Class Action Defense

June 28, 2024June 28, 2024 by Class Action Defense

California Federal Court Rejects AI Class Action Plaintiffs’ Cherry-Picking Of AI Algorithm Test Results And Orders Production Of All Results And Account Settings

By Gerald L. Maatman, Jr., Justin R. Donoho, and Brandon Spurlock

Duane Morris Takeaways: On June 24, 2024, Magistrate Judge Robert Illman of the U.S. District Court for the Northern District of California ordered a group of authors alleging copyright infringement by a maker of generative artificial intelligence to produce information relating to pre-suit algorithmic testing in Tremblay v. OpenAI, Inc., No. 23-CV-3223 (N.D. Cal. June 13, 2024). The ruling is significant as it shows that plaintiffs who file class action complaints alleging improper use of AI and relying on cherry-picked results from their testing of the AI-based algorithms at issue cannot simultaneously withhold during discovery their negative testing results and the account settings used to produce any results. The Court’s reasoning applies not only in gen AI cases, but also other AI cases such as website advertising technology cases.

Background

This case is one of over a dozen class actions filed in the last two years alleging that makers of generative AI technologies violated copyright laws by training their algorithms on copyrighted content, or that they violated wiretapping, data privacy, and other laws by training their algorithms on personal information.

It is also one of the hundreds of class actions filed in the last two years involving AI technologies that perform not only gen AI but also facial recognition or other facial analysis, website advertising, profiling, automated decision making, educational operations, clinical medicine, and more.

In Tremblay v. OpenAI, plaintiffs (a group of authors) allege that an AI company trained its algorithm by “copying massive amounts of text” to enable it to “emit convincingly naturalistic text outputs in response to user prompts.” Id. at 1. Plaintiffs allege these outputs include summaries that are so accurate that the algorithm must retain knowledge of the ingested copyrighted works in order to output similar textual content. Id. at 2. An exhibit to the complaint displaying the algorithm’s prompts and outputs purports to support these allegations. Id.

The AI company sought discovery of (a) the account settings; and (b) the algorithm’s prompts and outputs that “did not” include the plaintiffs’ “preferred, cherry-picked” results. Id. (emphasis in original). The plaintiffs refused, citing work-product privilege, which protects from discovery documents prepared in anticipation of litigation or for trial. The AI company argued that the authors waived that protection by revealing their preferred prompts and outputs, and asked the court to order production of the negative prompts and outputs, too, and all related account settings. Id. at 2-3.

The Court’s Decision

The Court agreed with the AI company and ordered production of the account settings and all of plaintiffs’ pre-suit algorithmic testing results, including any negative ones, for four reasons.

First, the Court held that the algorithmic testing results were not work product but “more in the nature of bare facts.” Id. at 5-6.

Second, the Court determined that “even assuming arguendo” that the work-product privilege applied, the privilege was waived “by placing a large subset of these facts in the [complaint].” Id. at 6.

Third, the Court reasoned that the negative testing results were relevant to the AI company’s defenses, notwithstanding the plaintiffs’ argument that the negative testing results were irrelevant to their claims. Id. at 6.

Finally, the Court rejected the plaintiffs’ argument that the AI company can simply interrogate the algorithm itself. As the Court explained, “without knowing the account settings used by Plaintiffs to generate their positive and negative results, and without knowing the exact formulation of the prompts used to generate Plaintiffs’ negative results, Defendants would be unable to replicate the same results.” Id.

Implications For Companies

This case is a win for defendants of class actions based on alleged outputs of AI-based algorithms. In such cases, the Tremblay decision can be cited as useful precedent for seeking discovery from recalcitrant plaintiffs of all of plaintiffs’ pre-suit prompts and outputs, and all related account settings. The court’s fourfold reasoning in Tremblay applies not only in gen AI cases but also other AI cases. For example, in website advertising technology (adtech) cases, plaintiffs should not be able to withhold their adtech settings (the account settings), their browsing histories and behaviors (the prompts), and all documents relating to targeted advertising they allegedly received as a result, any related purchases, and alleged damages (the outputs). As AI-related technologies continue their growth spurt, and litigation in this area spurts accordingly, the implications of Tremblay may reach far and wide.

June 28, 2024 by Class Action Defense

California Legislature Passes PAGA Reform Bills

By Nick Baltaxe, Shireen Wetmore, Jennifer Riley, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: PAGA reform is here. On June 27, 2024, the California Legislature signed off on two bills (AB 2298 and SB 92) resulting in significant reforms to California’s Private Attorneys General Act (“PAGA”). Governor Newsom previously announced the deal between business and labor groups, which also means the referendum to repeal PAGA will not appear on the November ballot. Once signed into law by the Governor, the new reforms will bring sweeping changes to the PAGA. These changes aim to curtail many of the criticisms that have been levied at the PAGA from both groups. The changes apply to PAGA actions in which the PAGA notice was filed on or after June 19, 2024 and it is anticipated that the changes will also have an immediate impact on litigation strategy in pending PAGA actions filed before that date as well.

California Legislature Approves PAGA Reform Bills

After Governor Newsom announced on June 18, 2024, that labor and business interests had inked a deal significantly altering the PAGA, the California Legislature quickly moved to approve two bills (AB 2288 and Senate Bill 92). Proponents of the initiative to repeal PAGA had agreed to withdraw the referendum if the bills were passed within the deadline to withdraw the referendum. The bills were approved just in the nick of time — on June 27, 2024, which was both the deadline to withdraw the the PAGA referendum and the date the two bills were passed. These changes include reforms to the penalty structure, new defenses for employers, standing requirements limiting the scope of PAGA actions, and a new “cure” process for both small and large employers, among other changes that will significantly impact litigation strategy for PAGA claims (and likely spawn new legal questions as the law is tested in the field and the courts.) The reforms do not alter the requirement that a claimant first file a notice with the Labor & Workforce Development Agency (“LWDA”) also known as an LWDA or PAGA notice. These reforms affect all PAGA notices filed on or after June 19, 2024, with some exceptions, described in further detail below.

Penalty Structure Reforms

One of the primary complaints from business interests, in particular small business interests, was that the PAGA’s penalty structure frequently resulted in potential penalties in the millions upon millions of dollars based on the barest of allegations, often of highly technical violations of the Labor Code. Employers complained that these violations did not implicate any actual harm to employees and that there could be compounded penalties for so-called “derivative” claims. The compounding of penalties meant plaintiffs would try to stack multiple penalties based on the same alleged act or omission by an employer. The new PAGA addresses several of these complaints, eliminating some penalties altogether, limiting the availability of penalties for certain derivative claims, and clarifying how penalties are calculated.

Clarity on Initial vs. Subsequent Violations: Previously, PAGA penalties were set at $100 for “initial” violations of the Labor Code and $200 for any “subsequent” violations, unless otherwise prescribed by statute. The reforms removed the distinction between “initial” and “subsequent” violations — now the civil penalty for an alleged violation is $100 for each aggrieved employee per pay period. However, a court may reduce a penalty award in order to avoid an award that is unjust, arbitrary and oppressive, or confiscatory. See Lab. Code § 2699(e)(2). Repeat offenders may be subject to higher penalties.
Reduced Penalties for Isolated Events: If the violation resulted from an isolated, non-recurring event (e., the violation had not extended beyond the lesser of 30 days or four consecutive pay periods), the penalties are further limited to $50 per aggrieved employee per pay period. See Cal. Lab. Code § 2699(f)(2)(A)(ii).
Reduced Penalties for Wage Statement Violations: If the violation is a violation of Labor Code section 226 for non-complaint wage statements, additional limitations apply. For violations of § 226(a) (other than (a)(8) regarding the legal name or address of the employer), the penalty is $25 for each aggrieved employee per pay period if the employee could promptly and easily determine accurate information from the wage statement or if the employee would not be confused or misled about the correct identity of their employer. If the violation involves § 226(a)(8), the penalty is $25 if the employee would not be confused or misled about the correct identity of their employer or, if their employer is a farm labor contractor, the legal entity that secured the services of that employer. These limitations do not apply if the employer failed to provide a wage statement to the employee. See Lab. Code § 2699(f)(2)(A)(i).
Special Rules for Increased Penalties: In lieu of the “subsequent violation” penalty, a $200 penalty per aggrieved employee per pay period can now only be levied in certain circumstances. Specifically, this amount may only be awarded where an agency or court has determined that the employer’s policy or practice led to that same violation of the Labor Code in the previous five years or if a court determines that the employers’ conduct was malicious, fraudulent, or oppressive. See Lab. Code § 2699(f)(2)(B).
No Additional Recovery For Derivative Penalties Under Labor Code Sections 201, 202, or 203: An employee can no longer recover additional penalties for violations of Labor Code section 201, 202, or 203, which address when an employee must be paid upon resignation or termination, when seeking recovery for underlying wage violations. The same applies to Labor Code sections 204 and 226, unless the violation meets heightened scienter requirements as outlined below. See Lab. Code § 2699(i).
Limited Recovery Under Labor Code Sections 204 and 226: An employee can recover additional penalties for Labor Code section 204, which addresses when an employee must be paid during their employment, if that violation is willful or intentional. Additionally, an employee can recover additional penalties for violation of Labor Code section 226, which mandates that certain information be included on wage statements, if that violation is knowing, intentional, or involves a complete failure to provide a wage statement. See Lab. Code § 2699(i).
Pay Period Defined: PAGA originally imposed monetary penalties on a per pay period basis. This unfairly penalized employers that paid employees on a weekly basis, as opposed to a biweekly basis. The reforms address this disparity, by clarifying that the recoverable penalties will be reduced by 50% where an employer’s regular pay period is weekly rather than biweekly.
Employee’s Share Of Recovery Increased: The percentage of penalties awarded to the aggrieved employees has been increased from 25% to 35%.

The “Cure” For Employers’ Ills

The reforms also introduce a new and more complicated “cure” process for avoiding or reducing penalties. Employers may take steps before a complaint is filed, or during litigation, to limit potential penalties.

Pre-LWDA Notice Penalty Cap: If, before receiving an LWDA notice or a request for records from the employee, an employer takes “all reasonable steps” to cure the violations alleged in the LWDA letter, awardable penalties are now capped at no more than 15% of the total available penalties. See Lab. Code § 2699(g).
Post-LWDA Notice Penalty Cap: The penalty cap is increased to 30% if the “reasonable steps” are taken within 60 days of receiving the LWDA Notice. See Lab. Code § 2699(h).

An employer takes “all reasonable steps” if it conducts periodic payroll audits and takes action in response to those audits, disseminates lawful policies, trains supervisors on applicable Labor Code and wage order compliance, and takes appropriate corrective action with regard to its supervisors. Whether or not an employer’s conduct was reasonable will be evaluated by the totality of the circumstances. See Cal. Lab. Code § 2699(g)(2).

Eliminating Penalties Altogether

In addition to these caps, there is now a path towards the complete elimination of PAGA penalties if an employer cures an alleged labor code violation. Specifically, if an employer takes the “reasonable steps” defined by statute and actually cures an employee’s unpaid wages, the employee can no longer recover PAGA penalties for the Labor Code violation. The “cure” is effective when the employee is “made whole,” or provided an amount sufficient to recover any unpaid wages due to the alleged violations going back three years from the date of the notice. However, this amount must also include seven percent interest, liquidated damages that are required by statute, and a reasonable attorneys’ fees award as determined by the court or agency. Practically speaking, this “cure” option will likely still require costly outlays to ensure all fees are covered and potentially litigation over the reasonableness of the claimed attorneys’ fees. We anticipate that, in response to these complicated requirements, employee’s may start to include in the LWDA notice a calculation of the proposed “cure” amount, much like an initial settlement demand.

New Standing Requirement

Prior to the passage of these bills, judicial interpretations of the statute held that an employee who experienced a single Labor Code violation could bring a claim for violations of any provision of the Labor Code on behalf of aggrieved employees, even for violations the employee bringing the claim never experienced. Now, an employee must have suffered every violation he or she attempts to bring on behalf of other aggrieved employees. This inclusion effectively negates the California Court of Appeal’s ruling in Huff v. Securitas Security USA Services, Inc., 23 Cal.App.5th 745 (2018), which held that an employee could seek PAGA penalties for any and all Labor Code violations, even if the employee had not experienced those violations. The new standing requirement will narrow the scope of PAGA actions to only those allegedly suffered by the PAGA plaintiff—and by extension add some guard rails to discovery as well as the size of the representative group at issue.

Manageability Is Back!

The bills also codified a long-litigated potential defense known as “manageability.” Specifically, in January of this year, the California Supreme Court struck down the limited defense that employers had been using to try to reign in PAGA matters, holding that trial courts did not have the inherent authority to strike a claim as unmanageable. See Estrada v. Royal Carpet Mills, Inc., 15 Cal.5th 582 (2024). Now, courts are empowered by statute to limit evidence presented at trial or the scope of the claims to ensure that the case is manageable and may be effectively tried. It will remain to be seen whether requests for trial plans enter the employer’s toolbox in these representative matters as they have in California class actions.

Injunctive Relief

Another criticism of the PAGA was the inability of a PAGA plaintiff to seek injunctive relief, effectively making PAGA a bounty-hunter statute with no real teeth to effectuate change. Under the new reforms, an employee can now seek injunctive relief related to alleged Labor Code violations. Employers should be prepared for new PAGA claims to include requests that the Court require the employer to modify their practices to ensure compliance with Labor Code provisions. This is reminiscent of the injunctive relief available to plaintiffs under California’s Unfair Competition Law. Labor had identified this provision as a key priority for PAGA reform and comments from representatives from the business community reflect the common interest in working towards full compliance with the Labor Code for all employers and employees.

New Early Evaluation Procedures For Large And Small Businesses

The reforms introduce new procedures both with the LWDA and the courts to allow for effective litigation, and potential early resolution, of these claims.

For PAGA notices (and their associated claims) filed on or after June 19, 2024, employers who employed at least 100 employees during the PAGA period can now request an “early evaluation conference” and a request to stay the proceedings before or simultaneous with the employer’s responsive pleading. This request must include a statement from the employer identifying which allegations it disputes and which allegations it will cure. The court will then set an early evaluation conference. To the extent the employer stated they would cure any of the alleged violations, the court may also ask the employer to submit to the neutral and plaintiff, on a confidential basis, the employer’s plan to cure the deficiencies. If other violations remain in dispute, the neutral may stay the consideration of the cure plan or agreement until after the litigation of the disputed issues.

If the neutral approves the cure plan, the employer must submit evidence within ten days showing that the cure occurred. If the neutral, employer, and employee all agree the violations have been cured, they will submit a joint statement to the court setting forth the terms of their agreement. If the neutral or employee does not agree that the violation was cured, the employer may file a motion to request the court to approve the cure. The employer can submit evidence with this motion showing that the alleged violations were corrected. Any PAGA penalties calculated with these cures must take into account other limitations and caps on penalties that would be applicable due to the prompt cure.

Smaller employers have a separate early evaluation process. Before October 1, 2024, employers with fewer than 100 employees during the PAGA period cannot take advantage of this early conference. However, starting October 1, 2024, employers with under 100 employees can submit a confidential proposal to the LWDA within 33 days of their receipt of notice that lays out their exact plan for the cure. The LWDA can make a determination on the sufficiency of the cure at the outset or set a conference to determine the sufficiency of the cure.

If the cure is facially sufficient or if the LWDA believes a conference is needed to discern the sufficiency of the cure, the LWDA will set a conference. This is an accelerated timeline, as the LWDA must rule on the plan within 14 days of its submission and the conference must occur within 30 days of that date. At this conference, the LWDA will discern if the cures are sufficient, whether or not any additional information is needed, and set a deadline to complete the cure.

When the employer completes the cure, it must provide to the LWDA and the plaintiff a sworn notification to the employee and agency that the cure is completed, accompanied by a payroll audit and check register if the violation involves a payment obligation. The LWDA must confirm whether the cure was completed within twenty days of receiving the cure documents. If the LWDA preliminarily believes the violation has been cured, the LWDA must provide notice to the plaintiff that the cure is complete. If a plaintiff disagrees with the decision, the plaintiff may request a hearing on that determination. If the LWDA confirms the violation was cured, the employee cannot continue with a civil action. The employee can also appeal this determination to the superior court, although any payment the plaintiff received as part of the cure process will offset any judgment later entered with respect to that violation if the superior court concludes the agency abused its discretion in finding the cure was adequate.

However, if the LWDA believes the cure proposal is not sufficient, the employee can proceed with a civil action. Importantly, if this process extends beyond the 65-day timeframe for the investigation by the LWDA, the statute of limitations on the PAGA claims are tolled. As of October 1, 2024, employers with fewer than 100 employees during the PAGA period can also request the early evaluation conference described above for larger employers. The employer’s submission of a cure proposal to the LWDA does not prevent the employer from requesting the early evaluation conference. However, no employer can use this notice and “cure” provision more than one time in a 12-month period for violations of the same provision, regardless of the location of the worksite or if it did not cure that same violation upon prior notice. See Cal. Lab. Code § 2699.3(d)

There is also a separate process if the only alleged violation the small employer will seek to cure is a violation of Labor Code section 226. In that case, the employer can cure the deficiency within 33 days of the postmark date of the notice and file notice with a description of the cure to both the LWDA and the plaintiff. If the plaintiff disputes this cure, he or she may file notice describing why the cure is being disputed. This process is also on an accelerated timeline, and the LWDA must make a determination within 17 days of receipt of that dispute. The LWDA can either confirm the cure, provide an additional three days for the employer to complete the cure, or allow the employee to file a PAGA claim for violation of Labor Code section 226. If the LWDA does not respond, the employee can continue with his or her PAGA claim. This determination can also be appealed to the superior court.

Impact On Employers and Litigation Strategy

While the focus may be on the reduction of penalties, the passage of these bills has also ushered in a new era for employers. Not only will this greatly impact litigation strategy when dealing with PAGA claims, but employers now have a tight timeline in which to make important strategic decisions regarding things like election into early evaluation, cure, or other alternative dispute resolution. Many are celebrating the reforms, but it remains to be seen how these reforms will impact PAGA litigation generally. Because the reforms only apply as of June 19, 2024, employers with pending PAGA matters will want to look closely at the reforms and their cases to see whether and how the reforms will impact those pending matters. In addition, we anticipate that there will be some bumps as the LWDA and the courts work through new questions raised by these reforms. Each case is unique and employers should work closely with counsel to evaluate each claim.

What Should Employers Do Next?

As always, it is important to maintain up to date, compliant policies and practices and ensure your teams are trained on those policies. If you are hit with an LWDA notice, take prompt action to evaluate whether one of these new alternative procedures will benefit your company.

Please stay tuned for additional steps you can take in light of these reforms.

If you have any questions about this post, please feel free to contact any of the wage-and-hour attorneys in our Employment, Labor, Benefits and Immigration Practice Group or your Duane Morris contact.

June 27, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 62: Class Action Fairness Act Key Rulings

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partners Jennifer Riley and Alex Karasik and associate Derek Franklin with their discussion of key rulings involving the Class Action Fairness Act (“CAFA”).

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

Episode Transcript

Jennifer Riley: Thank you for being here again for the next episode of our weekly podcast the Class Action Weekly Wire. I’m Jennifer Riley partner at Duane Morris and joining me today are Alex Karasik and Derek Franklin. Thank you both guys for being on the podcast.

Alex Karasik: Great to be here, Jen. Thank you.

Derek Franklin: Thanks for having me, Jen.

Jennifer: Today we wanted to discuss trends and important developments in the area of the Class Action Fairness Act, or the CAFA. Alex, can you tell our listeners a little bit about the CAFA before we get into the latest developments?

Alex: Absolutely. Jen. The CAFA is a staple of class action litigation. It was signed into law by George W. Bush, on February 18, 2005. The CAFA expands federal subject-matter jurisdiction over significant class action lawsuits and mass actions in the United States. Functionally, the CAFA provides a mechanism for defendants to remove class actions from state courts to federal courts. So, as a result, CAFA impacts form selection strategies in the class action litigation space.

Derek: Also, to add to Alex, the CAFA does more than facilitate the removal of class actions from state court to federal court. It also regulates the selection of class counsel, toughen certain pleading standards, tightens control over the range of attorneys’ fees that may be awarded in class action settlements, it facilitates the appeals of class certification orders, and it regulates the settlement process in class action settlements.

Jennifer: Thanks so much for that background, guys. Derek, can you talk a bit more about the impact of CAFA on class action litigation?

Derek: Yeah, CAFA has played a major role in large bet the company class actions. The plaintiffs’ class action bar has traditionally maintained success in achieving class certification in state courts, particularly those with locally elected judges who may be hostile toward out-of-state defendants. Prior to the implementation of the CAFA, in order for a federal court to have maintained jurisdiction, there needed to be a monetary threshold of $75,000 met by every plaintiff in the case, and all named plaintiffs in a class action had to be citizens of states differing from those of all defendants. Now under the CAFA, jurisdictional requirements are much less restrictive, and thus more difficult for the plaintiffs’ bar to establish that the action should remain in state court.

Jennifer: Alex, what types of class action litigation, would you say, are most affected by the CAFA?

Alex: Great question, Jen. Class actions filed under federal statute, such as the FLSA, Title VII, or ERISA, are almost exclusively filed in federal court. So, the CAFA has most significantly impacted state law wage and hour claims and related state law type class action claims in employee-friendly states, such as California. The plaintiffs’ class action bar notoriously pursues wage and hour claims in state courts. It tends to be a more favorable forum for plaintiffs in certain areas. The Second Circuit over time became known as the federal circuit where securities law became the most developed. However, the Ninth Circuit became a circuit where more rulings under CAFA were made than any other circuit in the federal system. So, we tend to see various wage and hour and other potential consumer claims filed in state court, and therefore removed under the CAFA.

Jennifer: Were there any key CAFA rulings in 2023?

Alex: It doesn’t happen every year – but in 2023, in fact, courts and all of the federal circuits adjudicated jurisdictional issues based on the CAFA. Beyond the traditional wage and hour context, the CAFA rulings come in a variety of shapes, form, and sizes. Some of those came under the Illinois Biometric Information Privacy Act, which the three of us know very well, being located here in Chicago, Illinois. Other claims involve breaches of consumer product warranties, for instance, under the Magnum-Moss Warranty Act, so CAFA claims can really impact a wide variety of different types of causes of action.

Derek: In particular, the Third Circuit ruled on a breach of warranty case in Rowland, et al. v. Bissell Homecare, Inc., which involved a consolidated appeal concerning four putative class actions filed in state court, alleging violations of the MMWA. The defendants removed those cases pursuant to the CAFA and the plaintiffs filed motions to remand which the district court granted on appeal. The Third Circuit affirmed the District Court’s rulings under the MMWA. The amount controversy must be at least $50,000, and, if it’s a class action, it must have at least 100 named plaintiffs. The Third Circuit opined that in imposing additional requirements for federal jurisdiction, that Congress manifested an intent to restrict access to federal court for MMWA claims. The Third Circuit determined that at a minimum, the requirement that a class action name at least 100 plaintiffs for federal jurisdiction under the MMWA was not satisfied because each complaint at issue named only one plaintiff. The Third Circuit also reasoned that the MMWA’s stringent jurisdictional requirements were irreconcilable with the CAFA because they have differing requirements for how many plaintiffs must be named in a class action that can be brought in federal court, i.e., the CAFA requires only one plaintiff, and the MMWA requires at least 100 plaintiffs. The Third Circuit, therefore, concluded that applying the CAFA in this situation would render the MMWA’s named plaintiff requirement meaningless.

Jennifer: Alex, with the explosive amount of privacy class action litigation recently, can you tell us a bit more about the BIPA ruling in particular that you mentioned earlier?

Alex: Yeah, Jen, there was a really interesting ruling in the Northern District of Illinois in a case called Halim, et al. v. Charlotte Tilbury Beauty, Inc. There the plaintiff filed a putative class action in Illinois state court against the defendants, a makeup and cosmetic company and its parent corporation, alleging violation of the BIPA. It wasn’t a fingerprint scan BIPA case, but rather, this is one where, the defendants allegedly unlawfully collected facial geometry when the plaintiff used the virtual try-on software to superimpose the defendant’s makeup products on the plaintiff’s face. The defendants removed the case to federal court, and the plaintiffs thereafter sought to remand. The court granted plaintiffs’ motion to remand the action to state court because the defendants did not satisfy the $5 million amount-in-controversy requirement. The defendants had argued in removing the case, that they satisfied the requirement through their calculation of a $12 million dollar amount-in-controversy calculation for the BIPA. They claim there was six violations of the BIPA for each putative class member, times 100 putative class members, times two face scans per class member, times $5,000 per violation – which is the statutory amount for a reckless violation – times two defendants. Yeah, that’s a lot of math. And using all this math, defendant came up with an 8-figure number that they anticipated would be the damages exposure. Court rejected this calculation, saying, it’s too speculative and unreasonable to satisfy the defendant’s burden, and therefore, because of that, the court remanded this case back to Illinois state court.

Jennifer: What should corporate counsel and employers be on the lookout for in 2024?

Alex: We anticipate, there will be continued arguments over removal due to jurisdictional issues. The plaintiffs’ bar is crafty and constantly evolving their strategies for arguing against litigating cases in federal court. Many times state courts are more favorable forum, and I don’t think that trend will change in the coming year. What remains to be seen is how effective these strategies will be, and granting motions through remand especially as many of the major class action statutes, such as the BIPA, might evolve at the legislative level.

Jennifer: Well said. Thank you so much for all of this great analysis. Derek and Alex, thank you for being here with me today, and listeners, thank you so much for tuning in.

Alex: Thanks for having me, Jen, and thank you to all of our listeners. We appreciate you tuning in today as well.

Derek: Thanks, everyone.

June 24, 2024June 24, 2024 by Class Action Defense

Colorado Federal Court Grants Frontier Airlines’ Motion to Compel Arbitration In The GoWild! Pass Program Class Action

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

Duane Morris Takeaways: On June 14, 2024, in Hartsfield, et al. v. Frontier Airlines, Inc., Case No. 23-CV-2093 (D. Colo. June 14, 2024), Magistrate Judge Kathryn A. Starnella for the U.S. District Court for the District of Colorado recommended granting Frontier Airline’s motion to compel arbitration and dismiss the class claims of the Plaintiffs. This decision further illuminates the power of clear and conspicuous terms and conditions that allow for arbitration clauses and class action waivers.

Case Background

Plaintiffs and the putative class representatives (“Plaintiffs”) are individuals who sued Frontier Airlines, Inc. (“FA”) for alleged misrepresentations associated with its GoWild! Pass Program (“Pass Program”), a program that allowed participants to book unlimited number of airline flights for a specific period of time. When signing up for the Pass Program, Plaintiffs had to click “Join Now” button, thereby confirming that they agreed to the Terms & Conditions (“T&C”). When clicking “Join Now” button, the T&C was hyperlinked above, which opened another window to the actual T&C. The T&C was presented multiple times throughout the enrollment process, and even after purchase through a confirmation email, which expressly stated that the participant in the Pass Program is subject to the T&C. Id. at 2-3.

The T&C contained an arbitration clause that clearly outlined any Pass Program dispute would be subject to arbitration and governed by Colorado law. The T&C also contained a class action waiver.

For these reasons, FA moved to compel arbitration under the T&C and dismiss the class claims. Plaintiffs claimed that the arbitration clause was invalid because they never assented to the T&C, and that FA did not provide a conspicuous notice of T&C to which they agreed, thereby making it unconscionable and unenforceable.

The Court’s Opinion

Under the Federal Arbitration Act, (“FAA”), the Court noted that it “must rigorously enforce arbitration agreements according to their terms.” Id. at 4 (citing Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 230 (2013)). The Court also opined that it must apply state contract law principles to determine validity and enforceability. Id.

Plaintiffs argued that no contract existed between the parties, because the T&C and its arbitration clause were “obscure” and failed to prove a “reasonably conspicuous notice.” Id. 5. The Court disagreed. It recognized that Plaintiffs “merely had to click on a single bold and underlined link” that would directly open the T&C which included the arbitration clause. The Court, highlighted that the link was offered multiple times to Plaintiffs during the sign up process and after purchase. Id. at 5-6.

Plaintiffs also argued that regardless if there was a valid contract, the arbitration agreement was unconscionable and thus unenforceable. The Court used a multi-factor test to determine a contractual provision’s conscionability, including: (1) a standardized agreement executed by parties of unequal bargaining strength, (2) lack of opportunity to read or become familiar with the document before signing it; (3) use of fine print in the portion of the contract containing the provision; (4) absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated; (5) the terms of the contract, including substantive unfairness; (6) the relationship of the parties, including factors of assent, unfair surprise and notice; and (7) and all the circumstances surrounding the formation of the contract, including its commercial setting, purpose and effect. Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo. 1986).

Plaintiffs claimed the unconscionability stemmed from unequal bargaining strength, convoluted presentation of the agreement, commercially unreasonable application and as it was substantively unfair. The Court was not persuaded by these arguments, as it found that circumstances here did not support that idea that the arbitration agreement was “snuck in or forced upon an unsuspecting or unsophisticated customer with no options.” Id. at 8 (citing Davis, 712 P.2d at 991). While the Court agreed that there was unequal bargaining strength, it held that FA provided Plaintiffs ample opportunities to read the T&C, which were not in fine print, thus there was no surprise or lack of notice. Finally, the Court found that the dispute fell within the scope of the arbitration agreement because the language was clear as to “any dispute in connection with Member and Frontier.” Id. at 9.

As it applies to the class action status, the T&C explicitly state that any case brought under the Pass Program can only be pursued in an individual capacity and not as a purported class-wide action. Because Plaintiff provided no arguments that the class action waiver was unconscionable, the Court held that the class action waiver bars Plaintiffs’ collective claims.

Implications For Employers

The holding in Hartsfield, et al. v. Frontier Airlines, Inc. highlights the enforceability of an arbitration through clear and conspicuous T&C.

T&C can completely change the landscape where a dispute can be raised, the choice of law, and the existence of any class claims. Giving individuals ample opportunities to review the T&C they are agreeing to is equally important. As such, corporate counsel, therefore, should take note any T&C, where modifications can or should be made to ensure enforceability of specific clauses like an arbitration agreement and class action waiver.

June 20, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 61: Key Developments In Civil Rights Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Nathan Norimoto with their discussion of developments and trends in the area of civil rights class action litigation.

Episode Transcript

Jennifer Riley: Hello, everyone, and thank you for being here again for the next episode of our weekly, podcast the Class Action Weekly Wire, I’m, Jennifer, Riley partner and Dwayne Morris and joining me today is Nathan Norimoto. Thank you for being on the podcast Nathan.

Nathan Norimoto: Great to be here, Jen.

Jennifer: Today we wanted to discuss some trends and important developments in the area of civil rights class action litigation. Nathan, do you want to talk a bit about this area of law before we get into a development over the past year?

Nathan: Yes, definitely. For more than 70 years, class actions have been among the most powerful tools to secure civil rights in America. This began with the class action of Brown, et al. v. The Board Of Education, which declared school segregation unlawful and arguably set the stage for the Civil Rights Movement. In 1966, Congress and the judicial rule-making authorities crafted Rule 23 with the express goal of empowering litigants, challenging systemic discrimination, particularly segregation, to force courts to order widespread objective relief that would protect members of the class as a whole. Ever since, this provision remains as salient to the enforcement of federal civil rights statutes and constitutional claims as it was at its inception. So, for a multitude of reasons, class actions are often a tool of first resort by advocacy groups to remedy civil rights violations.

Jennifer: Thank you so much for that overview. What were some of the major developments in 2023 and during the first half of 2024 in the civil rights class action litigation space?

Nathan: Class actions in the civil rights context span numerous issues during that time period. Given this breadth of subject area, there were well over 100 decisions in this space. In these far ranging claims and groups of individuals, one common theme continues to be whether litigants can meet the commonality and typicality requirements of Rule 23, under the federal rules of civil procedure, to establish class certification. 2023 saw court rulings where numerous civil rights cases were certified, as well as granted class certification affirmed on appeal.

Jennifer: Are there any key rulings from this past year that listeners need to know about in the civil rights litigation class action area?

Nathan: Definitely. So, among all civil rights cases, the ruling on class certification in Progeny, et al. v. City Of Wichita was likely amongst the most significant. The plaintiffs, a nonprofit organization and several individuals, filed a class action alleging that the defendant, the city of Wichita, kept a “gang list” created and maintained by the Wichita Police Department, or WPD, whom WPD personnel had determined that the definition of a criminal street gang member. The individual plaintiffs alleged that they were wrongfully designated as criminal street gang members and added to the gang list, which adversely affected their lives. The plaintiff filed a motion for class certification pursuant to Rule 23, and the court granted the motion. The plaintiff proposed class consisted of all persons included in the Wichita Police Department’s gang list as an active or inactive gang member or gang associate. The court also determined that several common questions existed to establish commonality, including whether the statute was unconstitutionally vague, whether it failed to provide procedural protections to persons on the gang list, and whether inclusion in the gang list has a chilling effect on the right to freedom of association. The court held that the plaintiffs established that the defendant acted or refused to act by applying the gang list criteria to add persons to the gang list without procedural protections for those persons, which was applicable to the entire class. So the court ruled that the requested injunction seeking to bar the defendant from enforcing the statute was appropriate to the class as a whole, because all class members were on the gang list, and therefore the court granted class certification.

Jennifer: Thank you, Nathan, for that overview. So, turning to some trends and developments – there were over 100 rulings in this area in 2023. How are things progressing thus far in 2024 – have there been any interesting cases where class certification was granted?

Nathan: Certainly. So it seems like courts are continuing to grant class certification rulings in this area so far this year. One example here in California, Berg, et al. v. County Of Los Angeles, the plaintiffs were a group of protesters who filed a class action asserting that the Los Angeles Sheriff’s Department, or the LASD, had used excessive force against peaceful protesters and unlawfully detain them in violation of their First, Fourth, and Fourteenth Amendment rights in connection with the George Floyd protests. The plaintiffs filed a motion for class certification on one injunctive relief class and two damages classes, and that motion was granted by the court. As to the injunctive relief class, the defendants opposed the motion on mootness and standing grounds, and the court found that could not determine that the class would be moot, and that because the plaintiffs had stated they plan to attend future protests, they could plausibly be fearful of future harm. Next, for the first damages class, containing individuals who were arrested at the protests, the court stated that there were several common issues central to the class, including (i) whether the defendants have a custom and practice of using indiscriminate force against the peaceful protesters; (ii) whether there has been a manifest failure by the defendants to train employees on the use of force against the protesters; and (iii) whether the defendants had ratified violations of peaceful protesters’ rights. So finally, on the last and third class, the other damages class which contained individuals who were subject to the use of rubber bullets or tear gas, the court determined that the plaintiffs sufficiently established the common alleged harm of a “chill” to their First Amendment rights to unify the class. The court stated that the class met the predominance requirement under Rule 23 because the plaintiffs alleged class-wide general damages and challenged only a single “custom and practice of abusing indiscriminate force against peaceful protesters.” The court concluded that class action would be superior method of adjudication for the direct force class, or the third class, and granted the motion for class certification in its entirety.

Jennifer: It certainly seems like we will see courts continuing to grapple with motions for class certification in this area in 2024, and the plaintiffs’ bar continuing to aggressively pursue certification on behalf of plaintiffs. We know that successful certification often leads to settlements between the parties, rather than continuing the litigation and ultimately going to trial. How successful were plaintiffs in securing settlement dollars in this space in 2023?

Nathan: Pretty successful. Settlement numbers in civil rights class actions in 2023 were definitely significant. The top 10 settlements total $643.15 million. However, this is significant, but it was a decrease from the prior year when the top 10 civil rights class action settlements topped $1.3 billion.

Jennifer: The top settlement amounts in each area of law have been massive in recent years, and a major trend that we track in the Duane Morris Class Action Review. We will continue to track these numbers in 2024 and keep listeners aware of developments. Is there anything else corporate counsel and employers should be on the lookout for in 2024?

Nathan: So given the volume of litigation in the civil rights area, as well as the frequency which with classes are granted and new burgeoning issues for that can percolate in these cases – for example, claims connection with COVID-19 in connection with the increase homelessness issues that we’re facing in our cities – it’s anticipated that the plaintiffs’ bar will continue to be creative, and definitely inventive in this space, as we progress through 2024.

Jennifer: Well, thanks so much for all of this great analysis, Nathan. Thank you for being here with me today. Listeners, thank you for tuning in. And if you have any questions or comments on today’s podcast please feel free to send us a DM on Twitter @DMClassAction.

Nathan: Thanks for having me, Jen, and thank you listeners for being here today.

Jennifer: Thank you listeners again for joining us today, and please join us next week for the next episode of the Class Action Weekly Wire.

June 20, 2024 by Class Action Defense

Illinois Federal Court Rejects Class Action Because An AI-Powered Porn Filter Does Not Violate The BIPA

By Gerald L. Maatman, Jr., Justin R. Donoho, and Tyler Z. Zmick

Duane Morris Takeaways: In a consequential ruling on June 13, 2024, Judge Sunil Harjani of the U.S. District Court for the Northern District of Illinois dismissed a class action brought under the Illinois Biometric Information Privacy Act (BIPA) in Martell v. X Corp., Case No. 23-CV-5449, 2024 WL 3011353 (N.D. Ill. June 13, 2024). The ruling is significant as it shows that plaintiffs alleging that cutting-edge technologies violate the BIPA face significant hurdles to support the plausibility of their claims when the technology neither performs facial recognition nor records distinct facial measurements as part of any facial recognition process.

Background

This case is one of over 400 class actions filed in 2023 alleging that companies improperly obtained individuals’ biometric identifiers and biometric information in violation of the BIPA.

In Martell v. X Corp., Plaintiff alleged that he uploaded a photograph containing his face to the social media platform “X” (formerly known as Twitter), which X then analyzed for nudity and other inappropriate content using a product called “PhotoDNA.” According to Plaintiff, PhotoDNA created a unique digital signature of his face-containing photograph known as a “hash” to compare against the hashes of other photographs, thus necessarily obtaining a “scan of … face geometry” in violation of the BIPA, 740 ILCS 14/10.

X Corp. moved to dismiss Plaintiff’s BIPA claim, arguing, among other things, that Plaintiff failed to allege that PhotoDNA obtained a scan of face geometry because (1) PhotoDNA did not perform facial recognition; and (2) the hash obtained by PhotoDNA could not be used to re-identify him.

The Court’s Opinion And Its Dual Significance

The Court granted X Corp.’s motion to dismiss based on both of these arguments. First, the Court found no plausible allegations of a scan of face geometry because “PhotoDNA is not facial recognition software.” Martell, 2024 WL 3011353, at *2 (N.D. Ill. June 13, 2024). As the Court explained, “Plaintiff does not allege that the hash process takes a scan of face geometry, rather he summarily concludes that it must. The Court cannot accept such conclusions as facts adequate to state a plausible claim.” Id. at *3.

In other cases in which plaintiffs have brought BIPA claims involving face-related technologies performing functions other than facial recognition, companies have received mixed rulings when challenging the plausibility of allegations that their technologies obtained facial data “biologically unique to the individual.” 740 ILCS 14/5(c). BIPA defendants have been similarly successful at the pleading stage as X Corp., for example, in securing dismissal of BIPA lawsuits involving virtual try-on technologies that allow customers to use their computers to visualize glasses, makeup, or other accessories on their face. See Clarke v. Aveda Corp., 2023 WL 9119927, at *2 (N.D. Ill. Dec. 1, 2023); Castelaz v. Estee Lauder Cos., Inc., 2024 WL 136872, at *7 (N.D. Ill. Jan. 10, 2024). Defendants have been less successful at the pleading stage and continue to litigate their cases, however, in cases involving software verifying compliance with U.S. passport photo requirements, Daichendt v. CVS Pharmacy, Inc., 2023 WL 3559669, at *2 (N.D. Ill. May 4, 2023), and software detecting fever from the forehead and whether the patient is wearing a facemask, Trio v. Turing Video, Inc., 2022 WL 4466050, at *13 (N.D. Ill. Sept. 26, 2022). Martell bolsters these mixed rulings in non-facial recognition cases in favor of defendants, with its finding that mere allegations of verification that a face-containing picture is not pornographic are insufficient to establish that the defendant obtained any biometric identifier or biometric information.

Second, the Court found no plausible allegations of a scan of face geometry because “Plaintiff’s Complaint does not include factual allegations about the hashes including that it conducts a face geometry scan of individuals in the photo.” Martell, 2024 WL 3011353, at *3. Instead, the Court found, obtaining a scan of face geometry means “zero[ing] in on [a face’s] unique contours to create a ‘template’ that maps and records [the individual’s] distinct facial measurements.” Id.

This holding is significant and has potential implications for BIPA suits based on AI‑based, modern facial recognition systems in which the AI transforms photographs into numerical expressions that can be compared to determine their similarity, similar to the way X Corp.’s PhotoDNA transformed a photograph containing a face into a unique numerical hash. Older, non-AI facial recognition systems in place at the time of the BIPA’s enactment in 2008, by contrast, attempt to identify individuals by using measurements of face geometry that identify distinguishing features of each subject’s face. These older systems construct a facial graph from key landmarks such as the corners of the eyes, tip of the nose, corners of the mouth, and chin. Does AI-based facial recognition — which does not “map[] and record[] … distinct facial measurements” (id. at *3) like these older systems — perform a scan of face geometry under the BIPA? One court addressing this question raised in opposing summary judgment briefs and opined on by opposing experts held: “This is a quintessential dispute of fact for the jury to decide.” In Re Facebook Biometric Info. Priv. Litig., 2018 WL 2197546, at *3 (N.D. Cal. May 14, 2018). In short, whether AI-based facial recognitions systems violate the BIPA remains “the subject of debate.” “The Sedona Conference U.S. Biometric Systems Privacy Primer,” The Sedona Conference Journal, vol. 25, at 200 (May 2024). The Court’s holding in Martell adds to this mosiac and suggests that plaintiffs challenging AI-based facial recognition systems under the BIPA will have significant hurdles to prove that the technology obtains a scan of face geometry.

Implications for Companies

The Court’s dismissal of conclusory allegations is a win for defendants’ whose cutting-edge technologies neither perform facial recognition nor record distinct facial measurements as part of any facial recognition process. While undoubtedly litigation over the BIPA will continue, the Martell decision supplies useful precedent for companies facing BIPA lawsuits containing insufficient allegations that they have obtained a scan of facial geometry unique to an individual.

June 19, 2024 by Class Action Defense

District Court Dismisses Data Privacy Class Action Against Health Care System For Failure To Sufficiently Allege Disclosure of PHI

By Gerald L. Maatman, Jr., Jennifer A. Riley, Justin Donoho, and Ryan T. Garippo

Duane Morris Takeaways: On June 10, 2024, in Smart, et al. v. Main Line Health, Inc., No. 22-CV-5239, 2024 WL 2943760 (E.D. Pa. June 10, 2024), Judge Kai Scott of the U.S. District Court for the Eastern District of Pennsylvania dismissed in its entirety a class action complaint alleging that a nonprofit health system’s use of website advertising technology disclosed the plaintiff’s protected health information (“PHI”) in violation of the federal wiretap act and in commission of the common-law torts of negligence and invasion of privacy. The ruling is significant because it shows that such claims cannot surmount Rule 12(b)(6)’s plausibility standard without specifying the PHI allegedly disclosed.

Background

This case is one of the hundreds of class actions that plaintiffs have filed nationwide alleging that Meta Pixel, Google Analytics, and other similar software embedded in defendants’ websites secretly captured plaintiffs’ web browsing data and sent it to Meta, Google, and other online advertising agencies. This software, often called website advertising technologies or “adtech” is a common feature on many websites in operation today; millions of companies and governmental organizations utilize it. (See, e.g., Customer Data Platform Institute, “Trackers and Pixels Feeding Data Broker Stores” (reporting that “47% of websites using Meta Pixel, including 55% of S&P 500, 58% of retail, 42% of financial, and 33% of healthcare”); BuiltWith, “Facebook Pixel Usage Statistics” (offering access to data on over 14 million websites using the Meta Pixel and stating “[w]e know of 5,861,028 live websites using Facebook Pixel and an additional 8,181,093 sites that used Facebook Pixel historically and 2,543,263 websites in the United States”).)

In these lawsuits, plaintiffs generally allege that the defendant organization’s use of adtech violated federal and state wiretap statutes, consumer fraud statutes, and other laws, and they often seek hundreds of millions of dollars in statutory damages. Plaintiffs have focused the bulk of their efforts to date on healthcare providers, but they have filed suits that span nearly every industry including retailers, consumer products, and universities.

In Smart, 2024 WL 2943760, at *1, Plaintiff brought suit against Main Line Health, Inc. (“Main Line”), “a non-profit health system.” According to Plaintiff, Main Line installed the Meta Pixel on its public-facing website – not on its secure patient portal, id. at *1 n.2 – and thereby transmitted web-browsing information entered by users on the public-facing website such as:

“characteristics of individual patients’ communications with the [Main Line] website (i.e., their IP addresses, Facebook ID, cookie identifiers, device identifiers and account numbers) and the content of these communications (i.e., the buttons, links, pages, and tabs they click and view).”

Id. (quotations omitted).

Based on these allegations, Plaintiff alleged claims for violation of the Electronic Communications Privacy Act (ECPA), negligence, and invasion of privacy. Main Line moved to dismiss under Rule 12(b)(6) for failure to state sufficient facts that, if accepted as true, would state a claim for relief that is plausible on its face.

The Court’s Opinion

The Court agreed with Main Line and dismissed all three of Plaintiff’s claims.

To state a claim for violation of the ECPA, also known as the federal wiretap act, a plaintiff must show an intentional interception of the contents of an electronic communication using a device. Main Line, 2024 WL 2943760, at *3. The ECPA is a one-party consent statute, meaning that there is no liability under the statute for any party to the communication “unless such communication is intercepted for the purposes of committing a criminal or tortious act in violation of the Constitution or laws of the United States or any State.” Id. (quoting 18 U.S.C. § 2511(2)(d)); 18 U.S.C. § 2511(2)(d).

Plaintiff argued that he plausibly alleged Main Line’s criminal or tortious purpose because, under the Health Insurance Portability and Accountability Act (“HIPAA”), it is a federal crime for a health care provider to knowingly disclose PHI to another person. The district court rejected this argument, finding Plaintiff failed to allege sufficient facts to support an inference that Main Line disclosed his PHI. As the district court explained: “Plaintiff has not alleged which specific web pages he clicked on for his medical condition or his history of treatment with Main Line Health.” Id. at 3 (collecting cases).

In short, the district court concluded that Plaintiff’s failure to sufficiently allege PHI was reason alone for the Court to dismiss Plaintiff’s ECPA claim. Thus, the district court did not need to address other reasons that may have required dismissal of Plaintiff’s ECPA claims, such as (1) lack of criminal or tortious intent even if PHI had been sufficiently alleged, see, e.g., Katz-Lacabe v. Oracle Am., Inc., 668 F. Supp. 3d 928, 945 (N.D. Cal. 2023) (dismissing wiretap claim because defendant’s “purpose has plainly not been to perpetuate torts on millions of Internet users, but to make money”); Nienaber v. Overlake Hosp. Med. Ctr., 2024 WL 2133709, at *15 (W.D. Wash. May 13, 2024) (dismissing wiretap claim because “Plaintiff fails to plead a tortious or criminal use of the acquired communications, separate from the recording, interception, or transmission”); and (2) lack of any interception, see, e.g., Allen v. Novant Health, Inc., 2023 WL 5486240, at *4 (M.D.N.C. Aug. 24, 2023) (dismissing wiretap claim because an intended recipient cannot “intercept”); Glob. Pol’y Partners, LLC v. Yessin, 686 F. Supp. 2d 631, 638 (E.D. Va. 2009) (dismissing wiretap claim because the communication was sent as a different communication, not “intercepted”).

On Plaintiff’s remaining claims, the district court held that lack of sufficiently pled PHI defeated the causation element of Plaintiff’s negligence claim and defeated the element of Plaintiff’s invasion of privacy claim that any intrusion must have been “highly offensive to a reasonable person.” Main Line, 2024 WL 2943760, at *4.

Implications For Companies

The holding of Main Line is a win for adtech class action defendants and should be instructive for courts around the country. Other courts already have described the statutory damages imposed by ECPA as “draconian.” See, e.g., DIRECTTV, Inc. v. Beecher, 296 F. Supp. 2d 937, 943 (S.D. Ind. 2003). Main Line shows that, for adtech plaintiffs to plausibly plead claims for ECPA violations, negligence, or invasion of privacy, they at least need to identify what allegedly private information allegedly was disclosed via the adtech, in addition to surmounting additional hurdles under ECPA such as plausibly pleading criminal or tortious intent and an interception.

June 19, 2024 by Class Action Defense

California’s Governor Announces Deal On PAGA Reform

By Shireen Wetmore, Nick Baltaxe, Jenifer A. Riley, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: On June 18, 2024, Governor Gavin Newsom of California announced that business and labor groups have reached an agreement to reform California’s Private Attorneys General Act (“PAGA”). The bill is aimed at avoiding the inclusion of the initiative to repeal and replace the PAGA, which would otherwise be included on the November ballot. If the Legislature signs off on the bill, proponents of the ballot initiative have agreed to withdraw the referendum. It must be withdrawn by June 27, 2024. While the exact language of the bill is not yet public, Governor Newsom’s and interest group press releases hint that the changes will have a positive impact on employers and greatly impact PAGA litigation going forward. Given the nature of PAGA litigation faced by employers, these developments are of utmost importance to companies operating in California.

We’ve Got A Deal!

Hot off the presses! Governor Newsom just announced on June 18, 2024, that labor and business interests have inked a deal that would avoid the placement of the PAGA referendum on the November ballot. On November 5, 2024, the California voters would have had the opportunity to vote on the “California Employee Civil Action Law and PAGA Repeal Initiative,” which would have repealed the PAGA and replaced it with the “Fair Pay and Employer Accountability Act.” This new Act was aimed at addressing many of the criticisms of the PAGA and proposed changes including providing more power to the Labor & Workforce Development Agency (“LWDA”) for enforcement, allowing employees to recover all of the recovered penalties instead of only 25%, and eliminating attorneys’ fees entirely.

Instead, Cal Chambers and Labor representatives negotiated a compromise bill that would avoid the ballot initiative while providing much needed reforms to the PAGA. While the full language of the bill has not yet been released, nor has the referendum been officially withdrawn, the proposal purportedly includes:

Penalty Structure Reforms, including capped penalties for employers who quickly take steps to “cure” alleged violations; new, higher penalties on employers who act maliciously, fraudulently or oppressively in violating labor laws; and allocation of 35% (instead of 25%) of penalties to aggrieved employees.

Streamlined Litigation, including expansion of the Labor Code sections that may be cured; more “robust” cure processes “through the Labor and Workforce Development Agency (LWDA)” (aimed at protecting small businesses and potentially permitting employers to seek to cure in partnership with the LWDA to avoid litigation); and importantly, the new legislation is intended to codify a court’s ability to limit the scope of claims presented at trial and to ensure cases can be managed effectively.

Injunctive Relief and Standing Requirements, including allowing courts to compel businesses to implement changes in the workplace to remedy labor law violations and requiring the employee to personally experience the alleged violations brought in a claim.

If this last item is accurate, it will have a huge impact on defense strategies and place significant pressure on plaintiffs to demonstrate harm before bringing broad allegations against employers. Recently reported details not in the official press release indicate that there will still be some attorney fees available but that attorneys’ fees may be limited in some way.

The deadline to remove the referendum from the ballot is June 27, 2024, and the proponents have agreed to withdraw the measure once the legislation is passed. We anticipate the full release of the proposed legislation later this week. In the meantime, here is the Governor’s announcement.

Needless to say, the terms of the deal will have a major impact on litigation strategies in PAGA cases. Employers will want to look closely at the procedural posture of pending cases and consider revising litigation strategy in those matters as more details emerge.

What is the PAGA?

The Labor Code Private Attorneys General Act, or “PAGA,” was passed in 2004 and authorizes employees to “step into the shoes of the state” and file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations. Standing requirements were minimal and the statute was designed to allow employees (and their counsel) to enforce the Labor Code while funneling collected penalties to the State’s coffers. While the aggrieved employee had to follow certain notice requirements, including allowing the Labor and Workforce Development Agency (“LWDA”) an opportunity to investigate the claims, and a nominal opportunity to cure alleged violations, there was little guidance on the cure process and in practice the Labor Commissioner rarely investigated claims. Subsequent case law developed to confirm that class action standards would not apply to these representative actions. Combined with the low standing requirements and minimal notice standards, PAGA matters proliferated, threatening employers statewide with bet-the-company litigation alleging penalties far outstripping any alleged damages by millions upon millions of dollars. There was no requirement that an aggrieved employee even suffer all the violations alleged in their lawsuit.

The PAGA permits recovery of civil penalties on behalf of the plaintiff and “aggrieved employees” for violations of the Labor Code during a one-year lookback often on a per employee and/or per violation basis, plus attorneys’ fees. Seventy-five percent of recovered penalties are allocated to the State, while the aggrieved employees retain 25% of the award. Since the inception of PAGA in 2004, the number of notices filed with the LWDA has skyrocketed, and the number of PAGA lawsuits has increased exponentially in the last couple of years.

The Referendum

The PAGA has faced significant criticism since its implementation. Many noted that the lack of a “certification” process allowed employees to represent entire workforces with minimal protections against abuse. As a result, employers were often forced to settle for large sums of money simply to avoid the cost or inconvenience of company-wide or state-wide discovery and litigation, even in the absence of any evidence of unlawful conduct. Additionally, some argued that the PAGA primarily benefits attorneys at the expense of employees, as attorneys’ are allowed to take a portion of the employees’ already limited recovery for attorneys’ fees. While employers had a few successes in the courts, California courts have generally supported a broad interpretation of a plaintiff’s ability to pursue a PAGA action and struck down repeated attempts by employers to narrow the scope of these cases.

With these criticisms in mind, an initiative to repeal PAGA began to work its way towards the ballot, finally receiving enough support to be placed on the November 2024 ballot. Specifically, this ballot initiative, if passed, would have replaced the PAGA with the “Fair Pay and Employer Accountability Act.” This Act was meant to curtail many of the general criticisms levied against the PAGA, including providing more power to the Labor & Workforce Development Agency (“LWDA”) for enforcement, allowing employees to recover all of the recovered penalties instead of only 25%, and eliminating attorneys’ fees entirely.

However, opponents of the initiative argued that the PAGA was intended to provide a unique enforcement mechanism to protect employees and sought to avoid a vote that could eliminate this powerful tool. The ongoing negotiations between business and labor were aimed at finding a compromise that would avoid the inclusion of the initiative on the ballot, protecting employers from crushing litigation and protecting employees from Labor Code violations.

Implications For Employers

Change is in the air. While the latest proposal may take effect, more grounds will need to be covered. Stay tuned to these developments, which we will cover in future updates on our Blog.

What’s next?

The official language of the bill will be released by June 24, 2024. If passed, the ballot initiative will be withdrawn. The latest date to withdraw the initiative is June 27, 2024, so we anticipate the Legislature will move quickly. While the specifics are not yet known, the language of the bill could have a significant impact on PAGA actions going forward and litigation strategy for any pending actions as well. Stay tuned for a deep dive into the bill once the proposed language is released!

June 13, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 59: Key Developments In Antitrust Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partners Jerry Maatman and Sean McConnell with their discussion of key rulings and developments in the antitrust class action space, including a landmark settlement resolving litigation spurred by college athletes’ claims regarding the NCAA’s ban on monetization of name, image, and likeness.

Episode Transcript

Jerry Maatman: Welcome loyal blog listeners. Thank you for being here on our weekly podcast, the Class Action Weekly Wire. I’m excited to introduce Sean McConnell, my partner in our Philadelphia office, who chairs our antitrust defense group. Welcome, Sean!

Sean McConnell: Thank you, Jerry. I’m very happy to be part of the podcast today.

Jerry: Today we’re talking about key issues in antitrust class action litigation. We recently published, under your guidance, the Duane Morris Antitrust Class Action Review. Readers can get it for free off of our blog. Sean, in the antitrust class action world, what sorts of issues is the publication focusing on this year?

Sean: Well, we had one fairly large decision recently this year from the U.S. Supreme Court in Visa v. National ATM Council. In that case, the United States Supreme Court declined a petition for review submitted by both Visa and MasterCard that urged the Supreme Court to review a circuit split according to petitioners over the correct standard of review that courts should use when evaluating motions for class certification. Visa and MasterCard argued that the U.S. Court of Appeals for the DC. Circuit erred by only requiring plaintiffs to show that questions common to the class predominate and allowing the fact finder later in proceedings to address issues related to uninjured class members. So, by denying the petition for review, the U.S. Supreme Court has left that standard open for interpretation by the circuit courts.

Jerry: I think that’s a really significant decision, and certainly the D.C. Circuit’s opinion ought to be a required read for any counsel involved in antitrust class actions involving price fixing allegations. I think it underscores how important the standard for review is. To me, securing class certification is the Holy Grail on the plaintiff side of the V. They file the case, they certify it, they monetize it. If you take a deep dive into the D.C. Circuit’s ruling, what are some of the takeaways that you think are important?

Sean: Sure. So we’ll start with the kind of the basic facts, Jerry. The plaintiffs for the case where the petitioners involved ATM operators and the defendants, of course, were Visa and MasterCard. You know, global payment technology companies that operate networks that connect various financial institutions together, so that when a consumer is using an ATM they can access their bank, even if they’re using an ATM from another member bank that’s using that network. And the plaintiffs allege that the defendants used an ATM nondiscrimination rule, which kept fees the same across various networks, and prevented ATM operators from playing networks off of each other, and getting lower rates for their users and plaintiffs, allege that those rules allowed defendants to actually charge supracompetitive transaction fees, and to foreclose competition from those other competing ATM networks. The D.C. Circuit Court affirmed a district court ruling that granted class certification with respect to three different classes. So the first two classes, which were not at issue in the Supreme Court decision involved consumers, but the third class involved the ATM operators themselves. And according to defendants, the D.C. Circuit used a lower standard for class certification similar to one used by the Eighth and Ninth Circuits, whereas the Second, Third, Fifth, and Eleventh Circuits employ a more rigorous, careful consideration standard regarding plaintiffs’ burden to establish predominance. And by denying review, the issue remains unresolved in terms of Rule 23 class certification standards.

Jerry: You know, I think it’s much like buying real estate – location, location, location is everything. And in one circuit, a case might not get certified and the defendant would win yet in another circuit, depending on the difference in the standard plaintiffs might be successful. It sounds to me like this is going to end up in the U.S. Supreme Court someday. Were there other notable developments that you think are important to corporate counsel in the past 12 months on the antitrust space?

Sean: Yes, Jerry, there were a few very high profile settlements in the class action world this year focusing on antitrust class actions in both collegiate and professional sports. So, the first, which I’m sure many are familiar with, involves the college athlete, name, image, and likeness antitrust litigation. And shortly after the Ninth Circuit declined to decertify the certified class of former college athletes, who sought damages due to the NCAA’s ban on compensation, going back to 2016, the NCAA agreed to a settlement with the class in the amount of $2.77 billion. The class contains hundreds of thousands of former student athletes who claimed they were owed name, image, and likeness compensation during that period. The payments as part of the settlement will be spread out over 10 years, and the settlement will also establish a framework for revenue sharing between schools, conferences, and the athletes themselves. The settlement potentially ends one of the NCAA’s most significant legal battles, but still faces other antitrust class action lawsuits over player compensation and transfer rules and will likely face other issues related to how it will compensate athletes going forward. The NCAA, of course, has been lobbying Congress for many years for federal legislation on name, image, and likeness and for an antitrust exemption that would allow the schools, the conferences, and the NCAA itself to, you know, collectively bargain or arrange with student athletes compensation rules. But absent that ability to collectively bargain, or for the players to unionize, any such arrangement with the student athletes has been considered a violation of Section 1 of the Sherman Act. So it’s still yet to be decided what will happen going forward on how these schools, conferences, and the NCAA itself will be able to compensate student athletes going forward absent an antitrust exemption.

Jerry: It’s so interesting to me as a sports fan how there’s such a tie between an antitrust law and college athletics. Also, I’ve been involved on the professional side with the LIV and the PGA Tour. I know that you’re quite a thought leader in this space, and you’ve written quite a bit on MMA fighters. I know that that was an important development this year. Could you share a little bit of your thoughts on that case?

Sean: Sure, you know, one of the most significant kind of antitrust wage and compensation cases from the past year actually happened in the context of UFC fighters and mixed martial artists. The UFC’s parent company TKO Holding Inc. revealed recently that it will pay $335 million to settle a class action brought by MMA fighters who alleged that UFC engaged in anticompetitive conduct to suppress the fighters’ wages in the case Le v. Zuffa. The parties had engaged the mediation in February, and were set for trial for April. And you know, practitioners and thought leaders were excited for the case because it was really the first kind of monopsony antitrust class action. The prior rulings in the case are required reading for any corporate counsel handling antitrust class action litigation involving wage suppression issues. The plaintiffs allege that UFC engaged in a in a practice of using exclusive contracts as well as its overall market power with respect to mix mixed martial arts and a series of acquisitions consolidating the market and buying up competing promoters of MMA fights to suppress the wages of the fighters and their opportunities to and earn more endorsement, money, and other forms of compensation. And the class alleged damages of upwards of $1.6 billion. The parties will still, despite the settlement agreement in principle, will still need to present that settlement to the court for preliminary and final approval. Of course, pursuant to Rule 23, but the settlement itself really underscores the ability of workers to use the antitrust laws to tilt labor market dynamics in their favor and to increase workers bargaining leverage for get greater compensation and benefits going forward.

Jerry: Think it’s very interesting, too. It kind of foreshadows the Biden administration arm of the Department of Justice getting involved in both criminal civil wage suppression antitrust cases. So the remaining chapters of the book have a long way to go to be written. But thank you so much for Sean, for sharing your expertise and joining us. And thank you, loyal blog listeners, for tuning into this week’s Class Action Weekly Wire.

Sean: Thank you very much, Jerry.

June 12, 2024 by Class Action Defense

Ninth Circuit Rejects Challenge To A.B. 5, And Holds That Disparate Treatment Of Gig Workers Is Justified By California’s Interest In Curbing Independent Contractor Misclassification

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

Duane Morris Takeaways: On June 10, 2024, the Ninth Circuit issued its en banc opinion in Olson, et al. v. State of California, et al., Case No. 21-55757, 2024 WL 2887392 (9th Cir. June 10, 2024). The en banc panel affirmed the dismissal of the Plaintiffs’ lawsuit challenging the constitutionality of A.B. 5, which mandates application of the “ABC test” for independent contractor classification to workers in certain industries. The Ninth Circuit found no equal protection violation in applying the “ABC test” to certain gig workers, yet applying the easier-to-satisfy “Borello” test to other gig workers.

California employers in industries subject to A.B. 5 and its more rigorous “ABC test” for independent contractor classification should take heed of the Olson ruling.

Case Background

Postmates, an application-based goods delivery platform, Uber, and two individual workers for those companies sued the State of California and Attorney General of California seeking declaratory and injunctive relief based on the allegation that A.B. 5 violates the Equal Protection Clauses, the Due Process Clauses, and the Contract Clauses of the United States and California Constitutions. They sought a preliminary injunction to prevent enforcement of A.B. 5.

Enacted in 2018, A.B. 5 codified and expanded upon the California Supreme Court’s holding in Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), which held that the “ABC test” applies in determining the proper classification of workers as independent contractors or employees under California wage orders. Under A.B. 5, subject to specified exemptions, the “ABC test” applies beyond the wage orders to other labor and employment legislation, including workers’ compensation, unemployment insurance, sick and family leave, and disability insurance.

The “ABC test” is, as its name suggests, is comprised of three parts, with the burden being on the hiring entity to show, A: the worker is free from the control and direction of the hirer, B: the worker performs work outside the usual course of the hiring entity’s business, and C: the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity. This test is more challenging to meet that the traditional “Borello” test that was applied prior to A.B. 5’s enactment, which considers a larger number of factors, with the focus being the hiring entity’s right to control the manner and means of the work.

One statutory exemption from A.B. 5’s coverage applies to “referral agencies,” i.e., businesses that provide clients with referrals to service providers. However, A.B. 2257, enacted in 2019, modified this exemption to carve-out referral agencies, like Uber and Postmates, that provide delivery, courier, or transportation services. Consequently, categories of referral agencies are treated differently under the law, with referral agencies like Postmates and Uber subject to the “ABC test,” and referral agencies that provide other services, for example, Wag!, a dogwalking service, and TaskRabbit, which provides on-demand help with daily tasks, subject to the easier-to-meet “Borello” test. It was that differential treatment that Plaintiffs alleged was unconstitutional.

The district court denied Plaintiffs’ motion for preliminary injunctive relief, concluding that A.B. 5 was rationally related to a legitimate state interest. While Plaintiff’s’ appeal of that ruling was pending, California voters approved Proposition 22, a ballot initiative that classifies rideshare and deliver drivers as independent contractors, notwithstanding A.B. 5. Thereafter, the district court dismissed the lawsuit, and Plaintiffs’ appealed that ruling too.

A three-judge panel of the Ninth Circuit reversed, in part, concluding that the district court erred by dismissing the Equal Protection claims. However, the Ninth Circuit then granted rehearing en banc.

The Ninth Circuit’s En Banc Opinion

The Ninth Circuit first noted, as some readers may be wondering, that Proposition 22 did not moot the appeal because Postmates and Uber were still facing a number of claims for alleged violations of A.B. 5 that predated Proposition 22’s passage.

The Ninth Circuit then addressed the Equal Protection claim. It explained that, even if it were true that the application-based business models of Postmates, Uber, Wag!, and TaskRabbit were similar, there were rational reasons for applying a different worker classification test to workers that provide delivery, courier, or transportation services. Such disparate treatment was rational because Postmates and Uber were seemingly perceived by the legislature as “substantial contributors” to the ills that A.B. 5 sought to remedy, including worker misclassification and “erosion of the middle class,” and were pioneers in the on-demand-app-based industry whose business models others might try to replicate. Id. at p. 21-22. The Ninth Circuit further emphasized that, for a “referral agency” like Wag! or TaskRabbit to be exempt from A.B. 5, it needs to satisfy multiple requirements, so the availability of the referral agency exemption remains “limited.” Id. at 23.

The Ninth Circuit further opined that, even though A.B. 5 contains many exemptions, it is entirely rational for the ABC test to apply in some contexts, and for the Borello test to apply in others, because the legislature supposedly wanted the ABC test to apply in industries where worker misclassification was historically problematic (and not because certain industries successfully pushed through legislative exemption).

Implications Of The Decision

We anticipate U.S. Supreme Court review will be sought.

The Olson opinion deals a blow to efforts to challenge A.B. 5’s enforcement. California employers in industries subject to A.B. 5 must satisfy the more rigorous ABC test to establish they have properly classified workers as independent contractors, whereas employers in industries not subject to A.B. 5 bear a lesser burden under the Borello test. That differential treatment is, in the Ninth Circuit’s view, constitutionally sound.