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Baker v. Microsoft: Appellate Jurisdiction after Denial of Class Certification

On January 15, 2016, the U.S. Supreme Court granted Microsoft’s petition for a writ of certiorari in Baker, et al. v. Microsoft Corporation, a Ninth Circuit Court of Appeals decision which allows plaintiffs in a class action lawsuit to appeal an order denying class certification after the named plaintiffs voluntarily dismiss their claims with prejudice. See No. 12-35946, 797 F.3d 607 (9th Cir. 2015) (slip op. available here). Following the passing of Justice Antonin Scalia, oral argument in Baker was postponed until next term, possibly in an effort to avoid issuing a ruling with an eight-Justice Supreme Court.

In Baker, the plaintiffs alleged that a design defect in the Xbox caused game discs to become scratched from movements of the Xbox during game play. Slip op. at 6. U.S. District Court Judge Richard Martinez deferred to the earlier class certification denial order in a consolidated case in the same district court, In re Microsoft Xbox 360 Scratched Disc Litig., No. C07-1121 (W.D. Wash. Oct. 5, 2009), which had denied the plaintiffs’ motion for class certification (reasoning that individual questions of causation and damages precluded certification) and granted Microsoft’s motion to strike the class allegations based on comity. Slip op. at 10-11. The Baker plaintiffs sought permissive review under Federal Rule of Civil Procedure (FRCP) 23(f) which was denied by the Ninth Circuit. The plaintiffs then voluntarily dismissed their individual claims, and filed a notice of appeal pursuant to 28 U.S.C. § 1291.

The Ninth Circuit reversed the district court, reasoning that while individual factors may affect when disc damage occurred and how extensive it was, they do not affect whether the Xbox was sold to consumers with a design defect. Slip op. at 15. More significantly, the court found appellate jurisdiction under 28 U.S.C. § 1291 existed, distinguishing a stipulated, voluntary dismissal of an individual claim from a failure to prosecute claims, as in Huey v. Teledyne, Inc., 608 F.2d 1234 (9th Cir. 1979), finding that a plaintiff who engages in the former has given up a valuable right and created “an adverse and appealable final judgment,” whereas a plaintiff engaged in the latter has forfeited their right to appeal the denial of class certification. Id. at 12-13, n.4. Exercising mandatory appellate jurisdiction, the appeals court remanded to the district court for further proceedings. Microsoft petitioned the Ninth Circuit for rehearing en banc, which was denied on July 20, 2015.

The Ninth Circuit’s decision provided a much-needed shortcut to the appeals process for class action plaintiffs, who would otherwise have to seek an interlocutory appeal under FRCP 23(f), which appellate courts grant sparingly, or wait for a final judgment, effectively ending any meaningful right to appeal class certification in many cases. Some see the Ninth Circuit decision as a revival of the “death knell” doctrine that some federal appellate courts recognized as grounds for appeal under 28 U.S.C. § 1291 several decades ago, which allowed appeals for denial of class certification when the denial would “end the lawsuit for all practical purposes.” Eisen v. Carlisle & Jacquelin, 370 F.2d 119, 120 (2d Cir. 1966). However, the doctrine was abandoned in Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978), where the Supreme Court found orders regarding class certification not independently appealable prior to judgment under 28 U.S.C. § 1291. Congress then responded to the Coopers & Lybrand decision by allowing the Supreme Court to provide for appeals to interlocutory decisions under 28 USC § 1292(e), and, in 1998, the Supreme Court adopted FRCP 23(f). However, due to the infrequent usage of Rule 23(f), Congress’ attempt to fill the void of the “death knell” doctrine was largely ineffective until the Baker case.

Instead of creating grounds for interlocutory appeal, Baker allows plaintiffs to appeal class certification upon voluntarily dismissing their claims, effectively replacing one way of demonstrating the case had ended for all practical purposes with another. Slip op. at 12 (citing Berger v. Home Depot USA, Inc., 741 F.3d 1061, 1065 (9th Cir. 2014)). Circuit courts are split on this issue, as there is case law forbidding voluntary dismissal as a vehicle for appellate review in the Third, Fourth, Seventh, Tenth, and Eleventh Circuits, but case law permitting such dismissal as a vehicle for appellate review in the Second and Ninth Circuits. It is difficult to predict how the Supreme Court will rule, especially after the passing of Justice Scalia, who historically had been hostile towards class actions. Both plaintiffs’ and defense counsel will have to await oral argument next term for an indication of the direction the Supreme Court may take.

Authored by: 
Ishan Dave, Associate

VW’s Clean Diesel Debacle: Not an Instance of “No-Injury”

Volkswagen’s (VW) recent admission that its “clean diesel” vehicles are not-so-clean has led to a proliferation of what some characterize as “no-injury” lawsuits, in that proponents of this view allege that the vehicles did not physically or emotionally harm consumers, nor did it cause them economic loss (other than the purchase price of the vehicle). This “no-injury” argument has been closely tied to the Spokeo case currently pending before the United States Supreme Court, in which the defendant has urged the Court to hold that that there is no Article III standing unless the plaintiff has suffered an “actual injury.” Robins v. Spokeo, Inc., 742 F.3d 409 (9th Cir. 2014), cert. granted, 2015 U.S. LEXIS 2947 (U.S. Apr. 27, 2015) (No. 13-1339) (previously covered on the ILJ here). However, Spokeo involves the Fair Credit Reporting Act (FCRA), a consumer law that requires no actual transactions between the parties. While the Spokeo FCRA violations undoubtedly result in injuries, they are a different animal than those presented in the VW scandal.

An injury is defined as “[t]he violation of another’s legal right, for which the law provides a remedy; a wrong or injustice.” INJURY, Black’s Law Dictionary (10th ed. 2014). The Volkswagen debacle unequivocally involves injury. First, each consumer purchased a VW vehicle that was not as they expected. In other words, consumers paid Volkswagen for a vehicle that complied with governmental regulations and legally could be driven on American roadways, but consumers did not receive what they paid for because they are now stuck with vehicles that violate state and federal clean air requirements, including the Clean Air Act. Further, Volkswagen priced its vehicles at the market value of a clean diesel engine vehicle, which is substantially higher than a standard gasoline engine, but it fraudulently advertised and sold a vehicle that did not meet that market definition. Essentially, customers paid for a vehicle of a certain value, but actually received a vehicle that was of lower value. In the process, VW profited from this deception at the consumers’ expense.

However, consumers sustained additional injuries in the VW matter. Until repaired, the vehicles themselves may actually be worthless to many owners. For example, in California, each vehicle must be “smogged,” i.e. comply with stringent emissions standards, in order to be registered and driven on public roads. Volkswagen admits that these vehicles do not meet these standards, which could render the vehicles “un-merchantable” pursuant to California’s Song-Beverly Consumer Warranty Act. Cal. Civ. Code §§ 1791.1 and 1792, et seq. If that is so, the “injury” would be the entire transaction or price of the vehicles. Another potential injury sustained by purchasers of VW’s “clean diesel” cars is to the environment, consumers’ health, and the public as a whole. According to a recent joint study by Harvard and MIT, which was published in the journal Environmental Research Letters, VW’s deception in connection with the existing clean diesel vehicles (model years 2009-2015) is estimated to cause or have caused, by the end of 2015, sixty premature deaths in the U.S. as a result of the emissions. If not fixed, the emissions ultimately could lead to an additional 140 deaths by the end of 2016. See Barrett, et al., Environmental Research Letters, “Impact of the Volkswagen emissions control defeat device on US public health,” available here. The excess emissions are also estimated to contribute directly to 31 cases of chronic bronchitis and 34 hospital admissions involving respiratory and cardiac conditions. Id.

Injuries continue to materialize due to Volkswagen’s deceptive conduct: its violation of the consumers’ right to know what they are getting when they purchase a “clean diesel” vehicle, overvaluation of the vehicles, and health-related harms to the public, including injuries and possibly death, and the environment.

Authored by: 
Tarek Zohdy, Associate

Cal. Supreme Court to Decide on Attorneys’ Fees Calculation Method in Laffitte v. Robert Half

Even seasoned class action practitioners might be surprised to learn that the percentage-of-the-fund method for awarding attorneys’ fees is not settled law in California. After all, California trial courts routinely award attorneys’ fees based on a percentage of the overall recovery, and numerous California courts have endorsed this approach. [1] This common practice has been called into question by David Brennan, an objector to the $19 million wage-and-hour class action settlement in the long-running Laffitte v. Robert Half Int’l, No. S222996, rev. granted, 342 P.3d 1232 (Feb. 25, 2015). [2] Laffitte, which was initially filed in 2004, involved independent contractor misclassification claims against the staffing agency Robert Half; in 2013, the trial court approved a $19 million settlement, including an attorneys’ fee award of one-third of the gross settlement.

In Laffitte, the California Supreme Court will decide whether use of the percentage method is valid under California law. In his petition for review and opening brief (available here and here, respectively), Objector Brennan seized on a footnote from Serrano v. Priest, 20 Cal.3d 25, 48 n. 23 (1977), where the California Supreme Court stated that “the starting point of every fee award . . . must be a calculation of the attorney’s services in terms of the time he has expended on the case,” to argue that California law requires use of the lodestar method for assessing fees. The lodestar method multiplies the number of hours reasonably expended by a reasonable hourly rate, and the resulting number can be adjusted at the court’s discretion. While Brennan correctly identified a source of potential confusion, his radical position, if adopted, would unsettle the landscape, upending not just the settlement in Laffitte, where the trial court awarded attorneys’ fees representing 33 1/3% of the settlement fund, but numerous other already-approved settlements. Further, the vast majority of California class action settlements currently pending final approval would have to be renegotiated.

However, there is little doubt that the California Supreme Court will enshrine the use of the percentage method for cases where an ascertainable fund is created. As Respondent Mark Laffitte discussed in his Answering Brief (available here), every Federal Circuit has authorized use of percentage method, with two Circuits, the Eleventh Circuit and the District of Columbia Circuit, requiring use of the percentage method for common fund cases. This is because the percentage method has several significant advantages over the lodestar method: (1) it is less demanding of judicial resources; (2) it connects the fee recovery more closely to the results obtained; (3) it aligns the interests of class members and class counsel; (4) it rewards efficient prosecution; (5) it better approximates the workings of the marketplace; and (6) it leads to greater predictability in fee awards. Lafitte Answering Brief at 35-39 (internal citations omitted).

California also has a venerable tradition of utilizing the percentage method for common fund cases, as detailed in Serrano itself. See Serrano, 20 Cal.3d at 34-38 (observing that the percentage method was first approved in California in 1895 and “has since been applied by the courts of this state in numerous cases”). Serrano declined to apply the percentage method principally because the settlement there did not create an ascertainable fund. Id. at 35-38. Contrary to Brennan’s position, there is nothing in Serrano that would preclude courts from applying the percentage method in awarding attorneys’ fees.

Although Laffitte presents only one question for review—whether the percentage method is permitted under Serrano—several open questions remain even if the Court cements the use of the percentage method. Among other issues, the Court may also decide whether a benchmark percentage is appropriate, and whether to require a “lodestar cross-check” if a court applies the percentage method in awarding fees. In sum: do not expect a sea change, but class action practitioners should nonetheless keep a close watch on Laffitte to see if the Court will provide further guidance to courts on when and how to apply the percentage method.

Authored By:
Ryan Wu, Senior Counsel

[1] See, e.g., In re Consumer Privacy Cases, 175 Cal. App. 4th 545, 558 (2009), Chavez v. Netflix, Inc., 162 Cal. App. 4th 43, 63 (2008), and Apple Computer v. Superior Ct., 126 Cal. App. 4th 1253, 1271 (2005).
[2] Capstone Law APC, on behalf of its clients, submitted a letter requesting publication that contributed to the publication of the intermediate court decision, Laffitte v. Robert Half Int’l Inc., 231 Cal. App. 4th 860 (2014), and intends to submit an amicus brief supporting Respondent Laffitte.

NLRB’s Browning-Ferris Decision Expands Joint Employer Liability

Recently, the National Labor Relations Board (“NLRB”) drastically expanded joint employer liability under the National Labor Relations Act (“NLRA”). In a 3-2 decision involving a Local 350 union, which had filed a representative petition that sought to represent sorters, housekeepers, and screen cleaners employed by a subcontractor Leadpoint, the NLRB modified its standard for determining joint-employer status. Browning-Ferris Industries of California, 362 NLRB No. 186 (August 27, 2015) (slip op. available here). Initially, Local 350’s petition alleged that that Browning-Ferris, a waste and recycling services company, jointly employed the workers with Leadpoint because Leadpoint had contracted with Browning-Ferris to provide temporary labor to manually sort materials, clean the screens on the sorting equipment and clear jams, and clean the recyclery. After a hearing, a decision was issued, holding that Leadpoint was the sole employer because it had sole control over recruiting, hiring, counseling, disciplining, and terminating its employees. Then, Local 350 filed a request for review of the decision that Browning-Ferris and Leadpoint were not joint employers. The Board granted the petition for review in April of 2014, and issued the present decision.

Under the new standard, two separate entities will be found to be joint employers under the NLRA if “they ‘share or codetermine those matters governing the essential terms and conditions of employment.’ . . . [T]he initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.” Slip op. at 2, citing NLRB v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117, 1123 (3d Cir. 1982). In short, the NLRB may find the entities to be joint employers where (1) they are both employers within the meaning of the common law; and (2) they share or co-determine matters governing the essential terms and conditions of employment indirectly or whether they both have the authority to do so. For example, if Company A, that obtained workers from Company B, has a mere right to control elements of employment such as salary and working conditions, then both companies may qualify as employers.

This decision is likely to have profound implications for companies that rely on third-party labor providers because previously, those companies had to exercise “direct and immediate” control over workers. Slip op. at 7. The majority stated that it chose to “restate the Board’s legal standard for joint-employer determinations and make clear how that standard is to be applied going forward,” returning to the “traditional test” used by the Board. Id. at 15. Under the new regime, the courts and regulators will take a case-by-case approach in determining whether companies have the potential to affect pay and working conditions of the contracted employees. “The right to control, in the common-law sense, is probative of joint-employer status, as is the actual exercise of control, whether direct or indirect.” Id. at 16. Notably, the Board stated it would “no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but must also exercise that authority, and do so directly, immediately, and not in a ‘limited and routine’ manner,” thus overruling prior Board decisions to the extent they are inconsistent with this decision. Id. at 15-16. 

Indeed, under the new approach, many companies, including franchisors or users of staffing agencies, may become wary of relying on labor services provided by third parties, because such an arrangement may substantially expand these companies’ potential liability. On the other hand, the NLRB’s approach is likely, in its own words, to avoid requirements that are “increasingly out of step with changing economic circumstances,” and “significantly and unjustifiably narrow the circumstances where a joint-employment relationship can be found.” Slip op. at 31. Labor providers frequently have little control over their employees, whose daily working conditions are determined by policies and practices of the companies that hire those employees. The new rule, therefore, ensures that companies that rely on contract or temporary employees may not shield themselves from liability merely by citing their third-party status.

Authored By:
Stan Karas, Senior Counsel