class certification – Class Action Defense

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

November 30, 2022November 30, 2022 by Class Action Defense

Just In Time For The Holidays: New York Federal Court Gifts The Denial Of Plaintiffs’ Rule 23 Class Certification Motion In FDNY Bias Lawsuit

By Gerald L. Maatman, Jr., Katelynn Gray and Elizabeth M. Lacombe

Duane Morris Takeaways – In Local 3621 Of The EMS Officers Union, et al. v. City Of New York, Case No. 18 Civ. 4476, 2022 U.S. Dist. LEXIS 212218 (S.D.N.Y. Nov. 22, 2022), the City successfully defeated a Rule 23 motion for class certification brought by a group of EMS officers and Unions who alleged that the promotional process to leadership positions resulted in disparate and discriminatory promotional practices in violation of federal, state, and local law. The ruling is a primer for employers on how to dismantle employment discrimination class claims.

Background Of The Case

Plaintiffs Renae Mascol, Luis Rodriguez, Local 3621, EMS Officers Union, DC-37, AFSCME and AFL-CIO (collectively, “Plaintiffs”) brought a class action on behalf of its members and all other similarly-situated individuals against Defendants, the City of New York, the New York City Fire Department, and the Department of Citywide Administrative Services (collectively, the “City”), alleging Defendants’ subjective promotional policies and practices led to the denial of promotions to qualified applicants based on their race, sex, gender and/or disability and/or circumstances that led to the applicant taking a leave of absence.

Plaintiffs sought class certification pursuant to Rule 23(a) and (b)(2) of the Federal Rules of Civil Procedure on behalf of three classes, including: (1) EMS officers who are non-white, female, have received a reasonable accommodation, or have taken a leave of absence due to a disability or pursuant to FDNY time and leave policies; (2) non-white and/or female EMS officers; and (3) EMS officers who have received a reasonable accommodation or taken a leave of absence because of a disability and/or have taken a leave of absence pursuant to FDNY time and leave policies.

In support of their motion, Plaintiffs submitted an expert report from a forensic labor economist who concluded there was “statistically significant evidence of discriminatory promotional disparities” and that the statistical evidence showed that the common promotional policy “resulted in disparities that commonly disadvantaged the class.” Id. at *7. Plaintiffs also submitted anecdotal evidence in the form of declarations from EMS officers testifying to their experiences with the City’s promotional processes.

Defendants opposed these theories and submitted rebuttal evidence with their own expert report. They argued that Plaintiffs’ expert’s analysis was flawed, largely because it was based in part on data that was irrelevant to the analysis and in other instances because it failed to consider other, relevant data. Moreover, Defendants’ expert concluded that the relevant data led to a determination that, when evaluating promotions over the same time period, white men were actually less likely to be promoted than similarly-situated non-white officers; men were less likely to be promoted than women; and whites were less likely to be promoted than non-whites.

The Court’s Ruling Denying Class Certification

In denying Plaintiffs’ motion for class certification, Judge Lewis J. Liman of the U.S. District Court for the Southern District of New York conducted an extensive review of the promotional process at issue, as well as the expert reports and anecdotal evidence offered by the parties. Ultimately, the Court concluded that Plaintiffs had failed to sufficiently demonstrate the element of commonality under Rule 23(a)(2).

With respect to Plaintiffs’ disparate impact claims, the Court explained that Plaintiffs cannot simply point to the promotional process generally as the basis for the disparate impact, but must identify the “specific” employment practices allegedly responsible for the at-issue disparities. In this case, there were several distinct steps in the promotional process, which combined subjective criteria with standardized eligibility criteria. Significantly, an applicant could fail to be promoted at any one of these steps. As such, the Court opined that in order to state a disparate impact claim based on a failure to promote, Plaintiffs were required to identify which specific employment practice was responsible for the statistical disparities.

The Court reasoned that Plaintiffs’ expert’s analysis did not help them win the day, where it merely showed a racial and gender disparity with respect to the individuals holding leadership positions but failed to identify what aspect of the promotional process, if any, resulted in those disparities. Moreover, the Court found that Plaintiffs’ anecdotal evidence did more harm than good, underscoring the individualized nature of each alleged incident of discrimination where each declaration identified a different form of discrimination and a different course of conduct. The Court ultimately determined that Plaintiffs had failed to show that Defendants had used any of the cited employment practices to discriminate against the proposed class or that such practices had a discriminatory impact, holding that “the question of which of these specific employment practices has a discriminatory impact on the applicant is largely an individualized inquiry.” Id. at *25.

Plaintiffs’ disparate treatment claim fared no better for similar reasons, as the Court again noted that the statistical evidence from Plaintiffs’ expert did not offer “significant proof of a pattern or practice of unlawful discrimination” and failed to account for non-discriminatory explanations for any disparities. Plaintiffs’ primary evidence, that of anecdotal evidence from declarants, was similarly insufficient to salvage their claims because it raised “individual rather than common questions.” Id. at *26.

Implications For Employers

The ruling in Local 3621 Of The EMS Officers Union emphasizes the value of crafting and implementing detailed and thoughtful employment policies and procedures that utilize both objective and subjective measures in an effort to reduce or eliminate the influence of potential bias (implicit or otherwise) when evaluating employees for promotional opportunities. Moreover, ensuring that those policies and procedures are reduced to writing, provided to those employees who might have occasion to evaluate others for promotional opportunities, and implemented appropriately will provide a strong defense to discrimination claims and may, as it did here, serve to dismantle a potential class claim based on generalized allegations of process-based discriminatory conduct.

November 28, 2022 by Gerald L. Maatman, Jr.

Ohio State Wins More Than Just Games, As The Ohio Court of Appeals Reverses Class Certification In Favor Of The University

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

Duane Morris Synopsis – In Smith v. Ohio State University, 2022-Ohio-4101 (Ohio App. Nov. 17, 2022), The Ohio State University successfully appealed an Ohio Court of Claim’s (“trial court”) Order granting class certification in a lawsuit brought by a former undergraduate student. The former student alleged that when the university only offered online classes due to COVID-19, it breached its contract by keeping all the tuition payments from her and other students without giving them the robust in-person experience promised when they initially paid their tuition bills. The Ohio Court of Appeals held that while the trial court has broad discretion in granting class certification, it failed to determine proof of injury and economic damages relative to the former student and potential class members. In crafting a class certification defense strategy, especially in a breach of contract case where the injury and damages typically are in play, employers should focus on the lawsuit basics when opposing class certification, i.e., demanding that plaintiffs show causation and injury in fact.

Case Background

Plaintiff, a former college student, filed a lawsuit alleging that Defendant, The Ohio State University (“OSU”), breached its contract and received unjust enrichment in Spring 2020 by failing to partially refund students their tuition and fees after transitioning from their robust, in-person education to “subpar” online education during COVID-19. Id. at 4-5.

In June 2021, Plaintiff moved for class certification. Id. at 5. After briefing and oral argument, the trial court granted Plaintiff’s motion and certified a class consisting of all undergraduate students enrolled in classes at Defendant’s Columbus campus during the Spring 2020 semester. Notably, the trial court found that the class suffered the same injury, i.e., losing the benefit of in-person classes and access to the campus. Id. at 9-10.

In appealing the trial court’s decision, Defendant raised several arguments for why the trial court’s decision was incorrect. Significantly, Defendant’s main, and ultimately successful, arguments focused on the trial court’s failure to conduct the “rigorous analysis” required by Ohio Civil Rule 23 (like Federal Rule of Civil Procedure 23) in determining whether Plaintiff had satisfied the prerequisites for class certification. Id. at 10-11.

The Court Of Appeals’ Ruling Reversing Class Action Certification

The Ohio Court of Appeals agreed with Defendant and reversed the trial court’s order granting class certification for three reasons.

First, the Court of Appeals found that the Plaintiff failed to present sufficient evidence of an economic injury. Id. at 17-18. Instead, the trial court simply assumed that a “benefit” was lost based only on the fact Defendant closed its campus and switched to remote classes and services in response to the pandemic. Id. at 18.

Second, the Court of Appeals found that the trial court failed to consider Defendant’s arguments and evidence contesting proof of injury. Id. at 18-19. Defendant submitted an expert report that included evidence that students paid the same for in-person and online learning and that the in-person teaching modality carried the possibility of substantial remote instruction even in a normal semester. Id. at 19. Meanwhile, Plaintiff submitted no expert testimony regarding how and or whether other students were injured in this case. Id. Indeed, Plaintiff’s expert’s report excluded any survey questions or consideration of market preferences during an emergency such as the pandemic that forced the closure. Id.

Third, the Court of Appeals found that the trial court’s analysis of Plaintiff’s unjust enrichment claim was merely folded into the same generalized injury analysis without any individualized consideration. Id. at 19-20.

In holding that the trial abused its discretion, the Court of Appeals reasoned that, “[t]he trial court, in assuming an injury from the fact of closure and termination of in-person classes, did not assess these complicated and difficult considerations, particularly as they relate to whether [Plaintiff] presented any common evidence — or even a method to possibly determine — that class members suffered an economic injury considering the effect of the pandemic.” Id. at 20. Further, the Court of Appeals opined that “having accepted the closure of campus and temporary termination of in-person classes and services as an injury per se, and having failed to consider how the pandemic affects class certification in this case at all, the trial court did not undertake a rigorous analysis with respect to the number and nature of individualized inquires that might be necessary to establish liability with respect to both tuition and fees.” Id.

Implications

In class actions asserting breach of contract claims, it is not uncommon for plaintiffs to seek class certification before developing their case through affidavits from other individuals and expert testimony. Employers can use this to their advantage by attacking causation and damages. This strategy may not only hinder a plaintiff from notifying potentially thousands of other putative class members of the claims, but also potentially saving money through limited discovery.

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.