Class Action Defense

November 8, 2022December 1, 2023 by Gerald L. Maatman, Jr.

Judges Continue To Push For Diversity In Selecting And Approving Class Counsel

By Gerald L. Maatman, Jr., Jennifer A. Riley, Shaina Wolfe

Duane Morris Takeaways – Requiring a legal team’s diversity in the courtroom is part of a growing trend by federal judge in selecting lead counsel in a class action. On both sides of a class action, plaintiffs and defense teams are increasingly staffing cases with junior and diverse attorneys, and allowing them meaningful opportunities to participate in litigation. In turn, federal judges are viewing such staffing methodologies as part and parcel of good practice management.

Background

The push for diversity in the law is hardly new.

Federal district judges around the nation – including judges in California, Illinois, Massachusetts, New York, and Texas – have issued general standing orders that encourage legal teams to allow diverse and less experienced attorneys take the lead in various segments of court proceedings. And in 2021, George Washington Law School released a leading guide to best practices for MDL and class actions, which advocated that judges “make appointments consistent with the diversity of our society and justice system.” George Washington Law School, Inclusivity and Excellence: Guidelines and Best Practices for Judges Appointing Lawyers to Leadership Positions in MDL and Class-Action Litigation, at 1 (March 15, 2021).

Over the last couple of years, some judges have acted on George Washington Law School’s advice by facilitating opportunities for diverse and/or junior attorneys to have a role in their cases. For example, recently, on October 26, 2022, Magistrate Judge Gabriel Fuentes of the U.S. District Court for the Northern District of Illinois advised the parties in multidistrict litigation that he would be holding a video hearing to discuss expert discovery and argue motions, and that he expected junior attorneys to take the lead. John Gross and Co., Inc., et al. v. Agri Stats, Inc., et al., 1:19-CV-08318 (N.D. Ill. Oct. 26, 2022).

Other judges in class action lawsuits have strongly encouraged, or even required, counsel to be diverse. For example, Judge Susan Illston of the U.S. District Court for the Northern District of California approved lead counsel in a class action lawsuit but noted “the apparent lack of diversity, including by female lawyers, among the group that argued” at a recent hearing. Sayce v. Forescout Technologies, Inc., No. 20-CV-00076, 2020 WL 6802469, at *9 (N.D. Cal. Nov. 19, 2020). Judge Illston “strongly urge[d] all parties to this case to make meaningful litigation opportunities available to junior and underrepresented lawyers throughout the pendency of this action.” Id.

With the increase in newly appointed judges, it is likely that even more federal judges will follow suit by not only instituting standing orders, but also in requiring law firms to send their junior and diverse attorneys to court. Now, more than ever, it is important for law firms to hire diverse attorneys, teach diverse attorneys to handle small and complex matters, and retain their diverse attorneys by allowing them to meaningfully participate in legal proceedings.

Implications for Law Firms

We expect that more courts and clients will begin to consider, and perhaps require, the diverse makeup of legal teams at increasing rates. Law firms can prepare for this critical demand of diverse legal teams by hiring, retaining, and actively involving diverse and junior lawyers, in both big and small cases, at the outset.

November 7, 2022 by Gerald L. Maatman, Jr.

Illinois Federal Court Holds Private University Is Exempt From BIPA Regulations

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Alex W. Karasik

Duane Morris Takeaway: In an important ruling for higher education entities, Judge Robert Gettleman of the U.S. District Court for the Northern District of Illinois recently dismissed a student’s proposed class action alleging that Defendant’s remote test-proctoring software violated the Illinois Biometric Information Privacy Act (“BIPA”). The Court determined that Defendant DePaul University qualified as a financial institution exempt from the statute. Powell v. DePaul University, No. 21-C-3001, 2022 U.S. Dist. LEXIS 201296 (N.D. Ill. Nov. 4, 2022). Employers in the higher education space who are confronted with biometric privacy class actions can tuck this ruling away for potential use at the pleading stage.

Case Background

Plaintiff alleged that Defendant’s use of the Respondus Monitor, an online remote proctoring tool, violated the BIPA by capturing, using, and storing students’ facial recognition and other biometric identifiers and biometric information. Plaintiff specifically asserted that Defendant did not “disclose or obtain written consent before collecting, capturing, storing, or disseminating user’s biometric data, and failed to disclose what it does with that biometric data after collection, in violation of BIPA’s retention and destruction requirements. Id. at *2.

Defendant moved to dismiss the action pursuant to Rule 12(b)(6) for failure to state a claim. It argued that the BIPA’s express terms specify that it does not apply to financial institutions that are subject to Title V of the Gramm-Leach-Bliley Act (“GLBA”). Id. Defendant contended that since it was a participant in the U.S. Department of Education’s Federal Student Aid Program, it is considered a financial institution subject to Title V of the GLBA. Defendant contended that both the Federal Trade Commission (“FTC”) and the Department of Education (“DOE”) have recognized that universities are considered financial institutions under the GLBA. Defendant also asserted that Title V rulemaking authority lies with the Consumer Financial Protection Bureau (“CFPB”), which adopted and republished the privacy rules originally promulgated by the FTC. The FTC rules state that any institution “significantly engaged in financial activities” is a financial institution. Id. at *5.

Plaintiff argued that Defendant was not a financial institution, but rather was in the business of higher education. Thus, Plaintiff contended that Defendant was not subject to Title V, and therefore subject to the BIPA.

The Court’s Decision

The Court granted Defendant’s motion to dismiss. First, the Court noted that at least five other district courts have ruled on the same issue and rejected Plaintiff’s argument, and have determined that the BIPA’s section 25(c) exemption for financial institutions applies to institutions of higher education. Id.

In support of its conclusion, the Court found that the guidance provided by the CFPB included examples demonstrating the word “significantly” means something less than “primary.” Id. at *8. Accordingly, the Court rejected Plaintiff’s argument that the exemption should not apply was because Defendant was not primarily in the financial business. Id.

The Court further explained that the DOE provided issued public guidance in 2020 reiterating that the GLBA required financial institutions to have information privacy protections, and that the FTC “has enforcement authority for the requirements and has determined that institutions of higher education (institutions) are financial institutions under GLBA.” Id. at *4-5.

Additionally, the Court opined that the FTC’s rule, made in 2000 when it had enforcement and rulemaking authority under the GLBA, also considered universities to be financial institutions if they “appear to be significantly engaged in lending funds to consumers.” Id. at *6. The Court reasoned that the consistent interpretation of the statute by multiple entities was particularly persuasive in finding that the claims should be dismissed. For these reasons, the Court granted Defendant’s motion to dismiss Plaintiff’s claims with prejudice.

Implications For Employers

In the BIPA class action landscape, federal and state courts in Illinois have rejected many potential affirmative defenses that employers have used to try and stave off these massive cases. However, even though the exemption is somewhat narrow, higher education institutions now have a blueprint to attack BIPA class actions at the pleading stage. Finally, to the extent states beyond Illinois enact similar privacy statutes, this ruling may be of use to higher education institutions in those states that are confronted with class actions.

November 7, 2022 by Gerald L. Maatman, Jr.

What Employers Should Know About The EEOC’s Draft Strategic Plan For FY 2022-2026

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

Duane Morris Takeaways: On November 4, 2022, the U.S. Equal Employment Opportunity Commission released a preliminary draft of its 2022-2026 Strategic Plan. According to its preliminary draft, the EEOC plans to focus its internal operations over the next four years to make changes that it hopes will improve its performance securing targeted injunctive relief and conducting systemic investigations, along with its use of technology to process charges and conciliate them. The four-year plan – which is distinct from the EEOC’s strategic enforcement plan, still to be released in the coming months – was published in the Federal Register and is open for comment until December 4, 2022. Even if employers do not submit comments, they would be well-advised to review the draft and final Plan once it is announced because it provides a window into the EEOC Commissioners’ thinking for how the agency will use its resources to redress and deter workplace discrimination.

Introduction

Every four years, the EEOC prepares a Strategic Plan that drives how it will improve its internal operations to better enforce federal anti-discrimination laws. The Plan for 2022-2026 that has now been published in the Federal Register is important because once it is finalized after the review and comment period expires, it will set forth specific goals along with performance metrics to measure how well those goals are being met. The key elements of the draft Plan and why they are important are critical data points for employers.

Operational Improvements And Performance Metrics Sought By The EEOC

The 2022-2026 Strategic Plan draft signals that when investigating private sector employers, the EEOC will focus its internal operations on four key areas. First, the EEOC will ensure that by FY 2025, “90% of EEOC conciliations and litigation resolutions contain targeted, equitable relief and that level is maintained through FY 2026.” (Draft Strategic Plan at 15.) The draft Plan explains the EEOC’s view that such a goal likely would improve compliance with the statutes enforced by the agency nationwide.

Second, between FY 2022 and 2026, the EEOC aims to continue to “favorably resolve at least 90% of enforcement lawsuits.” (Id. at 16.) On this point, the EEOC explains that because its systemic litigation program is resource intensive, this goal is important to enable the agency to use its resources in a wise and efficient manner. Employers who have faced systemic lawsuits are well-aware of the amount of litigation resources they can consume, both for the companies involved and the EEOC.

Third, “In each year through FY 2026, the EEOC will provide training to all field staff on identifying and investigating systemic discrimination, and at least 90% of investigators and trial attorneys will participate in systemic training each year.” (Id.) The draft Plan explains that the purpose of this goal is “expanding the EEOC’s capacity to conduct systemic investigations, resulting in a coordinated, strategic, and effective approach to systemic enforcement.” (Id.) This likely signals that the draft Strategic Enforcement Plan will continue to emphasize and prioritize the EEOC’s use of pattern or practice lawsuits to enforce the statutes over which Congress gave it authority.

Fourth, “the EEOC will make significant progress toward enhanced monitoring of conciliation agreements, leading to a more robust compliance program.” (Id. at 17.) The Commission’s focus here is to implement “streamlined and standardized procedures, improved tracking and internal reporting mechanisms, and related training for EEOC field staff” to ensure that conciliation agreements are reached and enforced. (Id.).

Finally, the EEOC continues to be aware that its charge intake process needs work. The draft Plan pledges to leverage technological advancements to “enhance its intake services to potential charging parties, respondents, and representatives.” (Id. at 19.)

Implications For Employers

The EEOC’s FY 2022-2026 draft Strategic Plan is a document that provides insight into the direction the agency will take to improve how it functions.

With a nod the old E.F. Hutton TV commercial, “when the EEOC speaks, employers should listen…”

November 3, 2022 by Gerald L. Maatman, Jr.

Massachusetts State Court Rules In Class Action That A Multiple-Choice Promotional Test Discriminated Against Minority Police Officers

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

Duane Morris Takeaways – In Tatum et al. v. Commonwealth of Massachusetts, et al., C.A. No. 0984-CV-00576 (Mass. Sup. Ct. 2022), a Massachusetts state court judge conducted a class trial found that a multiple-choice promotional exam – used for years by various police departments to determine promotions – discriminated against Black and Latino police officers in violation of Massachusetts law. In analyzing the test format, which largely required “rote memorization,” the court opined that the exam failed to adequately test for the relevant job qualifications, as well as the police departments’ use of a ranking system from which candidates were selected for promotion. Ultimately, the court held that the test and ranking system adversely impacted minorities and interfered with their ability to promote to sergeant. The decision demonstrates why employers must be careful to implement policies and processes that do not have a discriminatory impact, even if on their face such policies and practices appear to be neutral.

Case Background

The Commonwealth of Massachusetts’ Human Resource Division (“HRD”), for 50 years, administered a written multiple-choice test to police officers to determine promotion to sergeant. Id. at 4. Officers were ranked almost exclusively according to their scores on the written examination, with individuals at the top of the list being first in line for promotion. In 2007, certain police officers that were subject to the written examination sued the Commonwealth of Massachusetts, and the municipalities in which they worked as police officers. They alleged that the testing process unfairly discriminated against them due to their race and national origin in violation of state and federal law. Id. at 2. The U.S. Court of Appeal for the First Circuit, in an interlocutory appeal, held that state defendants did not qualify as “employers” under Title VII and were entitled to sovereign immunity, thereby resulting in the dismissal of state law claims against the state defendants, which the plaintiffs subsequently re-filed in state court. Id. Though the Massachusetts state court initially dismissed the entire action based on the First Circuit decision, the Massachusetts Supreme Judicial Court remanded several claims, rejected the defense of sovereign immunity, and held that the plaintiffs could be entitled to relief under Massachusetts law prohibiting discrimination. Id. at 3. The state trial court subsequently certified a class of current and former police officers that took the written examination administered by HRD in certain years between 2005 and 2012. Id.

Ultimately, the plaintiffs lost their federal court case after a bench trial, with the federal court finding that the tests had a disparate impact on minorities but that plaintiffs failed to prove that Boston refused to adopt an alternative test with less disparate impact. Id. Though the defendants in the state court case tried to dismiss the entire state court action based on the federal court’s decision, the Massachusetts Appeals Court held that defendants did not show issue preclusion and it authorized the case for trial. Id. at 3-4. The state trial court conducted a two-week bench trial in June and July of 2022 limited to the issue of class-wide liability. Id. at 1.

The State Court’s Findings Of Fact And Conclusions Of Law

The state court found a “massive amount of evidence proving the known and unjustified disparate impact” of HRD’s testing format. Id. at 1. Turning first to the format of the test, the court noted that exam questions “largely test for rote memorization of facts and passages taken directly from textbooks that candidates are asked to study,” and studies commissioned by the HRD over the years to measure the test’s efficacy “did not identify test-taking skills and lack of test-related anxiety as job related.” Id. at 8. The multiple choice portion of the test accounted for 80% of a candidate’s score, with 20% coming from an “Education and Experience” form that each candidate would complete. Id. The court explained that the allocated percentages had no discernible basis, and further disparaged the Education and Experience portion since every officer received 14 of the 20 available points simply for being able to sit for the exam. Id. at 8, 28. Though HRD worked with consultants and subject matter experts to identify the knowledge, skills, and abilities (“KSAs”) important to the job of sergeant, the court noted that the multiple choice questions could only test for 22% to 40% of the relevant KSAs and “did not in fact test for some skills that could have been tested” due to the types of multiple choice questions asked. Id. at 13-15. Rather than focusing on abstract knowledge and memorization of academic textbooks, the court reasoned that questions testing situational judgment, for example, should have been used but were not. Id. at 19.

Given the format of the multiple-choice exam and the types of questions asked, the court observed that a racial disparity existed based on test-taking ability, and not on job qualifications. Noting that “[t]est taking skills are built through practice,” the court adopted the opinions of expert witnesses who testified that “minorities, in general, have had fewer opportunities to participate in our educational system” and differences in average test scores of minorities on tests of cognitive abilities “is due to socioeconomic differences, lack of access to opportunity, and structural racism that exists within the system.” Id. at 26. Ultimately, the court found that “[b]ecause HRD failed to test many important KSAs, measured test-taking skills and memorization, enabled test-related anxiety to affect results and failed to ask questions that focused upon measuring job-related knowledge, its format did not rank candidates for promotional purposes on a basis that was substantially job related.” Id. at 14.

The court also noted that HRD had knowledge of the shortcomings and adverse impact of its tests before and during their use. A 1987 job analysis conducted by a consulting firm recommended that a written test “did not assess many of the attributes needed for the job” and “should account for no more than 40% of the overall score.” Id. at 16. In addition, a study conducted for the Boston Police Department in 2000 advised HRD that an examination should include non-written components, such as an assessment center and performance review system. Id. at 17. The failure to include a performance based assessment technique, the court explained, “injects extraneous influences (such as test-taking ability and temporary memorization skills) into the selection process.” Id. Analysis of the rate of minorities’ promotion to sergeant showed that minorities were promoted at a drastically lower rate than non-minority officers. Id. at 17-19.

The court further determined that Defendants failed to adopt alternatives that would have minimized or eliminated the adverse impact of the tests on minority test-takers. The tests could have contained fewer questions, reducing the “large cognitive loads” and memorization required, in order to reduce the adverse impact. Id. at 45. Rather than using questions that require “rote memorization,” HRD could have used questions that tested situational judgment and were written in plain language instead of “convoluted phrases.” Id. Most notably, banding, in which scores within a range are treated as equal, would have reduced adverse impact because there was no evidence that a police officer that scored one point higher than another was more qualified or would make a better sergeant. Id. at 45-46. Further, HRD adopted 11-point bands in 2009 at the recommendation of a consultant. Id. Finally, the use of other testing methods, such as oral assessments and performance reviews, to assess nonwritten skills “such as leadership, conscientiousness, calmness under pressure, decision-making, interpersonal skills, and oral communication” would have reduced the adverse impact of the tests. Id. at 47.

As a result of the myriad shortcomings of HRD’s written tests, the Court described at length the statistically significant adverse impact of the tests on minority test-takers across all years as compared to white test-takers in the form of lower passing rates, lower overall scores, lower rate of promotion of minority police officers, and increased delay in promotion of minority police officers. Id. at 34-42. Given the adverse impact on scoring and the use of a rank-order list to determine promotions, the court found an adverse impact on the ability and timeliness of minority police officers to achieve promotion to sergeant. Id. at 57. The multiple-choice format of the exam and the ranking of candidates were not job-related, the court also held, given the invalidity of the exam and ranking process. Id. at 61-63. Based upon its factual findings, the court held that “[o]verwhelmingly persuasive evidence proves that HRD interfered with the class members’ rights to consideration for promotion to police sergeant without regard to race or national origin.” Id. at 75.

Implications for Employers

The Tatum decision illustrates why employers with criteria for promotion must be cognizant of how such testing systems may adversely impact classes of individuals in violation of state and federal law. While the testing system used in this case appeared neutral, in practice the test and ranking system resulted in less promotions and increased delay in promotions for minorities. This case demonstrates the potential for costly and years-long class action lawsuits stemming from employer policies and practices in determining promotions. Given these risks, it behooves employers to ensure that neutral policies and practices do not adversely impact groups of individuals.

October 31, 2022 by Class Action Defense

Consumer Fraud Class Actions On The Rise In The Cannabis Industry – With More To Come With Interstate Sales

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

Duane Morris Takeaways: Cannabis products – such as vapes, pre-rolled joints, tinctures, gummies, and beverages – are consumer packaged goods that are required under state law to be marketed with packaging and labeling that demonstrates their safety to consumers. Although the U.S. state-licensed cannabis industry has been one of the fastest-growing industries in the U.S. over the past decade, consumer fraud lawsuits arising out of alleged packaging and labeling problems, which are a common risk for CPG manufacturers in other industries, have, until now, not been a major consideration for the cannabis supply chain. However, that is changing. As three recent lawsuits suggest, consumer fraud class actions may be on the rise in the industry. Given the media attention cases like these attract, and the potential for damages for thousands or millions of potential consumers, the cannabis supply chain should take notice. As discussed below, this is going to be especially true once cannabis products are permitted to be sold interstate.

Key Cases

In Centeno et al. v. DreamFields Brands Inc., and Med for America, Inc., a consumer class action filed on October 20, 2022, in the Superior Court of California for Los Angeles County, two putative class representatives filed a putative class action against the manufacturers of Jeeter-branded pre-roll joints on behalf of “all persons who, while in the State of California and within the applicable statute of limitations period, purchased or more Jeeter Products.” The complaint alleges that the putative class representatives purchased a variety of Jeeter-branded pre-rolled joints based on the high THC potencies stated on the labeling of such products, but those products were actually lower in THC than stated on the labeling. Given that products with greater THC potency are priced higher than products with lower THC, the putative class representatives claim they paid a premium they would not have paid had they known the true THC potency of the Jeeter products they purchased, and thus they suffered an economic loss for which they should be made whole. Their complaint alleges that “millions of other consumers” bought Jeeter pre-rolled joints and suffered the same economic loss. As the Complaint asserts:

If Defendants told the truth — that is, that its products’ THC content is substantially lower than represented on the label — the price of its Products would fall dramatically. If consumers knew the truth — that the Products contain substantially less THC than the label says — Defendants could not sell their Products for its current prices. Indeed, as explained above, cannabis products with lower declared amounts of THC content sell for substantially less than ones with higher declared amounts of THC content. Accordingly, if Defendants told the truth about the THC content of their products, they would have had to lower the price, and Plaintiffs and class members would have paid less.

In addition to seeking for themselves and the class of “millions of consumers” damages for the amounts overpaid for the Jeeter-branded pre-rolls, the putative class representatives also seek punitive damages, attorneys’ fees, and injunctive relief to stop the allegedly fraudulent labeling under California’s unfair competition and false advertising statutes, as well as various common law claims.

We previously wrote about a number of separate actions filed against Curaleaf, the largest U.S. cannabis product manufacturer in 2021, arising out of allegations that Curaleaf mislabeled tinctures containing THC that were marketed as containing CBD. One of those cases, Williamson v. Curaleaf, Inc., a consumer class action filed in the U.S. District Court for the District of Oregon on May 30, 2022, was reported last week to have settled for payments of $150 to $200 for as many as 500 class members who are alleged to have consumed the mislabeled Curaleaf tinctures. Like the class action complaint filed in Centeno arising out of the mislabled Jeeter pre-rolls, Williamson’s class action complaint sought statutory damages, punitive damages, and attorneys’ fees under Oregon’s consumer fraud statute known as the unfair Trade Practices Act.

In addition to Centeno and Williamson, we previously wrote about Plumlee v. Steep Hill Inc., a putative class action filed in the U.S. District Court for the Eastern District of Arkansas against cannabis testing lab and cannabis cultivators NSMC-OPCO LLC, Bold Team LLC and Osage Creek Cultivation LLC, which, like Centeno, arose out of allegations that the operators falsified the amount of THC in their cannabis products. As in Centeno, Plumlee seeks class-wide damages for economic loss, i.e., amounts overpaid for mislabeled cannabis products, and as in Centeno and Williamson, Plumlee seeks punitive damages and attorneys’ fees for the alleged fraudulent conduct. Interestingly, although the claims in Plumlee are sound in consumer fraud, Plumlee asserts that the defendants acted together to form an enterprise in violation of the Racketeer Influenced and Corrupt Organizations Act. As we previously wrote, these claims could just as easily been asserted as consumer fraud.

Future Litigation Prospects

There are a few reasons cannabis consumer fraud class actions may not have been attractive to the plaintiffs’ class action bar in recent years. First, given that cannabis products may only be manufactured and sold in the same state, the size of a class and the amount of damages are limited to consumers in a single state, as opposed to the type of nationwide class action one see with other CPGs. Indeed, Centeno, Williamson, and Plumlee, assert claims on behalf of a single state-wide class.

Second, most state cannabis markets have only recently – in the past few years – begun to grow into markets of hundreds of thousands or millions of consumers, and thus a single state class a few years ago would likely have been too small to warrant the investment in an expensive litigation by plaintiffs’ counsel.

Third, and similarly, defendants’ pockets are deeper today as a result of the increased sales over time than they were just a few years ago. For these reasons, the continued growth of state cannabis markets is likely to result in more cannabis consumer fraud class actions.

However, the interstate sale of cannabis products is really going to change the risk spectrum from consumer fraud class actions.

Once interstate sales of cannabis products are permitted, the mass marketing and distribution of cannabis products to consumers in multiple states in a region, if not nationally, will open the door to claims asserted on a nationwide basis that a cannabis consumer product was mislabeled. While such claims would be asserted under state-specific consumer fraud laws, they may be asserted on behalf of consumers around the country, resulting in significant exposure to the cannabis supply chain, i.e., growers, processors, labs, and dispensaries, for economic loss and punitive damages, as well as attorneys’ fees. These types of claims are routinely filed by the plaintiffs’ class action bar on behalf of nationwide classes arising out of the alleged mislabeling of other CPGs, and that bar will no doubt have cannabis products in their sights when interstate sales cannabis begin.

October 31, 2022 by Class Action Defense

Happy Halloween From The Duane Morris Class Action Defense Blog!

Wishing a very safe and happy Halloween to all of our loyal blog readers! Stay tuned for new updates coming soon (if the goblins underlying class actions do not scare you too much…)

October 26, 2022 by Class Action Defense

Follow The Duane Morris Class Action Defense Blog On Twitter!

The Duane Morris Class Action Defense Blog is now officially on Twitter! We have made it easier than ever for our clients and loyal followers to get breaking news updates and thought leadership regarding class action rulings, legal updates, and key trends. Follow us @DMClassAction to make sure you don’t miss any exclusive content!

October 19, 2022October 19, 2022 by Class Action Defense

Massachusetts District Court Denies Class Certification and Grants Summary Judgment Because Franchisees Not Employees

By Gerald L. Maatman, Jr., Brandon Spurlock, and Shaina Wolfe

Duane Morris Takeaways – In Patel, et al. v. 7-Eleven, Inc., et al., 2022 WL 4540981, No. 17-11414 (D. Mass. Sept. 28, 2022), Judge Nathaniel Gorton of the U.S. District Court for the District of Massachusetts granted summary judgment in favor of 7-Eleven, as a franchisor, and denied Plaintiffs’ motion for class certification because franchisees were not employees under Massachusetts state law. In analyzing the state independent contractor statute, the Court determined that the obligations the franchisees undertook pursuant to the franchise agreement did not amount to “services” for purposes of the statute and Plaintiffs, therefore, were not employees. This ruling is important because it provides guidance for companies operating under a franchisor/franchisee business model on how to combat arguments that franchisee agreements create an employee/employer relationship and obligate franchisors to cover a myriad of legal costs for their franchisees.

Background Of The Case

Plaintiffs, a group of franchisee store owners and operators, brought a putative class action against 7-Eleven alleging that Defendant misclassified them as independent contractors in violation of the Massachusetts Independent Contractor Law. Id. at 1. Two of the named Plaintiffs entered into franchise agreements directly with 7-Eleven and three as corporate entities. Id. The franchise agreements outlined the obligations of the franchisees and included language that the franchisee agreed to hold itself out to the public as an independent contractor. Id. Under the agreement, the franchisee also agreed to pay several types of fees to 7-Eleven, including a franchise fee, gasoline fee, and down payment fee. Id. at 2. Plaintiffs filed a class action in Massachusetts state court and Defendant removed it on diversity grounds. Id. Both parties filed cross-motions for summary judgment, and Plaintiffs filed a motion for class certification. Id. The District Court granted summary judgment in favor of 7-Eleven, and Plaintiffs appealed to the First Circuit where the case was remanded to allow the District Court to first weigh on the issue, which the First Circuit certified as “[w]hether the three-prong test for independent contractor status … applies to the relationship between a franchisor and its franchisee…” Id.

On remand, the District Court analyzed the elements for the independent contractor test under Massachusetts law, including: (1) freedom from control and direction; (2) service is performed outside the usual course of business; and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service. Id. at 3. Defendant argued that franchisees do not perform services for 7-Eleven, and in fact, 7-Eleven actually provides services to the franchisee in exchange for payment; and that 7-Eleven was not a direct employer where the franchise agreement was entered into by corporate entities. Id. at 4.

The District Court based its ruling on the threshold inquiry of determining whether the individual performs any service for the alleged employer. Id. Plaintiffs argued that because the franchise agreement required them to work full time in the store, operate the store 24 hours a day, record inventory sales, wear approved uniforms and use 7-Eleven payroll system, in addition to submitting cash reports and depositing receipts, they should be deemed employees, not independent contractors. Id. at 5. The District Court, however, was not convinced that the contractual obligations outlined in the franchise agreement, alone, constituted services under Massachusetts law regarding independent contractors. Id. Moreover, the District Court opined that although the parties do have mutual economic interests, even though both profit from the franchise stores’ revenue, that mutual interest was not enough to establish that plaintiffs provide services to support an employee relationship. Id.

In short, the District Court reasoned that where a franchisee is merely fulfilling its contractual obligations under a franchise agreement, that by itself does not refute the independent contractor status. Id. The District Court therefore granted 7-Eleven’s motion for summary judgment and denied Plaintiffs’ motion for class certification. Id. at 6.

Implications For Employers

For those companies with franchisee operations, this ruling supports the position that obligations under a franchise agreement requiring the franchisee to perform certain tasks does not establish an employment relationship. And the fact that the franchisor provides services to the franchisee for payment actually cuts against the employee designation. Further, the simple fact of mutual benefit from business revenues does not help establish employee status under these circumstances. Although an appeal from Plaintiffs is anticipated, the District Court’s analysis offers solid guidance for franchisors who are operating under similar franchise agreements.

October 17, 2022 by Gerald L. Maatman, Jr.

Indiana Court Of Appeals Strikes Down Class Action COVID-19 Immunity Statute

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

Duane Morris Takeaways – In Mellowitz v. Ball State University and Board of Trustees of Ball State University, et al, No. 22A-PL-337 (Ind. Ct. App. Oct 5, 2022), the Indiana Court of Appeals struck down a 2021 law that sought to protect in-state universities from class action liability related to the shutdown of university campuses during the COVID-19 pandemic. While the law stated that individuals “may not” bring class actions against universities resulting from actions taken to defend against the spread of COVID-19, the Indiana Court of Appeals held that the statute was “procedural” and in conflict with Rule 23 of Indiana’s Rules of Trial Procedure, which states that individuals “may” proceed as a class under certain circumstances. The Court’s ruling is important, as it puts at risk other statutes passed in Indiana and other states restricting class actions against businesses for COVID-19-related claims.

Background Of The Case

In 2020, Plaintiff Keller J. Mellowitz, a student at Ball State University, filed a putative class action asserting claims for breach of contract and unjust enrichment against Ball State as a result of the university’s decision to cancel in-person classes during the COVID-19 pandemic. Id. at 3. After the complaint was filed, the Indiana General Assembly in 2021 enacted Public Law 166-2021, part of which was codified as Indiana Code Section 34-12-5-7 (“Section 7”) and barred class actions against post-secondary educational institutions for claims of breach of contract and unjust enrichment arising from COVID-19. Ball State subsequently sought relief from Plaintiff’s lawsuit under Section 7, which the trial court granted, and Plaintiff appealed. Id. at 5.

The Appellate Court’s Ruling Reversing And Remanding the Trial Court’s Decision

Plaintiff argued on appeal that, as a procedural statute, Section 7 impermissibly conflicts with Indiana Trial Rule 23, which governs class-action procedures and sets forth the requirements to proceed as a class action, thus rendering Section 7 a “nullity.” The Indiana Court of Appeals began its analysis recognizing longstanding precedent establishing that in a conflict between a procedural statute and the Indiana Rules of Trial Procedure, “the trial rules govern,” however trial rules “cannot abrogate or modify substantive law.” Id. at 6-7. Whether a law was “substantive,” the Court explained, depended on whether it established “rights and responsibilities” whereas procedural laws merely prescribed “the manner in which such rights and responsibilities may be exercised.” Id. at 7.

In analyzing the specific statutes at issue, the Court of Appeals examined Indiana’s analog to Federal Rule 23, which sets forth the criteria for bringing a class action. The Court of Appeals noted that Indiana Trial Rule 23 was indisputably a procedural rule that allows a plaintiff, when the appropriate criteria are met, to assert his or her claims on behalf of others. Turning to Section 7, the Court of Appeals explained that the statute did not affect any plaintiff’s substantive right to bring a suit for breach of contract or unjust enrichment, but simply “frustrates them by encouraging a multiplicity of lawsuits from similarly situated plaintiffs.” Id. at 14. While Ball State argued that the law protected Indiana universities from “widespread legal liability” from actions taken to combat and mitigate the spread of COVID-19, the Court of Appeals found the argument “unpersuasive,” explaining that since Section 7 did not prevent any individual plaintiff from asserting the same claims against universities, it therefore “does not reduce the institutions’ potential legal liability in the slightest.” Id. at 14-15. Ball State also argued that adopting Plaintiff’s “extreme position” would endanger two similar laws passed by the Indiana Legislature, which sought to protect business owners from class-action tort liability. Id. at 15 n.6. The Court rejected Ball State’s argument. It determined that it had “no opinion” on those statutes since they were not before it in the appeal. Id.

With Indiana Trial Rule 23 stating that a plaintiff “may” bring a class action and Section 7 stating the plaintiff “may not,” the Court of Appeals held that both laws could not apply in a given situation and, as a result, Section 7 was a “nullity.” Id. at 15. The Court of Appeals therefore reversed the trial court’s ruling and remanded the case for further proceedings.

Implications for Employers

While Ball State will very likely appeal this decision to the Indiana Supreme Court, the rationale adopted by the Indiana Court of Appeals could undermine similar statutes meant to protect Indiana employers from class action liability resulting from actions taken in response to the COVID-19 pandemic. As many other states throughout the country similarly passed laws meant to protect businesses from liability due to COVID-19, the Mellowitz decision provides a potential avenue for plaintiffs to challenge laws in other states. Mellowitz demonstrates that employers should continue to be aware of the potential for class action lawsuits stemming from response to the COVID-19 pandemic, despite efforts by Indiana’s legislature and other states’ legislatures to prevent such costly, high-risk litigation.

October 14, 2022June 7, 2023 by Class Action Defense

Alabama Federal Court Affirms $13 Million Default Judgement Against Employer In A Wage & Hour Collective Action For Discovery Failures

By: Gerald L. Maatman Jr., Jennifer A. Riley, and Aaron A. Bauer

Duane Morris Takeaways – In Hornady v. Outokumpu Stainless USA, No. 1:18-CV-317 (S.D. Ala. Oct. 4, 2022), the U.S. District Court for the Southern District of Alabama upheld its sanction of a default judgement against the defendant on all of the Fair Labor Standards Act claims brought by a collective action of current and former employees. In affirming a default judgment of approximately $13 million, the Court cited the employer’s repeated failure to produce pay records, time records and incentive plan data during discovery. Such a catastrophic outcome demonstrates the importance of reliable and honest client communication and responsible and reasonable conduct at all stages of discovery in complex employment-related litigation.

Background Of The Case

In 2018, Plaintiff William Hornady filed a collective action against his former employer Outokumpu Stainless (“OTK”) alleging violations of the Fair Labor Standards Act (“FLSA”) for overtime and timekeeping record violations. The case proceeded to discovery, and on November 18, 2021, things quickly unraveled for OTK when the Court found that the company had “acted in pervasive bad faith throughout the discovery process of this entire case…” Id. at 3. As a result, the Court sanctioned OTK by entering non-final default judgement against the company, thereby holding it liable for all of plaintiffs’ FLSA claims. Id. at 6-7. Earlier this year, OTK challenged this ruling by filing a motion to reconsider the order granting default judgement.

The Court’s Ruling Denying Reconsideration Of The Default Judgement

In seeking reconsideration of the decision to grant default judgement, OTK urged the Court to apply the “good cause” standard of review, under Rule 55 of the Federal Rules of Civil Procedure, which allows courts to evaluate many different factors such as willfulness, prejudice, and whether the defaulting party might have a meritorious defense for purposes of determining whether to reconsider an order of a default judgement. Id. at 7. However, the Court declined to apply this “good cause” standard. Instead, it to use the stricter standard of Rule 54, which allows courts to reconsider interlocutory decisions if there is “evidence of an intervening change in the controlling law, the availability of new evidence, or the need to correct clear error or manifest injustice.” Id. at 12.

Given OTK’s failure to introduce newly available evidence disputing the Court’s previous finding that defense counsel had failed to meet its “discovery obligations,” the Court rejected OTK’s argument that the Court had abused its discretion by improperly imposing “death penalty” sanctions in the form of default judgement. Id. at 14. Specifically, the Court noted that it had ordered OTK to produce pay, time, and incentive plan records on “twelve (12) separate occasions spanning almost three years.” Id. at 17-18. When OTK finally did produce pay records, they were incomplete, and did not even include rate of pay data. Id. The Court also noted that the Magistrate Judge assigned to the case had originally recommended lesser sanctions against OTK. However, while a ruling on this lesser sanction was pending, the Court opined that OTK “engaged in additional sanction-worthy behavior” during discovery. Id. at 15.

OTK attempted to shift the blame for these discovery shortcomings to its payroll software provider and former outside counsel for the case. OTK argued that it could not have produced the formula used to calculate the regular rate of pay (“RROP”) for its employees, as the Court had ordered, because this formula came from the proprietary software of ADP, which OTK would have had to obtain through a subpoena. Id. at 23-24. In reality, the Court observed that it had previously ordered OTK to subpoena ADP for this data in 2020, a year before the entry of default judgement. Id. at 24. For this reason, OTK could no longer argue that the requirement to subpoena ADP was newly available evidence that might allow the Court to reconsider its sanctions order. Moreover, the Court noted that OTK’s failure to produce the RROP data had not been its “primary failing” because OTK also failed to produce hourly pay rates. Id. at 25.

The Court also rejected OTK’s contention that its failures during the discovery process should be attributed to its former outside counsel in the case. Id. at 27-28. In support of this position, OTK submitted emails of its former counsel that purported to show that it had been “kept in the dark… as to what was actually occurring” in discovery. Id. However, the Court found that these emails could only “provide insight into a fraction of the circumstances” leading to the default judgement. Id. at 29. Regardless of whether these emails provided a legitimate excuse for all of OTK’s failures during the discovery process, the Court determined that the emails did not constitute newly available evidence, as OTK had failed to submit them to the Court when it was first facing default judgement sanctions. Id. at 30. Given this record, the Court placed the blame squarely on OTK for failing to “produce accurate and complete time and pay records.”

Implications for Employers

The $13 million sanction of a default judgment in the case is an eye-opener for any litigant. The Hornady decision demonstrates that employers who fail to actively engage and communicate with their outside counsel on a regular basis do so at their own peril. To avoid such a disastrous outcome, clients should always expect and demand regular and truthful case status updates, especially in class and collective actions where the stakes can be so high.