Class Action Defense

July 25, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 66: Colorado Stakes Out Artificial Intelligence Frontier With Comprehensive Algorithmic Anti-Discrimination Law

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Tiffany Alberty with their discussion of a signification development on the forefront of artificial intelligence legislation – a Colorado bill recently signed into law making strides to curb the risk of algorithmic bias across all sectors and uses of AI technology.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jerry Maatman: Thank you. Loyal pro blog readers. Welcome to our next installment of our weekly podcast series, the Class Action Weekly Wire. I’m Jerry Maatman, a partner at Duane Morris and joining me today is my colleague, Tiffany Alberty. Welcome.

Tiffany Alberty: Thanks, Jerry, excited to be here.

Jerry: Today we wanted to discuss what I believe to be a landmark development coming out of the state of Colorado regarding artificial intelligence legislation, and specifically the new AI bill that was signed into law earlier this year. As a member both of the Illinois and Colorado bars, Tiffany, I know you’ve been advising employers on this – wondered what your takeaways were at a 100,00 foot level on this new law?

Tiffany: Sure. Thanks, Jerry, I appreciate the opportunity to speak today. So, as many of you know, on May 17th of this year, Colorado Governor Jared Polis signed into law SB-205, also known as the Consumer Protections for Interactions with Artificial Intelligence Systems. It does take effect in February of 2026, and it applies to Colorado residents. This bill was modeled after Connecticut’s ambitious legislation which ended up crumbling the same month due to the Connecticut Governor Ned Lamont’s concerns that it would stifle the innovation of the developing AI industry. So, comparing this legislation to AI laws such as in Florida or Utah. The statute is really the first legislation of its kind in the United States that focuses on what’s called “high-risk artificial intelligence systems”. Notably, it requires that developers and companies that deploy this high-risk AI technology use the standard of reasonable care to prevent algorithmic discrimination.

Jerry: Thanks for that overview, Tiffany. That’s very helpful in terms of what corporate counsel need to understand about the concept of “high-risk AI systems.” How would you describe that in layman’s terms, and with respect to the range of activities or software covered by the new Colorado law?

Tiffany: Sure. So, the Colorado law defines “high-risk AI systems” as those that make or substantially contribute to making “consequential decisions.” Of course, it’s not clear, but some examples that would be considered as “consequential decisions” under the law include a large range of companies and services, including education enrollment or education opportunities, employment or employment services and opportunities, financing or lending services, essential governmental services, healthcare services, housing, insurance, and then, of course, legal services.

The law does actually carve out specific systems that would not be included in the law – that either (i) perform narrow procedural tasks; or (ii) detect decision making patterns or deviations from prior decision-making patterns, and that aren’t intended to replace or influence the human component of assessment and review. Also excluded from the law is AI-enabled video games, cybersecurity software, anti-malware or anti-virus software, spam or robocalling features and filters – all when they’re not considered a “substantial factor” in making these consequential decisions

Going to what a ”substantial factor” is – it’s defined as a factor that (i) assists in making consequential decisions and (ii) is capable of altering the overall outcome of that said consequential decision, or (iii) is generated by an AI system alone.

Jerry: Well on its face, that sounds quite broad, and I doubt that the exemptions are going to be used to swallow the rule. What do corporate counsel need to know about penalties and potential damages under the statute for violations of it?

Tiffany: Sure, so the penalties are hefty. The law provides the Colorado Attorney General with the exclusive authority to enforce violations and penalties up to $20,000 for each consumer or transaction violation that’s involved. However, the law does not contain a private cause of action. Developers as well as deployers can assert an affirmative defense if they discover and cure the violation, or are in compliance with the latest version of the Artificial Intelligence Risk Management Framework that’s published by the National Institute of Standards and Technology, or otherwise known as NIST, or any other framework that is designated by the Colorado Attorney General that should come out with more specific and narrow confines.

Jerry: The job of a compliance counsel is certainly difficult with the patchwork quilt of privacy laws, but what would your advice be specifically for companies involved in trying to engage in good faith compliance with the Colorado law?

Tiffany: Sure, great question. There are key responsibilities at stake for both developers of AI technology and deployers, which are the companies that are utilizing these systems, in terms of protecting consumers and employees from the risks of algorithmic discrimination. For AI developers, there is a duty to avoid algorithmic discrimination, and under the reasonable care standard, it includes several critical steps. So that would be providing deployers with detailed information about the AI systems and the necessary documentation for impact assessments; developers must make a public statement about the types of AI systems that they have developed or substantially modified; and disclose any potential risks of algorithmic discrimination to known deployers and the Colorado Attorney General within 90 days of discovery.

So that’s going to be for the AI developer side. Now, if you go to the other variation which is going to be for deployers of high-risk AI systems, they, too, have a duty under the law to avoid algorithmic discrimination, and they are required to implement comprehensive risk management policies, conduct impact assessments throughout the year, and review their AI systems annually to ensure that there’s no algorithmic discrimination occurring. They also need to inform consumers about the system’s decision-making processes and offer opportunities for correcting any inaccurate information that’s being collected and allow for appeals against adverse decisions upon human review, if that is feasible. And then the last thing that is similar to the AI developer side – deployers must also disclose any algorithmic discrimination discovered to Colorado’s Attorney General within 90 days of discovery.

So, kind of taking more of a bird’s eye view, the law encompasses AI technology when it’s involved in the consequential decisions, such as in an employment context for hiring and firing. And it adds another layer of intervention to check the AI process, and ensuring that it doesn’t have any type of discriminatory or bias intent. As such, companies have until February 2026 to come into compliance with this new Colorado AI law.

Jerry: Well, thanks, Tiffany. Those are great insights. I think the bottom line is compliance just became a bit tougher in terms of all the things that are out there in that wild west which is the legal frontier of artificial intelligence. If there’s nothing other than what we’ve seen from the plaintiffs’ bar is that they’ve been very innovative and using statutes like this and cobbling together class actions involving employer use of artificial intelligence. Well, thank you loyal blog readers for tuning in to this week’s weekly podcast series – we will see you next week with another topic.

Tiffany: Thanks, everyone.

July 23, 2024 by Gerald L. Maatman, Jr.

Ninth Circuit Broadly Applies The FAA’s Transportation Worker Exemption To Fueling Technicians To Green Light Their Class Action And Side-Step Arbitration

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: On July 19, 2024, in Lopez v. Aircraft Service International, Inc., Case No. 23-55015 (9th Cir. July 19, 2024), the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act’s (FAA) transportation worker exemption applies to an airplane fueling technician. Even though the technician had no hands-on contacts with goods, the Ninth Circuit held that was not required because fuel is necessary to flying the plane that holds the goods. The decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow that loop hole to mandatory arbitration. The Lopez decision presents an obstacle for employers seeking to enforce arbitration agreements and class action waivers within the Ninth Circuit, thereby opening the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

Case Background

Danny Lopez worked as a fueling technician at Los Angeles International Airport. He added fuel to airplanes. After Lopez filed a wage & hour class action against his employer, the employer moved to compel arbitration. The district court denied the motion, concluding that Lopez was an exempt transportation worker because he was directly involved in the flow of goods in interstate or foreign commerce. It reasoned that, although Lopez did not handle goods in commerce, he was directly involved in the maintenance of the means by which the goods were transported. The employer appealed on the grounds that the FAA’s transportation worker exemption is to be narrowly construed and that Lopez did not have any hands-on contact with goods and direct participation in their movement.

The Ninth Circuit’s Decision

The Ninth Circuit began its analysis by mentioning the U.S. Supreme Court’s 2022 decision in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022). In Saxon, the U.S. Supreme Court instructed that the transportation worker exemption is to be narrowly construed and does not turn on the industry within which the work is performed. Saxon held that airline ramp agents are nonetheless transportation workers exempt from the FAA because, in loading and unloading cargo onto airplanes, ramp agents play a “direct and necessary role in the free flow of goods across borders” and are “actively engaged in the transportation of those goods across via the channels of foreign or interstate commerce.” Id. at 458. Perceiving that the transportation worker exemption continued to be misapplied by lower courts, the U.S. Supreme Court repeated this same guidance this year in Bissonnette v. Le Page Bakeries Park St., LLC, 601 U.S. 246 (2024), and cautioned that the exemption should not be applied broadly to all workers who load and unload goods as they pass through the stream of interstate commerce.

While mentioning this recent controlling authority, the Ninth Circuit harkened back to its 2020 analysis of the transportation worker exemption in Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2004), deeming it consistent with Saxon and Bissonnette. In Rittman, the Ninth Circuit held that Amazon delivery drivers making local, last mile deliveries of products from Amazon warehouses to customers’ homes were exempt transportation workers engaged in interstate or foreign commerce. Applying “the analytical approach applied in Rittman,” the Ninth Circuit concluded that Lopez was an exempt transportation worker because his fueling of airplanes was a “vital component” of the plane’s ability to fly. Id. at 12.

Implications Of The Decision

The Lopez decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow interpretation. The Lopez decision opens the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

July 18, 2024July 18, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 65: Key Developments In RICO Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Kelly Bonner with their discussion of key rulings, settlements, and trends analyzed in the RICO class action space.

Episode Transcript

Jennifer Riley: Thank you for being here again for the next episode of our podcast, the Class Action Weekly Wire. I’m Jen Riley, partner at Duane Morris, and joining me today is Kelly Bonner. Thank you for being on the podcast, Kelly.

Kelly Bonner: It’s great to be here, Jen.

Jennifer: Today we wanted to discuss trends and important developments in Racketeer Influenced and Corrupt Organizations Act, or RICO, class action litigation. RICO is a federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal enterprise. The Congress enacted the RICO in 1970 in an attempt to combat organized crime in the United States. The law has since been used to prosecute a variety of offenses, including securities fraud, money laundering, and even environmental crimes. Kelly, can you explain the burden on the plaintiff in a RICO action?

Kelly: Sure thing, Jen. RICO allows the government to prosecute individuals associated with criminal activities such as the leaders of crime organizations. Although there are criminal charges, today we’re going to focus on the burden for civil RICO claims. So, plaintiff must prove three elements: criminal activity, so that means the plaintiff must show that the defendant committed a RICO crime; a pattern of criminal activity, which means that the plaintiff must show that the defendant committed a pattern of at least two crimes – patterns can include everything from the same victim to the same methods used to commit the crimes, or that the crimes even happened within the same year; also the statute of limitations – in civil RICO cases, the statute of limitations is four years, and that runs from the time of discovery. Plaintiff must also prove the existence of an enterprise. So, civil RICO class actions are significant pieces of litigation, and due to the potential for exposure to treble damages – or, you know, three times the damages – such class actions can present extraordinary risks.

Jennifer: Thanks, Kelly, very different from the types of claims that we often discuss on the podcast. How often are RICO class actions granted class certification?

Kelly: So in 2023, the plaintiffs’ bar secured class certification at a rate of approximately 70%. Companies secured denials in 30% of the rulings – so plaintiffs were largely successful in certifying the class.

Jennifer: Can you discuss any key rulings from 2023?

Kelly: Sure. So, in several 2023 cases, courts granted class certification under Rule 23(b)(3). So this is where the court concluded that common questions of law, in fact, predominated over individual issues, and that a class method was superior to other available methods for fairly and efficiently adjudicating the controversy. So, for example, in Turrey, et al. v. Vervent, Inc., the court concluded that common questions were dominated over individualized issues where plaintiffs alleged that defendants violated RICO by offering high cost education programs and a sham private student loan program called the Program for Educational Access and Knowledge, or PEAKS. This program saddled students with significant debt and inferior credentials. Plaintiffs sought class certification on the basis that they identified several common questions that could be resolved on a class-wide basis: 1) whether defendants knew that PEAKS was a fraudulent scheme designed to defraud investors and the U.S. Department of Education; 2) whether loans lacked legally required information; 3) whether PEAKS operated as an association, in fact, enterprise; 4) whether PEAKS as an enterprise made fraudulent representations, and 5) finally, whether the PEAKS enterprise use the mail and interstate wire system for its activities. The court opined that all of the elements of a substantive RICO violation could be determined through evidence common to class members. The court also noted that expert testimony sufficiently established that defendants knowingly participated in fraudulent scheme, and that PEAKS was structured to further defend its fraudulent goals. The court also ruled that questions of causation and injury could be addressed on a class-wide basis, since the plaintiffs allege that defendants conduct was the actual approximate cause of their injuries, and that their harms were foreseeable. So, if the loans had not been made or serviced as they were, the borrowers would not have made the payments. Even though the exact amount of damages differed among individual borrowers, the court concluded that this issue did not preclude class certification.

Jennifer: There’s also an interesting ruling that I wanted to mention, that came out of the Fourth Circuit in a case called Albert, et al. v. Global Tel*Link Corp. In that case, the Fourth Circuit vacated and remanded a ruling by the district court dismissing the plaintiffs’ RICO claims based on a failure to establish proximate causation. The Fourth Circuit concluded that the plaintiffs’ alleged injuries were the direct result of defendants’ scheme, and thus sufficient to allege RICO violations. In that case, the plaintiffs were families of prison inmates. They filed a class action alleging that the defendants, a group of providers of inmate telephone services, violated the RICO by colluding to fix prices for single call offerings, as well as misleading the government about their pricing structures, and ultimately causing consumers to pay inflated prices. The district court had dismissed the plaintiffs’ RICO claims on the basis that the plaintiffs did not adequately allege that the defendants proximately caused their injuries, as their harm was contingent upon harm suffered by the contracting governments. On appeal though, the Fourth Circuit vacated and remanded, the Fourth Circuit concluded that even though the alleged conspiracy occurred before it impacted the plaintiffs, the government was not a more direct victim than the plaintiffs, and the plaintiffs’ injuries were not derivative of those suffered by the governments because they would have been charged inflated prices regardless of whether the governments were injured. The Fourth Circuit clarified that the plaintiffs need only alleged facts plausibly supporting a reasonable inference of causation, and that the plaintiffs’ complaint plausibly supports an inference that the governments would have demanded lower prices for consumers but for defendants’ misrepresentations. Because the Fourth Circuit concluded that the plaintiffs’ alleged injuries were the direct result of defendants’ scheme, and therefore sufficient to allege RICO violations, it vacated the district court’s ruling and remanded for further consideration.

Kelly, how did the plaintiffs do in securing major settlements in the RICO class action space over the past year?

Kelly: So, there were several settlements and judgments that were over a million dollars reached in RICO civil class actions in 2023. So I’m thinking of in Lincoln Adventures LLC, et al. v. Those Certain Underwriters at Lloyd’s London Members of Syndicates, the court granted final approval of a $7.9 million settlement to resolve claims that Lloyd’s Syndicates violated RICO with an illegal anticompetition agreement. A massive RICO default judgment of over $131 million was entered by the court in Gilead Sciences Inc., et al. v. AJC Medical Group Inc., based on allegations that dozens of companies and individuals were involved in parallel schemes run by two healthcare networks profiting from illegal resale of HIV treatment medications. And then finally, in Zwicky, et al. v. Diamond Resorts, which comes out of Arizona, the court granted file approval to a settlement of $13 million, resolving allegations under RICO that defendants misrepresented the required annual fees for timeshare interest they purchased.

Jennifer: Thanks so much, Kelly. I know that these are only some of the cases that had interesting rulings in 2023 and RICO class actions. 2024 is sure to give us some more insights into the ways that class actions will evolve or continue to evolve in the RICO space. Thanks to all of our listeners for joining us today, appreciate having you here for this episode of the Class Action Weekly Wire.

Kelly: Thanks so much. Bye-bye.

July 16, 2024 by Class Action Defense

Maryland Federal Court Refuses To Certify “Class Of One” In ERISA Bar Tips Case

By Gerald L. Maatman, Jr., Zachary J. McCormack, and Jesse S. Stavis

Duane Morris Takeaways: On July 10, 2024, Judge Peter J. Messitte of the U.S. District Court for the District of Maryland denied a bartender’s motion to certify a class of approximately 2,300 restaurant workers in Frankenstein v. Host Int’l, Inc., No. 8:20-CV-01100, 2024 U.S. Dist. LEXIS 120678 (D. Md. July 10, 2024). Plaintiff alleged that his employer violated the Employee Retirement Income Security Act (“ERISA”) by forcing tipped workers to accept gratuities in cash which prevented them from making pre-tax contributions to retirement accounts. The Court held that Plaintiff could not represent the class because he failed to show that any other employees opposed the policy. The ruling serves as a reminder to employers about the importance of considering conflicts within a putative class when opposing class certification.

Case Background

Defendant Host International, Inc. (“Host”), headquartered in Bethesda, Maryland, operates restaurants and bars, many of which are located in airports. Id. at *2. The company has a longstanding practice of paying out credit card tips in cash at the end of workers’ shifts. Id. at *4. While employees tend to support this policy, it has one unintended effect: An employee aiming to contribute a large percentage of his or her income to a 401(k) account is not able to do so using pre-tax earnings. Id. A bartender, Dan Frankenstein, objected to this policy, claiming his inability to contribute these pre-tax earnings to his retirement account prevented him from meeting his retirement goals. Id. at *8. This policy, he argued, violated § 502 of the ERISA, which allows plan participants to sue for breach of fiduciary duties. Id. at *9. He further claimed Host’s refusal to permit employees to defer credit card tips amounted to discrimination against tipped-employee participants, and that Host’s decision to prevent such deferrals is arbitrary and capricious. Id. at *10.

After the Court denied Host’s motion to dismiss, Frankenstein filed a motion to certify a class that would include all tipped workers who participated in the 401(k) plan and who had elected to defer some of their income. Id. The Court ordered evidentiary hearings and limited discovery to determine both the parameters of the class and the extent of any objections by its putative members. Id. at *11. Ultimately, Host presented witnesses who testified that many employees, and the unions that represented them, supported the tips-in-cash policy. Id. at *14. In response, Frankenstein was unable to present any evidence that other workers were unhappy with the policy. Id. at *15.

The Court’s Ruling

The Court denied Frankenstein’s motion for class certification. It held that Plaintiff had failed to demonstrate numerosity, commonality, typicality, and adequacy of representation under Rule 23(a). Id. at *17-18.

According to the Court, Frankenstein could not represent a class of aggrieved workers because he appeared to be the only aggrieved worker. Id. at *32. In fact, the tips-in-cash policy was exceptionally popular among Host’s employees. Id. at *33. When the company tried to change the policy by paying tips through an electronic debit card, many workers complained and the union representing employees filed an unfair labor practices charge with the National Labor Relations Board. Id. at *9. Despite Frankenstein’s yearlong opportunity to identify other employees who shared his complaints, he failed to present even one other individual. Id. at *28. The Court opined that the existence of an “intraclass conflict” proved fatal to Frankenstein’s motion for class certification. Id. at *22. Considering that Plaintiff appeared to present what the Court called as a “class of one,” he could not establish numerosity. Id. at *32. Further, due to his inability to point to other workers who shared his grievances, the Court concluded that he could not establish commonality or typicality. Id. at *28. Finally, considering Frankenstein’s views differed from those shared by other members of the putative class, the Court ruled that Plaintiff could not adequately represent the interests of the class. Id. at *25.

Implications Of The Decision

Frankenstein highlights the importance of investigating and considering potential intra-class conflicts when responding to motions for class certification. Evidence showing that members of the putative class disagree on fundamental issues in a lawsuit can help defendants establish that a class action is not appropriate. While Frankenstein presents a particularly dramatic example — the named plaintiff appeared to the only employee in the country who opposed his employer’s policy — this strategy also should be considered when different groups of putative class members disagree with one another.

July 16, 2024 by Class Action Defense

California Federal Court Denies Motion To Dismiss Artificial Intelligence Employment Discrimination Lawsuit

By Alex W. Karasik, Gerald L. Maatman, Jr. and George J. Schaller

Duane Morris Takeaways: In Mobley v. Workday, Inc., Case No. 23-CV-770 (N.D. Cal. July 12, 2024) (ECF No. 80), Judge Rita F. Lin of the U.S. District Court for the Northern District of California granted in part and denied in part Workday’s Motion to Dismiss Plaintiff’s Amended Complaint concerning allegations that Workday’s algorithm-based screening tools discriminated against applicants on the basis of race, age, and disability. This litigation has been closely watched for its novel case theory based on artificial intelligence use in making personnel decisions. For employers utilizing artificial intelligence in their hiring practices, tracking the developments in this cutting-edge case is paramount. This ruling illustrates that employment screening vendors who utilize AI software may potentially be liable for discrimination claims as agents of employers.

This development follows Workday’s first successful Motion to Dismiss, which we blogged about here, and the EEOC’s amicus brief filing, which we blogged on here.

Case Background

Plaintiff is an African American male over the age of 40, with a bachelor’s degree in finance from Morehouse College, an all-male Historically Black College and University, and an honors graduate degree. Id. at 2. Plaintiff also alleges he suffered from anxiety and depression. Since 2017, Plaintiff applied to over 100 jobs with companies that use Workday’s screening tools. In many applications, Plaintiff alleges he was required to take a “Workday-branded assessment and/or personality test.” Plaintiff asserts these assessments “likely . . . reveal mental health disorders or cognitive impairments,” so others who suffer from anxiety and depression are “likely to perform worse … and [are] screened out.” Id. at 2-3. Plaintiff was allegedly denied employment through Workday’s platform across all submitted applications.

Plaintiff alleges Workday’s algorithmic decision-making tools discriminate against job applicants who are African-American, over the age of 40, and/or are disabled. Id. at 3. In support of these allegations, Plaintiff claims that in one instance, he applied for a position at 12:55 a.m. and his application was rejected less than an hour later. Plaintiff brought claims under Title VII of the Civil Rights Act of 1964 (“Title VII”), the Civil Rights Act of 1866 (“Section 1981”), the Age Discrimination in Employment Act of 1967 (“ADEA”), and the ADA Amendments Act of 2008 (“ADA”), for intentional discrimination on the basis of race and age, and disparate impact discrimination on the basis of race, age, and disability. Plaintiff also brings a claim for aiding and abetting race, disability, and age discrimination against Workday under California’s Fair Employment and Housing Act (“FEHA”). Workday moved to dismiss, where Plaintiff’s opposition was supported by an amicus brief filed by the EEOC.

The Court’s Decision

The Court granted in part and denied in part Workday’s motion to dismiss. At the outset of its opinion, the Court noted that Plaintiff alleged Workday was liable for employment discrimination, under Title VII, the ADEA, and the ADA, on three theories: as an (1) employment agency; (2) agent of employers; and (3) an indirect employer. Id. at 5.

The Court opined that relevant statute prohibits discrimination “not just by employers but also by agents of those employers,” so an employer cannot “escape liability for discrimination by delegating [] traditional functions, like hiring, to a third party.” Id. Therefore, an employer’s agent can be independently liable when the employer has delegated to the agent “functions [that] are traditionally exercised by the employer.” Id.

In regards to the “employment agency” theory, the Court reasoned employment agencies “procure employees for an employer” – meaning – “they find candidates for an employer’s position; they do not actually employ those employees.” Id. at 7. The Court further reasoned employment agencies are liable when they “fail or refuse to refer” individuals for consideration by employers on prohibited bases. Id. The Court held Plaintiff did not sufficiently allege Workday finds employees for employers such that Workday is an employment agency. Accordingly, the Court granted Workday’s motion to dismiss with respect to the anti-discrimination statutes based on an employment agency theory, without leave to amend.

In addition, the Court held that Workday may be liable on an agency theory, as Plaintiff plausibly alleged Workday’s customers delegated their traditional function of rejecting candidates or advancing them to the interview stage to Workday. Id. The Court determined if it reasoned otherwise, and accepted Workday’s arguments, then companies would “escape liability for hiring decisions by saying that function has been handed to over to someone else (or here, artificial intelligence).” Id. at 8. The Court determined Plaintiff’s allegations that Workday’s decision-making tools “make hiring decisions” as it’s software can “automatically disposition[] or move[] candidates forward in the recruiting process” were plausible. Id. at 9.

The Court opined that given Workday’s allegedly “crucial role in deciding which applicants can get their ‘foot in the door’ for an interview, Workday’s tools are engaged in conduct that is at the heart of equal access to employment opportunities.” Id. In regards to artificial intelligence, the Court noted “Workday’s role in the hiring process was no less significant because it allegedly happens through artificial intelligence,” and the Court declined to “draw[] an artificial distinction between software decision-makers and human decision-makers,” [sic] as any distinction would “gut anti-discrimination laws in the modern era.” Id. at 10.

Accordingly, the Court denied Workday’s motion to dismiss Plaintiff’s federal discrimination claims.

Disparate Impact Claims

The Court next denied Workday’s motion to dismiss Plaintiff’s disparate impact discrimination claims as Plaintiff adequately alleged all elements of a prima facie case for disparate impact.

First, Plaintiff’s amended complaint asserted that Workday’s use of algorithmic decision-making tools to screen applicants including training data from personality tests had a disparate impact on job-seekers in certain protected categories. Second, the Court similarly found disparate treatment present and recognized Plaintiff’s assertions were not typical. “Unlike a typical employment discrimination case where the dispute centers on the plaintiff’s application to a single job, [Plaintiff] has applied to and been rejected from over 100 jobs for which he was allegedly qualified.” Id. at 14. The Court reasoned the “common denominator” for these positions was Workday and the platform Workday provided to companies for application intake and screening. Id.

The Court held “[t]he zero percent success rate at passing Workday’s initial screening” combined with Plaintiff’s allegations of bias in Workday’s training data and tools plausibly supported an inference that Workday’s algorithmic tools disproportionately rejects applicants based on factors other than qualifications, such as a candidate’s race, age, or disability. Id. at 15. The Court therefore denied Workday’s motion to dismiss the disparate impact claims under Title VII, the ADEA, and the ADA. Id. at 16.

Intentional Discrimination Claims

The Court granted Workday’s motion to dismiss Plaintiff’s claims that Workday intentionally discriminated against him based on race and age. Id. The Court found that Plaintiff sufficiently alleged he was qualified through his various degrees and qualifications and areas of expertise, supported by his work experience. However, the Court found Plaintiff’s allegations that Workday intended its screening tools to be discriminatory as “Workday [was] aware of the discriminatory effects of its applicant screening tools” was not enough to satisfy his pleading burden. Id. at 18. Accordingly, the Court granted Workday’s motion to dismiss Plaintiff’s intentional discrimination claims under Title VII, the ADEA, and § 1981, without leave to amend, but left open the door for Plaintiff to amend if a discriminatory intention is revealed during future discovery. Id. Finally, the Court granted Workday’s motion to dismiss Plaintiff’s California’s Fair Employment and Housing Act with leave to amend.

Implications For Employers

The Court’s resolution of employer liability for software vendors that provide AI-screening tools for employers centered on whether those tools were involved in “traditional employment decisions.” Here, the Court held that Plaintiff sufficiently alleged that Workday was an agent for employers since it made employment decisions in the screening process through the use of artificial intelligence.

This decision likely will be used as a roadmap for the plaintiffs’ bar to bring discrimination claims against third-party vendors involved in the employment decision process, especially those using algorithmic software to make those decisions. Companies should also take heed, especially given the EEOC’s prior guidance that suggests employers should be auditing their vendors for the impact of their use of artificial intelligence.

July 12, 2024 by Gerald L. Maatman, Jr.

Minnesota Federal Court Imposes $100 Per Day Civil Contempt Sanctions For Company’s Continued Failure To Comply With An EEOC Subpoena

By Gerald L. Maatman, Jr., Jennifer A. Riley, and George J. Schaller

Duane Morris Takeaways: In EEOC v. Cambridge Transportation., Inc., No. 0:23-MC-00101, 2024 U.S. Dist. LEXIS 118857 (D. Minn. July 8, 2024), Judge Nancy E. Brasel of the U.S. District Court for the District of Minnesota accepted U.S. Magistrate Judge Dulce J. Foster’s Report and Recommendation (see EEOC v. Cambridge Transportation, Inc., No. 0:23-MC-00101, 2024 U.S. Dist. LEXIS 121147 (D. Minn. June 10, 2024)) to impose civil contempt sanctions against Cambridge Transportation Inc. for its failure to comply with an EEOC subpoena. The EEOC sought documents in its administrative charge investigation into Title VII discrimination allegations on behalf of a former Cambridge Transportation, Inc. worker.

The Court ordered payment to the EEOC of $100 per day for each day Cambridge Transportation, Inc. remains out of compliance beginning on June 7, 2024. Over one month later, Cambridge remains out of compliance based on the docket. This ruling is a warning admonisiton for employers facing EEOC subpoenas and the seriousness for any alleged non-compliance with the Commission’s investigation process.

Case Background

On October 19, 2023, the EEOC petitioned for an Application for and Order to Show Cause Why Administrative Subpoena Should Not Be Enforced (the “Application”) against Respondent Cambridge Transportation, Inc. (“Cambridge”). (See United States EEOC v. Cambridge Transp., Inc., No. 0:23-MC-00101, ECF No. 1.) The EEOC’s subpoena duces tecum sought information from Cambridge regarding a charge of discrimination under Title VII of the Civil Rights Act of 1964. (See id.) In the underlying charge, Charging Party Becky Blechinger alleged that Cambridge “discriminated against her on the bases of her sex (female), race (white), national origin (United States) and disability by paying a higher rate of compensation to men of Somalian national origin,” who worked at Cambridge. (See id., ECF No. 2, at 2.)

On November 1, 2023, the Court issued an order to show cause for the EEOC’s Application. (See id., ECF No. 7.) On November 21, 2023, the EEOC provided a status report that reflected it had not effectuated service on Cambridge. (See id., ECF No. 9)

On December 19, 2023, the EEOC filed a Motion to Stay Proceedings. (See id., ECF No. 12.) Therein, the EEOC stated Cambridge responded and acknowledged receipt of the Court’s order to show cause and further indicated that Cambridge intended to produce the documents identified in the EEOC’s Application by December 26, 2023. (See id.) The following day the Court stayed the case. (See id., ECF No. 13.)

On January 25, 2024, the EEOC filed another status report with a request due to Cambridge’s failure to comply with the subpoena. Thereafter, the Court entered an order for hearing on the EEOC’s Application. (See id., ECF Nos. 14 & 15.) On February 22, 2024, Cambridge attended the hearing via telephone through its non-attorney registered agent. (See id., ECF No. 18.)

On February 27, 2024, the Court granted the EEOC’s Application and determined that Cambridge must comply with the subpoena or otherwise the Court may find Cambridge in civil contempt and impose a daily fine for each day Cambridge remains out of compliance. (See id., ECF No. 20.)

On May 14, 2024, the EEOC provided a status report to the Court and reiterated that Cambridge failed to comply with the subpoena and requested the Court impose a civil fine of $800 per day, for each day past May 14, 2024, that Cambridge remains non-compliant. (See id., ECF No. 23.)

On May 20, 2024, the Court ordered a hearing on the EEOC’s Application and required Cambridge to retain counsel to enter an appearance on its behalf to show cause why sanctions should not be imposed for failure to comply with the Court’s February 27 order. (See id., ECF No. 25.) On June 7, 2024, the hearing occurred and Cambridge did not appear. (See id., ECF No. 27.)

The Magistrate’s Report and Recommendation and the District Court Judge’s Finding

On June 10, 2024, Magistrate Judge Dulce J. Foster issued his Report and Recommendation. (See United States EEOC v. Cambridge Transp., Inc., No. 0:23-MC-00101, 2024 U.S. Dist. LEXIS 121147 (D. Minn. June 10, 2024). The report detailed the continued failures of Cambridge to respond to the Agency’s subpoena and efforts to enforce its subpoena. (See id., at *1-6.)

The Court opined Cambridge had “ample time to retain counsel, for its alleged counsel to enter an appearance and to ensure its counsel either would be available to attend the show cause hearing or move to reschedule it” and “despite having months,” it had “faile[d] to do so and made no efforts to explain that failure or seek more time to comply.” (See id., at *5.) As a result, the Court found Cambridge waived all of its defenses to the EEOC’s motion and request for sanctions. (See id., at *5-6.)

The Court reiterated its authority that it “may hold a person who, having been served, fails without adequate excuse to obey the subpoena or an order related to it.” (See id, at *6) (quoting Fed. R. Civ. P. 45(g).) The Court found Cambridge’s continued non-compliance with the subpoena warranted contempt and imposition of monetary sanctions. (See id.) The Court’s recommendation was not made “lightly, but Cambridge’s intransigent refusal to cooperate” left the Court with few other options. (See id.)

On the requested $800 per day fine from the EEOC, the Court reasoned at this stage that it was not justified at this stage. (See id.) The Court instead recommended an initial daily fine of “$100 per day for each day Cambridge remains noncompliant with the subpoena beginning June 7, 2024, the date of the show cause hearing, and continuing until Cambridge satisfactorily complies.” (See id., at *7.) The Court further held “additional sanctions and penalties may be warranted in the future” if Cambridge’s failure to comply continues. (See id.)

The District Court Judge found no clear error in the Magistrate Judge Foster’s recommendation and report. (United States EEOC v. Cambridge Transp., Inc., No. 0:23-MC-00101, 2024 U.S. Dist. LEXIS 118857, at * 1 (D. Minn. July 8, 2024).) In so holding, the Court adopted the report in full, and found Cambridge in civil contempt and ordered payment of $100 per day for each day Cambridge remains out of compliance with the EEOC’s subpoena, beginning on June 7, 2024. (Id.) The Court left open whether any additional sanctions and penalties may apply.

Implications For Employers

This recommendation and report, and resulting Court order, illustrates the length to which the EEOC will go to enforce its investigation of allegations of discrimination under Title VII of the Civil Rights Act of 1964. Companies should recognize the EEOC’s enforcement efforts have teeth, and heed the Court’s response that imposed a daily fine based on total non-compliance.

Companies should take measures to ensure compliance with any EEOC request for information and respond accordingly, and promptly, to any investigation including subpoena requests. Otherwise, Companies may find themselves footing a $100 bill for every day of non-compliance and possibly expose themselves to further civil contempt sanctions.

July 12, 2024 by Class Action Defense

New Jersey Supreme Court Finds Standalone Class Action Waivers In Consumer Contracts Are Not Per Se Unlawful

By Gerald L. Maatman, Jr., Gregory S. Slotnick, and James Hearon

Duane Morris Takeaways: On July 10, 2024, in William Pace v. Hamilton Cove, A-4-23 (July 10, 2024 N.J.), the New Jersey Supreme Court held that consumer contract provisions waiving class actions are lawful under New Jersey law, even if they are not directly connected to an arbitration agreement. The Supreme Court also found that while class action waivers in consumer contracts are not per se contrary to public policy, they may be unenforceable if they are found to be unconscionable or otherwise violate state contract law. In a unanimous opinion, the Supreme Court analyzed claims by plaintiff-tenants seeking class certification in an action brought against their landlord, Hamilton Cove, for allegedly advertising that its apartments had “elevated, 24/7 security,” when in reality security cameras in the three-tower apartment complex did not function and there was no around-the-clock security. The Supreme Court reversed the New Jersey Appellate Division, finding that in the case before it, the plaintiff-tenants clearly and unambiguously waived their right to maintain a class action knowingly and voluntarily by signing a lease agreement including a standalone class action waiver, despite the fact that the class action waiver was not part of an arbitration agreement or arbitration provision.

The Supreme Court held that class action waivers standing alone and apart from a mandatory arbitration provision are not per se unenforceable. It then analyzed the lease language at issue and held that the lease was written in a simple, clear, understandable, and easily readable way as required by the New Jersey Consumer Fraud Act (CFA), putting plaintiff-tenants on notice that they could only proceed with a lawsuit against the landlord defendants on an individual basis. Under the lease and facts of the case, the Supreme Court held that the landlord defendants’ standalone class action waiver provision was lawful, relying on factors including the parties’ relative bargaining power, no indicia of economic compulsion, and the class action waiver not impermissibly prohibiting plaintiff-tenants from individually vindicating their statutory rights under the CFA. As such, the class action waiver was not unconscionable, and the lease was therefore enforceable.

The opinion will likely have a far-reaching impact for businesses using arbitration programs in New Jersey and beyond.

Case Background

The landlord defendants operate Hamilton Cove, a three-building apartment complex located in Weehawken, New Jersey housing hundreds of apartments along the Hudson River waterfront. Id. at 4-5. The plaintiff-tenants claimed that in April 2020, Hamilton Cove advertised on its website and on social media that its apartments had “elevated, 24/7 security,” and that during an apartment tour before moving in, Hamilton Cove’s leasing officer told them that security personnel would be stationed 24 hours a day, 7 days a week. Id. at 5. The plaintiff-tenants entered into lease agreements in 2020, which allowed prospective tenants three days to consult with an attorney, after which the releases would become final. Id. The leases included multiple addenda – one of which was a “Class Action Waiver” addendum – which were all incorporate into the lease. Id. at 5-6. The Class Action Waiver included language in bold and the plaintiff-tenants agreed to waive their ability to participate either as a class representative or members of any class action claims against the landlord-defendants. Id. at 6.

After moving into their apartments, the plaintiff-tenants found that the Hamilton Cove security cameras did not work, and there was no 24/7 security. They claimed that the advertised “24/7 security” drew them to lease their apartments and pay the leasehold price, especially due to their allegation that Weehawken has a property crime rate approximately one-third higher than New Jersey’s state average. Id. at 7.

On March 31, 2022, the plaintiff-tenants filed the Complaint, claiming common law fraud and violation of the CFA. Id. They specifically alleged that the landlord-defendants engaged in an “unconscionable commercial practice” of knowingly making false representations regarding 24/7 security on their premises, and they sought to certify a class comprised of similarly-situated tenants. Id. at 7-8.

After landlord-defendants moved to dismiss the Complaint for failure to state a claim or, alternatively, to strike plaintiffs’ class allegations – arguing that plaintiff-tenants waived their ability to proceed as a class when they signed the class action waivers – the trial court denied the motions. Id. at 8. After landlord-defendants appealed the decision, the Appellate Division affirmed the trial court’s denial, holding that “a class action waiver in a contract that does not contain a mandatory arbitration provision” is unenforceable as a matter of law and public policy. Id. at 8-9. The New Jersey Appellate Division found that unless rendered unenforceable by the presence of an arbitration agreement, class action waivers are clearly contrary to the public policy of New Jersey, regardless of whether they are unconscionable or part of an adhesion contract. Id. at 10.

The New Jersey Supreme Court’s Decision

The New Jersey Supreme Court began by analyzing class actions as a procedural device and the legal requirements necessary to certify a class action. Id. at 16-17. While acknowledging that class action requirements should be “liberally construed” (id. at 18), the Supreme Court disagreed with the Appellate Division’s establishment of a bright-line rule that a waiver of the right to maintain a class action in unenforceable absent a mandatory arbitration agreement. Id. at 19. The Supreme Court held that an arbitration provision is not necessary and is separate to a class waiver’s enforceability, and that New Jersey law supports the contractual waiver of many rights that advance important goals, such as the right to a jury trial, provided that the requisite procedural safeguards surrounding the waiver are met. Id. at 19-20. The Supreme Court reiterated New Jersey’s strong public policy favoring the freedom to contract, and noted that legislatures can override this freedom in specific settings – which has not occurred in the context of class action waivers. It stated that in New Jersey, there is neither a controlling statutory provision expressly permitting class actions, nor a clear statement of public policy disfavoring class action waivers – as such, class action waivers must be evaluated through the lens of unconscionability and traditional tenants of contract formation. Id. at 23-24. As a result, the Supreme Court held that class action waivers standing alone and apart from a mandatory arbitration provision are not per se unenforceable, but that particular waivers may be unenforceable if unconscionable or invalid under general contract principles. Id. at 24. It then considered the specific waiver in the case before it. Id.

The Supreme Court confirmed that in order to analyze whether the class action waiver in the Hamilton Cove lease signed by plaintiff-tenants was unconscionable, a fact-sensitive analysis was required. Id. at 25. Factors considered by the Supreme Court to determine whether the class waiver was an unenforceable contract of adhesion, known as the Rudbart factors, included: (1) the subject matter of the contract; (2) the parties’ relative bargaining power; (3) the degree of economic compulsion motivating the adhering party; and (4) the public interests affected by the contract. Id. at 25-26. The Supreme Court found that plaintiff-tenants knowingly and voluntarily waived their right to maintain a class action because the waiver language was written in a simple, clear, understandable and easily readable way as required by the CFA, and it clearly and unambiguously put plaintiff-tenants on notice that they could only proceed with a lawsuit against landlord-defendants on an individual basis. Id. at 30.

The Supreme Court found that even if the lease could be considered a contract of adhesion, the Rudbart factors favored enforceability, since the parties’ relative bargaining power did not favor either party and plaintiff-tenants had time to consult with an attorney and were free to seek alternative housing if they did not agree with the lease’s terms. Id. at 30-31. It held that plaintiff-tenants were not under economic compulsion, and likely had the ability to choose from a vast selection of apartments available for a monthly rent comparable to the $3,700 rent at issue here. Id. at 31-32. Finally, the Supreme Court found that plaintiff-tenants were still able to pursue their CFA claims on an individual basis against the landlord-defendants, and that the class waiver did not prohibit plaintiffs, or similarly-situated Hamilton Cove tenants, from individually vindicating their statutory rights under the CFA. Id. at 33. Thus, the Supreme Court held that the class waiver was not unconscionable and was enforceable, reversing the Appellate Division’s judgment. Id. at 34.

Implications For New Jersey Businesses And Employers

The New Jersey Supreme Court’s opinion seemingly exceeds the landlord-tenant relationship, and may be characterized as a victory for New Jersey employers. As a result of the ruling, New Jersey businesses may seek to enforce a valid class action waiver separate and apart from an arbitration agreement or arbitration provision. While the class action waiver itself must be presented in a clear and direct manner, these waivers are not per se unenforceable on their face. As a best practice in light of the decision, New Jersey employers and businesses alike should ensure that any class action waivers provide for a reasonable period of time for review, and should strongly consider adding language providing time for a prospective signee to have the language reviewed by an attorney prior to signing. However, New Jersey businesses that do not wish to include mandatory arbitration provisions in contracts now have a clear path to still including class action waivers in such contracts, which are not per se unlawful, but which must still be presented in a manner that is not unconscionable based on individual circumstances.

July 11, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 64: Procedural Issues In Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and special counsel Brandon Spurlock with their discussion of key decisions addressing a myriad of procedural issues in class action litigation.

Episode Transcript

Jerry Maatman: Thank you loyal blog readers for joining us on our next episode of our weekly podcast series, the Class Action Weekly Wire, I’m Jerry Maatman, a partner at Duane Morris, and joining me today is Brandon Spurlock. Thanks so much for being here on our podcast.

Brandon Spurlock: Great to be here, Jerry.

Jerry: Today we wanted to discuss trends and important developments with procedural issues in class action litigation. This is somewhat of a catch-all term in the Duane Morris Class Action Review in terms of our analysis of key rulings throughout the year. In 2023, federal and state courts address procedural issues and a wide range of class certification issues. Brandon, to your way of thinking, what are some highlights that corporate counsel should be aware of?

Brandon: Yes, jurisdiction is always an important consideration. Class action litigation jurisdictional defenses are often dispositive when a defendant challenges the ability of plaintiffs to maintain their class action in court. The Tenth Circuit issued a very interesting ruling on jurisdiction in Boulter, et al. v. Noble Energy Inc. There the plaintiffs, a group of oil and gas lessors filed a class action against the defendants for alleged underpaid royalties. The defendants then argued that the district court lacked jurisdiction because the plaintiffs failed to exhaust administrative remedies required by Colorado’s Oil and Gas Conservation Act, which grants jurisdiction to the COGCC to determine the amount of proceeds due to a payee. However, the Act excludes resolution of disputes over contract interpretation from the COGCC’s jurisdiction. The district court then agreed with the defendants, and granted their motion to dismiss. Plaintiffs did not appeal this decision, but filed a nearly identical second complaint in Boulter II three months later. While the second complaint was pending, the Colorado Court of Appeals issued a decision regarding the COGCC’s jurisdiction in another action. The district court dismissed Boulter II for the second time, and plaintiffs filed a third complaint, Boulter III in December 2021. The district court again dismissed the action on plaintiffs’ appeal. This Tenth Circuit affirmed the district court’s ruling. The Tenth Circuit considered whether the district court’s decision in Boulter I should preclude the jurisdictional arguments in Boulter II and Boulter III, and whether an exception to issue preclusion, based on an intervening change in the law applied. The Tenth Circuit concluded that the ruling in Boulter I did preclude the jurisdictional arguments, and the subsequent complaints. The Tenth Circuit also determined that the decision from the Colorado Court of Appeals did not change the law or provide a basis for plaintiffs to avoid exhausting their remedies with the COGCC. Therefore, the Tenth Circuit affirmed the district court’s dismissal for lack of jurisdiction.

Jerry: I’ve always found jurisdiction to be a very powerful argument for the defense in a Rule 23 situation. But equally pertinent is the concept of standing, and whether or not a named plaintiff has standing to prosecute a class action. In 2023, however, the plaintiffs’ bar secured a pretty plaintiff-friendly ruling on the issue of standing out of the Ninth Circuit in a case called Vargas, et al. v. Facebook, Inc. The district court had dismissed the named plaintiff’s claim in a class action for lack of standing where the named plaintiff, a New York resident and a Facebook user, claimed that as a member of a protected category group, she was unable to view housing ads that similarly situated White Facebook users were able to access based on the algorithms at issue in the Facebook platform. On appeal, the Ninth Circuit reversed the dismissal of the class action and remanded the district court’s ruling. The Ninth circuit held that sufficient allegations were asserted in the complaint with respect to the disparate treatment of the named plaintiff as compared to white users of Facebook, and as a result, there was a viable cause of action and an injury-in-fact sufficient to confer standing. Many legal commentators think that the Vargas decision is kind of on the outer edge of standing principles, but nonetheless shows in a very plaintiff-centric, or plaintiff-friendly way, how standing can exist in a class action complaint sufficient for the class action to go forward.

Brandon, are there other areas that you think are impacted that is favorable either to the defense bar or to the plaintiffs’ bar in the class action space?

Brandon: Yes. Jerry also wanted to address the issue of consolidation in class action litigation, since consolidation issues often surface when defendants are subject to multiple class actions, and whether or not to consolidate multiple cases in one forum is often a strategic imperative. For instance, in the case of In Re Tiktok In-App Browser Consumer Privacy Litigation, the plaintiffs filed multiple class actions alleging that TikTok illegally intercepted users, communications and activities on third-party websites through the web browser within the TikTok app. The plaintiff, and the class action pending in the U.S. District Court for the Central District of California moved under 28 U.S.C. § 1407 to centralize three of the actions in the Central District of California. Since filing the motion, the Judicial Panel on Multidistrict Litigation, the JPML, have been notified of 14 potentially related actions pending in three additional districts. All of the plaintiffs supported centralization, but the plaintiffs in five actions supported the movement’s position. So, while the plaintiffs in seven actions requested centralization in the Northern District of Illinois, and the plaintiff in one related action alternatively requested centralization in the District of New Jersey, and also in the Northern District of Georgia, and one plaintiff opposed centralization entirely. Because the in-app browser actions raised questions relating to the interpretation and the scope of settlement and the related MDL, the JPML ruled that those questions would be most appropriately resolved by the transferee court. Therefore, denied the motion to centralize those actions.

Jerry: I’ve always thought consolidation of multiple class actions in one quarter of consolidated class actions is a big money saver for the defense in terms of defending something once rather than multiple times, so that’s a key ruling. What about the area of sanctions in class action litigation – were there any particular rulings of note in 2023?

Brandon: Another good question, Jerry. Given the cost of defending a class action, corporate defendants sometimes move for sanctions if the claims are frivolous. For instance, the Sixth Circuit examine this issue in Garcia, et al. v. Title Check, LLC. There the plaintiff filed a class action against the defendant, alleging that its additional buyer’s fee violated Michigan’s General Property Tax Act. The district court dismissed the plaintiff’s claims, finding that the fee was not prohibited by statute. Subsequently, the defendant moved for sanction against plaintiffs’ attorneys on the grounds that the case was frivolous, and forced the defendant to incur unnecessary legal fees. The district court granted the motion, and ordered plaintiffs’ counsel to pay attorneys’ fees and costs over $73,000. On appeal, the Sixth Circuit affirmed the district court’s ruling. Plaintiffs’ counsel argued that the district court erred in opposing sanctions because the legal issues in the case were debatable and because the district court misunderstood Michigan law. The Sixth Circuit agreed with the district court’s conclusion, however, the plaintiffs’ counsel had unreasonably pursued frivolous claims based on an implausible interpretation of statute. The Sixth Circuit also found that the plaintiffs’ counsel should have known their claims lacked merit. The Sixth Circuit further rejected the argument of plaintiffs’ counsel that sanctions should have been limited to the specific filings related to the unnecessarily claims. Instead, it deemed the entire action frivolous and vexatious, and affirmed the district court’s ruling. So, very powerful use of sanctions that support a defendant’s position in that case.

Jerry: Those are great insights and analysis, Brandon. It certainly underscores the notion that non-merits issues in essence procedural issues can be important to the overall outcome of a class action and the method by which a corporation defends itself in class action litigation. Well, loyal blog readers thanks so much for joining us in this installment of the Class Action Weekly Wire. And thank you, Brandon, for providing your thought leadership in this space.

Brandon: Thanks for having me, Jerry

July 9, 2024 by Class Action Defense

The Seventh Circuit Derails Mass Arbitration Tactics

By Gerald L. Maatman, Jr., Eden E. Anderson, Rebecca S. Bjork, and Ryan T. Garippo

Duane Morris Takeaways: On July 1, 2024, in Wallrich, et al. v. Samsung Electronics America, Inc., No. 23-2842, 2024 WL 3249646 (7th Cir. July, 1, 2024), the U.S. Court of Appeals for the Seventh Circuit dealt a major blow to mass arbitrations. This decision strengthens protections for companies that utilize arbitration agreements as an effective way to limit their potential classwide exposure. The Seventh Circuit’s opinion is required reading for any corporation utilizing arbitration programs.

Case Background

Samsung Electronics, Co. Ltd. and Samsung Electronics America, Inc. (collectively “Samsung”) are two affiliates that manufacture and sell consumer electronics. “When consumers purchase or use Samsung devices, they automatically agree to Samsung’s terms and conditions.” Id. at *1. Like many other companies, Samsung’s terms and conditions contain an arbitration provision, which specifies that “all disputes” between Samsung and its customers shall be arbitrated before the American Arbitration Association (the “AAA”). Id.

Pursuant to those terms and conditions, “[a] group of 35,651 Illinois consumers . . . filed arbitration demands before the AAA alleging they purchased Samsung devices and that those devices unlawfully collected and stored sensitive biometric data in violation of the Illinois Biometric Information Privacy Act.” Id. at *2. This tactic — commonly known as a mass arbitration demand — is often used by plaintiffs’ lawyers as an attempt to secure a quick settlement out of a defendant. The tactic is sometimes successful because a defendant is often forced to pay expensive arbitration filing fees in order to initiate an arbitration. Often it is more cost effective for the defendant simply to settle the claims altogether rather than pay the filing fees and other expenses of litigation. For this reason, numerous federal courts have held that while this tactic may be permissible, “mass arbitration interferes with the fundamental attributes of arbitration promoted by the [Federal Arbitration Act].” See, e.g., Lamour v. Uber Technologies, Inc., No. 16-CV-21449, 2017 WL 878712, at *6 (S.D. Fla. Mar. 1, 2017) (quotations and citations omitted).

Against that backdrop, counsel for the claimants in Wallrich attempted to deploy mass arbitration tactics in this litigation. After the consumers filed their arbitration demands, “the AAA requested $4,125,000 from Samsung, representing Samsung’s share of the initial administrative filing fees.” Wallrich, 2024 WL 3249646, at *2. The only difference between this case and others was that Samsung refused to pay the fees. The AAA then offered the consumers the opportunity to pay the $4,125,000. They also declined. And, as a result, the AAA terminated the proceedings and paved the way for a federal class action lawsuit.

Rather than pursue a class action, the consumers then “filed a Petition to Compel Arbitration” in the U.S. District Court for the Northern District of Illinois. Id. They sought, among other things, “an order compelling Samsung to pay its AAA filing fees and to arbitrate the claims.” Id. In support of that petition, the consumers submitted their: (1) “arbitration demands before the AAA”; (2) “copies of Samsung’s terms and conditions”; (3) a spreadsheet containing the consumers’ names and addresses; and (4) “the AAA’s determination that the consumers had met the AAA filing requirements.” Id. The consumers did not submit any proof, however, that they were actually customers of Samsung. Id. at *7. But regardless, the district court still entered an order compelling Samsung to pay the filing fees and to arbitrate the disputes. Samsung then appealed that decision.

The Seventh Circuit’s Opinion

On appeal, the Seventh Circuit dealt a major blow to mass arbitration tactics and reversed the order of the district court. The Seventh Circuit held, in a unanimous opinion, that “the consumers effectively needed to present evidence that they were in fact Samsung customers” in order to arbitrate the dispute. Id. at *6. It also held that the consumers had not met their burden of doing so.

The Seventh Circuit explained that “arbitration demands are nothing more than allegations, much like a complaint filed in a district court.” Id. As such, they are not proof that the consumers were actually Samsung customers. Similarly, copies of the terms and conditions “do nothing to show that any of the consumers purchased a Samsung device” nor did the AAA’s determination as to the filing requirements make such a showing either. Id. And last, the Seventh Circuit explained that the “spreadsheet of only names and addresses likewise fails to show that any of those named were Samsung customers.” Id. Accordingly, none of the “evidence” submitted by the consumers was sufficient to address their burden.

Further, the Seventh Circuit noted that the “consumers could have submitted almost anything to meet their burden of proving the existence of an arbitration agreement. For example, they could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices. Or even more directly, they could have submitted declarations attesting to the allegations in their arbitration demands. They did not.” Id. at *7. The major difference, however, was that all 35,651 consumers would have needed to submit such proof. In the absence of such evidence in the record, the Seventh Circuit was left with no choice but to reverse the district court.

The Seventh Circuit concluded that a motion to compel arbitration is akin to a motion for summary judgment and, therefore, “does not allow second chances.” Id. “The consumers had the opportunity to present their evidence, and they failed to do so.” Id. Consequently, the mass arbitration tactics on display here seem to have been permanently halted.

Implications For Companies

The importance of Wallrich, et al. v. Samsung Electronics America, Inc. cannot be understated. Companies faced with mass arbitration threats can now force each and every purported claimant to submit proof that his claim is subject to an arbitration agreement. If a claimant does not come forward with such proof, the company may be able to refuse to pay any filing fees and avoid mass arbitration altogether. As a result, corporate counsel can rest easy knowing that it is more difficult for their arbitration agreements to be weaponized against them.

That said, the importance of arbitration agreements also must be emphasized. The Illinois Biometric Information Privacy Act (“BIPA”) is one of plaintiff’s counsel’s favorite litigation targets. When utilized on a class-wide basis, claims under the BIPA are defined by its “draconian exposure” and its “job-destroying liability.” Cothron v. White Castle System, Inc., 216 N.E. 3d 918, 940 (Ill. 2023) (Overstreet, J., dissenting). However, if each BIPA plaintiff is required to arbitrate his claims individually, a company’s exposure becomes significantly less and, in some circumstances, even de minimis. Accordingly, corporate counsel should also consider this factor as one of the benefits to implementing an arbitration program as an effective strategy to limit classwide relief.

July 8, 2024 by Class Action Defense

California Federal Court Refuses To Dismiss Wiretapping Class Action Involving Company’s Use Of Third-Party AI Software

By Gerald L. Maatman, Jr., Justin R. Donoho, and Nathan Norimoto

Duane Morris Takeaways: On July 5, 2024, in Jones, et al. v. Peloton Interactive, Inc., No. 23-CV-1082, 2024 WL 3315989 (S.D. Cal. July 5, 2024), Judge M. James Lorenz of the U.S. District Court for the Southern District of California denied a motion to dismiss a class action complaint alleging that a company’s use of a third party AI-powered chat feature embedded in the company’s website aided and abetted an interception in violation of the California Invasion of Privacy Act (CIPA). Judge Lorenz was unpersuaded by the company’s arguments that the third-party functioned as an extension of the company rather than as a third-party eavesdropper. Instead, the Court found that the complaint had sufficient facts to plausibly allege that the third party used the chats to improve its own AI algorithm and thus was more akin to a third-party eavesdropper for which the company could be held liable for aiding and abetting wiretapping under the CIPA.

Background

This case is one of the hundreds of class actions that plaintiffs have filed nationwide alleging that third-party AI-powered software embedded in defendants’ websites or other processes and technologies captured plaintiffs’ information and sent it to the third party. A common claim raised in these cases is a claim under federal or state wiretap acts and seeking hundreds of millions or billions of dollars in statutory damages. No wiretap claim can succeed, however, where the plaintiff has consented to the embedded technology’s receipt of their communications. See, e.g., Smith v. Facebook, Inc., 262 F. Supp. 3d 943, 955 (N.D. Cal. 2017) (dismissing CIPA claim involving embedded Meta Pixel technology because plaintiffs consented to alleged interceptions by Meta via their Facebook user agreements).

In Jones, Plaintiffs brought suit against an exercise equipment and media company. According to Plaintiffs, the defendant company used third-party software embedded in its website’s chat feature. Id. at *1. Plaintiffs further alleged that the software routed the communications directly to the third party without Plaintiffs’ consent, thereby allowing the third party to use the content of the communications to “to improve the technological function and capabilities of its proprietary, patented artificial intelligence software.” Id. at **1, 4.

Based on these allegations, Plaintiffs alleged a claim for aiding and abetting an unlawful interception and use of the intercepted information under California’s wiretapping statute, CIPA § 631. Id. at *2. Although Plaintiffs did not allege any actual damages, see ECF No. 1, the statutory damages they sought totaled at least $1 billion. See id. ¶ 33 (alleging hundreds of thousands of class members); Cal. Penal Code. § 637.2 (setting forth statutory damages of $5,000 per violation). The company moved to dismiss under Rule 12(b)(6), arguing that the “party exception” to CIPA applied because the third-party software “functions as an extension of [the company] rather than as a third-party eavesdropper.” 2024 WL 3315989, at *2.

The Court’s Opinion

The Court denied the company’s motion and allowed Plaintiffs’ CIPA claim to proceed to discovery.

The CIPA is a one-party consent statute, meaning that there is no liability under the statute for any party to the communication. Id. at *2. To answer the question for purposes of CIPA’s party exception of whether the embedded chat software provider was more akin to a party or a third-party eavesdropper, the Court found that courts look to the “technical context of the case.” Id. at *3. As the Court explained, a software provider can be held liable as a third party under CIPA if that entity listens in on a consensual conversation where the entity “uses the collected data for its own commercial purposes.” Id. By contrast, the Court further explained, if the software provider merely collects, refines, and relays the information obtained on the company website back to the company “in aid of [defendant’s] business” then it functions as a tool and not as a third party. Id.

Guided by this framework, the Court found sufficient allegations that the software provider used the chats collected on the company’s website for its own purposes of improving its AI-driven algorithm. Id. at *4. Therefore, according to the Court, the complaint sufficiently alleged that the software provider was “more than a mere ‘extension’” of the company, such that CIPA’s party exemption did not apply and Plaintiffs sufficiently stated a claim for the company’s aiding and abetting of the software provider’s wiretap violation. Id.

Implications For Companies

The Court’s opinion serves as a cautionary tale for companies using third-party AI-powered processes and technologies that collect customer communications and information. As the ruling shows, litigation risk associated with companies’ use of third-party AI-powered algorithms is not limited to complaints alleging damaging outcomes such as discriminatory impacts, such as plaintiffs alleged in Louis v. Saferent Sols., LLC, 685 F. Supp. 3d 19, 41 (D. Mass. 2023) (denying motion to dismiss claim under Fair Housing Act against landlord in conjunction with landlord’s use of algorithm used to calculate risk of leasing a property to a particular tenant). In addition, companies face the risk of high-stakes claims for statutory damages under wiretap statutes associated with companies’ use of third-party AI-powered algorithms embedded in their websites, even if the third party’s only use of the algorithm is to improve the algorithm and even if no actual damages are alleged.

As AI-related technologies continue their growth spurt, and litigation in this area spurts accordingly, organizations should consider in light of Jones whether to modify their website terms of use, data privacy policies, and all other notices to the organizations’ website visitors and customers to describe the organization’s use of AI in additional detail. Doing so could deter or help defend a future AI class action lawsuit similar to the many that are being filed today, alleging omission of such additional details, raising claims brought under various states’ wiretap acts and consumer fraud acts, and seeking multimillion-dollar and billion-dollar statutory damages.