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. Jan 19, 2024) (ECF No. 45), Judge Rita F. Lin of the U.S. District Court for the Northern District of California dismissed a lawsuit against Workday involving allegations that algorithm-based applicant screening tools discriminated applicants on the basis of race, age, and disability. With businesses more frequently relying on artificial intelligence to perform recruiting and hiring functions, this ruling is helpful for companies facing algorithm-based discrimination lawsuits in terms of potential strategies to attack such claims at the pleading stage.
Case Background
Plaintiff, an African-American male over the age of forty with anxiety and depression, alleged that he applied to 80 to 100 jobs with companies that use Workday’s screening tools. Despite holding a bachelor’s degree in finance and an associate’s degree in network systems administration, Plaintiff claimed he did not receive not a single job offer. Id. at 1-2.
On July 19, 2021, Plaintiff filed an amended charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”). On November 22, 2022, the EEOC issued a dismissal and notice of right to sue. On February 21, 2023, Plaintiff filed a lawsuit against Workday, alleging that Workday’s tools discriminated against job applicants who are African-American, over the age of 40, and/or disabled in violation of Title VII, the ADEA, and the ADA, respectively.
Workday moved to dismiss the complaint, arguing that Plaintiff failed to exhaust administrative remedies with the EEOC as to his intentional discrimination claims; and that Plaintiff did not allege facts to state a plausible claim that Workday was liable as an “employment agency” under the anti-discrimination statutes at issue.
The Court’s Decision
The Court granted Workday’s motion to dismiss. First, the Court noted the parties did not dispute that Plaintiff’s EEOC charge sufficiently exhausted the disparate impact claims. However, Workday moved to dismiss Plaintiff’s claims for intentional discrimination under Title VII and the ADEA on the basis of his failure to exhaust administrative remedies. Workday argued that the EEOC charge alleged only claims for disparate impact, not intentional discrimination.
Rejecting Workday’s argument, the Court held that it must construe the language of the EEOC charge with “utmost liberality since they are made by those unschooled in the technicalities of formal pleading.” Id. at 5 (internal quotation marks and citations omitted). The Court acknowledged that the thrust of Plaintiff’s factual allegations in the EEOC charge concerned how Workday’s screening tools discriminated against Plaintiff based on his race and age. However, the Court held that those claims were reasonably related to his intentional discrimination claims, and that the EEOC investigation into whether the tools had a disparate impact or were intentionally biased would be intertwined. Accordingly, the Court denied Workday’s motion to dismiss on the basis of failure to exhaust administrative remedies.
Next, the Court addressed Workday argument that Mobley did not allege facts to state a plausible claim that it was liable as an “employment agency” under the anti-discrimination statutes at issue. The Court opined that Plaintiff did not allege facts sufficient to state a claim that Workday was “procuring” employees for these companies, as required for Workday to qualify as an “employment agency.” Id. at 1. For example, Plaintiff did not allege details about his application process other than that he applied to jobs with companies using Workday, and did not land any job offers. The complaint also did not allege that Workday helped recruit and select applicants.
In an attempt to salvage these defects at the motion hearing and in his opposition brief, Plaintiff identified two other potential legal bases for Workday’s liability — as an “indirect employer” and as an “agent.” Id. To give Plaintiff an opportunity to attempt to correct these deficiencies, the Court granted Workday’s motion to dismiss on this basis, but with leave for Plaintiff to amend. Accordingly, the Court granted in part and denied in part Workday’s motion to dismiss.
Implications For Businesses
Artificial intelligence and algorithm-based applicant screening tools are game-changers for companies in terms of streamlining their recruiting and hiring processes. As this lawsuit highlights, these technologies also invite risk in the employment discrimination context.
For technology vendors, this ruling illustrates that novel arguments about the formation of the “employment” relationship could potentially be fruitful at the pleading stage. However, the Court’s decision to let Plaintiff amend the complaint and have one more bite at the apple means Workday is not off the hook just yet. Employers and vendors of recruiting software would be wise to pay attention to this case –and the anticipated wave of employment discrimination lawsuits that are apt to be filed – as algorithm-based applicant screening tools become more commonplace.
Duane Morris Takeaway: During the past year, the label “ESG” became “mainstream,” and discussion of its impact became a recurring topic of conversation in boardrooms across the country. ESG refers to broadly to “environmental, social, and governance,” which many companies have embraced as part of their business plans and corporate missions.
Watch the video below as Duane Morris partner Jerry Maatman discusses the impact of ESG on class action litigation and how this trend will evolve in 2024.
DMCAR Trend #9 – ESG Class Action Litigation Hit Its Stride
ESG was not immune to lawsuits, and we saw a steady influx of class action litigation in two particular ESI spheres – (i) product advertising and (ii) employment and DEI-related lawsuits.
The former focused on product advertising and, in particular, on allegations that marketing campaigns touting products as “green” or “sustainable” or “carbon neutral,” among other things, are false, misleading, and deceptive. Commonly called “greenwashing,” these claims generally refer to false or misleading statements about the environmental benefits or about the performance of particular products or operations and, in particular, tend to target statements touting the “green” or “sustainable” or “eco-friendly” characteristics of such products or operations.
Most often, plaintiffs’ class action attorneys file greenwashing lawsuits as class actions. These lawsuits largely focus on claims that defendants marketed products as “environmentally responsible,” “sustainably sourced,” or “humanely raised,” arguing that such misleading claims induce purchasers to pay a premium for “greener” products.
In Smith, et al. v. Keurig Green Mountain, Inc., No. 4:18-CV-06690 (N.D. Cal.), for example, the plaintiffs filed a class action lawsuit asserting various claims, including breach of warranty, misrepresentation, and violation of the California Unfair Competition Law, targeting Keurig’s representations regarding its K-cup coffee pods. In particular, Keurig marketed its K-cups as recyclable with labeling that consumers could “[h]ave [their] cup and recycle it, too.” The plaintiffs claimed that, in fact, the K-cups were not recyclable. In 2019, the court denied Keurig’s motion to dismiss, and, in 2020, the court granted the plaintiff’s motion for class certification. In February 2023, the court granted final approval of class action settlement for $10 million.
In Dwyer, et al. v. Allbirds, 598 F. Supp. 3d 137 (S.D.N.Y. 2022), the plaintiff filed a similar greenwashing class action alleging that defendant marketed its shoes, in part, based on their sustainability using statements like “Sustainability Meets Style” and “Environmentally Friendly.” The plaintiff brought claims for breach of express warranty, fraud, and unjust enrichment and asserted violations of §§ 349-350 of the New York General Business Law. Allbirds maintained a website showing the carbon footprint associated with its products based on a life-cycle analysis (LCA), and showing the environmental impact of its materials based on the third-party Higg Material Sustainability Index (Higg MSI). The plaintiff attacked the LCA tool and the Higg MSI standard as incomplete measurements of product sustainability. The court granted Allbirds’ motion to dismiss for failure to state a claim.
In Lizama, et al. v. H&M Hennes & Mauritz LP, No. 4:22-CV-1170 (E.D. Mo. 2023), the plaintiffs filed a class action complaint alleging that the retailer deceptively attempted to “greenwash” its allegedly environmentally damaging practices. H&M’s “Conscious Choice” collection included items made from recycled and organic materials that H&M marketed as “more sustainable.” The plaintiffs alleged that, in fact, H&M’s clothing was not sustainable because the synthetic materials in the collection had a negative environmental impact. The plaintiffs asserted claims for violation of various California and Missouri statutes and sought to certify various sub-classes. On May 12, 2023, the court granted the defendant’s motion to dismiss the California claims for lack of personal jurisdiction and dismissed the Missouri claims because it found the alleged statements not misleading as a matter of law.
Relative to employment and DEI-related lawsuits, the plaintiffs’ class action bar focused numerous claims based on allegations that companies failed to live up to their representations regarding diversity, equity, and inclusion or breached their DEI commitments.
Plaintiffs anchored many of their class claims on board-related DEI commitments, employment discrimination, and workplace safety issues. In the corporate DEI cases, plaintiffs asserted claims that companies allegedly failed to live up to their DEI commitments or failed to abide by their DEI policies or practices. In many of the ESG-related employment discrimination cases, plaintiffs focused on claims that corporate officers or directors breached their fiduciary duties by failing to address employment discrimination, by adopting policies that discriminate, or by failing to address safety concerns.
In Bucks County Employees Retirement System v. Norfolk Southern Corp., No. 2:23-CV-982 (N.D. Ga. 2023), for instance, the plaintiff filed a securities class action against the defendant and three of its managers alleging that they misrepresented the corporation’s worker safety practices prior to a chemical train derailment, leading investors to purchase company stock at inflated levels. The plaintiff alleged that the defendants committed to safety as a “core value” in their public statements and SEC filings but, in reality prioritized more lucrative practices at the expense of safety, such as longer and heavier trains and lower headcounts. The plaintiff asserted that such culture of “increased risk-taking” made the company more vulnerable to derailments.
As companies continue to add statements regarding their environmental impact or social responsibility to enhance their marketing efforts, communicate their company values, and/or attempt to appeal to consumers and shareholders attuned to ESG considerations, we expect to see ESG class actions continue their growth trajectory.
Duane Morris Takeaway: Generative AI hit mainstream in 2023 and quickly become one of the most talked-about and debated subjects among corporate legal counsel across the country, as numerous companies jumped to incorporate AI while attempting to manage its risks. In 2023, we saw the tip of the iceberg relative to the ways that generative AI is poised to transform class action litigation.
In the video below, Duane Morris partner Jennifer Riley discusses the latest AI class action rulings, and what companies can expect to see in AI litigation in 2024.
DMCAR Trend #8 – Generative AI Began Transforming Class Action Litigation
Opportunities For Enhanced Efficiency
As the COVID 19 pandemic brought video-conferencing tools into the mainstream, such tools enabled more litigants to conduct and to attend more hearings, more depositions, and more mediations in less time. While the debate continues as to their effectiveness, generative AI is poised to enable lawyers to far surpass those gains in efficiency, potentially enabling the plaintiffs’ class action bar to do “more with less” like never before, leading to more lawsuits that can be handled by fewer lawyers in less time and a potential surge of class actions on the horizon.
Less than a year into the generative AI movement, we have seen the technology influence various aspects of the legal process, including by assisting legal professionals in analyzing vast amounts of data; automating the review of documents, contracts, and communications; increasing the speed and potentially enhancing the accuracy of e-discovery; and automating and enhancing the dissemination of information in the class action settlement administration process.
Legal research, for example, traditionally required a time-consuming undertaking that involved sifting through dozens of decisions and secondary authorities. AI tools are enhancing this process through natural language search capabilities and machine learning algorithms that streamline the process and enhance the results. Document review similarly traditionally required a time-consuming and painstaking process. AI tools are using machine learning and text analytics, for example, to sort and categorize large datasets with increasing accuracy. By quickly analyzing extensive document sets, AI tools can expedite the discovery process, making litigation more efficient and cost-effective.
Likewise, AI has the potential to revolutionize the process of administering class action settlements. The participation in claims-made settlements, for instance, often falls within the range of 15% to 35%, depending upon various factors such as the type and method of notice. AI can be used in a variety of ways, including to find potential class members and thereby raise claim rates, while reducing administrative costs, increasing the amount available for distribution as well as the ultimate settlement payout.
In sum, the legal industry is poised to leverage this transformative technology to make leaps in enhancing the efficiency and effectiveness of the class action litigation process.
Risk Of Class Claims
While improving the efficiency with which the plaintiffs’ class action bar can litigate class actions, generative AI is providing an ocean of raw material for potential claims. Upon hitting the mainstream, AI promptly became the subject of class claims, which span multiple theories and areas of law.
While generative AI might improve the speed of interactions, for instance, users have the ability to exploit AI to generate massive amounts of false information or to simply inadvertently rely upon errors in AI-generated communications, giving rise to claims. Similarly, the SEC has warned businesses against “AI washing,” or making false claims regarding their AI capabilities, likening it to the greenwashing phenomenon that has been the target of an agency crackdown. The plaintiffs’ class action bar is using such representations about AI to fuel class claims for consumer fraud based on allegedly misleading or deceptive representations about the efficacy of AI technology. In Matsko, et al. v. Tesla, Case No. 22-CV-5240 (N.D. Cal. Sept. 14, 2022), for instance, a plaintiff filed a class action alleging that Tesla exaggerated the capabilities of its software and asserting various causes of action for breach of warranty and violation of California consumer protection laws, among others.
Companies that incorporate AI to streamline their decision-making processes likewise face the prospect of class action suits. Plaintiffs have filed suits against insurers that used algorithms to adjudicate claims, for example, as well as against agencies that used programs to deny or reduce government benefits. In Kisting-Leung, et al. v. Cigna Corp., Case No. 23-CV-01477 (E.D. Cal. 2023), for instance, a group of California consumers filed a class action complaint against a national health insurance company alleging that its use of an algorithm to deny certain medical claims constituted breach of the implied covenant of good faith and fair dealing, unjust enrichment, intentionally interfered with contractual relations, and violated California’s Unfair Competition Law.
The developers of generative AI products have not remained immune. Such companies have faced a slew of class action lawsuits alleging privacy violations. In a series of lawsuits beginning in June and July 2023, the plaintiffs’ class action bar has alleged that, by collecting publicly-available data to develop and train their software, developers of generative AI products stole private and personal information from millions of individuals. In P.M., et al. v. OpenAI LP, No. 3:2023-CV-03199 (N.D. Cal. 2023), a group of plaintiffs filed a class action suit against OpenAI LP and Microsoft, Inc. alleging that by collecting publicly-available information from the internet to develop and train its generative AI tools, including ChatGPT, Dall-E, and Vall-E, OpenAI stole private information from millions of people, violating their privacy and property rights, among other claims. In J.L., et al. v. Alphabet Inc., No. 3:23-CV-03440 (N.D. Cal. 2023), the same plaintiffs’ firm filed a class action lawsuit against Google, similarly alleging that, by collecting internet data to train its tools like Bard, Imagen and Gemini, Google infringed privacy rights and violated the Copyright Act.
Developers of generative AI tools similarly have faced claims. Plaintiffs have filed class action lawsuits claiming that, by collecting and using internet data to train generative AI models, developers violated copyright laws. In Andersen, et al. v. Stability AI, Ltd., Case No. 23-CV-00201 (N.D. Cal. Oct. 20, 2023), for example, plaintiffs filed a class action on behalf of artists alleging that Stability AI, Ltd. and Stability AI, Inc. “scraped” billions of copyrighted images from online sources, without permission, to train their models to generate new images without ascribing credit to the original artists. In Doe v. GitHub, Inc., 22-CV-06823 (N.D. Cal. May 11, 2023), the plaintiffs, a group of developers who allegedly published licensed code on GitHub’s website, filed a class action lawsuit against GitHub, the online code repository, as well as Microsoft and OpenAI claiming that GitHub improperly used that code to train its AI-powered coding assistant, Copilot, without appropriate attribution in violation of copyright management laws.
As technology continues to grow and change, and the plaintiffs’ class action bar continues to flex its creativity, the number and types of claims are likely to expand and evolve during the upcoming year.
By Gerald L. Maatman, Jr., Jennifer A. Riley, and Kathryn Brown
Duane Morris Takeaways: On January 16 and 17, 2024, in Messer v. Bristol Compressors International, LLC, No. 1:18-CV-00040 (W.D. Va.), on remand from a Fourth Circuit decision, Judge James P. Jones of the U.S. District Court for the Western District of Virginia issued an opinion and order entering judgment in the amount of $2,407,471.90 for severance pay benefits owed under an ERISA employee benefits plan based on violations of the 60-day notice requirement of the Worker Adjustment and Retraining Notification Act (WARN Act), 29 U.S.C. § 2102(a)(1). The multi-million dollar ruling stems from a 2018 WARN-covered “plant closing” and follows an earlier award on November 23, 2021 of $1.39 million to certain class members for damages including back pay and interest owed pursuant to the WARN Act for the same notice violation underlying the recent ruling.
The decision highlights the extremely technical nature and high stakes of WARN Act litigation in the class action context.
Case Background
On July 31, 2018, Bristol Compressors International (BCI) notified employees that it would close its manufacturing facility in Bristol, Virginia, and their employment would terminate on or before September 30, 2018. BCI implemented several rounds of terminations over the next three and a half months, beyond the originally anticipated date of September 30, 2018 for the final terminations. However, BCI did not issue additional notice under the WARN to those whose employment ended after September 30, 2018. The manufacturing facility ultimately closed on November 16, 2018.
On October 19, 2018, a group of former employees sued BCI- under the WARN Act. The plaintiffs alleged that the company failed to provide 60 days’ notice of their terminations in accordance with the specific requirements of the WARN Act.
On June 20, 2019, the Court granted the plaintiffs’ motion for certification of three sub-classes of former employees terminated due to the plant closing under Rules 23(a) and 23(b)(3). Sub-class One included employees involuntarily terminated between July 31, 2018 and August 31, 2018. Sub-class Two included employees involuntarily terminated after August 31, 2018 who signed a stay bonus agreement that included an express waiver of claims under the WARN Act. Sub-class Three included employees involuntarily terminated after August 31, 2018 who had not signed a stay bonus agreement.
Following a bench trial, the Court in 2020 granted summary judgment to BCI on the plaintiffs’ claim for benefits owed under a company severance pay plan. The Court found that BCI validly terminated its severance pay plan before the employment terminations. In a separate 2020 opinion, the Court dismissed upon summary judgment the WARN Act claims of four class members whose employment ended on October 19, 2018. The Court reasoned that BCI’s July 31, 2018 notification was adequate to prepare them for their later job losses. The plaintiffs appealed those prior rulings to the Fourth Circuit.
The Fourth Circuit’s Ruling
On April 3, 2023, the Fourth Circuit, in an unpublished opinion, reversed and remanded parts of the 2020 rulings. Messer v. Bristol Compressors International, LLC, 2023 U.S. App. LEXIS 7826 (4th Cir. Apr. 3, 2023) (per curiam).
The Fourth Circuit reversed the denial of severance pay benefits to the class, concluding the company did not terminate the severance pay plan in accordance with the ERISA’s requirements for modifying or terminating an ERISA-governed benefits plan. As a result, the severance pay plan was in effect when the employment terminations occurred.
The Fourth Circuit affirmed the decision upholding the release of claims under the WARN Act to members of Sub-class Two. However, because the release of claims in the stay bonus agreements those class members signed explicitly carved out claims for vested benefits under the company’s “written benefit plans,” members of Sub-class Two did not waive their claims for severance pay benefits owed to them under the ERISA-governed employee benefit plan.
The Fourth Circuit also vacated the grant of summary judgment to BCI on the WARN Act claims of the four plaintiffs whose employment ended on October 19, 2018. The Fourth Circuit pointed to the regulation under the WARN Act providing that, if an employer postpones a covered plant closure for 60 days or more, additional 60 days’ notice under the WARN Act is owed to affected employees. See 20 C.F.R. § 639.10. Because the company issued no additional notice to those four individuals after July 31, 2018, but terminated their employment after September 30, 2018, the Fourth Circuit opined that a WARN Act violation was established.
The District Court’s Decision
On remand, the Court granted the plaintiffs’ unopposed motion for summary judgment on the two issues on which the Fourth Circuit reversed and remanded. Consistent with the Fourth Circuit’s ruling, the Court held that all class members were entitled to severance pay benefits under the severance pay plan, plus interest, and the four plaintiffs whose employment ended on October 19, 2018 were in addition owed back pay and prejudgment interest for a 60-day period.
On January 17, 2014, the Court ordered the case closed, with leave granted to class counsel to file a supplemental motion for attorneys’ fees and costs within 30 days.
Implications For Employers
The Messer case is illustrative of the many decisions in recent years in which plaintiffs have recovered multi-million dollar judgments following class certification of WARN Act claims. Employers should remain vigilant to the WARN Act, and the potential exposure to 60 days’ worth of back pay, lost benefits and prejudgment interest in the event of violations, well before implementing any mass layoff or plant closure that may trigger its strict notification requirements.
By Gerald L. Maatman, Jr., Alex W. Karasik, and Tyler Zmick
Duane Morris Takeaways: In Sloan, et al. v. Anker Innovations Ltd., No. 22-CV-7174 (N.D. Ill. Jan. 9, 2024), Judge Sarah Ellis of the U.S. District Court for the Northern District of Illinois granted in parta motion to dismiss privacy claims brought against the companies that manufacture and sell “eufy” security products. The Court dismissed the claims asserted under the federal Wiretap Act because Defendants were “parties” to the communication during which the eufy products sent security recordings to Plaintiffs’ mobile devices (notwithstanding that the products also sent the data to a server owned by Defendants). In addition, the Court partially dismissed Plaintiffs’ claims under the Illinois Biometric Information Privacy Act and under four state consumer protection statutes, thereby allowing Plaintiffs to proceed with their case only with respect to some of their claims.
For businesses who are embroiled in facial recognition software and related privacy class actions, this ruling provides a helpful roadmap for fracturing such claims at the outset of the lawsuit.
Case Background
Plaintiffs were individuals from various states who purchased and used Defendants’ “eufy” branded home security cameras and video doorbells. The eufy products can, among other things, detect motion outside a person’s home and apply a facial recognition program differentiate “between known individuals and strangers by recognizing biometric identifiers and comparing the face template against those stored in a database.” Id. at 3. Eufy products sync to a user’s phone through eufy’s Security app, which notifies a user of motion around the camera by sending the use a recorded thumbnail image or text message.
Defendants advertised that the video recordings and facial recognition data obtained through eufy cameras are stored locally on user-owned equipment owned and that the data would be encrypted so that only the user could access it. Media reports later revealed, however, that the eufy products uploaded thumbnail images used to notify users of movement to Defendants’ cloud storage without encryption, and that users could stream content from their videos through unencrypted websites.
Claiming they relied to their detriment on Defendants’ (allegedly false) privacy-related representations when purchasing the eufy products, the eight named Plaintiffs filed a putative class action against corporate Defendants involved in the manufacture and sale of “eufy” products. In their complaint, Plaintiffs asserted that Defendants violated: (1) the Federal Wiretap Act; (2) the Biometric Information Privacy Act (the “BIPA”); and (3) the consumer protection statutes of Illinois, New York, Massachusetts, and Florida. Defendants moved to dismiss Plaintiffs’ claims under Federal Rule of Civil Procedure 12(b)(6).
The Court’s Decision
The Court granted in part and denied in part Defendants’ motion, holding that: (1) the Wiretap Act claim should be dismissed because Defendants were a party to the relevant communication (i.e., the transmission of data from eufy products to Plaintiffs via the eufy Security app); (2) the BIPA claims should be dismissed as to non-Illinois resident Plaintiffs; and (3) the claims brought under the relevant consumer protection statutes should be dismissed only to the extent they were premised on certain of Defendants’ public-facing privacy statements.
Wiretap Act Claims
The Court first addressed Plaintiffs’ Wiretap Act claims, explaining that the statute “empowers a private citizen to bring a civil claim against someone who ‘intentionally intercepts [or] endeavors to intercept . . . any wire, oral, or electronic communication.’” Id. at 8 (quoting 18 U.S.C. § 2511(1)(a)).
Defendants argued that Plaintiffs failed to state a claim under the Wiretap Act because the statute does not apply to a party to the relevant communication. Specifically, the Wiretap Act exempts a person who intercepts an electronic communication “where such person is a party to the communication or where one of the parties to the communication has given prior consent to such interception.” 18 U.S.C. § 2511(2)(d).
The Court agreed with Defendants and thus dismissed Plaintiffs’ Wiretap Act claim. The Court described the relevant “communication” as the transmission of data from eufy products to Plaintiffs’ devices and explained that the transmission “is not between the eufy product and Plaintiffs, but rather between the eufy product and the eufy Security app, which Defendants own and operate. As such, the communication necessarily requires Defendants’ participation, even if Plaintiffs did not intend to share their information with Defendants.” Id. at 8-9 (emphasis added). The Court thus held that Defendants were parties to the communication, and Defendants also uploading the data to their own server (without Plaintiffs’ knowledge) did not change that conclusion.
BIPA Claims
Regarding Plaintiffs’ BIPA claims, Defendants argued that Plaintiffs failed to allege that the relevant data (which Defendants described as “thumbnail images”) qualifies for protection under the BIPA because photographs are not biometric data under the statute. The Court rejected this argument since Plaintiffs alleged that Defendants uploaded thumbnail information and facial recognition data (namely, “scans of face geometry”) to their server.
The Court agreed with Defendants’ second argument, however, which asserted that Plaintiffs’ BIPA claim failed to the extent it was brought by or on behalf of Plaintiffs who are not Illinois residents. The BIPA applies only where the underlying conduct occurs “primarily and substantially” in Illinois. The Court determined that the relevant communications between Plaintiffs and Defendants “occurred primarily and substantially in the state of residency for each Plaintiff.” Id. at 12-13. And the End User License Agreement for eufy Camera Products and the Security App stating that the agreement is governed by Illinois law did not change the result that the BIPA claim brought by non-Illinois residents must be dismissed.
Statutory Consumer Protection Claims
Finally, the Court turned to Defendants’ contentions relative to the alleged violations of the four state consumer protection statutes. In beginning its analysis, the Court explained that “[t]o state a claim for deceptive practices under any of the alleged state consumer fraud statutes, Plaintiffs must allege a deceptive statement or act that caused their harm.” Id. at 14. Moreover, “a statement is deceptive if it creates a likelihood of deception or has the capacity to deceive.” Id. at 15 (citation omitted); see also id. (noting that “the allegedly deceptive act must be looked upon in light of the totality of the information made available to the plaintiff”) (citation omitted). Defendants argued in their motion to dismiss that Plaintiffs did not allege cognizable deceptive statements because the statements at issue constitute either puffery or are not false.
The Court dismissed Plaintiffs’ statutory fraud claims in part. Specifically, the Court held that Defendants’ advertising in the form of certain “statements relating to privacy” (e.g., “your privacy is something that we value as much as you do”) constituted nonactionable “puffery.” Id. at 16. The Court therefore dismissed Plaintiffs’ statutory fraud claims insofar as they were premised on the similarly vague “statements relating to privacy.”
However, the Court denied Defendants’ attempt to dismiss the claims premised on their more specific statements about (1) end-user data being stored only on a user’s local device, (2) the use of alleged facial recognition, and (3) end-user data being encrypted. Defendants argued that these were “accurate statements” and thus could not serve as the basis for consumer fraud claims. The Court disagreed, ruling that Plaintiffs sufficiently alleged that the storage, encryption, and facial recognition statements may have misled a reasonable consumer. Accordingly, the Court granted in part and denied in part Defendants’ motion to dismiss.
Implications For Corporate Counsel
The most significant aspect of Sloan v. Anker Innovations Limited is the Court’s analysis of Plaintiffs’ Wiretap Act claims, given the rapidly emerging trend among the plaintiff class action bar of using traditional state and federal laws – including the Wiretap Act – to seek relief for alleged privacy violations. In applying modern technologies to older laws like the Wiretap Act (passed in 1986), courts have grappled with issues such as the determination of who is a “party to the communication” such that an entity is exempt from the statute’s scope. As data exchanges and data storage become more complex, the “party to the communication” determination reciprocally becomes more nebulous.
In Sloan, the “communication” was the eufy products transmitting data to Plaintiffs’ device and “contemporaneously intercept[ing] and sen[ding] [the data] to [Defendant’s] server.” Id. at 8 (citation omitted). Because Plaintiffs had to use the eufy Security app to access the data, and because Defendants owned and operated the app, the Court determined that Defendants necessarily participated in the communication. But the result may have been different if, for instance, Plaintiffs could use a different app (one not owned by Defendants) to access the data, or if unbeknownst to Plaintiffs, the eufy Securty app was actually owned and operated by a third-party entity. The upshot is that corporate counsel should keep these principles in mind with respect to any data-flow processes regarding end-user or employee data.
Duane Morris Takeaway:In 2023, the EEOC’s litigation enforcement activity showed that its previous slowdown in filing activity is well in the rearview mirror, as the total number of lawsuits filed by the EEOC increased from 97 in 2022 to 144 in FY 2023.
In accordance with tradition, the EEOC filed more lawsuits in September 2023, the last month of its fiscal year, than in any other month from October 2022 forward. This past year, the EEOC filed 67 lawsuits in September, up from 39 filed in September 2022.
Watch below as Duane Morris partner Jerry Maatman addresses the top Trends in Government Enforcement Litigation in 2023, and what to expect in this area in 2024.
DMCAR Trend #7 – Government Enforcement Lawsuit Filings Reflected A Resurgence
The EEOC exhibited a renewed focus on systemic discrimination lawsuits. “Systemic” discrimination, according to the EEOC, involves an alleged “pattern or practice, policy and/or class … where the discrimination has broad impact on an industry, profession, company, or geographic location.” The EEOC filed 25 systemic lawsuits in FY 2023, nearly double the number it filed in each of the past three years. Overall, the 2023 lawsuit filing data and strategic priorities confirm that aggressive EEOC enforcement activity is back on the menu, and the litigation filing machine is back in full throttle, with no signs of slowing down.
Litigation And Settlement Trends
In FY 2023, the EEOC filed 144 lawsuits, including 25 systemic lawsuits. This represents a resurgence from what we observed in FY 2022, during which the EEOC filed 97 lawsuits, including 13 systemic suits. These enforcement numbers reflect a boost over filing numbers from FY 2021, as well, during which the EEOC filed 114 lawsuits including 13 systemic lawsuits. They likewise reflect an increase over FY 2020, during which the COVID-19 pandemic pushed case filings down to 33.
The graphic shows this year-over-year filing trend:
As illustrated, FY 2023 represents the highest number of filings since FY 2019, during which the EEOC filed 157 lawsuits. These numbers remain off the high water marks we observed in prior years, including 217 lawsuits in FY 2018 and 201 lawsuits in FY 2017.
Notably, FY 2023 also reflected a resurgence in the filings from historically active district offices. In FY 2023, Philadelphia District Office had by far the most lawsuit filings with 19, followed by Indianapolis and Chicago with 13 filings, and New York and Los Angeles each with 10 filings. Charlotte, Atlanta, Dallas, Phoenix, and Memphis had 9 each, Houston had 8, Miami, Birmingham, and St. Louis had 7 each, and San Francisco had 5 filings.
The following shows the filing numbers in FY 2023 by district office:
The 19 filings by the Philadelphia District Office reflects a significant increase compared to FY 2022 during which Philadelphia filed 7 lawsuits. Similarly, Indianapolis nearly doubled its filings compared to FY 2022. The number of lawsuit filings by the Chicago District Office remained steady at 13. The filings by the Miami District Office fell slightly to 7, compared to its 8 filings in FY 2022.
The balance across various District Offices throughout the country confirms that the EEOC’s aggressiveness is in peak form, both at the national and regional level.
As to systemic filings, the EEOC filed 25 systemic lawsuits in FY 2023, almost double the number it filed in each of the past three fiscal years and the largest number of systemic filings in the past five years. As to its current docket, in FY 2023, the EEOC reported that it had a total of 32 systemic cases on its docket at the end of fiscal year 2022, accounting for 18% of its active merits suits. During FY 2022, the EEOC reported 29 pending systemic cases, which accounted for 16% of the EEOC’s docket.
While these numbers continue to climb, they do not yet reflect the activity that employers observed prior to FY 2018. By the end of FY 2018, the EEOC had 71 systemic cases on its active docket, two of which included over 1,000 victims, and systemic cases accounted for 23.5% of its active docket in that year.
Comparing its monetary recovery to previous years, the EEOC reported that it recovered $513.7 million in all types of cases in FY 2022, an increase over its reported recovery in FY 2021, during which it recovered, $485 million. Comparing the numbers to prior years, the EEOC recovered $535.5 million in all types of cases in FY 2020, $486 million in FY 2019, and $505 million in FY 2018.
The below chart shows the year-over-year change in total recoveries.
In terms of the types of filings, FY 2023 remained generally consistent with prior years in that the EEOC filed the bulk of its lawsuits under Title VII, the Americans with Disabilities Act (“ADA”), and the Age Discrimination in Employment Act (“ADEA”).
Title VII cases once again made up the majority of cases filed. The EEOC filed 97 cases under Title VII, making up 68% of all filings (down from 69% of filings in FY 2022 and above 61% of filings in FY 2021).
The EEOC filed more cases under the ADA this past year with 49 lawsuits, nearly twice the number of ADA lawsuits it filed in FY 2022, and, as a percentage of all filings, ADA lawsuits increased from 29.7% in FY 2022, to 34% of lawsuit filings in FY 2023.
The EEOC filed 12 ADEA lawsuits in FY 2023, an increase from the 7 ADEA lawsuits it filed in 2022.
The following graphs show the number of lawsuits filed according to the statute under which they were filed (Title VII, Americans with Disabilities Act, Pregnancy Discrimination Act, Equal Pay Act, and Age Discrimination in Employment Act) and, for Title VII cases, the theory of discrimination alleged.
Amplifying its renewed activism, the EEOC issued a press release at the end of the fiscal year touting its increased enforcement litigation activity. Such a media statement is unprecedented in that 2023 is the first year the EEOC issued a media statement touting its numbers, a signal that its renewed activity reflects a strategic priority.
In July 2023, the Senate confirmed Kalpana Kotagal, President Biden’s nominee to fill the fifth Commissioner slot, for a term expiring in July 2027. Upon her confirmation, Democrats gained a 3 to 2 majority among Commissioners. Employers are apt to see increased litigation enforcement activity in 2024 as the EEOC continues to gain momentum with its full component of Biden appointees and can utilize its majority power to advance its agenda.
What’s Next For The EEOC?
Now that the EEOC has a majority of Democratic-appointed Commissioners firmly in place, along with a significantly increased proposed budget, we expect that Corporate America will see a continued expansion of enforcement activity in 2024.
Every few years the EEOC prepares a Strategic Enforcement Plan to focus and coordinate the agency’s work and identify subject matter priorities. This year, the EEOC released its Strategic Enforcement Plan for Fiscal Years 2024-2028.
In the 2024-2028 Strategic Enforcement Plan, the EEOC identified three guiding principles. First, the Commission states that to maximize the EEOC’s effectiveness, it will focus on those activities that have the greatest strategic impact, including systemic investigations, resolutions, and lawsuits. The EEOC thus “reaffirms its commitment to a nationwide, strategic, and coordinated systemic program as one of the EEOC’s top priorities.”
Second, the EEOC states that it will take an integrated approach at the agency that promotes collaboration, coordination, and information sharing throughout the agency. It explains that “[e]ffective systemic enforcement requires communication and collaboration between the EEOC’s legal and enforcement units, between headquarters and the field, and across EEOC districts.”
Third, the EEOC states that it will ensure that it achieves results “in accordance with the priorities set forth in the [Strategic Enforcement Plan].” This signals that the Commission will continue to emphasize and prioritize the use of systemic, pattern or practice lawsuits to accomplish its agenda.
As in years past, the Strategic Enforcement Plan also sets out the EEOC’s six substantive priorities.
#1 – Eliminating Barriers In Recruitment and Hiring – The EEOC will focus on recruiting and hiring practices that discriminate, including, among other things the use of technology, including artificial intelligence and machine learning, to target job advertisements or assist in hiring decisions; job advertisements that exclude or discourage certain protected groups from applying; and the use of screening tools or requirements that disproportionately impact workers on a protected basis, including those facilitated by artificial intelligence or other automated systems.
#2 – Protecting Vulnerable Workers – The EEOC will focus on harassment, retaliation, job segregation, discriminatory pay, disparate working conditions, among other things, that impact “particularly vulnerable workers,” which include immigrant and migrant workers; people with developmental or intellectual disabilities; individuals with arrest or conviction records; LGBTQI+ individuals; temporary workers; older workers; individuals employed in low wage jobs, including teenage workers; among others.
#3 – Addressing Selected Emerging And Developing Issues – The EEOC will continue to prioritize issues that may be emerging or developing, which includes qualification standards and inflexible policies or practices that discriminate against individuals with disabilities; protecting workers affected by pregnancy, childbirth, or related medical conditions; and addressing discrimination influenced by or arising as backlash in response to local, national, or global events.
#4 – Advancing Equal Pay Protections for All Workers – The EEOC will continue to focus on combatting pay discrimination in all forms. It notes that, because many workers do not know how their pay compares to their co-workers’ pay and, therefore, are less likely to discover and report pay discrimination, the EEOC will continue to use directed investigations and Commissioner Charges to facilitate enforcement.
#5 – Preserving Access to the Legal System – The EEOC will focus on policies and practices that discourage or prohibit individuals from exercising their rights or impede the EEOC’s enforcement efforts, including, among other things, overly broad waivers, releases, or non-disclosure agreements; and unlawful, unenforceable, or otherwise improper mandatory arbitration provisions.
#6 – Preventing and Remedying Systemic Harassment — The EEOC will continue to focus on combatting systemic harassment in all forms. It notes that, with respect to charges and litigation, a claim by an individual or small group may fall within this priority if it is related to a widespread pattern or practice of harassment.
Some – but certainly not all – of the EEOC’s lawsuits initiated over the past year fall into one or more of these six categories. The EEOC’s focus on systemic litigation underlies many of these enforcement priorities. Because the EEOC views systemic cases as having a particular strategic impact, insofar as they affect how the law influences a particular community, entity, or industry, companies should brace for the expansion of these cases.
Department Of Labor Enforcement Year-End Recoveries
The US Department of Labor’s Wage and Hour Division recovered approximately $212.3 million in back wages in FY 2023 and concluded 20,215 compliance actions. These numbers align with the numbers we saw in FY 2022, in which the WHD recovered $213.2 million in back wages and concluded 20,422 compliance actions. The number of compliance actions, and the subsequent back wages recoveries in FY 2022-23 was measurably lower than in FY 2021 and FY 2020. In FY 2021, the WHD concluded 24,746 compliance actions and recovered $232.4 million in back wages and in 2020 it concluded 26,096 compliance actions and recovered $257.8 million in back wages.
Although the WHD back wages recoveries were down, the agency imposed civil money penalties to employers at a 10-year-high of $25.8 million for violations of federal labor laws in FY 2023. This was the highest number in a decade, and was significantly higher than the penalties assessed in 2022 ($21.6 million), 2021 ($20.4 million), and 2020 ($17.9 million).
By Gerald L. Maatman, Jr., Nathan N. Norimoto, Nick Baltaxe
Duane Morris Takeaways: On January 17, 2024, in Anders, et al. v. California State University Fresno, et al., No. 23-15265, 2024 U.S. App. LEXIS 1063 (9th Cir. Jan. 17, 2024), the Ninth Circuit vacated the U.S. District Court for the Eastern District of California’s decision to deny Plaintiffs’ renewed motion for class certification. Specifically, the Ninth Circuit held that the District Court erred by finding the named plaintiffs would not be adequate class representatives due a “speculative” conflict of interest that could develop at the remedy stage of the litigation. The Ninth Circuit remanded the action to the District Court for further proceedings. The ruling is required reading on the procedural aspects of class certification in discrimination cases in general, and with respect to how actual or perceived conflicts on interest in particular implicate the Rule 23 (a)(4) analysis.
Case Background
Plaintiffs Taylor Anders, Hennessey Evans, Abbigayle Roberts, Megan Walaitis, Tara Weir, and Courtney Walburger were all former members of the California State University, Fresno (“Fresno State”) women’s lacrosse team. Id. at *2. Plaintiffs brought class claims alleging effective accommodation and equal treatment under Title IX. Id. Plaintiffs sought an injunction that would prohibit Fresno State “from eliminating Fresno State’s women’s lacrosse team (or any other women’s varsity intercollegiate athletic opportunities at Fresno State) unless and until Fresno State is and will be in compliance with Title IX.” Id. at *5, fn. 4.
Plaintiffs “sought certification of classes consisting of current and future female students at Fresno State who have participated in or are able and ready to participate in women’s varsity intercollegiate athletics at Fresno State.” Id. at *3.The District Court denied Plaintiffs’ class certification motion in its entirety on the basis that the Plaintiffs were not adequate class representatives under Rule 23(a)(4), as their affiliation and contentions favored the women’s lacrosse team over other women’s varsity sports. Id. Plaintiffs appealed to the Ninth Circuit.
The Ninth Circuit’s Ruling
The Ninth Circuit vacated the District Court’s decision to deny class certification of the effective accommodation and equal treatment claims. Id. at *6.
First, the Ninth Circuit noted that to defeat adequacy under Rule 23(a)(4), any conflict of interest between the named Plaintiffs and the putative class members must be “actual” and not “speculative,” which only exists if the remedy sought precludes “structural assurance of fair and adequate representation for the diverse groups and individuals affected.” Id. at *4.
With respect to Plaintiffs’ effective accommodation claim, the Ninth Circuit opined that the District Court erred in finding Plaintiffs would not be adequate class representatives due to a “conflict of interest with members of their proposed class” because the District Court only “speculat[ed] as to conflicts that may develop at the remedy stage.” Id. For example, if Fresno State “reinstate[s] at least one women’s sports team,” the Ninth Circuit reasoned that it was only speculation that “plaintiffs would be able to advocate for the reinstatement of the women’s lacrosse team at the expense of other women’s teams.” Id. at *4-*5. At the remedies stage, however, the Ninth Circuit determined that Fresno State “can comply with Title IX without reinstating women’s sports teams by leveling down programs instead of ratcheting them up to achieve substantial proportionality between male and female athletics opportunities.” Id. at *5 (internal quotation marks and citation omitted). Further, the Ninth Circuit pointed out that if Fresno State reinstates women’s sports teams at the remedies stage, the District Court did not identify any “evidence suggesting plaintiffs would have input into which teams are to be reinstated.” Id.
In addition, the Ninth Circuit held that the District Court erred by failing to “independently analyze the equal treatment claim,” and evaluate whether a conflict of interest exists with the respect to the claim. Id. at *5. The Ninth Circuit directed the District Court to analyze the Plaintiffs’ equal treatment claim in light of the “conclusion that the injunctive relief Plaintiffs seek under their effective accommodation claim does not necessarily require reinstatement of the women’s lacrosse team” and to “specifically assess whether a conflict exists under the equal treatment claim.” Id. at *5-*6.
In conclusion, the Ninth Circuit vacated the denial of class certification and remanded to the District Court for further proceedings on the class certification issue. Id. at *6.
Key Takeaways
The Ninth Circuit’s decision in Anders makes it easier for plaintiffs to certify a class in the Title IX context by messaging that challenges to the adequacy of a class representative in a Title IX lawsuit must be based on an actual conflict of interest. Importantly, any challenges to class certification based on the fairness of a potential remedy will likely fail as too “speculative.” Any entity that must comply with Title IX, and finds itself the potential victim of a class action based on Title IX, should keep this distinction in mind.
By Gerald L. Maatman, Jr., Jennifer A. Riley, and Emilee N. Crowther
Duane Morris Takeaways: In Wittmeyer v. Heartland Alliance for Human Needs & Rights, No. 23-CV-1108, 2024 WL 182211 (N.D. Ill. Jan. 17, 2024), U.S. District Judge Jeremy C. Daniel granted in part and denied in part Defendant Heartland’s motion to dismiss under Rule 12(b)(6). The Court found that the Plaintiffs only pled facts sufficient to support their negligence claim, and dismissed their negligence per se, breach of express and implied contract, breach of the Illinois Consumer Fraud Act and Deceptive Business Practices Act claims, and declaratory judgment and injunction claims. The ruling is exceedingly favorable for companies. Data breach class action defendants should utilize this decision as a roadmap when preparing motions to dismiss.
Case Background
Heartland Alliance for Human Needs & Rights (“Heartland”) is a non-profit, anti-poverty organization that provides healthcare and other services to individuals. Id. at *1. To receive services, individuals provide Heartland with personally identifiable information (“PII”) such as names and social security numbers. Id. For those individuals who receive medical services, Heartland also collects and stores personal health information (“PHI”) including medical diagnoses and medication records. Id.
In January 2022, unauthorized individuals obtained access to the PII and PHI of Heartland’s clients, employees, and independent contractors. Id.In December 2022, Plaintiffs Tracy Wittmeyer and Audrey Appiakorang received notice that their PII and PHI were compromised in the data breach. Id. Plaintiffs alleged that they experienced various damages such as increased risk of fraud and identity theft, expenditure of time and effort in mitigating harms associated with the data breach, and, in particular as to Plaintiff Appiakorang, that someone fraudulently obtained car insurance in her name. Id.
Plaintiffs filed a class action against Heartland for various claims, including: (i) negligence, (ii) negligence per se, (iii) breach of express contract, (iv) breach of implied contract, (v) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), and (vi) a declaratory judgment and injunction. Id. Subsequently, Heartland moved to dismiss the lawsuit under Rule 12(b)(6). Id.
The Court’s Decision
U.S. District Judge Jeremy C. Daniel granted Heartland’s motion to dismiss as to Plaintiffs’ negligence per se, express and implied breach of contract, violation of the ICFA, and declaratory judgment and injunction claims. Id. at * 7.
The Court, however, denied Heartland’s motion to dismiss Plaintiffs’ negligence claim. Id. at *3. Heartland asserted that it did not owe Plaintiffs a duty to safeguard their personal information. Id. The Court disagreed. It “decline[d] to find, as a matter of law, that Heartland owed no duty to the plaintiff to safeguard their personal information.” Id. (citing an amendment to the Illinois Personal Information Protection Act and the Illinois Appellate Court’s holding in Flores v. Aon Corp., 2023 IL App (1st) 230140, at ¶ 23.).
The Court granted Heartland’s motion to dismiss Plaintiffs’ negligence per se claim. Id. Plaintiffs alleged that because Heartland failed to comply “with the FTCA and its corresponding obligations under HIPAA,” Plaintiffs were injured. Id. at *4. However, the Court reasoned that a violation of a statute only constitutes negligence per se “when it is clear that the legislature intended for the act to impose strict liability.” Id. at *3. Since Plaintiffs did not allege that either the FTCA or HIPAA imposed strict liability, the Court granted Heartland’s motion to dismiss. Id. at *4.
The Court also granted Heartland’s motion to dismiss Plaintiffs’ breach of express and implied contract claims. Id. at *4-6. The Court dismissed Plaintiffs’ breach of express contract claim because they failed to allege facts in the complaint to demonstrate that the parties entered into an express contract regarding security measures for Plaintiffs’ PII and PHI. Id. at *4. While the Court observed that an implied contract could exist between the parties, because Plaintiffs’ complaint did not contain any allegations that the Plaintiffs suffered monetary damages as a result of the data breach, the Court dismissed its breach of implied contract claim. Id. at *5-6.
Finally, the Court dismissed Plaintiffs’ ICFA and declaratory judgment and injunction claims. Id. at *6-7. Under the ICFA, the Court opined that Plaintiffs were required to plead facts sufficient to demonstrate the existence of a “real and measurable” loss. Id. at *6. The Court dismissed Plaintiffs’ ICFA claim because it found that Plaintiffs failed to plausibly plead that they suffered an economic loss. Id. In addition, the Court dismissed Plaintiffs’ declaratory judgment and injunction causes of action, noting that while they are forms of relief, they are not cognizable, independent causes of action. Id. at *7.
Implications For Data Breach Defendants
The decision in Wittmeyer v. Heartland Alliance for Human Needs & Rights serves as a roadmap for data breach class action defendants to utilize when preparing motions to dismiss.
Early in the litigation, data breach class action defendants typically move to dismiss a plaintiff’s complaint under Rule 12(b)(1) for lack of subject matter jurisdiction and/or, as Heartland did here, under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Importantly, various jurisdictions across the United States have different approaches to the issue of whether various claimed damages (i.e., increased risk of fraud and identity theft, expenditure of time and effort in mitigating harms associated with a data breach, loss of value in PII and PHI, and emotional harms like anxiety and stress) can confer standing upon a plaintiff. Class action defendants should conduct a thorough review of their relevant jurisdiction’s holdings concerning the plaintiff’s claimed damages in support of any motion to dismiss.
Duane Morris Takeaway: In 2023, employers saw claims filed under the California Private Attorneys General Act (PAGA) reach an all-time high. According to data maintained by the California Department of Industrial Relations, the number of PAGA notices filed with the LWDA has increased exponentially over the past two decades, from 11 in 2006 to 7,780 in 2023. The PAGA created a scheme to “deputize” private citizens to sue their employers for penalties associated with violations of the California Labor Code on behalf of other “aggrieved employees,” as well as the State. A PAGA plaintiff may pursue claims on a representative basis, i.e., on behalf of other allegedly aggrieved employees, but need not satisfy the class action requirements of Rule 23. In other words, the PAGA provides the plaintiffs’ class action bar a mechanism to harness the risk and leverage of a representative proceeding without the threat of removal to federal court under the CAFA and without the burden of meeting the requirements for class certification. If successful in prosecuting such a case, aggrieved employees receive 25% of any civil penalties and pass the other 75% to the California Labor and Workforce Development Agency (LWDA). The plaintiffs’ attorneys who pursue the action may collect their attorneys’ fees and costs.
Watch our Trend #6 video below, where Duane Morris partner Jennifer Riley discusses the PAGA filings explosion, the impact of the PAGA on arbitration, and what to expect with PAGA rulings in 2024.
Trend #6 – PAGA Filings Reached An All-Time High
The Explosion Of PAGA Notices
According to data maintained by the California Department of Industrial Relations, the number of PAGA notices filed with the LWDA has increased exponentially over the past two decades. The number grew from 11 notices in 2006, to 1,606 in 2013, and then experienced three sizable jumps – to 4,530 in 2014, to 5,732 in 2018, and to 7,780 in 2023, each coinciding with a significant shift in the legal landscape, as discussed below. From 2013 to 2014, employers saw the largest single year increase, from 1,605 notices in 2013 to 4,532 notices in 2014, an increase of 182%.
The most significant drop in the past two decades occurred in 2022, when notices fell from 6,502 in 2021 to 5,817 in 2022, before their resurgence in 2023.
The following chart illustrates this trend.
These numbers closely tie to the shifting landscape of workplace arbitration, as each of the major shifts coincides with the timing of a significant expansion or pull back in the law governing the enforcement of arbitration agreements.
The PAGA As A Work-Around To Arbitration
The proliferation of mandatory arbitration programs started as early as 1991 when the U.S. Supreme Court issued Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The movement did not gain steam, however, until 2011 when the U.S. Supreme Court issued its ruling in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and held that the Federal Arbitration Act (FAA) preempts state rules that stand “as an obstacle to the accomplishment of the FAA’s objectives.”
In the wake of AT&T Mobility, arbitration programs gained a boost in their popularity. Such programs provided companies a mechanism to contract around class and collective actions. Through a form agreement, offered as a condition of an employment relationship or transaction, for instance, a company could require its employees and customers to resolve any disputes on an individual basis through private, binding arbitration.
The growing popularity of such programs led the plaintiffs’ class action bar to identify work-arounds. The California Supreme Court cemented the PAGA as the frontrunner for employment-related claims with its decision in Iskanian v. CLS Transportation Los Angeles, 59 Cal.4th 348 (Cal. 2014). In Iskanian, the California Supreme Court seemingly immunized the PAGA from arbitration programs when it held that representative action waivers in arbitration agreements are “contrary to public policy and unenforceable as a matter of state law.” Id. at 384.
In rendering its decision, the California Supreme Court distinguished AT&T, reasoning that, whereas the FAA aims to ensure an efficient forum for the resolution of private disputes, a PAGA action “is a dispute between an employer and the state Labor and Workforce Development Agency.” Id.
Iskanian cleared the PAGA as a mechanism by which to maintain a representative action unhindered by arbitration agreements or commitments to arbitrate on an individual basis. The decision undoubtedly fueled the filing of PAGA notices in 2014, which catapulted from 1,606 in 2013 to 4,530 in 2014.
The PAGA workaround experienced another boost in October 2018, when the U.S. Supreme Court bolstered the enforceability of class and collective action waivers in arbitration agreements with its decision in Epic Systems Corp. v. Lewis, et al., 138 S.Ct. 1612 (2018), clearing the path to widespread adoption of arbitration programs. In the wake of Epic Systems, PAGA notices reached a new level, jumping from 4,984 in 2017, to 6,431 in 2019, reflecting PAGA’s expanding popularity as a work-around.
The PAGA-workaround movement suffered its first significant set-back in 2022 with the U.S. Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, et al., 142 S.Ct. 1906 (2022). In Viking River, the U.S. Supreme Court held that, to the extent Iskanian precludes division of PAGA actions into individual and non-individual claims, and thereby “prohibit[s] parties from contracting around this joinder device,” the FAA preempts such rule. Id. Thus, it concluded in the case before it that the lower court should have compelled arbitration of the plaintiff’s individual PAGA claims.
The U.S. Supreme Court then addressed the remaining question – what the lower court should have done with Moriana’s remaining non-individual or representative claims. The Supreme Court opined that the PAGA provides no mechanism to enable a court to adjudicate non-individual claims once an individual claim has been committed to a separate proceeding. As a result, the U.S. Supreme Court opined that Moriana lacked statutory standing to continue to maintain her non-individual claims in court, and the lower court should have dismissed the PAGA representative claims. Id.
Following Viking River, the number of PAGA notices suffered the largest single-year drop in two decades, dropping from 6,502 in 2021, to 5,817 in 2022.
The PAGA’s Resurgence
Although the PAGA workaround suffered its first significant set-back in 2022 with the U.S. Supreme Court’s decision in Viking River, the set-back was short lived as, in 2023, the California Supreme Court minimized the impact of the Viking River decision.
In Adolph v. Uber Technologies, Inc., 14 Cal. 5th 1104 (Cal. 2023), the California Supreme Court took up the issue of whether, under California law, a PAGA plaintiff whose individual claims are compelled to arbitration retains standing to bring representative claims. The California Supreme Court disagreed with the U.S. Supreme Court’s interpretation of California law and held that, once a PAGA plaintiff’s individual claims are compelled to arbitration, the plaintiff retains standing to maintain non-individual PAGA claims in court so long as he is an “aggrieved employee.” Id. at 1105.
Adolph, an Uber delivery driver, asserted that Uber misclassified him as an independent contractor. Adolph amended his complaint to allege PAGA claims, and Uber moved to compel arbitration. The trial court denied Uber’s motion to compel arbitration, and the California Court of Appeal affirmed, citing the California Supreme Court’s ruling in Iskanian v. CLS Transportation Los Angeles, 59 Cal.4th 348 (2014). Uber filed a petition for review and, while it was pending, the U.S. Supreme Court issued its decision in Viking River.
In a unanimous decision, the California Supreme Court disagreed with the U.S. Supreme Court’s interpretation of the PAGA. The California Supreme Court held that, so long as an employee alleges that he has been aggrieved by a violation of the Labor Code, he maintains standing under the PAGA. As a result, after a court compels an individual PAGA claims to arbitration, the plaintiff retains standing to pursue his representative PAGA claims in court.
As to logistics, the California Supreme Court clarified several items. First, even though individual PAGA claims may be pending in arbitration and representative PAGA claims pending in court, the claims remain one action, and the court may stay the representative action pending completion of arbitration. Second, if the plaintiff loses in arbitration, at that point, the plaintiff loses standing to maintain representative PAGA claims. Third, if the plaintiff prevails in arbitration or settles his individual claims, he retains standing to return to court to pursue his representative PAGA claims on behalf of others.
By deciding that an individual who signs an arbitration agreement can return to court after arbitration to pursue representative proceedings under the PAGA, the California Supreme Court relegated arbitration agreements to a mere hurdle rather than a bar to PAGA representative actions. Given the technical requirements of California wage & hour law, coupled with the potentially crushing statutory penalties available to successful plaintiffs, we anticipate continued growth of PAGA lawsuits in 2024, with no pull back in site.
What’s Next For The PAGA?
The California Supreme Court presently is considering two cases that significantly could impact the future popularity of PAGA lawsuits, including the ease with which plaintiffs can succeed in recovering on a representative basis.
On November 8, 2023, the California Supreme Court heard oral argument in Estrada, et al. v. Royalty Carpet Mills, Inc. The California Supreme Court is considering whether courts have the power to strike or limit PAGA claims based on unmanageability. In a prior decision, Wesson, et al. v. Staples the Office Superstore, LLC, 68 Cal. App. 5th 746 (2021), the California Court of Appeal held that trial courts have inherent authority to strike or limit unmanageable PAGA claims. A few months later, the Court of Appeal in Estrada, et al. v. Royalty Carpet Mills, Inc., 76 Cal. App. 5th 685 (2022), disagreed and concluded that, while a court may limit the presentation of evidence to ensure a manageable trial, a court does not have authority to strike or limit PAGA claims before trial. The California Supreme Court must issue a decision on this issue by February 2024. The California Supreme Court might hold that trial courts possess inherent authority to safeguard an employer’s due process rights, which necessarily encompasses the right to gauge the manageability of and to narrow PAGA claims. Either way, Estrada has the potential to significantly impact the prosecution and defense of PAGA actions.
In Turrieta, et al. v. Lyft, Inc., the California Supreme Court will weigh whether a PAGA plaintiff has a right to intervene, object to, or move to vacate a judgment approving a PAGA settlement in a related action. In that case, between May to July 2018, Olson, Seifu, and Turrieta, all Lyft drivers, filed separate PAGA actions alleging improper classification as independent contractors. Turrieta reached a $15 million settlement with Lyft, which included a $5 million payment to her counsel. As part of the settlement, Turrieta amended her complaint to allege all PAGA claims that could have been brought against Lyft. When Olson and Seifu got wind of the settlement, they moved to intervene and to object. The trial court denied the intervention requests, approved the settlement, and then denied motions by Olson and Seifu to vacate the judgment in the Turrieta PAGA action. The Court of Appeal affirmed, holding that, as non-parties, Olson and Seifu lacked standing to move to vacate the judgment. The Court of Appeal explained that the real party in interest in a PAGA action is the State, and, thus, neither Olson nor Seifu had a direct interest in the case.
Finally, in November 2024, California voters will pass on a proposed measure to repeal the PAGA and to replace it with a new law known as The Fair Pay and Employer Accountability Act. Under the proposed law, employees could not sue for civil penalties in court on behalf of the state and instead would have to file a complaint directly with the Labor Commissioner who would be a party to any lawsuit filed; all civil penalties would go to affected employees; the State would receive increased funding; and civil penalties would be doubled for “willful” violations. The measure is intended to eliminate the windfall profiteering that the plaintiffs’ bar has enjoyed from the PAGA. Although preliminary polling suggests voters support the measure, the plaintiffs’ bar surely will mount vociferous opposition.
By Eden E. Anderson, Gerald L. Maatman, Jr., and Jennifer A. Riley
Duane Morris Takeaways: On January 18, 2024, the California Supreme Court issued its opinion in Estrada v. Royalty Carpet Mills, No. S274340 (Cal. Jan. 18, 2024). It is a game changer for employers operating in California. The Supreme Court held, in a unanimous decision, that trial courts lack inherent authority to dismiss claims under the Private Attorneys General Act of 2004 – the “PAGA”- with prejudice due to lack of manageability. The Supreme Court declined to address whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim. As such, the decision in Estrada is a required read for employers and their decision-makers.
Case Background
Jorge Estrada filed a putative class and PAGA action against his former employer asserting, as relevant here, meal period violations. After two classes comprised of 157 individuals were certified, the case was tried to the bench. The trial court ultimately decertified the classes, finding there were too many individualized issues to support class-wide treatment. Although the trial court awarded relief to four individual plaintiffs, it dismissed the non-individual PAGA claim on the grounds that it was not manageable.
On appeal, Estrada argued that PAGA claims have no manageability requirement, and the Court of Appeal agreed in Estradav. Royalty Carpet Mills, Inc., 76 Cal.App.5th 685 (2022). The Court of Appeal reasoned that class action requirements do not apply in PAGA actions and, therefore, the manageability requirement rooted in class action procedure was inapplicable. Further, the Court of Appeal reasoned that “[a]llowing courts to dismiss PAGA claims based on manageability would interfere with PAGA’s express design as a law enforcement mechanism.” Id. at 712. The Court of Appeal acknowledged the difficulty that employers and trial courts face with PAGA claims involving thousands of allegedly aggrieved employees, each with unique factual circumstances, but concluded that dismissal for lack of manageability was not an available tool for a trial court to utilize.
The Court of Appeal in Estrada recognized its holding was contrary to the holding in Wesson v. Staples the Office Superstore, LLC, 68 Cal.App.5th 746 (2021), and created a split in authority. In Wesson, the trial court struck a PAGA claim as unmanageable, and the Court of Appeal affirmed. The claims at issue in Wesson involved the alleged misclassification of 345 store managers. The employer’s exemption affirmative defense turned on individualized issues as to each manager’s performance of exempt versus non-exempt tasks which varied based on a number of factors including store size, sales volume, staffing levels, labor budgets, store hours, customer traffic, all of which varied across the stores. The split in authority prompted the California Supreme Court to grant review in Estrada.
The California Supreme Court’s Decision
At the outset, the California Supreme Court noted that the issue before it was whether trial courts possess inherent authority to “strike” PAGA claims for lack of manageability, defining the word “strike” to mean a dismissal with prejudice. Jan. 18 Opinion at 7. The Supreme Court then addressed, and rejected, the employer’s argument that trial courts possess inherent authority to, for judicial economy purposes, strike any claim a plaintiff asserts. The Supreme Court explained that the power to dismiss a claim with prejudice is limited to cases involving a failure to prosecute, frivolous claims, or egregious misconduct, and that judicial economy does not warrant the dismissal of any claim.
The Supreme Court rejected the employer’s argument that the manageability requirement for class actions should be imported into PAGA actions. It reasoned that there are three structural differences between class actions and PAGA representative actions that warrant treating these claims differently, as well as differences in jurisprudential history. The three structural differences cited by the Supreme Court were: (1) that plaintiffs in PAGA actions are not required to establish superiority or predominance of common issues; (2) PAGA’s purpose is to maximize enforcement of labor laws; and (3) that the California Labor and Workforce Development Agency (LWDA) can impose civil penalties for Labor Code violations without considering manageability.
As to jurisprudential history differences, the Supreme Court noted that, unlike class actions which were an “invention of equity,” PAGA actions are not “creatures of equity.” Id. at 30. Thus, while class action jurisprudence developed to create various common law requirements for class actions that are not set forth in California’s class action statute, the PAGA statute provides detailed statutory requirements for maintaining a PAGA claim, thereby constraining trial courts from using “extra-statutory inherent authority to strike PAGA claims that the Legislature has authorized.” Id. at 31. Because PAGA’s express wording permits a plaintiff who has suffered one labor code violation to seek civil penalties on behalf of other employees for “violations that vary widely in nature,” imposing a manageability requirement would “defeat the purpose of statute.” Id. at 32.
The Supreme Court declined to address whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim other than to note that any such authority would be “narrow authority of last resort.” Id. at 41. Although the employer argued its due process rights would be violated if the PAGA claims against it were re-tried, the Supreme Court noted that the employer had only offered the testimony of two employees in the original trial and, thus, the due process issue was “hypothetical.” Id. at 40. The Supreme Court, however, agreed that employers have a due process right to present an affirmative defense, but emphasized that an employer has no due process right to present the testimony of an “unlimited number of individual employees” or “each allegedly aggrieved employee.” Id. at 40.
The Supreme Court concluded by noting that trial courts have “numerous tools” to manage complex cases, and suggested that the “extent of liability” in a PAGA case can be determined by surveys or statistical methods that estimate the number of aggrieved employees. Id. at 41. The Supreme Court emphasized that the burden of proof in a PAGA case remains with plaintiffs who should endeavor to be “prudent in their approach to PAGA claims” and that, if “a plaintiff alleges widespread violations of the Labor Code . . . but cannot prove them in an efficient manner, it does not seem unreasonable for the punishment assessed to be minimal.” Id. at 44.
Implications For Employers
The Estrada opinion strikes a blow to employers facing PAGA claims by removing lack of manageability as a ground for dismissal. While the California Supreme Court encouraged PAGA plaintiffs to be prudent to their approach to their PAGA theories, in practice, such prudence is uncommon. On the bright side, the decision leaves open an employer’s ability to seek dismissal on due process grounds.
By Alex W. Karasik, Gerald L. Maatman, Jr. and George J. Schaller
