Posts belonging to Category Caselaw Developments

McGill v. Citibank: Consumer Attorneys Buoyed by Grant of Review

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

Ninth Circuit Finds “Service Advisors” Not Exempt from FLSA OT

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

U.S. Supreme Court Declines Review, Hands Win to California Truckers

California truck drivers enjoyed a victory recently when the U.S. Supreme Court declined to review a decision by the California Supreme Court which held that the state’s Unfair Competition Law (“UCL”) is not preempted by federal transportation laws. See People ex rel. Harris v. Pac Anchor Transportation, Inc., 59 Cal. 4th 772 (Cal. 2014) (cert. denied by Pac Anchor Transp. v. Cal. ex rel. Harris, 2015 U.S. LEXIS 1326 (U.S., Feb. 23, 2015)).

Congress enacted the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) with the intent of preventing “‘. . . [s]tates from undermining federal deregulation of interstate trucking’ through a ‘patchwork’ of state regulations.” Dilts v. Penske Logistics, LLC, 769 F.3d 637, 644 (9th Cir. Cal. 2014) (citing Am. Trucking Ass’ns v. City of Los Angeles, 660 F.3d 384, 395-96 (9th Cir. 2011)). Congress did not want states to effectively undo federal deregulation of motor carriers by enacting their own laws “‘related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.’” Id. at 641 (citing 49 U.S.C. § 14501(c)(1)). The rationale was that lower fares and better service would be best achieved by maximum reliance on competitive market forces.

In September 2008, California Attorney General Kamala Harris filed a lawsuit against Pac Anchor Transportation Inc., alleging that the trucking company violated the UCL by misclassifying its truck drivers as independent contractors, thereby side-stepping state labor laws meant to protect employees within the state. The suit alleged that Pac Anchor gained an unfair advantage over competitors by not paying unemployment insurance taxes, not providing workers’ compensation benefits, and failing to pay drivers at least minimum wages and reimburse them for necessary business expenses. The trial court ruled in favor of Pac Anchor, finding that classifying truck drivers as employees could increase costs for the motor carrier, and, as such, California labor and unemployment insurance laws related to Pac Anchor’s prices, routes, and services and were therefore preempted by the FAAAA.

The appellate court reversed the trial court’s decision, finding that the UCL was a law of general application that did not relate to Pac Anchor’s prices, routes or services and thus was not preempted by the FAAAA. The California Supreme Court affirmed the appellate court’s ruling, noting that there was no indication in the congressional record that Congress intended to prevent states from being able to tax motor carriers, enforce labor and wage standards, or to exempt motor carriers from generally applicable insurance laws. Harris v. Pac Anchor at 786. Pac Anchor then petitioned the U.S. Supreme Court for review.

On February 23, 2015, the U.S. Supreme Court denied Pac Anchor’s petition for writ of certiorari, declining to review the issue of whether California can enforce its employment laws against motor carriers by seeking injunctive relief under the UCL or whether the FAAAA preempts such action by the state.

The Supreme Court’s denial of review in Pac Anchor reinforces other rulings holding that the FAAAA does not preempt the enforcement of California labor laws. In Dilts v. Penske, the Ninth Circuit held that the FAAAA did not preempt the enforcement of California meal and rest break laws for truck drivers. Dilts at 650. In reaching this determination, the Ninth Circuit found that California’s meal and rest break laws are not “significantly related to” price rates, routes or services of the motor carrier and therefore are not the types of state laws Congress set out to preempt when enacting the FAAAA.

Thus, for the time being, motor carrier employers cannot rely on FAAAA preemption to help them circumvent California employment and insurance laws. These decisions do not mean the end of independent contractor relationships in the State of California, but they definitely put motor carrier employers on notice that if they do utilize independent contractor models, they must do so properly.

Authored by: 
Jamie Greene, Associate

In re ConAgra Foods, Inc.: Article III Standing Requirements Swallow Up Another Injunctive Relief Claim in Food Labeling Case

Injunctive relief claimants in food labeling cases in federal court face a dilemma: to have standing to obtain injunctive relief under Article III and force a manufacturer to change an illegal or deceptive label, a plaintiff must allege that a “real or immediate threat” exists that he or she will be wronged again. City of Los Angeles v. Lyons, 461 U.S. 95, 111 (1983). But, once a consumer knows a food product is mislabeled, the consumer cannot plausibly allege that he or she will again be deceived by the same label. Arguably, because such a plaintiff will not be “fooled again,” he or she lacks standing to seek injunctive relief.

Federal courts in California have taken a number of approaches to this dilemma. See Rahman v. Mott’s LLP, 2014 U.S. Dist. Lexis 147102 *14-17 (N.D. Cal. Oct. 15, 2014). One line of cases following Henderson v. Gruma Corp., 2011 U.S. Dist. LEXIS 41077 (C.D. Cal. Apr. 11, 2011), reasons that Article III standing cannot be so narrowly construed because it would effectively bar consumers in advertising cases from obtaining injunctive relief. Lanovaz v. Twinings N. Am., Inc., 2014 U.S. Dist. LEXIS 1639 *31 (N.D. Cal. Jan. 6, 2014). Another line of cases rejects the notion that a plaintiff lacks standing because “he has learned that a label is misleading and therefore will not be fooled again.” Rather, a plaintiff lacks standing if he has not expressed an intent to purchase the product in the future. In re ConAgra Foods, Inc., 302 F.R.D. 537, 575 (C.D. Cal. 2014). Finally, some courts have held that knowledge of the allegedly unlawful or misleading label precludes standing for injunctive relief. See Rahman at *16-17.

In a new decision, In re ConAgra Foods, Inc. (“ConAgra Foods”), Judge Margaret Morrow expands upon the middle approach discussed in her prior decision by explaining what a plaintiff must demonstrate to establish a “future intent” to purchase a product. No. 11-cv-05379 (N.D. Cal. Feb. 23, 2015) (slip op. available here). In ConAgra Foods, the plaintiffs submitted declarations in support of their motion for class certification asserting that: (1) they purchased Wesson Oils in part because they were labeled “100% Natural”; (2) they were deceived by ConAgra’s “100% Natural” label because they believed that “100% Natural” meant the product did not contain genetically modified organism (GMO) ingredients; (3) they typically attempt to avoid purchasing products with GMO ingredients, but realize that it is extremely difficult to avoid GMO ingredients altogether; and (4) if ConAgra removes the “100% Natural” label, they “might consider” or “will consider” purchasing Wesson Oils in the future, depending on price and the availability of alternate products. Slip op. at 59.

These allegations are insufficient to establish Article III standing, according to the ConAgra Foods court. Equivocal language that a consumer “might” or “may” consider buying the product in the future does not establish a sufficient likelihood of future injury to establish Article III standing. Under the court’s reasoning, a plaintiff in a food labeling case must clearly state an intent to purchase the challenged product in the future in order to have standing to pursue injunctive relief. Slip op. at 63. Thus, plaintiffs in labeling cases are on notice that nothing short of a declaration that they will purchase a mislabeled product again, if the label is changed, will suffice.

ConAgra Foods may be the latest example of the elusive nature of Article III standing in food labeling cases, but it does not go far in clarifying the law. It begs the question, had the plaintiffs averred that after years of avoiding eating food products containing GMOs, they now intend to buy such a product simply because the label was changed to remove the words “100% Natural,” would that testimony be plausible? Clearly, the courts in the Ninth Circuit have a way to go before this Article III standing dilemma is resolved.

Authored By:
Robert Friedl, Senior Counsel