General – Page 8 – Class Action Defense

July 14, 2023July 13, 2023 by Class Action Defense

The Class Action Weekly Wire – Episode 21: State Court Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and special counsel Brandon Spurlock with their analysis of key trends and notable rulings throughout class action litigation at the state court level.

Episode Transcript

Jennifer Riley: Thank you for being here again, for the next episode of our Friday weekly podcast, the Class Action Weekly Wire. I’m Jennifer Riley, partner at Duane Morris, and joining me today is special counsel Brandon Spurlock. Thank you, Brandon, for being on the podcast.

Brandon Spurlock: Great to be here, Jen.

Jen: So today we wanted to discuss trends and important developments in state court class action litigation, since the decision on where to file a class action will always be an important strategic decision for plaintiffs’ lawyers – especially those seeking to maximize their odds for class certification, as well as seeking larger verdicts, settlements, and things of that nature. Whether it is between state or federal court, or deciding in which particular to state to file, many factors impact this decision. Brandon, can you tell our listeners what some of those factors are?

Brandon: Sure. Although almost all state law procedural requirements for class certifications mirror Rule 23 of the Federal Rules, the plaintiffs’ bar often perceives state courts as having a more positive predisposition toward their clients’ interests, particularly where putative class members have connections to the state or when the events at issue occurred in the state where the action is filed. But beyond forum shopping between state and federal court, the plaintiff’s bar also seeks out individual states that are believed to be “plaintiff friendly” such as California, Georgia, Florida, Illinois, Louisiana, Massachusetts, Missouri, to name some others – these are all among the leading states where plaintiffs’ lawyers file a volume of class actions. These courts are thought to have more relaxed procedural rules related to discovery, consolidation, and class certification, a lower bar for evidentiary standards, higher than average jury awards, among other considerations. All of this incentivizes forum-shopping related to state class actions.

Jen: In reviewing key state court class action decisions and analyzing class certification rulings, it seems that many state courts tend to apply a fairly typical Rule 23-like analysis, similar to the analysis we would see in federal court, although many state decisions also focus on the underlying claims at issue to address whether a class certification is appropriate and whether the matter should proceed on a class basis. Nevertheless, that said, understanding how state courts apply those respective Rule 23 analyses under the applicable state procedural law is really crucial I think toward effectively navigating those complexities and developing effective defense strategies in these types of lawsuits.

Brandon: Jen, I think that’s absolutely right. Another important topic for companies is state private attorney general laws. In particular, California’s controversial Private Attorneys General Act that we all know as PAGA. PAGA authorizes workers to file lawsuits to recover civil penalties on behalf of themselves, and other employees in the State of California for state labor code violations. Although California is the only state to have enacted this type of law so far, several other states are considering their own similar private attorney general laws, including New York, Washington, Oregon, New Jersey, and Connecticut. So it will be crucial to monitor state legislation on this topic given the impact such laws will have on class litigation strategy.

Jen: Absolutely – and we will continue to monitor all those developments and getting them out to listeners of the podcast as well as readers of the blog as they occur. Brandon, were there any key rulings from your perspective in specific state courts in 2022, going into 2023?

Brandon: Well, California being the epicenter of class actions filed in state courts – it’s a state that has more class action litigation than any other state. So needless to say we got some important rulings out of California. While all varieties of class-wide cases are filed in California, a high majority are consumer fraud and employment-related. Even when an employer’s written, formal policies appear facially neutral and compliant, employees may successfully seek class certification for demonstrating common issues where an employer’s practices and protocols allegedly violate law. So you asked about some key cases – one, in Cruz, et al. v. Health, the plaintiff filed a class action against his former employer for wage and hour violations stemming from defendant allegedly utilizing a time rounding policy that systemically resulted in uncompensated hours worked, as well as for failing to provide the plaintiff and other hourly employees with full, uninterrupted meal periods in compliance with the California Labor Code. So in this case, the plaintiff also brought derivative claims for inaccurate wage statements, failing to pay all wages due, and violations of California Business & Professions Code, as well as penalties under the PAGA. The court granted the plaintiff’s motion to certify his rounding-time, meal period, and derivative claims. In certifying the class for the “rounding policy” claim, the court reasoned that the plaintiff’s theory of liability – that the defendant’s policy of rounding employees’ time punches to the nearest quarter-hour increment resulted in employees’ systematic under compensation – presented common questions of law and fact that predominated over the individualized issues that might arise, including the calculation of damages to which each putative class member might be entitled. So, with respect to the meal period claims, the court agreed that while the defendant’s formal, written meal break policy may comport with California law, this fact alone did not preclude class certification. The plaintiff presented evidence of numerous meal break violations, including missed, short, and late employee breaks, which the court found sufficient to establish a rebuttable presumption that defendant had a “de facto policy” that failed to provide putative class members with compliant meal periods, and constituted a predominant question appropriately resolved on a class-wide basis. Having determined the rounding time and meal period claims appropriate for class certification, the court also certified the plaintiff’s derivative claims, concluding that they too involved common questions of law or fact also suitable for certification.

Jen: Thanks Brandon. Another key example of a PAGA ruling from last year occurred in a case called Estrada, et al. v. Royalty Carpet Mills, Inc. In that case were a group of hourly workers at the defendants’ carpet manufacturing facilities, brought claims primarily based on purported meal and rest break violations. Following a bench trial and an appeal, the California court of appeal addressed several issues, including: (i) the defendants’ policy of requiring workers to stay on premises during paid meal breaks; and (ii) the trial court striking of the PAGA claims based on manageability concerns. Regarding the meal break question, the defendant in that case had a policy of paying workers their regular wages during meal periods, but did not give them premium pay for having to remain on the premises. The defendants argued the on-premises meal policy was lawful because the employees were relieved of duty and paid wages during the meal period. The court of appeal ultimately disagreed with that argument – it opined that employers must afford employees uninterrupted half-hour periods in which they are relieved of any duty or employer control and are free to come and go as they please, and if an employer does not provide an employee with a compliant meal period, then the employer had to provide the employee with premium pay for the violation. Turning to the trial court’s dismissal of the representative PAGA meal period claim due to unmanageability, which is probably an even more crucial part of the decision, the court of appeal addressed the question of whether the PAGA has a manageability requirement similar to class actions. The court of appeal stated that a representative action under the PAGA is not a class action, but rather an administrative law enforcement action where the legislative purpose is to augment the limited enforcement capacity or capability of the Labor Workforce Development Agency (“LWDA”) by empowering employees to enforce the Labor Code as representatives of the Agency. The court reasoned that allowing courts to dismiss PAGA claims based on manageability concerns would actually interfere with the PAGA’s express design as a law enforcement mechanism, and create this extra hurdle that does not apply, and should not apply, to LWDA enforcement actions.

Brandon: Jen that was fantastic and insightful analysis. Florida was a state where the courts were disinclined to allow plaintiffs to proceed on a class-wide basis on claims related to the COVID-19 pandemic. There have a been a lot of class actions on the court docket that are related the pandemic. In University Of Florida Board Of Trustees v. Rojas the plaintiff, a graduate student, filed a class action asserting claims for breach of contract and unjust enrichment related to paid fees not refunded following the campus shut-down due to COVID-19. To support the breach of contract claim, the plaintiff filed a copy of the University’s financial liability agreement; an estimate of tuition and fees for the 2019-2020 academic year; and the plaintiff’s tuition statement showing he paid his tuition and fees for the Spring 2020 semester. The complaint also cited to various university webpages that contained general statements or descriptions of various campus amenities. The plaintiff, on behalf of a class of other students, asserted that these documents, in the aggregate, made up an express written contract between him and the university for specific on-campus resources and services during the relevant time period. However, the trial court dismissed the unjust enrichment claim, but allowed the contract claim to move forward. The Florida court of appeal then disagreed. It ruled that the “hodge-podge” of documents did not constitute an express written contract sufficient to overcome sovereign immunity enjoyed by the university. The court of appeal further found that the liability agreement merely conditioned a student’s right to enroll upon the agreement to pay tuition and fees, and although the agreement mentioned the provision of “educational services,” that general phrase fell far short of conveying an express promise by the university to provide in-person or on-campus services to a student at any specific time. For these reasons, the court of appeal reversed and remanded to the trial court for entry of judgment in favor of the university on the basis that sovereign immunity barred the action.

Jen: The last one I wanted to mention, because it really was a novel situation, was a ruling from Massachusetts that addressed the issue when the named plaintiff dies before class certification. The case is Kingara, et al. v. Secure Home Health Care Inc. In that case the plaintiff, a licensed practical nurse, filed suit against the defendant, an in-home care provider for the elderly, alleging causes of action arising under the state wage act, minimum fair wage law, and overtime law. The plaintiff died before the plaintiff’s counsel had filed a motion for class certification. Thereafter, the plaintiff’s counsel filed a motion to send notice to the putative class informing them of the plaintiff’s death and inviting them to join the action. The plaintiff’s counsel also sought an order requiring the defendant to identify the putative class members’ names and addresses and extend the tracking order deadlines to allow substitution of another putative class representative. The trial court granted the motions, and the defendant appealed. The Massachusetts Supreme Judicial Court explained that, upon a client’s death, the lawyer’s authority to act for the client terminates. So because the plaintiff had not filed a motion for class certification before he died, the plaintiff’s counsel could not take further action absent a motion by the deceased plaintiff’s legal representative. In addition, although counsel for a certified class has a continuing obligation to each class member – again here, there was not a certified class – the appeals court concluded that counsel does not have any authority to act for a putative class when no motion for class certification was pending, counsel had not located the deceased client’s representative, and counsel had not identified any other putative class member to serve as a putative class representative.

Brandon: Very interesting ruling Jen. It’s not often your plaintiff in the class action is going to pass away during the litigation, but definitely a good one for corporate counsel to note in the event that situation happens to them in the future.

Jen: Thanks so much, Brandon. Great insights and analysis Brandon. I know that these are only some of the cases that had generated some really interesting rulings in the myriad types of class action litigation pending across the country. 2023 is sure to give us some exciting rulings as well that we will look forward to blogging about and presenting on in future installations of the Class Action Weekly Wire. Thanks everyone for joining us today – great to have you here.

July 12, 2023 by Class Action Defense

The First Circuit Finds Article III Standing Requirements Met In Data Breach Class Action

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

Duane Morris Takeaways: In Webb et al. v. Injured Workers Pharmacy, LLC, No. 22-1896, 2023 U.S. App. LEXIS 16650 (1st Cir. June 30, 2023), the First Circuit reversed a district court’s ruling finding that Plaintiffs’ complaint plausibly alleged a concrete injury in fact where Defendant misused personally identifiable information, affirmed the district court’s ruling on injunctive relief , and remanded the case for further proceedings consistent with its First Circuit’s findings. For employers facing data breach class actions, this decision is instructive in terms of what courts consider for Article III standing requirements and, in particular, the “injury in fact” and “concrete harm” requirements.

Case Background

Alexis Webb and Marsclette Charley (“Plaintiffs”) brought a putative class action against Defendant, Injured Workers Pharmacy, LLC (“IWP” or “Defendant”), asserting various state law claims related to a data breach that allegedly exposed their personally identifiable information (“PII”) and the PII of over 75,000 other IWP patients. Id. at *2. In January 2021, IWP suffered a data breach. Id. at *3. Plaintiffs’ complaint alleged hackers infiltrated IWP’s patient record systems and gained access to the PII of over 75,000 IWP patients, and stole PII including patient names and Social Security numbers. Id. As a result of the breach, Plaintiff Webb alleged she “fears for her personal financial security and [for] what information was revealed in the [d]ata [b]reach,” she “has spent considerable time and effort monitoring her accounts to protect herself from identity theft,” and she “is experiencing feelings of anxiety, sleep disruption, stress and fear.” Id. at 4-5. In 2021, Webb’s PII was used to file a fraudulent 2021 tax return. Id. at *5. Plaintiff Charley alleged that she, “fears for her personal financial security,” “expends considerable time and effort monitoring her accounts to protect herself from identity theft,” and “is experiencing feelings of rage and anger, anxiety, sleep disruption, stress, fear, and physical pain.” Id.

On May 24, 2022, Plaintiffs filed a class action complaint against IWP in the U.S. District Court for the District of Massachusetts, and invoked the court’s jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”). Id. at *5-6. The complaint asserted state law claims for negligence, breach of contract, unjust enrichment, invasion of privacy, and breach of fiduciary duty. Id. at 6. The complaint sought damages, an injunction “enjoining IWP from further deceptive and unfair practices and making untrue statements about the [d]ata [b]reach and the stolen PII,” “other injunctive and declaratory relief … as is necessary to protect the interests of [the] [p]laintiffs and the [c]lass”, and attorneys’ fees. Id. Plaintiffs also sought to certify a class of U.S. residents whose PII was compromised during the data breach. Id.

On August 9, 2022, IWP moved to dismiss the complaint for lack of Article III standing, under Rule 12(b)(1), and for failure to state a claim as to each of the complaint’s asserted claims, pursuant to Rule 12(b)(6). Id. Plaintiffs opposed the motion. On October 17, 2022, the district court granted IWP’s motion and dismissed the case under Rule 12(b)(1). Id. The district court concluded that Plaintiffs lacked Article III standing because their complaint did not plausibly allege an injury in fact. Id. The district court reasoned that the complaint’s allegations that the fraudulent tax return filed in Webb’s name did not sufficiently allege a connection between the data breach and this false return. Id. at 6-7. The district court also reasoned the complaint’s other allegations that the potential future misuse of the Plaintiff’s PII was not sufficiently imminent to establish an injury in fact and that actions to safeguard against this risk could not confer standing either. Id. at 7. The district court did not reach IWP’s Rule 12(b)(6) arguments because the case was dismissed under Rule 12(b)(1). Id. Plaintiffs timely appealed the district court’s decision. Id.

The First Circuit’s Decision

The First Circuit reversed the judgment of the district court and held that Plaintiffs plausibly alleged a concrete injury in fact. In regards to Plaintiff Webb, the First Circuit concluded that “the complaint plausibly alleged a concrete injury in fact as to Webb based on the plausible pleading that the data breach resulted in the misuse of her PII by an unauthorized third party (or third parties) to file a fraudulent tax return.” Id. at *10-11. The First Circuit rejected the district court’s conclusion that the complaint did not plausibly allege a connection between the data breach and the filing of the false tax return. Id. at *13. Instead, the First Circuit opined “[t]here is an obvious temporal connection between the filing of the false tax return and the timing of the data breach.” Id.

Turning to Plaintiff Charley, the First Circuit held that in light of the plausible allegations of some actual misuse, the complaint plausibly alleged a concrete injury in fact based on the material risk of future misuse of Charley’s PII and a concrete harm caused by the exposure to this risk. Id. at *15. Further, the First Circuit opined that the totality of the complaint plausibly alleged an imminent and substantial risk of future misuse of the Plaintiffs’ PII. Id at *19.

In addition, the First Circuit found the complaint’s allegations satisfied the traceability and redressability standing requirements. Id. at *21. The complaint alleged IWP’s actions led to the exposure and actual or potential misuse of Plaintiffs’ PII, making their injuries “fairly traceable to IWP’s conduct.” Id. As to redressability, the First Circuit stated “monetary relief would compensate [the plaintiffs] for their injur[ies], rendering the injur[ies] redressable.” Id. at *22. The First Circuit thus held that Plaintiffs supported each of their five causes of action for damages with at least one injury in fact caused by the defendant and redressable by a court order. Id.

Finally, the First Circuit affirmed the district court’s ruling that Plaintiff’s lacked standing to seek injunctive relief. The sole allegation in the complaint that injunctive relief was necessary was that Plaintiffs’ PII was still maintained by IWP with its inadequate cybersecurity system and policies. Id. The First Circuit rejected the idea that an injunction requiring IWP to improve its cybersecurity measures would protect Plaintiffs from future misuse of their PII and instead would only safeguard against a future breach. Id. The First Circuit declined to extend injunctive relief where IWP faces, “much the same risk of future cyberhacking as virtually every holder of private data.” Id. at *24. For these reasons, the First Circuit affirmed the district court’s holding that Plaintiffs lacked standing to seek injunctive relief.

Implications For Employers

For employers facing data breach class actions, Article III standing defenses are often an optimal avenue to attack the pleadings at the outset, especially in situations involving questionable “injuries” to the named plaintiffs. Businesses that endure data breaches should take note that the First Circuit relied heavily on the temporal connection between the data breach and fraudulent tax filing which constituted a concrete injury. Accordingly, the lowered pleading threshold that results from this ruling suggests that employers should carefully evaluate the safeguards in place for any personally identifiable information stored, and swiftly respond to any data breaches.

July 7, 2023July 7, 2023 by Class Action Defense

The Class Action Weekly Wire – Episode 20: Securities Fraud Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Nelson Stewart with their analysis of key trends and notable rulings in the securities fraud class action landscape. We hope you enjoy the episode.

Episode Transcript

Jerry Maatman: Thank you loyal blog readers for joining us for our Friday weekly podcast, the Class Action Weekly Wire. I’m Jerry Maatman, partner at Duane Morris, and joining me today is Nelson Stewart, an associate in our New York office, to talk about securities fraud class action litigation. Thanks so much Nelson for being on the podcast today.

Nelson Stewart: Great to be here, Jerry – thank you.

Jerry: We wanted to discuss for our clients key trends and developments over the past year in securities fraud class action litigation. Obviously a very serious area of large amount of case law, and so we wanted in this podcast to get your thoughts and ideas about what corporate counsel should be thinking about in terms of key developments in 2022 and what you see in the future in 2023. Nelson, could you share with our listeners an overview of the way in which federal securities laws are structured?

Nelson: Sure – the pillars of federal securities law are the Securities Act of 1933 and the Securities Exchange Act of 1934. These statutes were enacted after the stock market crash of 1929 to regulate the securities markets and promote transparency in those markets for investors. The Securities Act regulates securities for public sale, while the Securities Exchange Act governs the trading of existing securities and securities markets. The Securities Act allows private litigants to pursue claims against corporate issuers for material misrepresentations or omissions made in connection with a securities offering. But a Plaintiff needs to show the shares of the security can be traced back to the actual offering in order to bring a claim under the Securities Act. Because of this limitation, investors alleging claims of securities purchased on an exchange after an offering has occurred tend to look to the implied private right of action under the Securities Exchange Act Section 10(b) and under SEC Rule 10b-5, which prohibit fraudulent schemes or fraudulent misrepresentations or admissions in a broad range of securities transactions.

Jerry: When it comes to class certification under Rule 23 – certainly that’s a rigorous standard to meet a la Walmart Stores v. Dukes – what particular barriers or challenges do plaintiffs face in this particular space when they seek to secure class certification in a securities fraud lawsuit?

Nelson: Proving reliance is one of the prerequisites to class certification under Rule 23(b)(3). The proposed class is often a varied and large group of plaintiffs. This could create individual fact issues that could overwhelm predominant ones and present a very difficult hurdle to class certification. This challenge was eased considerably in the ruling of Basic, et al. v. Levinson, where the U.S. Supreme Court adopted a “fraud on the market” theory of reliance. This theory avoids the need to show individual reliance by employing the presumption that, when a stock trades in an efficient market, investors “rely on the market as an intermediary for setting the stock’s price in light of all publicly available material information; accordingly, when [an investor] buys or sells the stock at the market price, one has, in effect, relied on all publicly available information, regardless of whether the buyer and/or seller was aware of that information personally.”

Jerry: I know the Basic presumption is very unique in this space – does it apply in all securities fraud cases, or are there certain requirements before it may be invoked?

Nelson: The Basic presumption for class certification is invoked by showing that the alleged misrepresentation was publicly known; that it was material; that the stock traded in an efficient market; and that the plaintiffs traded the stock between the time the misrepresentation was made, and the time when the misrepresentation was publicly corrected, or when the truth was revealed. Basic resulted in a significant expansion in securities class actions, and in an attempt to address this expansion and limit frivolous class actions, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) and the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).

Jerry: Nelson, I know that class certification rulings in this space tend to find their way into The Wall Street Journal, and I know you’ve analyzed this area in detail – in your opinion, what are some of the key class certification rulings over the past year that corporate counsel should know about?

Nelson: In 2022, a number of defendants successfully argued that plaintiffs failed to satisfy the heightened pleading standards required by the PSLRA, The higher bar of the PSLRA requires that a complaint alleging misstatements or omissions specify each statement alleged to have been misleading, and indicate the reasons why the statement is misleading.

In In Re Carnival Corp. Securities Litigation, plaintiffs alleged that Carnival had made false and misleading statements regarding its COVID-19 polices and the risks posed to its business by the pandemic. The court’s review of the complaint found that Carnival’s statements affirming compliance with regulatory requirements and safety protocols were not actionable and immaterial. The court found that the statements affirming Carnival’s commitment to passenger and crew safety too vague and general to satisfy the particularity requirements of Federal Rule 9(b) and the PSLRA.

Jerry: I know that the Holy Grail in class actions for plaintiffs’ counsel is securing class certification. In terms of a scorecard over the past year, relatively how did plaintiffs and defendants do in dealing with either preemptive motions to dismiss that attacked securities fraud class actions, or an actual litigation of certification motions?

Nelson: In 2022, plaintiffs’ bar was successful in obtaining class certification of at least part of a class in almost all of the cases that went to that stage of litigation. However, companies were successful almost 50% of the time in obtaining favorable rulings on motions to dismiss, motions to strike, and motions for summary judgment – as was the case in In Re Carnival, for example.

Jerry: In terms of All-Star rulings in 2022 for class certification, do you have any favorites in terms of cases you’ve studied and analyzed?

Nelson: Yes – one case in particular involved the Basic presumption we discussed. In St. Clair County Employees’ Retirement System, et al. v. Acadia Healthcare Co., plaintiffs alleged several misrepresentations and omissions concerning the quality of care and staffing at the defendant’s health care facilities. News items and reports by securities analysts later disclosed allegations of understaffing, cost cutting, and patient neglect at those facilities had in fact occurred. In an attempt to overcome the Basic presumption, the defendant argued that the misrepresentations alleged in the complaint were merely generic and not material to the relationship between a misrepresentation relied upon and its impact on the company’s share price. The defendant offered an expert report in support of this argument, but the court determined that the defendant failed to rebut the Basic presumption because the report offered no analysis showing a disconnect between the allegedly generic misstatements and the company’s share price. The court found that in the absence of such analysis, mere contentions that the statements were generic were insufficient to overcome the Basic presumption. As a result, the court granted the plaintiffs’ motion for class certification.

Jerry: I know that in many particular subset of areas class certifications lead to settlements, and in 2022 class action settlements were the highest they had ever been in decades. What did the space look like in terms of securities fraud class action settlements?

Nelson: The plaintiffs’ class action bar successfully converted class certification rulings into class-wide settlement at a brisk pace in 2022. The top ten securities fraud class-wide settlements totaled $3.25 billion in the past year. The top settlement was a class action against Dell Technologies for $1 billion, resolving claims that the defendants breached their fiduciary duties to former shareholders of a particular kind of Dell stock. There was also a large settlement of over $800 million from Twitter in a class action, where stockholders alleged that Twitter artificially inflated its stock price by misleading investors about user engagement.

Jerry: Those are hefty numbers and a lot of coin – I’m sure in 2023 the plaintiffs’ bar will be loaded for bear again. Well thank you for your analysis Nelson, and for your overview of the developments over the past year in securities throughout class action litigation, and thank you to our listeners for joining our Friday weekly podcast. Have a great day!

July 3, 2023 by Class Action Defense

In A Stark Bench-Slap, The Eighth Circuit Affirms An Attorneys’ Fee Award Of $500 For FLSA Collective Action Settlement

By Gerald L. Maatman, Jr., Emilee N. Crowther, and George J. Schaller

Duane Morris Takeaways: In Vines et al. v. Welspun Pipes, Inc., et al.., No. 21-3537, 2023 U.S. App. LEXIS 16425 (8th Cir. June 29, 2023), the Eighth Circuit affirmed a district court’s ruling in approving a settlement of an underlying class and collective action that reduced an attorneys’ fee award to $500. The Eight Circuit determined that the district court did not abuse its discretion when it reduced the fee award on the basis that plaintiffs were not a “prevailing party” on appeal.

For employers facing wage & claims under the Fair Labor Standards Act and state law related wage-claims, this decision is instructive in terms of what reviewing courts will consider for attorney’s fee awards, particularly where a party’s conduct may be considered unprofessional and/or abusive.

Case Background

In the underlying case, Vines I, Anthony Vines and Dominique Lewis (collectively “Plaintiffs”) brought a class and collective action against Defendants, Welspun Pipes Inc., Welspun Tubular LLC, and Welspun USA, Inc. (collectively “Welspun” or “Defendants”), under the Fair Labor Standards Act (“FLSA”) and the Arkansas Minimum Wage Act (AMWA). Id. at 1-2. Ultimately, the district court approved a settlement of the case. Id. at 2.

After approval of the settlement, Plaintiffs’ counsel moved for an award of attorneys’ fees and costs. Id. Plaintiffs sought $96,000 in attorneys’ fees following the $270,000 settlement deal. The district court rejected the request. It found significant that Plaintiffs’ law firm assigned 17 lawyers, plus staffers, to watch the district court deemed a “run-of-the-mill” FLSA case, saying such cases were not intended to be “conduits for funneling unearned fees into lawyers’ pockets.” Id. As a result, the district court partially granted the motion, awarding $1.00 in fees to the plaintiffs because of the billing practices of their law firm, Sanford Law Firm, PLLC (“SLF”). Id. Alternatively, the district court noted that it would award $25,000 in fees if $1.00 was improper. Id. Plaintiffs’ appealed the district court’s decision.

On appeal, the Eighth Circuit “vacated the award of attorneys’ fees,” “[b]ecause the record contained no lodestar calculation.” Id. The Eighth Circuit remanded the case for the “lodestar calculation” and expressly noted the district court had discretion “to consider. . . the party’s unprofessional conduct in the case,” for purposes of reducing any award of attorneys’ fee. Id. at 2.

On remand, the district court calculated a lodestar of $14,056.50. Id. However, relative to the award of attorneys’ fees, the district reduced the award to $500 “based on the SLF’s egregious conduct.” Id. The district court opined that the reduction was proper for “a multitude of reasons” including “SLF’s rejection of a ‘substantial settlement offer,’ ‘an unearned fee demand,’ and ‘deterrence for [SLF’s] unprofessional conduct.’” Id.

In response, Plaintiffs’ moved to amend the judgment and for leave to file a supplemental petition for costs and fees. Id. The district court denied Plaintiffs motion on the grounds that “[Plaintiffs] were not a prevailing party on appeal ‘because there [had] been no definitive ruling on the fees award and all [p]laintiffs’ other claims for relief were unequivocally rejected by the Eighth Circuit.” Id. at 3.

Plaintiffs appealed the attorneys’ fees award a second time. Id. In addition, the Plaintiffs’ counsel argued the district court’s decision was erroneous for: (i) “award[ing] a fee amount … not based on the lodestar calculation”; (ii) “us[ing] the FLSA’s statutory fee award as a vehicle for sanctions”; (iii) “fail[ing] to provide [them] with notice and an opportunity to respond prior to entering sanctions”; and (iv) “f[inding] that [they] were not prevailing parties and refus[ing] to award any fees related to the appeal.” Id.

The Eighth Circuit’s Decision

The Eighth Circuit affirmed the judgment of the district court in the second appeal. It found no abuse of discretion in the district court’s award of $500.00 in attorneys’ fees. Id. The Eighth Circuit held that the district court complied with its directive on calculating the award of attorneys’ fees and lodestar reduction by “provid[ing] ample justification” based on “SLF’s unprofessional conduct.” Id. The Eighth Circuit reasoned that “[t]he trial court knows the case best. It knows what the lawyers have done, and how well they have done it. It knows what these efforts are worth.” Id.

The Eighth Circuit also rejected Plaintiffs’ argument that the district court erred in determining Plaintiffs “[were] not prevailing parties.” Id. The Eighth Circuit acknowledged the FLSA “allow[s] a reasonable attorney’s fee to be paid by the defendant, and costs of the action,” in addition to any judgment to the plaintiff. Id. at 4. But, “[i]n general, if a plaintiff prevails in the district court, but then seeks and fails to obtain greater relief on appeal, he or she ‘will be hard pressed to demonstrate an entitlement to . . . attorney’s fees on appeal.’” Id.

The Eighth Circuit held that Plaintiffs “did not obtain the ‘greater relief on appeal’ that they sought in Vines I and therefore were not prevailing parties. It rejected Plaintiffs’ argument “that the district court erred in denying the March 2020 motion for approval of settlement.” Id. Second, it also rejected Plaintiffs’ request to “reassign the case to a new district judge on remand.” Id.

For these reason, the Eighth Circuit affirmed the judgment of the district court.

Implications For Employers

The ruling of the Eighth Circuit is well worth a read by employers who are often confronted with settlement demands where counsel for employees seek hefty awards of attorneys’ fees far in excess of the value of their clients’ unpaid overtime.

Employers that are confronted with appeals of attorney’s fee awards, should take note that the Eighth Circuit in Vines relied heavily on the district court’s recitations of the procedural facts for its decision. Further, from a practical standpoint, employers should carefully evaluate attorney’s actions for misconduct during wage & hour settlements when an attorney’s fee award is requested.

July 1, 2023 by Gerald L. Maatman, Jr.

California District Court Gives Green Light To BIPA Claims Brought Against YouTube

By Gerald L. Maatman, Jr. and Tyler Z. Zmick

Duane Morris Takeaways: In Colombo v. YouTube, LLC, et al., No. 22-CV-6987, 2023 WL 4240226 (N.D. Cal. June 28, 2023), the U.S. District Court for the Northern District of California issued a decision embracing a broad interpretation of the data types that are within the scope of the Illinois Biometric Information Privacy Act (“BIPA”). The decision puts businesses on notice that the statute may apply to the collection or possession of any “scan of face geometry,” regardless of whether the scan can be used to identify a specific individual – – in other words, a “biometric identifier” under the BIPA need not be capable of “identifying” a person. Colombo v. YouTube, LLC is required reading for corporate counsel facing privacy class action litigation.

Background

Plaintiff’s BIPA claims were premised on two YouTube video editing tools that allegedly resulted in the collection of his “biometric identifiers” and “biometric information” (collectively, “biometric data”) – YouTube’s (1) “Face Blur” tool and (2) “Thumbnail Generator” tool. Id. at 2-3. According to Plaintiff, the “Face Blur” tool enables a user to select faces appearing in videos uploaded by the user that he or she may wish to “blur,” resulting in those faces appearing blurry and unrecognizable to any viewer of the videos. Plaintiff claimed that when someone uses the tool, YouTube scans the uploaded video “to detect all unique faces” and, in doing so, “captures and stores scans of face geometry from all detected faces, creating a unique ‘faceId’ for each.” Id. at 2 (citation omitted).

Regarding YouTube’s “Thumbnail Generator” feature, Plaintiff described the tool as auto-generating photographic thumbnails (i.e., screenshots from an uploaded video) by scanning videos for faces at the time they are uploaded and using the “face data to auto-generate thumbnails that contain faces.” Id. (citation omitted).

Based on his alleged use of these two YouTube tools, Plaintiff alleged that YouTube violated Sections 15(a) and 15(b) of the BIPA by (i) failing to develop and comply with a written policy made available to the public establishing a retention policy and guidelines for destroying biometric data, and (ii) collecting his biometric data without providing him with the requisite notice and obtaining his written consent.

YouTube moved to dismiss on three grounds, arguing that: (1) Plaintiff failed to allege that data collected by YouTube qualifies as “biometric data” under the BIPA because YouTube did not (and could not) use the data to identify Plaintiff or others appearing in uploaded videos; (2) Plaintiff’s claims violated Illinois’s extraterritoriality doctrine and the dormant Commerce Clause; and (3) Plaintiff failed to allege that he was “aggrieved” for purposes of his Section 15(a) claim.

The Court’s Decision

The Court denied YouTube’s motion to dismiss on all three grounds.

“Biometric Identifiers” And “Biometric Information”

YouTube first argued that Plaintiff failed to allege that data collected through the Face Blur and Thumbnail Generator tools qualify as “biometric data” under the BIPA because Plaintiff did not plausibly allege that YouTube could use the data to affirmatively identify Plaintiff or other individuals. See id. at 4 (“In YouTube’s view, biometric identifiers must identify a person and biometric information must actually be used to identify a person.”).

The Court rejected YouTube’s argument, stating that “[t]he “point is not well taken.” Id. The Court noted the statute’s definition of “biometric identifier” as “a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry,” see 740 ILCS 14/10 – a definition that does not explicitly require that the listed data points be capable of identifying a particular person. While the Court acknowledged that the term “identifier” may suggest that the data must be used to identify a person, the Court also opined that “‘[w]hen a statute includes an explicit definition, we must follow that definition,’ even if it varies from a term’s ordinary meaning.” Id. at 4 (citation omitted); see also id. at 5 (“[T]he Illinois legislature was perfectly free to define ‘biometric identifier’ in a specific manner that is not tethered to the plain meaning of the word ‘identifier’ alone.”).

Extraterritoriality & Dormant Commerce Clause

The Court also rejected YouTube’s arguments that Plaintiff failed to allege that YouTube’s relevant conduct occurred “primarily and substantially” in Illinois, and Plaintiff’s interpretation of the BIPA would run afoul of the dormant Commerce Clause.

The Court held that Plaintiff sufficiently alleged that YouTube’s conduct occurred “primarily and substantially” in Illinois, thereby satisfying the extraterritoriality doctrine. Id. at 5. Responding to YouTube’s argument that the company’s headquarters and data servers are located outside of Illinois, the Court stated that those facts are “not dispositive” and that “[m]aking the geographic coordinates of a server the most important circumstance in fixing the location of an Internet company’s conduct would . . . effectively gut the ability of states without server sites to apply their consumer protection laws to residents for online activity that occurred substantially within their borders.” Id. at 6 (citation omitted).

Using the same reasoning, the Court concluded that “YouTube’s dormant Commerce Clause theory fares no better” because YouTube’s allegedly BIPA-violating conduct “cannot be understood to have occurred wholly outside Illinois,” id. at 7 (citation omitted) – i.e., Plaintiff’s claims were based on the application of an Illinois law to Illinois-based YouTube users.

Whether Plaintiff Is “Aggrieved” Under Section 15(a)

Finally, the Court rejected YouTube’s argument that Plaintiff failed to allege that he was “aggrieved” under Section 15(a), which sets forth two requirements for entities in possession of biometric data: (i) to develop a publicly available BIPA-compliant retention policy; and (ii) to comply with that policy. YouTube argued that Plaintiff failed to allege that he was aggrieved under Section 15(a) because he did not claim that YouTube failed to comply with an existing retention policy as to his biometric data (e.g., that three years had passed since his last interaction with YouTube, yet YouTube had failed to destroy his biometric data).

The Court observed, however, that Plaintiff alleged that YouTube failed to develop and “therefore failed to comply with any BIPA-compliant policy,” which “is enough to move forward . . . [a]t the pleadings stage.” Id. at 8 (emphasis added) (citation omitted).

Implications For Corporate Counsel

Colombo can be added to the list of recent plaintiff-friendly BIPA decisions, as it endorses an expansive view of the types of data that constitute “biometric data” under the statute. Indeed, the Colombo ruling suggests that any data that can be characterized as a “scan of face geometry” – regardless of whether the scan can be linked to a specific person to identify him or her – qualifies as a “biometric identifier” within the BIPA’s scope. Put another way, technology capable of only detecting a category of objects or characteristics in a photo or video (e.g., software that identifies the location of a human face in a photo – as opposed to an arm or leg – without being able to link that face to a specific person) may involve data subject to regulation under the BIPA.

June 30, 2023June 30, 2023 by Gerald L. Maatman, Jr.

U.S. Supreme Court Ends Affirmative Action in University Admissions, Likely Leading To Legal Challenges to Diversity Efforts Within Corporations

By Gerald L. Maatman, Jr. and Rebecca S. Bjork

Duane Morris Takeaways: On June 29, 2023, the U.S. Supreme Court ruled that colleges and universities may not consider the race of applicants when making admissions decisions. In Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, No. 20-1199 (U.S. June 29, 2023), Chief Justice Roberts wrote the majority opinion in a 6-3 ruling joined by Justices Thomas, Alito, Gorsuch, Kavanaugh and Barrett. The Supreme Court held that affirmative action programs at Harvard and the University of North Carolina-Chapel Hill violated the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution. The decision, which is 237 pages in length, including concurring and dissenting opinions, opens the door for legal challenges to be brought to employers’ diversity, equity and inclusion efforts because the Supreme Court’s reasoning – that race-conscious admissions policies may constitute unconstitutional differential treatment of individuals based on race – arguably applies to hiring and promotion decisions made within business organizations.

Case Background

The lawsuit that led to the Harvard decision was filed in the U.S. District Court for the District of Massachusetts by Students for Fair Admissions, Inc. (SFAA), a legal organization created to bring federal court challenges to affirmative action in college and university admissions. In 2014, SFAA sued both Harvard and UNC in separate lawsuits, arguing that their race-conscious admissions policies violated Title VII of the Civil Rights Act and the Fourteenth Amendment’s Equal Protection Clause. Id. at 6. The First Circuit had affirmed a trial judgment in Harvard’s favor, while the Fourth Circuit was considering an appeal of the UNC case when the Supreme Court granted certiorari in the Harvard case and brought the UNC case into its writ to be decided alongside it.

The Supreme Court’s Decision

After determining that SFAA had standing to bring its lawsuits, the majority turned to analyzing the merits. It focused on the Fourteenth Amendment in light of prior decisions relating to education, beginning with the holding in Brown v. Board of Education that “racial discrimination in public education is unconstitutional.” Id. at 13. After reviewing decades of case law following in the footsteps of Brown, the majority concluded that “[e]liminating racial discrimination means eliminating all of it.” Id. at 15. The majority discussed the application of the strict scrutiny test that courts apply to determine whether an exception can be made to the constitutional requirement of equal protection and analyzed how prior decisions regarding affirmative action considered the facts at hand in applying that test. Citing Regents of the University of California v. Bakke, 438 U.S. 265 (1978), Grutter v. Bollinger, 539 U.S. 306 (2003), and Fisher v. University of Texas at Austin, 570 U.S. 297 (2013) – the latter of which was also brought by the founder of SFAA – the majority examined these prior rulings in detail. The majority asserted that in Fisher, the Supreme Court made it clear that while colleges and universities could consider race in admissions decisions, the process must have “a termination point,” “have reasonable durational limits,” “must have ‘sunset provisions’” and “must have a logical end point.” Id. at 21.

The majority concluded that the end point has now been reached, deciding that both Harvard’s and UNC’s admissions policies that took race into consideration were unconstitutional because the operations of those programs do not create outcomes that are “sufficiently measurable to permit judicial [review].” Id. at 22. For example, Harvard’s stated purposes for using race-conscious admissions processes included “training future leaders in the public and private sectors,” “preparing graduates to adapt to an increasingly pluralistic society,” “better educating its students through diversity,” and “producing new knowledge stemming from diverse outlooks.” Id. at 23. The majority held that those objectives “are not sufficiently coherent for purposes of strict scrutiny.” Id.

Independently, the majority held that the programs violated equal protection principles based on statistics showing that Harvard’s consideration of race in admissions led to an 11/1% decline in the number of Asian-Americans admitted to the prestigious college. Id. at 27. This led the majority to conclude that an individual’s race is, by effect, a negative factor in the admissions process, which violates the rules set forth in the earlier affirmative action cases in higher education discussed in the ruling. Id.

Finally, the majority expressed a caveat to its ruling forbidding the use of race-conscious processes in admissions. It wrote that “nothing in this opinion should be construed as prohibiting universities from considering an applicant’s discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise.” Id. at 39. Time will tell whether this creates a loophole in the majority’s decision, but it clearly will encourage further litigation in the future in this area of the law, as college admissions officials grapple with how to consider and weigh the impact of such admissions essays submitted by prospective students.

As expected, the dissenting Justices Sotomayor and Jackson wrote impassioned dissents, and Justice Sotomayor read hers from the bench, in terms of signaling its importance. They maintained that the Fourteenth Amendment itself is not race-neutral; it was drafted at the end of the Civil War precisely to provide race-based relief to former enslaved persons seeking to enter civic and commercial society. For these reasons, they contended that, to hold that its application requires a form of color-blindness, is in conflict with the amendment itself. And they expressed concern that students who are members of historically disadvantaged racial groups will find it increasingly difficult to get ahead of their non-minority peers as a result of the majority’s ruling.

Implications For Employers

While one would not normally think that a decision relating to university admissions processes would implicate how employers hire and evaluate employees, in this case it does. Media outlets have already reported that attorneys are preparing challenges to employers’ diversity, equity and inclusion programs, applying the same Fourteenth Amendment analysis outlined in the Supreme Court’s decision in Harvard. As such, legal department leaders in corporate America should pay attention and be aware of how this decision poses litigation risks to their businesses.

June 30, 2023December 1, 2023 by Gerald L. Maatman, Jr.

Revised Illinois Day and Temporary Labor Services Act: Implications For Staffing Agencies And Their Customers

By Gerald L. Maatman, Jr., Gregory Tsonis, and Shaina Wolfe

Duane Morris Takeaways – Recently, the Illinois General Assembly made substantial modifications to Illinois’ Day and Temporary Labor Services Act (820 ILCS 175/). The legislation drastically alters the legal landscape for staffing agencies and their clients. These amendments, codified in HB2862, were passed on May 19, 2023, and presented to the Governor for signing on June 16, 2023. Absent a veto, the law will automatically come into effect upon the date of the Governor’s approval or no later than August 15, 2023, if no action is taken. The alterations made to the Act are significant and present considerable implications for staffing agencies that employ or utilize day or temporary laborers, as well as their customers. The changes to the Act impose increased obligations and require unprecedented information-sharing between staffing agencies and their customers to ensure compliance with the new requirements. When paired with increased penalties and a third-party enforcement mechanism, staffing agencies and their customers face substantially increased regulatory and compliance burdens and vastly increased exposure to monetary penalties and litigation.

An Overview Of The Changes

The proposed changes can be grouped into various categories, each with its unique impact on staffing agencies and their customers. One element that has not changed, however, is the definition of “day and temporary labor,” which remains defined as “work performed by a day or temporary laborer at a third party client,” but excluding work “of a professional or clerical nature.” 820 ILCS 175/5. The amended Act contains the several significant modifications.

Equivalent Compensation And Benefits

The new legislation requires that day and temporary laborers assigned to a client for more than 90 calendar days must receive equal compensation and benefits (“equal pay for equal work”) as their counterparts directly employed by the client. The requisite equal pay and benefits to qualifying temporary laborers must, at a minimum, match the least paid direct hire at the same seniority level, performing work of a substantially similar nature under substantially similar working conditions. The staffing agency may, in lieu of benefits to a temporary worker, choose to compensate the worker with the cash equivalent of those benefits. In instances where there is no direct hire for comparison, the temporary worker should be paid an equivalent salary and receive the same benefits as the lowest-paid employee at the nearest level of seniority. Furthermore, if a staffing agency requests it, a client company is obligated to supply the staffing agency with all relevant information regarding the job roles, pay, and benefits of directly hired employees.

These changes present significant challenges for staffing agencies and their customers alike. The revised legislation, for example, does not define what “benefits” fall within the Act and which must be provided to qualifying temporary workers and what impact, if any, the staffing agencies’ benefit plans offered to workers have on the requisite compensation. Client companies must provide staffing agencies with the necessary information as to “job duties, pay, and benefits” or risk committing a violation of the Act punishable by a $500 penalty and attorneys’ fees and costs. As a result, the uncertainty injected by the new requirements presents several practical challenges to staffing agencies and client companies alike.

Disclosure Of Labor Disputes

The revised Act requires staffing agencies to inform laborers, before dispatch, if they will be working at a site currently experiencing “a strike, a lockout, or other labor trouble.” 820 ILCS 175/11.

The notice to the temporary worker must be in a language that the worker understands and must inform the worker of the dispute and the worker’s right to refuse the assignment “without prejudice to receiving another assignment.” The phrase “other labor trouble” is undefined in the revised Act, further inserting ambiguity and uncertainty for staffing agencies in compliance with the proposed law.

Safety Inquiries And Training

The amendments also introduce considerable new safety-related responsibilities for both staffing agencies and their client companies.

Prior to assigning a temporary worker, a staffing agency is obligated to inquire into the safety and health practices of the client company, inform the temporary worker about known job hazards, offer general safety training about recognized industry hazards, and document this training. In addition, the agency should give a general overview of its safety training to the client company at the onset of placement, provide temporary workers with the Illinois Department of Labor’s hotline for reporting safety concerns, and instruct the temps on whom to report safety issues to in the workplace.

Simultaneously, client companies are also compelled to adhere to several new safety-related requirements before a temporary worker begins work. Client companies must disclose any anticipated job hazards, review the safety and health awareness training received by the temporary workers from their staffing agencies to ensure its relevance to their specific industry hazards, offer specific worksite hazard training, and maintain records of such training. These records must also be confirmed to the staffing agency within three business days of the training completion. If a temporary worker’s role is altered, the company must provide updated safety training to cover any specific hazards of the new role. In addition, client companies must grant staffing agencies access to the worksite to verify the training and information given to temporary workers.

Increased Fees And Penalties

Under the revised law, fees charged to staffing agencies for registration with the Illinois Department of Labor have increased. Penalties for staffing agencies and client companies in violation of notice requirements have also seen a substantial increase, and now range from $100 to $18,000 per first violation (up from $6,000) and $250 to $7,500 for repeat violations within three years (up from $2,500). Distinct violations may be found on the basis of the type of violation, the day on which the violations occurred, or even each worker impacted by a violation, thereby drastically increasing exposure to staffing agencies and their client companies.

The Illinois Attorney General may even request that a court suspend or revoke the registration of a staffing agency for violating the Act or when warranted by public health concerns.

Third-Party Enforcement

The amendments also provide third-party organizations – defined as any entity “that monitors or is attentive to compliance with public or worker safety laws, wage and hour requirements, or other statutory requirements” – with the power to initiate civil actions to enforce compliance with the Act.

Notably, these “interested parties” can bring suit against staffing agencies and/or their customers if they merely hold a “reasonable belief” that a violation of the Act has occurred in the preceding three years. As a prerequisite to filing suit, these organizations must first file a complaint with the Illinois Department of Labor, which provides notice to the staffing agency or client of the complaint. However, regardless of whether the Department of Labor finds the complaint without merit, or even if the violation is cured, the interested party can still receive a right to sue notice and proceed with litigation. A prevailing party in litigation is entitled to 10% of any assessed penalties, as well as attorneys’ fees and costs.

Implications For Employers

The modifications to the Day and Temporary Labor Services Act present several potential complications and ambiguities for staffing agencies as well as their customers. Notably, the requirement of equal pay for equal work, after a laborer has been with a client for over 90 days, creates substantial issues in what constitutes “equal work,” “equal pay,” and which benefit programs fall within the compensation requirements. Moreover, the provision permitting staffing agencies to pay the hourly cash equivalent of the actual cost benefits in lieu of the required benefits further muddies the waters and requires unprecedented information-sharing between staffing agencies and their clients. Staffing agencies’ obligation to inform temporary workers of “other labor trouble” at client sites is vague, and the lack of a clear definition may lead to compliance issues. Moreover, the increased fees, penalties, and potential civil actions initiated by third-party organizations may lead to additional regulatory and litigation burdens for staffing agencies and clients alike. Finally, the private right of action created by the enactment is sure to prompt class actions by advocacy groups.

These substantial changes call for staffing agencies and their clients to revisit their current policies and practices to ensure compliance with the revised Act before it comes into effect. As the amendments hold significant implications for staffing agencies and client companies alike, early communication and a cooperative approach is recommended to navigate the new requirements effectively. While further guidance from the Department of Labor is likely to clarify several ambiguities in the Act, in the meantime, staffing agencies and client companies should immediately seek legal counsel to better understand the changes, assess the specific impact of each category of changes on their businesses, and ensure compliance to minimize exposure to penalties or litigation.

June 30, 2023 by Class Action Defense

The Class Action Weekly Wire – Episode Nineteen: RICO Class Action Litigation

June 23, 2023 by Class Action Defense

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

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Hari Kumar with their analysis of procedural class action issues and rulings from 2022, and predictions for what 2023 may bring for Corporate America. We hope you enjoy the episode.

June 16, 2023 by Class Action Defense

Illinois Federal Court Dissolves 41-Year Old Consent Decrees That Successfully Quelled The Influence Of Organized Crime In The Management Of Pension Funds

By Gerald L. Maatman, Jr. and Jeffrey R. Zohn

Duane Morris Takeaways: On June 9, 2023, Judge Thomas Durkin of the U.S. District Court for the Northern District of Illinois terminated consolidated cases from the late 1970’s and early 1980’s that sought to thwart Defendants’ efforts to continue to funnel pension funds to organized crime. The litigation – entitled U.S. Department of Labor v. Estate of Fitzsimmons et al., Case Nos. 78 C 00342, 78 C 04075 & 82 C 07951, 2023 WL 3916304 (N.D. Ill. Jun. 9, 2023) – is one of the oldest pending cases in the American judicial system. The first chapter of these cases concluded in 1982 and 1985, respectively, when the Northern District of Illinois entered two separate Consent Decrees that subjected the funds to Court-appointed monitoring. The final chapter recently concluded – 41 years later – when Judge Durkin dissolved those Consent Decrees over objections from the Department of Labor (“DOL”). Although the language of the Consent Decrees did not explicitly give the Court the right to dissolve both Consent Decrees in this manner, the Court relied on the broad power granted to it under the Federal Rules of Civil Procedure, which allows it to relieve parties from final judgment if the continued application of the judgment is no longer equitable.

Case Background

More than 40 years ago, the DOL filed suit against Frank Fitzsimmons, Loran Robbins, Allen Dorfman – all of whom have since passed away – and several others alleging that the trustees of the Central States, Southeast and Southwest Areas Pension Fund (the “Pension Fund”) and Health & Welfare Fund (the “Health & Welfare Fund”) had mismanaged assets by providing loans to organized crime. The U.S. District Court for the Northern District of Illinois entered multiple Consent Decrees, which appointed fiduciaries to manage the assets of those Funds. The Consent Decrees have been in place since 1982 and 1985, respectively.

The Court noted that since then, not once has the DOL found that the Funds have violated the Consent Decrees or any other applicable laws. Judge Durkin opined that “[s]uch a record is almost incredible, given that it has been 41 years since the [first] Consent Decree was entered.” Id. at 4. In fact, a government investigation revealed that the Funds were actually outperforming comparable funds. Further, in 2022, the Pension Fund applied for and received $35.8 billion in Special Financial Assistance, as part of the American Rescue Plan Act of 2021.

On April 4, 2023, the Court-appointed Independent Special Counsel (“ISC”) for the Consent Decrees recommended dissolution of the Consent Decrees because they have fully achieved their objectives. The Funds neither advocated for or opposed dissolution. The DOL opposed dissolution so that it could monitor the influx of new money.

The Court’s Opinion

Judge Durkin determined that the relevant language in the Pension Fund Consent Decree permitted the Court to dissolve the Consent Decree if the Pension Fund makes such a petition. The relevant language in the Health & Welfare Fund Consent Decree permitted the Court to dissolve the Consent Decree sua sponte or upon petition from the Health & Welfare Fund. Here, only the ISC petitioned the Court for dissolution. The ISC has no authority under the Consent Decrees and only the Health & Welfare Fund Consent Decree permits the Court to act sua sponte.

Although the Funds took no position on the dissolution of the Consent Decrees, the Court held that it still has equitable power to dissolve the Consent Decrees. In quoting Rule 60(b)(5), the Court explained that it may relieve a party from final judgment if the judgment “has been satisfied, released, or discharged, . . . or applying it prospectively is no longer equitable.” Id. at 2. It reasoned that the Court “may modify a decree of injunctive relief if the legal or factual circumstances have changed since the time of issuance.” Id. Consent decrees, in particular, are “not intended to operate in perpetuity.” Id.

In support of its decision to dissolve the Consent Decrees, the Court noted that the circumstances have changed since the issuance of the Consent Decrees. Their purposes have long since been achieved. There is no longer a credible threat of the Funds being used as a front for organized crime, which was the original purpose of the Consent Decrees.

The Court recognized the DOL’s desire to continue supervising the Funds in light of the $38.5 billion the Pension Fund recently received, noting that the disposition of billions of dollars in taxpayer money is cause for heightened concern. However, this new money is unrelated to the purpose of the Consent Decrees. The DOL and other government agencies still have other avenues to supervise the Funds, such as through the ERISA and the American Rescue Plan Act.

Implications For Employers

The Fitzsimmons ruling is a stark reminder of the potential power of Federal Courts and government. This ruling illustrates both the staying power of an order entered by a District Court judge decades ago and the power to supersede such an order despite the plain language of the original order indicating otherwise. Moreover, the fact that the DOL would not agree to relinquish the power the Court granted it over 40 years ago is another reminder of the importance of handling pension funds appropriately. A finding of mismanagement may enable cumbersome government oversight for an untold period of time.