Class Action Defense

January 31, 2023 by Class Action Defense

The Fifth Circuit Breathes Live Into A Securities Fraud Class Action Based On Information From Confidential Witnesses

By James J. Coster and Nelson Stewart

Duane Morris Takeaways: At the motion to dismiss stage of a securities fraud class action, the weight given to the statements of a confidential witness will depend on the basis of that individual’s knowledge concerning the allegations at issue. In Oklahoma Firefighters Pension & Retirement Systems v. Six Flags Entertainment Corp., No. 21-10865, 2023 WL 228268 (5th Cir. Jan. 18, 2023), the Fifth Circuit reversed a decision from the District Court dismissing a class action complaint against Six Flags Entertainment Corp. The District Court had applied a significant “discount” to the allegations of a confidential witness. The Fifth Circuit’s decision indicates that the heightened pleading requirements of securities fraud claims brought under the Securities Exchange Act can be satisfied by an anonymous witness if the source of the information identified in the complaint demonstrates the significant knowledge of the witness and the statements are accompanied by corroborating evidence. As such, this ruling is a “must read” for corporate decision-makers involved in securities fraud class action litigation.

Background

In 2014 Six Flags Entertainment Corp. partnered with Chinese real estate developer Riverside Investment Group to construct and manage new theme parks across three cities in China as part of its plan to increase development and licensing revenues through international expansion. From April 2018 to October 2019, Six Flags, as well as its CEO and CFO, issued public statements confirming the progress of the parks and projected opening dates for the new parks. Plaintiff brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5, alleging that Six Flags and its officers made material omissions of fact and misleading statements concerning the competence and financial health of Riverside, the progress of construction on the new parks, and projected openings and revenue. The complaint relied primarily on the allegations of a confidential witness, who formerly held the position of Six Flags International Director of International Construction and Project Management, to assert that construction of the parks was well behind schedule because Riverside could not pay its contractors, and the timelines Six Flags had projected for the opening of its parks in China were not possible. In early 2020 Six Flags acknowledged that it expected a $1 million negative revenue adjustment and charges of $10 million because Riverside had defaulted on its payment obligations. Shortly thereafter, Six Flags also announced that it was terminating its agreement with Riverside. Shares of Six Flags fell from $73.38 to a seven year low of $31.89 in during the Putative Class Period.

Citing earlier decisions from the Fifth Circuit, the District Court determined that it was required to substantially discount the statements of the confidential witness. The District Court dismissed the complaint with prejudice and held that Plaintiff had not met the heightened pleading requirements for securities fraud claims under Rule 9(b) or the Private Securities Litigation Reform Act (PSLRA).

The Fifth Circuit’s Ruling

On appeal, a key consideration in determining whether the complaint had adequately alleged material misrepresentations and the scienter required for securities fraud claims under the Securities Exchange Act concerned the appropriate weight that should be given to the confidential witness. The Fifth Circuit distinguished the cases cited by the District Court and found that while allegations of an anonymous witness must be discounted under the heightened pleading standards of Rule 9(b) and the PSLRA, the degree of that discount depends on the details in the complaint describing the source and whether the source’s knowledge has been substantiated by those details.

Plaintiff’s confidential witness supervised and inspected the development of the parks in China onsite and sent progress reports to Six Flags. The witness also interacted directly with Riverside, attended meetings with Six Flags personnel in China (where it was disclosed that Riverside did not have sufficient funds to complete the project), and sent a letter warning that Riverside had inadequate funds to a Senior Vice President of Six Flags in August 2019. The Fifth Circuit cited cases from the Seventh Circuit and Third Circuit, which held that the level of detail provided and first-hand knowledge of the facts can determine the weight afforded to anonymous sources. It reasoned that the level of details in the complaint concerning the former employee’s duties, and corroborating evidence in the form of a photograph that showed minimal construction at one of the park sites, warranted only a minimal discount of the former employee’s general allegations. As for the allegations concerning the financial health of Riverside, the District Court applied a significant discount to the statements of the confidential witness because it concluded the witness would not have personal knowledge of Riverside’s internal finances. The Fifth Circuit held that personal knowledge of Riverside’s financial condition based on the position the witness held at Six Flags, rather than comprehensive personal knowledge, was sufficient and applied a minimal discount to those allegations as well.

With greater weight given to the statements of the confidential witness, the remaining findings of the District Court with respect to forward looking statements, i.e., Plaintiff’s failure to adequately plead misstatements of facts and Plaintiff’s failure to adequately plead scienter, were also reversed. The Fifth Circuit denied Six Flags’ argument that statements made during the Class Period were forward looking, included appropriate cautionary language and should be granted protection under the PSLRA’s safe harbor provision. Because many of the alleged misstatements concerned projections that were based on the current status of the construction, they were deemed mixed statements of present and future conditions that were ineligible for safe harbor protection. Certain statements that did address future projections were also denied protection. The Fifth Circuit ruled that the cautionary language cited by Six Flags was not sufficiently specific to the risks at issue in the forward looking statements.

In the absence of appropriate cautionary language, the Fifth Circuit examined whether the complaint sufficiently alleged materially misleading statements of fact. Where the District Court found the allegations of the confidential witness conclusory as to statements concerning the impossibility of the projected opening dates of the parks, the Fifth Circuit concluded the impossibility of the timeline necessary to construct the park was a fact-based, industry specific question that was not applicable at the motion to dismiss stage of the litigation. Plaintiff was also found to have sufficiently alleged that the Six Flags omitted critical information about Riverside’s financial difficulties based on the minimally discounted allegations of the complaint. The Fifth Circuit specifically cited the August 2019 letter to Six Flags that contradicted its positive statements regarding Riverside’s financial viability.

In its analysis of the scienter requirements under the PSLRA, the Fifth Circuit considered the collective weight of motive, and reports from the confidential witness detailing the poor progress of the theme parks that were sent to Six Flags management. Bonuses well in excess of base salaries would be awarded to management if Six Flags achieved a $600 million EBITDA by the end of 2018. While acknowledging that this motive alone could not support a strong inference of scienter, the bonus incentives, when viewed together with the progress reports, were held sufficient to create a strong inference that Six Flags had actual knowledge that its 2018 statements were false. After the target was missed the bonus incentives were eliminated and thus inapplicable to the alleged misstatements or omissions of fact made in 2019. Nevertheless, the Fifth Circuit found that Six Flags had boasted that its international licensing deals would be a significant driver of increased EBITDA. A February 2019 statement concerning a comprehensive review of the parks also indicated that Six Flags was aware of the progress of construction at the various sites in China. Plaintiff alleged a “core operations” theory of scienter, which asserts that when a transaction at issue is critical to a company’s success, misstatements or omissions concerning the transaction should be readily apparent to the speaker. The decision acknowledged that all elements of a core operations theory of scienter were not entirely satisfied. However, the Fifth Circuit held that the circumstances of the 2019 statements, combined with the witness reports to Six Flags, also created a strong inference of scienter for the 2019 statements.

Implications for Public Companies

The ruling in Oklahoma Firefighters Pension & Retirement Systems provides clarification concerning the discount that should be applied to the allegations of a confidential witness that is consistent with decisions of the Seventh Circuit and the Third Circuit. These decisions suggest that descriptions in a complaint that detail the source of relevant information provided by an anonymous witness increase the credibility of that information. This clarification may help the plaintiff’s bar navigate motions to dismiss by offering increased guidance in framing securities fraud complaints in the Fifth Circuit.

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

Delaware Says Corporate Officers Are Now Subject To A Duty Of Oversight In The Workplace Harassment Context

By Rebecca Bjork, Gerald L. Maatman, Jr., and Jennifer A. Riley

Duane Morris Takeaways: In a new legal development of significant import, employees of corporations incorporated in Delaware who serve in officer roles may be sued for breach of the duty of oversight in the particular area over which they have responsibility, including oversight over workplace harassment policies. In its ruling in In Re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-CV-324 (Del. Ch. Jan. 25, 2023), the Delaware Court of Chancery determined that like directors, officers are subject to oversight claims. This decision expands upon the rule established in the case of In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), which recognized the duty of oversight for directors. The decision will likely result in a flurry of litigation activity by the plaintiffs’ bar, as new cases will be filed alleging that officers in corporations who were responsible for overseeing human resource functions can be held liable for failing to properly oversee investigations of workplace misconduct such as sexual harassment.

Introduction

On January 25, 2023, the Court of Chancery for the State of Delaware issued a ruling that will have a substantial impact on shareholder derivative lawsuits, especially as they implicate allegations of workplace harassment. For the first time, corporate officers may be held liable for breach of the fiduciary “duty of oversight.” This ruling is likely to result in a multitude of court filings as the contours of this new legal rule are tested in litigation filed by plaintiffs’ attorneys. This represents yet another reason for companies to boost their efforts at corporate compliance and to ensure that robust complaint reporting and investigation systems are in place to protect employees who claim they are victims of discrimination, sexual harassment, and retaliation.

The Facts Underlying The Delaware Ruling

In In Re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-CV-324 (Del. Ch. Jan. 25, 2023), the Court found that Defendant David Fairhurst, who served as Executive Vice President and Global Chief People Officer of McDonald’s Corporation from 2015-2019, was liable to stockholders of McDonald’s for his failure to fulfill his fiduciary duty to fulfill his oversight role over human resource practices and policies. As the Court explained, Fairhurst “breached his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct” and “breached his duty of oversight by consciously ignoring red flags.” (Slip Op. at 1.) The Court therefore denied Fairhurst’s motion to dismiss, clarifying that under the logic of Caremark, Delaware law does recognize a duty of oversight for corporate officers.

To prevail in their claims against Fairhurst, the plaintiffs had a legal challenge to surmount, in that no court had found that officers as opposed to directors had a duty of oversight in light of misconduct within a corporation. Even more, Delaware law presumes that directors and officers act in good faith when making decisions. Id. at 3. But the plaintiffs did have sufficient and specific facts on their side, which the Court discussed in detail.

McDonald’s has its principal place of business in Chicago, Illinois, and has a global workforce that exceeds 200,000 individuals. Id. at 5-6. The Complaint alleged that the Chicago headquarters of the Company had a “party atmosphere” that was encouraged by former CEO Stephen J. Easterbrook and Fairhurst, who were close personal friends. Id. at 7. Weekly happy hours featured an open bar, and “Easterbrook and Fairhurst developed reputations for flirting with female employees, including their executive assistants.” Id. Importantly, the plaintiffs alleged that the process for reporting human resource complaints (a company function directly under Fairhurst’s control) failed to address complaints sufficiently. Between 2016 and 2018, more than a dozen complaints were filed with the EEOC by employees who alleged sexual harassment and retaliation. Id. at 8. In December 2018, McDonald’s employees in ten cities went on strike in protest, attracting the attention of the U.S. Senate. Id. at 8-9, 12.

Plaintiffs also alleged that Fairhurst engaged in acts of sexual harassment in December 2016 and November 2018, and was warned about his use of alcohol at company events. Id. He was terminated in November 2019 after committing yet another act of sexual harassment. Id. And in October 2019, the Board of Directors learned that Easterbrook was engaging in a prohibited relationship with an employee, and he was terminated after an investigation by outside counsel. Id. at 15.

The crux of the reasoning behind the Court’s ruling is that an officer of a corporation has a fiduciary duty to oversee the corporation’s activities that fall within his or her role in the corporation. As the Global Chief People Officer at McDonald’s, the Court opined that “[Fairhurst] had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.” Id. at 3. Simply put, his human resources role required that he act in good faith to maintain an awareness of potential liability resulting from improper workplace conduct, and the Court found that he did not do so. “Corporate fiduciaries can face liability if they knowingly fail to adopt an internal information and reporting system that is ‘reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance.’” Id. at 24 (citation omitted). Because plaintiffs pled specific facts sufficient to allege that Fairhurst ignored red flags surrounding sexual harassment and the Company’s failed complaint system, the Court denied Fairhurst’s motion to dismiss.

Conclusion

While the Court’s decision is notable because it established a new fiduciary duty applicable to corporate officers, it is not a surprising outcome. The logic of Caremark leads inevitably to this decision, once it is established that corporate officers have real power and obligations within a corporation to manage risk. Because workplace harassment and retaliation claims pose very high risks to a corporation, it is to be expected that an officer responsible for the human resource function will come under strong scrutiny when EEOC charges and lawsuits are filed. The best defense to a high stakes workplace lawsuit is to prevent it from being filed in the first place. Ensuring that the proper systems for reporting and investigating workplace complaints are in place is by far preferable to litigating a case like this one.

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

DMCAR Trend #3 – The Arbitration Defense Suffered Setbacks In 2022

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaway: Of all defenses, a defendant’s ability to enforce an arbitration agreement containing a class or collective action waiver may have had the single greatest impact in terms of shifting the pendulum of class action litigation. With its decision in Epic Systems Corp. v. Lewis, et al., 138 S. Ct. 1612 (2018), the U.S. Supreme Court cleared the last hurdle to widespread adoption of such agreements. In response, more companies of all types and sizes updated their onboarding materials, terms of use, and other types of agreements to require that any disputes be resolved in arbitration on an individual basis. To date, companies have enjoyed a high rate of success enforcing those agreements and using them to thwart class actions out of the gate.

Statistically, corporate defendants fared well in asserting the defense. Across various areas of class action litigation, the defense won approximately 68% of motions to compel arbitration (roughly 69 motions granted in 102 cases).

By almost any measure, the arbitration defense had a tumultuous year in 2022. In the courts, chinks in the armor of the defense began to grow. While the U.S. Supreme Court shut down state efforts to evade arbitration of wage and hour claims, as discussed above, it limited application of the FAA to workers who participate in interstate transportation. Perhaps more significantly, on the legislative front, Congress significantly limited the availability of arbitration for cases alleging sexual harassment or sexual assault when it passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. President Biden signed the Act into law on March 3, 2022.

The Act amends the FAA and provides a plaintiff the discretion to enforce pre-dispute arbitration provisions and class and collective action waivers in cases where he or she alleges “conduct constituting a sexual harassment dispute or a sexual assault dispute” or is “the named representative of a class or in a collective action alleging such conduct.” In other words, whereas the Act does not render such agreements invalid, it allows the party bringing sexual assault or sexual harassment claims to elect to enforce them or avoid them. The Act does not impact agreements entered into after a dispute arises.

The plaintiffs’ bar often alleges other claims along with claims for sexual assault or sexual harassment. Whereas the Act refers to a “case,” it remains to be seen whether courts will attempt to limit a plaintiff’s option to avoid pre-dispute arbitration to sexual assault or sexual harassment claims or will extend such option to all claims at issue in a case. The Act provides that “no pre-dispute arbitration agreement or pre-dispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.” To date, courts have not issued significant decisions interpreting such language.

Given the impact of the arbitration defense, in 2023, companies may face additional hurdles, on the judicial or the legislative front, as the plaintiffs’ bar continues to look for workarounds. In particular, we expect to see litigation over whether the Act’s use of the word “case” renders the statute applicable to all claims in the case, including claims other than sexual harassment and sexual assault and whether the statute, therefore, will allow for a broader shield to the arbitration defense.

January 28, 2023July 5, 2023 by Gerald L. Maatman, Jr.

Defendants Lose Motion To Dismiss Antitrust Class Action Over No Poach Claims

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Michael DeMarino

Duane Morris Takeaways – In Borozny, et al, v. Raytheon Technologies Corp, Pratt & Whitney Division et al, No. 3:21-CV-1657, 2023 WL 348323 (D. Conn. Jan. 20, 2023), Judge Sarala Nagala of the U.S. District Court for the District of Connecticut declined to dismiss private civil class action claims against Raytheon’s Pratt & Whitney division, a leading manufacturer of civil and military airline engines, and the other defendants named as outsource suppliers for skilled aerospace labor. The decision in Borozny is an important one for companies because it serves as a reminder that even agreements to restrain trade amongst non-competitors can be treated as a per se antitrust violation and thus make it easier for Plaintiffs to obtain Rule 23 class certification.

Background Of The Case

In Borozny, et al, v. Raytheon Technologies Corp – an antitrust putative class action – eight named Plaintiffs alleged, on behalf of themselves and others similarly situated, that six corporate Defendants engaged in a conspiracy to restrain trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, by secretly agreeing to restrict their competition in the recruitment and hiring of aerospace engineers and other skilled workers in the jet propulsion systems industry.

Specifically, Plaintiffs alleged that Defendants’ alleged conspiracy not to hire or recruit each other’s employees was kept secret from Defendants’ employees due to its illegality and negative impact on the compensation and career options of Defendants’ employees. Plaintiffs further alleged that once any Defendant hired any aerospace worker, no other Defendant could recruit or hire that same employee, and that this agreement allowed Defendants to artificially suppress the market rate for aerospace workers. According to Plaintiffs, this alleged conspiracy impacted the market for aerospace workers by suppressing labor competition and, in turn, compensation.

Defendants moved to dismiss the complaint, arguing that that Plaintiffs had failed to allege conduct that is appropriately deemed a per se antitrust violation and failed to plead an alternative rule of reason claim. The Court denied Defendants’ moutons to dismiss.

The Court’s Ruling

Defendants moved to dismiss the Complaint on the basis that it failed to allege a per se antitrust violation and also failed to allege in the alternative a rule of reason violation. Defendants’ core contention was that they had a vertical, rather than a horizontal, relationship with each other, such that any agreements amongst them cannot be per se violations of the Sherman Act. As the Court, explained, “the difference between a horizontal restraint on trade and a vertical restraint on trade is that . . . [r]estraints imposed by agreement between competitors have traditionally been denominated as horizontal restraints, and those imposed by agreement between firms at different levels of distribution as vertical restraints.”’ Id. at *6.

The Court rejected Defendants’ argument, and agreed with Plaintiffs that Defendants were focusing on the “wrong market.” Id. The Court opined that the relevant market is not, as Defendants suggested, the market for aircraft engines or the “greater aerospace industry at large,” but rather the labor market for aerospace workers.

Because the complaint alleged a “conspiracy to restrain competition in the aerospace labor market” the Court concluded that “all Defendants . . . participate in that market horizontally, and they are all alleged to have participated in the market division conspiracy horizontally, and thus, per se treatment could be appropriate.” Id. at *7.

The Court similarly concluded that Plaintiffs sufficiently alleged a rule of reason violation. To state a claim for a rule of reason violation, Plaintiffs must “allege[s] a plausible relevant market in which competition will be impaired” and an adverse impact on that market. Id. at *8. Plaintiffs alleged that they could not easily transition to work outside of aerospace engineering firms, given the specialized training they obtained by working for Defendant. Based on these allegations, the Court found “it reasonable, at least for purposes of a motion to dismiss, for Plaintiffs to limit the proposed market to the aerospace industry and to exclude other potential positions for people with Plaintiffs’ qualifications.” Id. As such, the Court held that Plaintiffs adequately alleged a plausible market for purposes of alleging a rule of reason violation.

The Court also concluded that Plaintiffs had alleged an adverse impact on the relevant market. Plaintiffs alleged that the agreement not to hire each other’s employees allowed Defendants to keep wages artificially low, due to the decreased competition in the market for aerospace workers. The Court found these allegations, “adequately stated an effect on the market.” Id. at *13. Thus, the Court concluded that “Plaintiffs have adequately, although inartfully, pleaded an antitrust claim under the rule of reason.” Id.

On these bases, the District Court denied Defendants’ motions to dismiss.

Implications For Companies Facing Antitrust Class Actions

The ruling in Borozny highlights the ongoing battle in antitrust no-poach class actions to plead a per se violation. Indeed, in the class action context, whether the court analyzes the no-poach agreements under the per se or rule of reason test is often the critical issue driving the outcome of whether plaintiffs can satisfy Rule 23’s class certification requirements. This is because a per se violation (unlike a rule of reason violation) relieves a plaintiff from having to define the market where antitrust harm occurred, which often involves individualized inquiries that overwhelm the commonality necessary for class certification.

Employers should understand that their risk for no-poach claims extends broader than a potential alleged conspiracy with their competitors. Borozny is a reminder that even agreements amongst non-competitors in vertical relationships (i.e., at different levels of the market structure) can be treated as a per se violation if they are horizontal competitors in the labor market. Corporate defendants are well-advised to analyze and vet their vendor agreements and staffing contracts to look for potential restraints on competition.

January 27, 2023 by Gerald L. Maatman, Jr.

Thank You For Attending The Duane Morris Class Action Review – 2023 Book Launch!

Thank you to all our clients who attended the in-person book launch of the Duane Morris Class Action Review in Philadelphia, as well as our nationwide audience who participated via Zoom.

January 27, 2023January 30, 2023 by Gerald L. Maatman, Jr.

Introducing The Duane Morris EEOC Litigation Review – 2023

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaways: Given the importance of compliance with workplace anti-discrimination laws for our clients, we are pleased to present the inaugural edition of the Duane Morris EEOC Litigation Review – 2023. The EEOC Litigation Review – 2023 analyzes the EEOC’s enforcement lawsuit filings in 2022 and the significant legal decisions and trends impacting EEOC litigation for 2023. We hope that employers will benefit from this deep dive into how the EEOC’s priorities reveal themselves through litigation. Click here to download a copy of the EEOC Litigation Review – 2023 eBook.

The Review explains the impact of the EEOC’s six enforcement priorities as outlined in its Strategic Enforcement Plan on employers’ business planning and how the direction of the Commission’s Plan should influence key employer decisions. The Review also contains a compilation of significant rulings decided in 2022 that impacted EEOC-initiated litigation and a list of the most significant settlements in EEOC cases in 2022.

Government enforcement litigation is similar in many respects to class action litigation. Lawsuits brought by the U.S. Equal Employment Opportunity Commission (EEOC) typically present significant monetary exposure and involve numerous claimants. Most often the lawsuits pose reputational risks to companies.

The EEOC is one of the most aggressive federal agencies in terms of prosecuting government enforcement litigation. This book focuses on EEOC litigation in 2022 and the types of legal issues spawned by that litigation.

We hope readers will enjoy this new publication. We will continue to update blog readers on any important EEOC developments, and look forward to sharing further thoughts and analysis in 2023!

January 24, 2023January 24, 2023 by Class Action Defense

There Is Still Time To Register For A Duane Morris Exclusive Event: Top Trends In Class Action Litigation In-Person Panel And Webinar Discussion For Book Launch

Duane Morris Takeaways: Register today and come join us Thursday at a Duane Morris Exclusive Event!

You are invited to join Duane Morris Partners Gerald L. Maatman, Jr. and Jennifer Riley for a panel discussion marking the release of the Duane Morris Class Action Review. The DMCAR has received rave reviews (here and here) since its publication, and this event will provide expert insights into the top 10 class action trends of 2022, and perspectives on what corporate counsel and business leaders can expect in 2023. Prominent plaintiffs’ class action lawyer of Joe Sellers of Cohen Milstein will join the discussion to provide thoughts on what the plaintiffs’ bar is expected to focus on in 2023.

Please register here to attend in person or by zoom to reserve your seat!

In Person Event: Thursday, January 26, 2023
Registration: 1:30 p.m. to 2:00 p.m. Eastern
Book Launch and Discussion: 2:00 p.m. to 3:00 p.m. Eastern
Reception: 3:00 p.m. to 5:00 p.m. Eastern

Location:
Convene CityView
Duane Morris Plaza | 13th Floor
30 South 17th Street
Philadelphia, PA 19103

Speakers:

Gerald L. Maatman, Jr., Partner and Chair Workplace Class Action Group, Duane Morris LLP

Jennifer A. Riley, Partner and Vice-Chair Workplace Class Action Group, Duane Morris LLP

Joseph M. Sellers, Partner Cohen Milstein

Opening Remarks:

Matthew A. Taylor, Chairman and CEO, Duane Morris LLP

Thomas G. Servodidio, Vice-Chairman, Duane Morris LLP

January 24, 2023 by Gerald L. Maatman, Jr.

DMCAR Trend # 2 – The U.S. Supreme Court’s Decisions In 2022 Continued To Define The Class Action Landscape Video

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaways: In 2022, the U.S. Supreme Court continued to define and shift the playing field for class action litigation. The Supreme Court issued three key rulings in 2022 that impact the plaintiffs’ bar’s ability to bring and maintain class actions. Watch our video analysis of these three key decisions below by Duane Morris partner and Class Action Review co-editor Jennifer Riley. Enjoy!

January 23, 2023 by Gerald L. Maatman, Jr.

DMCAR Trend # 2 – The U.S. Supreme Court’s Decisions In 2022 Continued To Define The Class Action Landscape

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaways: As the ultimate referee of law, the U.S. Supreme Court has continued to define and shift the playing field for class action litigation. The Supreme Court’s rulings in 2022 were no exception. Consistent with its approach over the past several years, the Supreme Court issued three key rulings that impact the plaintiffs’ bar’s ability to bring and maintain class actions. The rulings include Southwest Airlines Co. v. Saxon, et al., 142 S.Ct. 1783 (2022), Morgan, et al. v. Sundance, Inc., 142 S.Ct. 1708 (2022), and Viking River Cruises, Inc. v. Moriana, et al., 142 S.Ct. 1906 (2022).

The most effective tool for combating class actions may be the arbitration defense. Contrary to the tendency of its rulings in recent years to expand the arbitration defense, and thus make it more difficult for the plaintiffs’ bar to pursue claims on a class-wide basis, this past year the U.S. Supreme Court pulled back on the arbitration defense by narrowing its coverage. After expanding this defense for defendants over the past decade, for the first year we can recall, the Supreme Court issued two decisions that arguably pull back on and weaken the defense for defendants. In a third decision, the Supreme Court continued to protect the defense from state efforts to dilute its impact and limit its application to claims asserted under state law.

Arguably as important as the areas for which it offered guidance, the Supreme Court declined to take up cases in two key areas apt to continue to fuel defenses and, thus, to have a significant impact on class action litigation over the upcoming year, including defenses regarding personal jurisdiction and those that challenge a court’s ability to certify classes that include uninjured members.

A. Southwest Airlines Co. v. Saxon, et al., 142 S.Ct. 1783 (2022)

In the first and arguably the largest door-opener to the courthouse for the plaintiffs’ class action bar during 2022, the Supreme Court narrowed the application of the Federal Arbitration Act by expanding its so-called “transportation worker exemption.”

The plaintiff, a ramp supervisor, brought a collective action lawsuit against Southwest for alleged failure to pay overtime. Id. at 1787. Southwest moved to enforce its workplace arbitration agreement under the Federal Arbitration Act (FAA). In response, the plaintiff claimed that she belonged to a class of workers engaged in foreign or interstate commerce and, therefore, fell within §1 of the FAA, which exempts “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. The plaintiff filed an “uncontroverted declaration” stating that, as a ramp supervisor, she “frequently” stepped in to load and unload cargo on and off airplanes traveling across state lines. Id. at 1787-88.

The district court rejected the plaintiff’s argument and granted Southwest’s motion. It held that only those involved in “actual transportation,” and not those merely “handling goods” fall within the exemption. Id. at 1787. The U.S. Court of Appeals for the Seventh Circuit reversed and the U.S. Supreme Court granted review. As an initial matter, the Supreme Court noted that Southwest did not “meaningfully contest” that ramp supervisors like the plaintiff “frequently load and unload cargo.” Thus, it accepted the premise that the plaintiff “belongs to a class of workers who physically load and unload cargo on and off airplanes on a frequent basis.” Id. at 1788.

The Supreme Court went on to hold that “any class of workers directly involved in transporting goods across state or international borders” falls within the exemption. Id. at 1789. It had no problem finding the plaintiff part of such a class: “We have said that it is ‘too plain to require discussion that the loading or unloading of an interstate shipment by the employees of a carrier is so closely related to interstate transportation as to be practically a part of it.’ . . . We think it equally plain that airline employees who physically load and unload cargo on and off planes traveling in interstate commerce are, as a practical matter, part of the interstate transportation of goods.” Id. (citation omitted).

The Supreme Court interpreted the §1 exemption in a way such that contracts with workers who engage in the process of transportation across state lines are not enforceable under the FAA. Thus, employers will need to turn to state law to attempt to enforce those agreements.

B. Morgan, et al. v. Sundance Inc., 142 S.Ct. 1708 (2022)

In a second door-opener for the plaintiffs’ class action bar during 2022, the U.S. Supreme Court broadened the circumstances that may give rise to a defendant’s waiver of the arbitration defense.

The plaintiff, an hourly employee at a Taco Bell franchise, brought a nationwide collective action lawsuit alleging that Sundance violated the FLSA by failing to pay overtime. When applying for her job, the plaintiff signed an agreement to use “arbitration, instead of going to court” to resolve any employment dispute. Id. at 1711. Sundance defended the lawsuit by moving to dismiss the suit as duplicative of another collective action previously brought by other employees, by subsequently answering the complaint, and by asserting 14 affirmative defenses, none of which included arbitration. Nearly eight months after the plaintiff filed the lawsuit, Sundance moved to stay the litigation and to compel arbitration under the FAA. The plaintiff opposed the motion and argued that, by litigating for eight months, Sundance waived enforcement of the arbitration agreement.

Applying Eighth Circuit precedent, the district court held that a party waives its right to arbitration only if it knows of the right, acts inconsistently with the right, and prejudices the other party by its inconsistent actions. Id. at 1711-12. The U.S. Court of Appeals for the Eighth Circuit agreed. It reasoned that, although the prejudice requirement is not a feature of federal waiver law generally, the requirement should apply because of the “federal policy favoring arbitration.” Id. at 1712. The U.S. Supreme Court subsequently granted review.

Although the parties disagreed about the role of state law in resolving questions as to when a party’s litigation conduct results in the loss of a contractual right to arbitrate, the Supreme Court observed that appellate courts, including the Eighth Circuit, generally have resolved such issues as a matter of federal law. Assuming the correctness of such decision, the Supreme Court considered only whether it was correct to “create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’” Id. The Supreme Court decided the issue in the negative. It observed that, outside the arbitration context, federal courts assessing waiver do not generally ask about prejudice and, instead, focus on the actions of the person who held the right. Id. at 1713.

The Supreme Court noted that the Eighth Circuit’s rule in this case derives from a decades-old Second Circuit decision that grounded the rule in the FAA’s policy. Id. The Supreme Court, however, held that the FAA’s “policy favoring arbitration” does not authorize federal courts to “invent special, arbitration-preferring procedural rules.” Id. at 1713. Rather, the policy “is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding refusal to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” Id. In other words, the Supreme Court clarified that “[t]he policy is to make ‘arbitration agreements as enforceable as other contracts, but not more so.’” Id. Accordingly, it concluded that a court must hold a party to its arbitration contract just like any other contract but may not devise novel rules to favor arbitration over litigation.

C. Viking River Cruises Inc. v. Moriana, et al., 142 S.Ct. 1906 (2022)

In the largest door-closer to the courthouse to representative proceedings, the U.S. Supreme Court reacted to a state’s attempt to render alleged violations of its laws immune from arbitration.

The plaintiff filed an action under California’s Private Attorneys General Act of 2004 (PAGA) alleging that her former employer violated the California Labor Code. The PAGA purports to authorize any “aggrieved employee” to initiate an action “on behalf of himself or herself and other current or former employees” to obtain civil penalties recoverable by the State. Id. at 1914. The PAGA contains what the Supreme Court recognized as “effectively a rule of claim joinder” in that it allows a party to unite multiple claims against an opposing party in a single action. Id. at 1915.

The plaintiff’s employment contract with Viking contained a mandatory arbitration agreement and a class action waiver that prohibited any party from bringing a class, collective, or representative action under the PAGA. Viking moved to compel arbitration of the plaintiff’s individual PAGA claim and to dismiss her other PAGA claims. The trial court denied the motion, reasoning that, according to California precedent, courts cannot split claims into arbitrable “individual” claims and non-arbitrable “representative” claims. After the California Supreme Court affirmed, the U.S. Supreme Court granted review. Id. at 1917.

The Supreme Court ruled that the FAA preempts California precedent insofar as such precedent precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. The Supreme Court reasoned that, according to its precedents, the imposition of class procedures leaves unwilling parties with an unacceptable choice between being compelled to arbitrate using such procedures and foregoing arbitration altogether. While a rule that prohibits a court from enforcing a plaintiff’s waiver of standing to assert claims on behalf of absent principals does not conflict with the FAA, a rule prohibiting a court from enforcing a plaintiff’s waiver of the PAGA’s built-in claim joinder mechanism does conflict with the FAA because it unduly circumscribes the freedom of the parties to determine “the issues subject to arbitration” and “the rules by which they will arbitrate.” Id. at 1923.

The Supreme Court concluded that state law cannot condition the enforceability of an agreement to arbitrate on the availability of a procedural mechanism that permits an expansive rule of joinder. Id. at 1924. Because, as interpreted by California precedent, the PAGA’s joinder rule would function in such a way, it effectively would coerce parties into opting for a judicial forum rather than realizing the benefits of private dispute resolution. Thus, while the FAA does not preempt a wholesale waiver of PAGA claims, it does preempt a rule that prevents the PAGA claims from being divided into their individual and non-individual claims. Id. at 1925. The Supreme Court also noted that, because the PAGA does not contain a mechanism that enables a court to adjudicate non-individual claims after compelling individual claims to a separate proceeding, the lower court should have granted Viking’s motion to compel arbitration and dismissed the remaining claims. Id.

In the meantime, despite the U.S. Supreme Court’s ruling in Viking River, many plaintiff’s attorneys have requested, and many California courts have granted, stays of representative claims, rather than dismissals, likely in order to preserve tolling in the event that the California Supreme Court fashions a rule that permits them to proceed with representative claims.

January 20, 2023 by Gerald L. Maatman, Jr.

DMCAR 2023 Trend # 1 – Class Action Settlements In 2022 Redistributed Wealth At An Unprecedented Level Video

By Gerald L. Maatman, Jr. and Jennifer A. Riley

Duane Morris Takeaway: In today’s video blog, Duane Morris partner Jerry Maatman discusses how the aggregate monetary value of class action settlements exploded to an all-time high in 2022, as plaintiffs’ lawyers and government enforcement agencies monetarized their claims into enormous settlement values. In 2022, the plaintiffs’ bar was successful in converting case filings into significant settlement numbers at higher levels than any recent year. Tune in below to hear all about this 2022: