RICO’s civil provision, the U.S. Supreme Court in 1985 noted that Congress stated RICO should be “liberally construed,” and the policy implications of the statute’s breadth were issues for Congress, not the courts, to address. See Sedima, 473 U.S. at 481. The court also rejected the defendant’s argument that several courts have declined to apply RICO to “routine commercial relationships,” finding that in such cases, the plaintiffs had failed to establish an underlying element, such as knowing participation, financial loss, or the existence of an “enterprise.” See slip op. at 9-10.

The defendant further argued the plaintiffs could not show Mr. Trump “conducted the affairs of TU.” Slip op. at 10. Civil RICO requires the defendant to have “participated in the operation or management of the enterprise itself.” Id. (quoting Reves v. Ernst & Young, 507 U.S. 170, 183 (1993)). Mr. Trump argued his role was limited that of an investor and executive. The court noted that the statute’s use of the word “participated” makes clear that RICO liability is not limited to an individual or exclusive director or manager—it is enough for a defendant to play “some part” in directing the enterprise’s affairs. Id. at 12. Further, the court found persuasive the testimony of TU’s Chief Marketing Operator, who stated that, following the publication of TU’s first advertisement, Mr. Trump had asked why the advertisement had been placed on an even numbered page, when odd numbered pages are more visible to readers, calling Mr. Trump “very hands on.” Id. at 10-11 n5. The court found the plaintiffs had made a prima facie showing Mr. Trump had failed to rebut.

The court also rejected Trump’s arguments that the alleged omissions and misrepresentations were not material, finding that the plaintiffs’ evidence, including internal TU policies encouraging employees to use “real university” terminology such as “apply,” and “enroll,” and mailers addressed from Mr. Trump himself stating he had “handpicked” instructors, raised a genuine issue of material fact. Id. at 13-14. Lastly, the court rejected Mr. Trump’s argument that the plaintiffs had failed to show the requisite knowledge and intent, noting that “direct proof of knowledge and fraudulent intent—of what a person is thinking—is almost never available.” Id. at 16.

The court previously vacated pre-trial deadlines while the Motion for Summary Judgment was under submission. With the court’s recent order denying the motion in its entirety, trial dates will likely be reset.

Authored by:
Cody Padgett, Associate