Certification of Alleged Misclassified Bakery Distributors Denied due to Predominance of Individualized Issues

Class certification would have been granted in Soares v. Flowers Foods, Inc., 3:15-cv-04918 (N.D. Cal., June 28, 2017), but for the allegedly misclassified independent contractors’ decision to deliver, or not deliver, the goods themselves.

In Soares, the named plaintiffs sought to represent a class of truck drivers who were paid to distribute baked goods manufactured by Flowers Foods.  Plaintiffs filed suit in October 2015, alleging that Flowers Foods misclassified them as independent contractors and failed to reimburse them for business expenses, failed to provide meal or paid rest periods, and made improper deductions from their compensation, among other things. The distributors all signed a Distributor Agreement that purported to establish an independent contractor relationship and set forth details about how the baked goods must be distributed.  The distributors claimed that they were actually employees, not independent contractors, and asserted violations of California wage and hour laws.

Magistrate Judge Corley ruled that the four requirements to certify a class pursuant to Fed. R. Civ. P. (“FRCP”) 23(a) were met: (1) typicality, (2) commonality, (3) numerosity, and (4) adequate representation.

However, Judge Corley denied class certification pursuant to FRCP 23(b)(3) because in the substantive independent contractor/employee misclassification analysis, the individual issues clearly predominated over the common issues. In California, the common law test to distinguish between employees and independent contractors focuses on the purported employer’s “right to control the manner and means of accomplishing the result desired,” S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal.3d 341, 350 (1989).  Thus, Judge Corley found the “right to control” was subject to common proof under the Distributor Agreement.

However, S.G. Borello also set forth nine secondary factors to determine an employment relationship.  One of the nine factors was so “riddled with individualized inquiries,” that it predominated over the common issues, namely, “whether the individual performing services is engaged in a distinct occupation or business from the alleged employer.”  Judge Corley evaluated the class members’ business operations, such as whether they contracted with other companies besides the alleged employer, or hired sub-drivers to do the work, to determine whether the distributors were engaged in distinct work from each other or the alleged employer.  The Court found a wide variety of business arrangements among the distributors, in whether they also provided delivery services for other companies, or hired sub-drivers to perform their routes.  For example, Judge Corley stated there would need to be “mini-trials” into the distributors’ recollections of how often they personally serviced their routes, and when and how often, if at all, they provided distribution services for other companies. These factual questions of whether the distributors were engaged in the same, or distinct business from the alleged employer, were ultimately too individualized for common resolution, thus defeating class certification.

New York Appeals Court Rejects Enforceability of Class Action Waivers – But Is This Ruling Short-Lived?

In an issue of first impression in the state of New York, last week the New York Supreme Court, Appellate Division (the state’s intermediate appellate court) weighed in on the enforceability of arbitration provisions that preclude employees from pursuing claims on a class, collective or representative basis. The appeals court concluded that such provisions are in violation of the National Labor Relations Act and therefore are unenforceable. Gold v. New York Life Insurance Co., 2017 N. Y. App. LEXIS 5627 (N.Y. App. Div. July 18, 2017).  In so holding, the court of appeals sided with the federal U.S. Courts of Appeal for the Sixth, Seventh and Ninth Circuits. NLRB v. Alternative Entertainment, Inc., 858 F.3d 393 (6th Cir. 2017); Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016); Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016).

However, as the appeals court noted, an equal number of federal U.S. Courts of Appeal have held that such class/collective action waiver provisions do not violate the NLRA and instead are consistent with the purposes of the Federal Arbitration Act (FAA). Cellular Sales of Missouri, LLC v. NLRB, 824 F.3d 772 (8th Cir. 2016); D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013); Murphy Oil Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015); Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2nd Cir. 2013).

Will this state appellate ruling have any long-lasting practical effect? That depends, for as the appeals court noted, “[i]n all likelihood, the United States Supreme Court will resolve this circuit split in due course.”  In fact, the Supreme Court has agreed to take up the matter, granting certioriari in a consolidated manner in Murphy Oil, Lewis and Morris.  The potential outcome of the appeal became even more interesting when, just over a month ago, the Office of the Solicitor General, on behalf of the Trump administration, reversed its Obama-era position and filed an amicus brief supporting the enforceability of class/collective action waiver provisions.  Notably, just last week the Supreme Court set oral argument for October 2, 2017, the first day of the Court’s upcoming session.  Thus, no later than the spring of 2018, we expect this issue to be resolved.

Murphy Oil Case Scheduled for Oral Argument

In January, the United States Supreme Court granted certiorari in National Labor Relations Board v. Murphy Oil USA, Case No. 16-307, Epic Systems Corp. v. Lewis, Case No. 16-285 and Ernst & Young LLP v. Morris, Case No. 16-300, consolidating them for argument.  The U.S. Supreme Court is expected to resolve the circuit split over whether an arbitration agreement that requires an employee to waive his or her right to bring or participate in a class action violates the National Labor Relations Act.  The Court’s decision will have major implications on class and collective actions going forward.  Jackson Lewis represents Murphy Oil in the case.

We recently posted that the Department of Justice (DOJ) filed an amicus curiae brief in support of the employers, taking a position opposed to the NLRB.

The consolidated cases were just scheduled for oral argument before the Supreme Court on October 2, 2017.  Although DOJ already filed its brief, the NLRB has not.  We will continue to monitor for the Board’s filing.

Jackson Lewis Class Action Trends Report Summer 2017 Now Available

Below is a link to the latest issue of the Jackson Lewis Class Action Trends Report.  This report is published on a quarterly basis by our firm’s class action practice group in conjunction with Wolters Kluwer.  We hope you will find this issue to be informative and insightful.  Using our considerable experience in defending hundreds of class actions over the last few years alone, we have generated another comprehensive, informative and timely piece with practice insights and tactical tips to consider concerning employment law class actions.

Jackson-Lewis_Whitepaper_Summer 2017

Department of Justice Changes Stance on Class Action Waivers in Favor of Employers

In a fascinating turn of events, the United States Department of Justice (“DOJ”) switched sides in a critical pending Supreme Court case last Friday. The three consolidated cases—National Labor Relations Board v. Murphy Oil USA, Case No. 16-307, Epic Systems Corp. v. Lewis, Case No. 16-285 and Ernst & Young LLP v. Morris, Case No. 16-300—have been closely watched as the Supreme Court is expected to resolve a growing circuit split over whether an employment contract that requires an employee to waive his or her right to bring or participate in a class action violates the National Labor Relations Act (“NLRA”).  The NLRA protects employees’ rights to engage in concerted activity concerning wages, hour and working conditions.  Employers are increasingly relying on such waivers, which are an effective way to avoid costly class action litigation.  To read a more in-depth analysis of this pending case, click here. Jackson Lewis represents Murphy Oil before the Supreme Court.

Under the Obama Administration, the government had defended the NLRB’s position that class action waivers violated the NLRA and were unenforceable. Now, under President Trump, the DOJ has reversed course.  In an amicus curiae brief filed on Friday, DOJ expressly acknowledged that it had “previously filed a petition…on behalf of the NLRB, defending the Board’s view” that class action waivers were unenforceable, but stated that “[a]fter the change in administration, the [DOJ] reconsidered the issue and has reached the opposite conclusion.”

Of course the change does not guarantee that the Supreme Court will agree with DOJ. It does, however, appear to make that outcome more likely – especially given the recent appointment of Justice Gorsuch to the Court, breaking an ideological stalemate. To read more on Justice Gorsuch’s judicial philosophy, click here.

Stay tuned for more on this important issue affecting the workplace law landscape!

 

Supreme Court: Plaintiffs May Not Voluntarily Dismiss Case to Appeal Class Certification Decision

Plaintiffs may not voluntarily dismiss their class action claims upon receiving an adverse class certification decision and subsequently invoke 28 U.S.C. § 1291, the general rule that appeals can be taken only from a final judgment, to appeal the decision as a matter of right, the U.S. Supreme Court has ruled. Microsoft Corporation v. Baker, No. 15-457 (June 12, 2017).

Background
In this case, the plaintiffs were denied Rule 23(f) permission to appeal the district court’s refusal to grant class certification. Rather than pursuing their individual claims to final judgment on the merits, the plaintiffs stipulated to a voluntary dismissal of their claims “with prejudice,” but reserved the right to revive their claims if the Court of Appeals reversed the district court’s certification denial. Microsoft stipulated to the dismissal, but maintained that respondents would have “no right to appeal” the order striking the class allegations after thus dismissing their claims.  The U.S. Court of Appeals for the Ninth Circuit, in San Francisco, relying on Berger v. Home Depot USA, Inc., 741 F.3d 1061 (9th Cir. 2014), accepted the plaintiffs’ appeal and reversed the district court’s decision rejecting class-based adjudication. The Ninth Circuit stated that “in the absence of a settlement, a stipulation that leads to a dismissal with prejudice does not destroy the adversity in that judgment necessary to support an appeal” of a class certification denial. Therefore, the Ninth Circuit, after reviewing the district court’s decision, ultimately held that the lower court had abused its discretion in striking the plaintiffs’ class allegations. (For a full summary of the procedural history or an analysis of the Supreme Court oral argument, please see our article, Supreme Court Hears Argument on Appellate Jurisdiction after Denial of Class Certification.)

Question is Jurisdiction
The Supreme Court agreed to review the case to resolve a circuit conflict over the following question: Do federal courts of appeals have jurisdiction under § 1291 and Article III of the Constitution to review an order denying class certification (or, as here, an order striking class allegations) after the named plaintiffs have voluntarily dismissed their claims with prejudice?

Going Too Far
Justice Ruth Bader Ginsburg, writing for a court majority (that included Justices Anthony Kennedy, Stephen Breyer, Sonia Sotomayor, and Elena Kagan), stated that the plaintiffs’ voluntary-dismissal tactic “invites protracted litigation and piecemeal appeals.” Stressing that the final judgment rule (now codified in § 1291) preserves the proper balance between trial and appellate courts, minimizes harassment and delay that would result from repeated interlocutory appeals, and promotes the efficient administration of justice, the majority found the plaintiffs’ attempt to secure appeals as of right from adverse class-certification orders stretched § 1291 too far.

The Court concluded that because the device subverted the final-judgment rule and the process Congress has established for refining that rule and for determining when nonfinal orders may be immediately appealed, the majority of the Court found the plaintiffs’ tactic did not give rise to a “final decision” under § 1291.
While the plaintiffs maintained that their position promoted efficiency (because after dismissal with prejudice, the case is over if the plaintiff loses on appeal) the Court disagreed. It found the plaintiffs overlooked the prospect that plaintiffs with weak merits claims will readily assume the risk in order to leverage class certification for a hefty settlement.

Additionally, the majority was concerned that if plaintiffs’ voluntary dismissal tactic was allowed, Rule 23(f)’s careful calibration — as well as Congress’ intent behind the rule — would be “severely undermined.” Further, the plaintiffs’ theory would permit only plaintiffs, and never defendants, to force an immediate appeal of an adverse certification ruling.

Accordingly, the majority did not find it appropriate to disturb the rulemaking process carefully selected by Congress to govern in this context. The judgment of the Ninth Circuit was therefore reversed, and the case remanded for further proceedings consistent with the Court’s opinion.

Concurrence
The concurrence, led by Justice Clarence Thomas (joined by Chief Justice John Roberts and Justice Samuel Alito) agreed with the majority that the Court of Appeals lacked jurisdiction over the plaintiffs’ appeal, but would have grounded that conclusion in Article III of the Constitution, instead of 28 U.S.C. § 1291.

Justice Thomas reiterated that the judicial power of the United States extends only to “cases” and “controversies,” which limits the jurisdiction of the federal courts to issues in which the parties maintain an “actual” and “concrete” interest. Here, he stated, the plaintiffs’ appeal from their voluntary dismissal did not satisfy this jurisdictional requirement. Once the plaintiffs asked the district court to dismiss their claims, they consented to the judgment against them and disavowed any right to relief from Microsoft. The parties, thus, were no longer adverse to each other on any claims and the Court of Appeals could not “affect the[ir] rights” in any legally cognizable manner.
***

While this decision is not surprising, a different outcome would have had severe consequences for companies defending against class actions. Microsoft issued a statement praising the decision, commenting, “This case was about following procedural rules that Congress established and that work for everyone. No party should be able to do an end-run around these rules and have rights that the other party doesn’t get. We’re grateful to the Supreme Court for its time and consideration of this issue.”
For more information or to discuss the potential implications of this ruling, please contact the Jackson Lewis attorney with whom you regularly work.

UNANIMOUS SUPREME COURT DECISION IN FAVOR OF “CHURCH PLAN” DEFENDANTS

Today, the Supreme Court handed a long-awaited victory to religiously affiliated organizations operating pension plans under ERISA’s “church plan” exemption. In a surprising 8-0 ruling, the Court agreed with the Defendants that the exemption applies to pension plans maintained by church affiliated organizations such as healthcare facilities, even if the plans were not established by a church. Justice Kagan authored the opinion, with a concurrence by Justice Sotomayor.  Justice Gorsuch, who was appointed after oral argument, did not participate in the decision.  The opinion reverses decisions in favor of Plaintiffs from three Appellate Circuits – the Third, Seventh, and Ninth.

For those of you not familiar with the issue, ERISA originally defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”   Then, in 1980, Congress amended the exemption by adding the provision at the heart of the three consolidated cases.  The new section provides: “[a] plan established and maintained . . . by a church . . . includes a plan maintained by [a principal-purpose] organization.”  The parties agreed that under those provisions, a “church plan” need not be maintained by a church, but they differed as to whether a plan must still have been established by a church to qualify for the church-plan exemption.

The Defendants, Advocate Health Care Network, St. Peter’s Healthcare System, and Dignity Health, asserted that their pension plans are “church plans” exempt from ERISA’s strict reporting, disclosure, and funding obligations.  Although each of the plans at issue was established by the hospitals and not a church, each one of the hospitals had received confirmation from the IRS over the years that their plans were, in fact, exempt from ERISA, under the church plan exemption because of the entities’ religious affiliation.

The Plaintiffs, participants in the pension plans, argued that the church plan exemption was not intended to exempt pension plans of large healthcare systems where the plans were not established by a church.

Justice Kagan’s analysis began by acknowledging that the term “church plan” initially meant only “a plan established and maintained . . . by a church.” But the 1980 amendment, she found, expanded the original definition to “include” another type of plan—“a plan maintained by [a principal-purpose] organization.’”  She concluded that the use of the word “include” was not literal, “but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition.”

Thus, according to Justice Kagan, because Congress included within the category of plans “established and maintained by a church” plans “maintained by” principal-purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements. Although the DOL, PBGC, and IRS had all filed a brief supporting the Defendants’ position, Justice Kagan mentioned only briefly the agencies long-standing interpretation of the exemption, and did not engage in any “Chevron-Deference” analysis.  Some observers may find this surprising, because comments during oral argument suggested that some of the Justices harbored concerns regarding the hundreds of similar plans that had relied on administrative interpretations for thirty years.

In analyzing the legislative history, Justice Kagan aptly observed, that “[t]he legislative materials in these cases consist almost wholly of excerpts from committee hearings and scattered floor statements by individual lawmakers—the sort of stuff we have called `among the least illuminating forms of legislative history.’” Nonetheless, after reviewing the history, and as she forecasted by her questioning at oral argument (see our March 29, 2017 Blog, Supreme Court Hears “Church Plan” Erisa Class Action Cases), Justice Kagan rejected Plaintiffs’ argument that the legislative history demonstrated an intent to keep the “establishment” requirement.  To do so “would have prevented some plans run by pension boards—the very entities the employees say Congress most wanted to benefit—from qualifying as `church plans’…. No argument the employees have offered here supports that goal-defying (much less that text-defying) statutory construction.”

In sum, Justice Kagan held that “[u]nder the best reading of the statute, a plan maintained by a principal-purpose organization therefore qualifies as a `church plan,’ regardless of who established it.”

Justice Sotomayor filed a concurrence joining the Court’s opinion because she was “persuaded that it correctly interprets the relevant statutory text.” Although she agreed with the Court’s reading of the exemption, she was “troubled by the outcome of these cases.”  Her concern was based on the notion that “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.”  This concern appears to be based on the view that some church-affiliated organizations effectively operate as secular, for-profit businesses.

 Takeaways:

 Although this decision is positive news for church plans, it may not be the end of the church plan litigation.  Numerous, large settlements have occurred before and since the Supreme Court took up the consolidated cases, and we expect some will still settle, albeit likely for lower numbers.

In addition, Plaintiffs could still push forward with the cases on the grounds that the entities maintaining the church plans are not “principal-purpose organizations” controlled by “a church.”  If you maintain a church plan, reach out to us with any concerns about the impact of, and your ability to rely on, this decision.

Timing Is Everything: District Court in New York Approves CAFA Removal Two Years After Case Filing

In a somewhat unusual ruling, a New York federal court denied an unpaid intern’s attempt to remand a putative wage-hour class action against Oscar de la Renta to state court even though the case was removed to federal court under the Class Action Fairness Act (“CAFA”) approximately two years after the case was filed.

CAFA

Under CAFA, federal courts have jurisdiction over class actions if the defendant establishes “a reasonable probability” that the class has more than 100 members, the parties are minimally diverse, and the amount in controversy exceeds $5 million. Specific, enumerated exceptions to CAFA include the “local controversy” and the “home state” exceptions.  Generally, under both exceptions, the federal court cannot assert jurisdiction over class actions that involve “local” parties and controversies (i.e., involving parties and controversies from the forum state).

Removal After Two Years Considered Timely

Principle to the Court’s finding was a rejection of Plaintiff’s argument concerning timeliness.  Plaintiff argued that notice of removal was untimely since it was filed more than 30 days after the employer could have determined that the amount in controversy exceeded $5 million “with a reasonable amount of intelligence” by reviewing its own records.

When Oscar de la Renta ultimately conducted its own internal investigation, including a review of it s documents to determine the number of individuals who interned during the statutory period, it learned the proposed class contained approximately 600 individuals and the $5 million amount in controversy threshold was satisfied.  As a result, it sought removal.

Plaintiff argued the employer needed to review its own records to determine that the CAFA requirements were met, and that failing to do so for two years was unreasonable.

The Court disagreed.  The Complaint stated the potential class exceeded 40 individuals, and the Court found this alleged number of proposed class members would not yield an amount in controversy approaching $5 million.  Instead, with just 40 alleged class members, the amount in controversy would be less than $500,000.  The Court held that CAFA does not require a defendant to look beyond the pleadings and related documents to determine if the requirements are met, and failure to conduct an investigation earlier provided no basis for concluding that removal was untimely.  The Court also found that the CAFA exceptions did not apply as the Plaintiff failed to prove their application absent anecdotal arguments.

Takeaway

While we would not go so far as to say that “it’s never too late” to apply CAFA, this ruling shows that, even years after filing, the CAFA requirements can be met for the first time, and removal to federal court may be an option. As a result, defendants should always take a fresh look at each stage of the litigation to see if the requirements have been met in the first instance.  But once the CAFA requirements are satisfied, remove quickly.  Failure to do so may result in the removal application being denied.  After all, “time makes fools of us all.”

UPDATE ON UNIVERSITY SECTION 403(b) CASES: INCONSISTENT RULINGS

As a result of rulings on motions to dismiss within a day of each other (May 10 and 11, 2017, respectively), Emory University and Duke University must continue to defend claims challenging aspects of their Section 403(b) retirement plans in plaintiffs’ proposed class actions: Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP; and Clark v. Duke Univ., M.D.N.C., No. 1:16-cv-01044.  As we have previously reported, these cases are two out of a series of twelve proposed class actions filed against the retirement plans of 12 prominent American universities, challenging various aspects of plan management, including excessive fees and fiduciary prudence.

In granting in part and denying in part the Emory defendants’ motion to dismiss, Judge Charles Parnell found that the plaintiffs could move forward with a claim that choosing retail-class shares (with higher expense ratios) over institutional-class shares is imprudent.  The plaintiffs allege that Emory could have but did not use its bargaining power to negotiate lower cost fees, and that no reasonable fiduciary would “choose or be complacent with being provided retail-class shares over institutional-class shares.”  (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

A novel theory proceeding in both the Duke and Emory cases is the claim that the defendants were imprudent to hire multiple record keepers, where consolidating services with one record keeper could have resulted in lower fees for participants.

Plaintiffs in both cases also raised the novel theory that the defendants acted imprudently by offering too many investment options—111 at Emory, and more than 400 at Duke. Judge Catherine Eagles, who issued the ruling in the Duke case, allowed this claim to go forward.  In contrast, Judge Charles Parnell disagreed with the Emory plaintiffs.  In his ruling, he reasoned that “[h]aving too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.”  (Order, Doc. 61, p. 7, Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP (May 10, 2017)).

In Duke, the court dismissed as time-barred plaintiffs’ claims that Duke imprudently “locked” itself into offering TIAA-CREF products and recordkeeping, because the actual act of “locking” into the arrangement with TIAA-CREF occurred more than six years before the complaint was filed.  Judge Eagles disagreed with the plaintiffs’ argument that their claim is based on Duke “maintaining” the arrangement with TIAA-CREF, as though the failure to monitor and remove CREF stock from the plan were a continuing violation.

In contrast, the “locked in” claim is moving forward in Emory.  Emory made the same arguments that the “locked in” claim is time-barred; however, Judge Parnell was persuaded by plaintiffs’ argument that they challenge not just the initial arrangement, but the maintenance of the arrangement and failure to monitor and remove CREF stock within the six years preceding the complaint.  However, the Emory plaintiffs may only recover damages resulting from being “locked in” to TIAA-CREF that occurred within six years before the filing of the complaint.

We’ll continue to post updates as decisions in the other University cases are handed down. In the meantime, if you have any questions about these cases or issues, please contact René Thorne (thorner@jacksonlewis.com), one of the firm’s senior ERISA class action litigators.

ALERT: Senate confirms Acosta as Secretary of Labor

Today the U.S. Senate approved Alexander Acosta as Secretary of the U.S. Department of Labor by a vote of 60-38.  Click here to read more background information on Acosta.  Acosta’s nomination was previously approved by the U.S. Senate Health, Education, Labor and Pensions Committee by a 12-11 party line vote in March.

Chief among the issues awaiting Acosta is what position the DOL will take with respect to the new overtime rule announced by the Obama administration in 2016, which more than doubled the minimum salary threshold for the FLSA’s white collar exemptions to $47,476 annually.  After a District Court in Texas issued a nationwide injunction in December blocking the rule from taking effect, the case was appealed.  The U.S. Court of Appeals for the Fifth Circuit recently granted the government’s request for additional time to file its final reply brief.   Stay tuned.

 

 

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