Articles from November 2016

Shimono v. Harbor Freight: Lawsuit Alleging False Advertising in “Sale” Prices Moves Forward

In May of 2016, Plaintiff Ted Shimono filed suit against Harbor Freight, a discount tool and equipment retailer, in the Central District of California. The complaint alleged that Harbor Freight, by listing a “sale” price next to a “regular” price that reflects neither customary store prices nor the prevailing market price, violated California’s unfair competition, false advertising, and consumer protection laws. On July 15, 2016, Harbor Freight filed a motion to dismiss the proposed class action, arguing that the plaintiff had failed to state a claim because he had received the “benefit of the bargain,” since the plaintiff had not alleged that the items were worth less than the price he paid. In October, Judge Christina A. Snyder denied Harbor Freight’s motion to dismiss, finding that the plaintiff offered sufficient factual allegations that he purchased products pursuant to the misleading advertising scheme and in reliance upon the misleading pricing scheme. Ted Shimono, et al. v. Harbor Freight Tools USA, Inc., No. EDCV16-1052-CAS (C.D. Cal. Oct. 24, 2016) (slip op. available here), at 15.

Plaintiff Shimono’s claims address several common, yet deceptive, advertising schemes used by retailers to convince purchasers that they are buying discounted goods, when, in fact, the goods are priced at customary store prices. Slip op. at 2. In addition to listing sales prices next to misleading regular prices, the plaintiff alleged Harbor Freight used deceptive coupons that advertised “20% off your purchase” with small text below stating “of any one item,” and Harbor Freight would only apply the 20% discount to the lowest priced item in customers’ orders. Id. at 3-4. Moreover, the plaintiff alleged Harbor Freight advertised different prices simultaneously and charged the highest advertised price, falsely labelled substandard products as of the “highest” quality, and used a limited warranty that was “substantially shorter and more limited that those typical of its competitors.” Id. at 4.

The court relied on the Ninth Circuit’s ruling in Hinojos v. Kohl’s Corp., 718 F.3d 1098, 1104 n.3 (9th Cir. 2013), which found that class members had suffered an injury-in-fact when they purchased a product or paid more for a product than they otherwise would have, due to misleading advertising, and that the plaintiff had thus alleged a concrete and particularized injury. Slip op. at 6. In Shimono, Harbor Freight unsuccessfully argued that this is an abstract injury, and that the plaintiff has no statutory standing, because the plaintiff did not allege he bought a product that was worth less than he paid. Id. at 7. Furthermore, the Shimono court found the plaintiff had standing to seek injunctive relief even though he is now aware of Harbor Freight’s pricing practices and, as Harbor Freight argued, there is therefore no plausible risk of future injury, as such an argument could broadly preclude prospective relief in consumer protection contexts. Id. at 13.

While this is a favorable ruling for California consumers, Judge Snyder cautioned that the plaintiff would still have to prove Harbor Freight made misleading representations and absent class members encountered the same types of misrepresentations. Slip op. at 14-15. However, the court’s ruling on this motion, which re-affirms Hinojos, represents a continuing victory for California consumers. Listing of sales prices adjacent to regular prices that match neither customary store prices nor market prices has been a longstanding practice of the retail industry. Such practices create a false sense of a discount coupled with the time pressure of a sale that often induces customers into purchases that they would not ordinarily make. The prospect of injunctive relief barring retailers from using such deceptive sales tactics marks a significant potential change that could go a long way in protecting consumers.

Authored by: 
Ishan Dave, Associate

Morris v. Ernst & Young: 9th Cir. Strikes Down Concerted Action Waiver Under Federal Labor Law

In the ongoing fight over the use and enforceability of collective action waivers, the stage has been set for the United States Supreme Court to weigh in and hopefully offer clarity to labor law practitioners and employers. In 2012, two former employees filed a class and collective action lawsuit against Ernst & Young in the Southern District of New York, alleging violations of the Fair Labor Standards Act (FLSA) due to the company misclassifying them as exempt. Morris, et al. v. Ernst & Young, LLP, et al., No. C-12-04964-RMW. As a condition of their employment, plaintiffs Stephen Morris and Kelly McDaniel were required to sign agreements requiring them to pursue legal claims solely through arbitration and only individually, in “separate proceedings.” The case was then transferred to the Northern District of California, where the court granted the defendant’s motion to compel arbitration, enforced the arbitration agreement’s de facto class action waiver, and ordered the plaintiffs to individual arbitration. Order Granting Defendants’ Motion to Dismiss and Compel Arbitration, Morris, et al. v. Ernst & Young, LLP, et al., No. C-12-04964-RMW (July 9, 2013). The plaintiffs appealed the decision to the Ninth Circuit.

In 2012, in D.R. Horton, 357 NLRB No. 184 (2012), the National Labor Relations Board held that class action waivers violate federal labor law by frustrating employees’ right to engage in concerted activity to improve their working conditions. On appeal in Morris, the issue was whether the district court had properly rejected the plaintiffs’ reliance on federal labor law (specifically the National Labor Relations Act), as interpreted by the NLRB, as a basis for invalidating the arbitration agreement’s class action waiver. A divided Ninth Circuit reversed, thereby joining the Seventh Circuit in adopting the NLRB’s position that collective action waivers do in fact interfere with an employee’s right under the NLRA to engage in concerted activity, and are therefore unenforceable. Morris, No. 13-16599 (9th Cir. Aug. 22, 2016) (slip op. available here); Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016) (available here).

The Morris majority concluded, after examining the statutory language of the NLRA and the NLRB’s decision in D.R. Horton, that an employer violates the NLRA when it requires covered employees to sign an agreement precluding them from “filing joint, class, or collective claims.” Slip op. at 6-7, citing D.R. Horton, 357 NLRB No. 184 (2012). The court emphasized that the problem with the agreement was not that it called for arbitration of disputes, but that it prevented employees from acting in concert in any forum to address labor concerns, which undermines the substantive federal right of employees to collectively pursue work-related legal claims:

It would equally violate the NLRA for Ernst & Young to require its employees to sign a contract requiring the resolution of all work-related disputes in court and in “separate proceedings.” The same infirmity would exist if the contract required disputes to be resolved through casting lots, coin toss, duel, trial by ordeal, or any other dispute resolution mechanism, if the contract (1) limited resolution to that mechanism and (2) required separate individual proceedings.

Id. at 16 (emphasis in original). Had Ernst & Young’s arbitration agreement permitted concerted activity, the court held that it would have been enforceable. See id. Further, the panel reasoned that its holding in Morris did not contradict the Federal Arbitration Act (FAA) because the rights in NLRA section 7—including the employees’ right to collective action—are substantive; “when an arbitration contract professes the waiver of a substantive federal right, the FAA’s saving clause prevents a conflict between the statutes by causing the FAA’s enforcement mandate to yield.” Id. at 18-19.

In her dissent, Judge Ikuta sided with the Second, Fifth, and Eighth Circuits, calling the Ninth Circuit majority’s decision “breathtaking in its scope and in its error; . . . [and] directly contrary to Supreme Court precedent.” Slip op., Ikuta dissenting op. at 27. Judge Ikuta’s dissent focused on the existence of a “contrary congressional command,” CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 669 (2012), i.e. that Congress expressly intended to preclude waiver of the judicial forum, and took the position that, absent an express contrary congressional command, an arbitration agreement’s terms (including those that waive the use of class or collective mechanisms) should be enforced. Id. at 30-36. According to Judge Ikuta, the text of the federal statute at issue, here, the NLRA, must “expressly preclude the use of a predispute[s] arbitration agreement for the underlying claims at issue” to trump the FAA. Id. at 35-36. She found that the NLRA’s right to “concerted activities” did not meet this standard, and that “the Supreme Court consistently rejects claims that a ‘contrary congressional command’ precludes courts from enforcing arbitration agreements according to their terms . . . .” Id. at 36.

At the heart of the dispute seems to be a disagreement over whether the FAA and NLRA can co-exist, or whether one must override the other, and whether the NLRA creates substantive rights. In the past, when the U.S. Supreme Court has weighed in on class action waivers and class arbitration, it has been outside of the employment context and has not involved interpretation of two co-equal federal laws. In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), the Court held that under the FAA, arbitration on a class basis could not be ordered absent evidence that the parties agreed to such procedure in the arbitration agreement. A year later, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court again expansively interpreted the FAA, holding that state laws prohibiting class action waivers in consumer arbitration agreements were preempted by the FAA.

If the Supreme Court grants certiorari to address the circuit split, how it balances employees’ rights to engage in concerted activity under the NLRA with the “national policy favoring arbitration” under the FAA will surely have tremendous impact on workplace rights throughout the country. Ernst & Young’s petition for review has been joined by several amicus curiae briefs, and the Supreme Court has issued an order extending the time for Morris to file his response to the petition to November 14, 2016.

Authored by:
Jamie Greene, Associate

Augustus v. ABM: Awaiting Cal. Supreme Court Ruling on Rest Break Case

For many workers, the California Supreme Court decision in Augustus v. ABM will determine if they continue to enjoy the right to off-duty rest breaks (previously covered on the ILJ here and here). In September 2016, the court finally heard oral arguments from one of the most significant employment cases of this session. The Augustus case has been closely watched and the ruling is expected to have a significant impact on the rights to rest breaks for a large portion of California’s work force.

Augustus originates from a trial court victory by a certified class of security guards who were required to remain “on call” to respond to emergencies or other incidents during their 10-minute rest breaks. The trial court held that, because the guards were not completely relieved of all duty during their breaks, the guards remained “under ABM’s control” during this time (such as by having to carry and monitor communication radios) and, thus, were not afforded an off-duty break as required by California law. Order re: Cross Motions for Summary Judgment/Adjudication and Defendant’s Motion to Decertify Class, No. BC 336416 (Dec. 23, 2010), at 4-7 (slip op. available here). The trial court based this finding on the California Supreme Court’s earlier holding that “time that the employee is subject to control of the employer is work time and must be paid [Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000)].” Slip op. at 5. The trial court reasoned that, accordingly, “a rest period must not be subject to employer control; otherwise a ‘rest period’ would be part of the work day for which the employer would be required to pay wages in any event.” Slip op. at 7. The inevitable conclusion reached by the trial court was that “[p]ut simply, if you are on call, you are not on break.” Augustus v. ABM Security Services, Inc., 2014 Cal. App. LEXIS 1209, at *11.

The Court of Appeal reversed the trial court, and ruled in favor of the employer ABM. Rather than following the “subject to control” definition of “work” long used in California, the appellate court instead proposed a dual definition of the term never previously utilized under California law. Citing the 70-year-old Fair Labor Standards Act (FLSA) case of Tennessee Coal, Iron & R. Co. v. Muscoda Local, 321 U.S. 590 (1944), the Court of Appeal reasoned that the term “work” is used as a verb in section 226.7, not as a noun as in the definition of “hours worked” in Wage Order No. 4, and that when used as a verb, “work” “means exertion on an employer’s behalf.” Augustus v. ABM Security Services, Inc., 2014 Cal. App. LEXIS 1209, at *17. The court then concluded that because “[o]n-call status is a state of being, not an action [and] 226.7 prohibits only the action, not the status,” the security guards had not been “required to work” during their rest breaks in violation of section 226.7. Id.

The problems flowing from the Court of Appeal’s logic are manifest. Many jobs consist primarily of watching and waiting for something to happen.  If a security guard performing his required job duty of waiting for something to happen could be considered “on break” so long as no actual incidents occur during any ten minute stretch, then a drive-thru cashier manning her window could be considered “off-duty” so long as no customers arrive during any 10-minute stretch. Likewise, an ambulance dispatcher sitting at his post waiting the next 911 call could be considered “off duty” so long as no call comes for a stretch of 10 minutes. And same for the receptionist sitting at her desk or the shoe salesman waiting for his or her next customer. Once the act of observing a work station, being prepared and ready to respond to the next customer, phone call, or emergency is defined as “not work,” the very concept of a rest break is functionally eliminated for a large segment of California’s workforce who, in reality, are required to be “on-call” and ready to respond as part their regular work duties.

Fortunately for California employees, in other recent decisions the California Supreme Court has signaled its support for the Augustus plaintiffs’ position. In another action involving security guards who were required to remain on-call overnight, California’s highest court found that “on-call hours constituted compensable hours worked and, further, that [the employer] could not exclude ‘sleep time’ from plaintiffs’ 24-hour shifts.” Mendiola v. CPS Security Solutions, 60 Cal. 4th 833, 838 (2015). Promisingly, the court found that the “extent of the employer’s control” standard was determinative of “whether on-call time constitutes hours worked.” Id. at 840. The court further found that employees could be deemed to be performing compensable “work” even while they “wait for something to happen,” noting that “[r]eadiness to serve may be hired, quite as much as service itself.” Id. Based on these principles, the court concluded that security guards’ “on-call” time was “time worked” and compensable.

The employment law community now awaits the California Supreme Court’s decision on this issue. Undoubtedly, the holdings therefrom will carry significant ramifications for the California workplace for years to come.

Authored By:
Matthew Bainer, Senior Counsel