Source: http://blog.abbeyspanier.com/category/class-action-2/
Timestamp: 2019-04-26 02:17:11+00:00

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A recent Pennsylvania State Court order granting a defendant’s motion to compel the production of one of the plaintiff’s Facebook log-in credentials found that social media accounts–even if set to private–are fair game in discovery.
In Largent v. Reed, Case No. 2009-1823 (C.P. Franklin Nov. 8, 2011), a personal injury case, the plaintiffs alleged serious and permanent physical and mental injuries, pain and suffering resulting from a motorcycle-automobile accident.
During the deposition of one of the plaintiff’s, Jennifer Largent, the defendant learned that Ms. Largent had a Facebook profile and that she used it regularly. However, she declined to disclose any information about the account and plaintiffs’ counsel advised that it would not voluntarily turn over such information.
Months prior, Ms. Largent’s profile was public, meaning that anyone with an account could read or view her profile, posts and photographs, but she changed her privacy settings to private.
In support of its motion to compel, the defendant claimed that some of Ms. Largent’s posts that had been publicly accessible contradict plaintiffs’ claims and, specifically, that Ms. Largent posted several photographs that show her enjoying life with her family and a status update about going to the gym.
Plaintiff argued that the discovery sought by the defendant was irrelevant, that disclosure of her Facebook account access information would cause unreasonable embarrassment and annoyance, and that such disclosure may violate certain privacy laws.
The ruling is well-reasoned and consistent with existing case law, suggesting that this issue is likely to be widely resolved in favor of disclosure.
As such, we believe plaintiffs’ counsel should make discussing their clients’ social media accounts a routine part of their intake procedures depending on their practice areas and that litigants should be aware that setting a Facebook page to “private” does not necessarily mean it will be out of bounds in Court.
A recent ruling in the United States District Court for the District of Maryland reaffirms a defining characteristic of the collective action.
Potential claimants’ legal rights are preserved unless and until they affirmatively agree to “opt in” to the litigation. They may elect to participate, file an individual lawsuit or do nothing at all.
With class actions, which proceed under Federal Rule of Civil Procedure 23, the situation is reversed. Potential claimants must affirmatively “opt out” of a certified action otherwise their legal rights will be resolved in the litigation.
As such, inaction by potential claimants may result in very different consequences depending on whether the claims are being resolved under the FLSA or Rule 23.
In Vetter v. GEICO General Insurance Company, et al., No. 8:13-cv-00642 (D. Md. Sept. 25, 2013), the court was confronted with a second motion for conditional certification and judicial notice under the FLSA for a group of GEICO Security Investigators who the plaintiffs claimed had been misclassified as exempt and, thus, not owed overtime pay.
Defendants claimed that the plaintiffs were precluded from seeking collective treatment in the latter case because they had previously received notice in a prior case and elected not to participate.
However, the plaintiffs correctly argued that the law is clear that the opt-in provision of FLSA provides for no legal effect on those parties who choose not to participate. Despite the identical nature of the two proceedings, the plaintiffs also argued that a second judicial notice was still appropriate because the prior notice was obviously ineffective to notify potential plaintiffs of their right to opt in to the new case.
The court sided with the plaintiffs and granted the motion for conditional certification and judicial notice.
In a recent ruling of the U.S. Supreme Court, Oxford Health Plans LLC v. Sutter, petitioner-defendant Oxford was forced to proceed with class arbitration with respondent-plaintiff John Ivan Sutter.
This case, like other recent rulings of the Supreme Court, has an unusual procedural history, which will limit its applicability to future cases. However, it does provide an important reminder for all parties of the great compromise arbitration represents.
Sutter, a pediatrician, entered into a contract with Oxford, a health insurance company, to provide medical care to members of Oxford’s network and Oxford agreed to pay for those services at prescribed rates. Several years later, Sutter filed suit against Oxford in New Jersey Superior Court on behalf of himself and a proposed class of other New Jersey physicians under contract with Oxford, alleging that Oxford had failed to make full and prompt payments to the doctors, in violation of their agreements and various state laws.
Oxford moved to compel arbitration of Sutter’s claims, relying on an arbitration provision in their contract. The state court granted Oxford’s motion, thus referring the suit to arbitration.
In what must be a regrettable decision on the part of Oxford, the parties agreed that the arbitrator should decide whether their contract authorized class arbitration and the arbitrator determined that it did.
As Justice Alito explained in his concurrence, the arbitrator improperly inferred an implicit agreement to authorize class-action arbitration from the fact of the parties’ agreement to arbitrate and that it is far from clear that absent class members will be bound by the arbitrator’s ultimate resolution of the dispute.
After all, it is well-established that arbitration is a matter of consent, not coercion, and the absent members of the plaintiff class have not submitted themselves to this arbitrator in any way.
Class arbitrations that are vulnerable to such collateral attack allow absent class members to unfairly claim the benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one. However, because Oxford consented to the arbitrator’s authority by conceding that he should decide in the first instance whether the contract authorizes class arbitration, this argument was not available to it.
It is unlikely that other defendants will make the same mistake in light of this ruling, which will limit its impact going forward.
The greater lesson is in the arbitrator’s erroneous analysis of the parties’ contract. Justice Kagan, who wrote for the majority, explained that the potential for such mistakes are the price of agreeing to arbitration. Where an arbitrator’s decision concerns the construction of a contract, it holds, however good, bad or ugly.
In this rare instance, the misfortune of an arbitrator’s grave error fell on a defendant with the wherewithal to appeal the decision to the highest court in our nation, albeit unsuccessfully. More often, however, the misfortune will fall upon plaintiffs who are inexperienced with the arbitration process and whose individual damages do not warrant appeal.
Last year we posted several blog posts that covered the wave of class action lawsuits relating to the United States Treasury’s Home Affordable Modification Program (“HAMP”), including the Fletcher litigation against IndyMac Mortgage Servicers, FSB (a division of OneWest Bank, FSB) where Abbey Spanier is lead counsel. See some of our posts located here, here and here.
HAMP was created by the federal government to combat the national foreclosure crisis. The program was specifically designed to allow eligible homeowners who are about to default on their mortgages to save their homes by modifying the terms of their loans. Despite the government’s noble intentions, HAMP has been criticized and viewed by many people as unsuccessful. One of the many problems with the HAMP was that mortgage service providers often unjustifiably denied requests for permanent modifications by losing paperwork, including documents showing borrowers financial hardship.
A few weeks ago, the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae and Freddie Mac will offer a new, simplified loan modification initiative to minimize losses and to help troubled borrowers avoid foreclosure and stay in their homes. Under the new initiative, many borrowers who are at least 90 days delinquent will be sent an offer that includes a Trial Period Plan specifying the dollar amount of their new mortgage payment based upon a fixed interest rate, extending the payment terms to 40 years, and providing principal forbearance for certain underwater borrowers. Only those borrowers with loans more than 12 months old with a mark-to market loan-to-value ratio greater than 80 percent and who have not had two or more previous loan modifications will be solicited for participation in the program.
The new streamlined loan modification program is only available to those homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac. The program will commence on July 1, 2013 and will expire on August 1, 2015. If you have questions about the new initiative, you can find some helpful answers provided by the FHFA here.
In Menga v. Clark Dodge & Company, Inc., et al., Index No. 650081/2011, the Supreme Court of the State of New York recently denied a bid to compel arbitration of two stockbrokers’ putative class claims alleging failure to pay overtime and impermissible wage deductions, despite the presence of an arbitration provision in their employment agreements.
Deric Menga and Wildred Ignace (the “Plaintiffs”) are stockbrokers for Clark Dodge & Company (the “Defendants”), a brokerage and wealth management services provider. In their pleading, Plaintiffs allege that the Defendants (1) failed to pay overtime in violation of 12 NYCRR § 142-2.2; (2) took impermissible wage deductions contrary to N.Y. Labor Law § 193; (3) took illegal pay deductions and deductions from wages in violation of N.Y. Labor Law § 198-b; and (4) failed to pay wages and commissions on a timely basis contrary to N.Y. Labor Law § 191.
Defendants’ argument is an attractive one, given the boon employers received under the United States Supreme Court decision AT&T Mobility v. Concepcion, 563 U.S. ___ (2011), which, under limited circumstances, permits employers to force employees to resolve their disputes in arbitration on an individual basis. However, Concepcion concerned the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the “FAA”). FINRA regulations are not nearly so antagonistic to class proceedings.
It is true, as the Defendants argued, that FINRA Rule 13204(d) prohibits arbitration of class action claims and specifically prohibits enforcement of “any arbitration agreement against a member of a… putative class action with respect to any claim that is the subject of the… class action…” However, that prohibition applies only in an extremely limited set of circumstances: (1) when class certification has been denied; (2) when an existing class has been decertified; or (3) when a member of the certified or putative class has been excluded from the action by either the court or the member’s own determination.
Because none of those conditions had been met with respect to the Plaintiffs, the court denied the Defendants’ attempt to compel arbitration.
Are you considering filing a lawsuit against your present or former employer but have questions about whether an arbitration provision in your employment agreement or some other agreement with your employer requires you to resolve your dispute in arbitration? If so, please tell us your story.
Have you ever received unsolicited advertising in the form of a text message? These forms of solicitations may be illegal under the Telephone Consumer Protection Act (“TCPA”) which restricts telephone solicitations and the use of automated telephone equipment. The TCPA also limits the use of automatic dialing systems, artificial or prerecorded voice messages, SMS text messages and fax machines.
In a recent decision in Agne v. Papa John’s International, Inc., et al., No. C10-1139-JCC, 2012 WL 5473719, at *1 (W.D. Wash. Nov. 9, 2012), the court certified a national class of all persons in the United States and a sub-class of all persons in Washington State who were sent text messages advertising Papa John’s pizza by Defendant OnTime4U who were sent such messages by Defendant OnTime4U. The Court found that because Plaintiff’s allegation was not merely that all class members suffered a violation of the TCPA, but rather that all class members were sent substantially similar unsolicited text messages by the same defendants using the same automatic technology, commonality is satisfied. 2012 WL 5473719, at *8.
Defendant OnTime4U, a marketing company, offered to increase the profits of Papa John’s restaurants by sending text message advertisements to their customers. Certain Papa John’s franchisees provided OnTime4U with lists of telephone numbers of customers obtained from Papa John’s proprietary database, the PROFIT system. The text messages that were sent solicited consumers to purchase Papa John’s products and provided the customer with a telephone number corresponding to a particular Papa John’s restaurant along with a promotional code. The Plaintiff, who never gave any Papa John’s entity express consent to send her text messages, received three message sent by OnTime4U. 2012 WL 5473719, at *9.
Papa John’s, relying on the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), argued that determining whether Papa John’s was sufficiently involved in the market decisions of its different franchises in order to establish liability would require individual inquiries that undermine commonality. The court rejected Papa John’s comparison of Plaintiff’s claim to the allegation in Dukes that Wal-Mart “national” caused or encouraged the local store managers to make discriminatory employment decisions. The Papa John’s court cited to the Supreme Court’s finding in Dukes that “the only corporate policy that the plaintiffs’ evidence convincingly establishes is Wal-Mart’s “policy’ of allowing discretion by local supervisors over employment matters.” To the contrary, in Papa John’s, the Plaintiff came forward with affirmative evidence that Papa John’s had at least a hand in franchisees’ decisions to enlist OnTime4U to send text messages to their customers. For example, Plaintiff submitted email messages from Papa John’s franchise business directors to multiple franchisees encouraging those franchisees to commission text messages from OnTime4U. Thus, the Court found that the Plaintiff alleged “far more” than an amorphous corporate culture. 2012 WL 5473719, at *8-9.
The Court also rejected Papa John’s challenges that there were three areas where individualized inquiries would overwhelm common issues: (1) consent; (2) questions regarding who actually received messages; and (3) inquiries into Papa John’s liability for various franchisees’ text campaigns. 2012 WL 5473719, at *11. The court found that Defendants’ consent defense could be resolved in one stroke because resolving the legal question of whether a customer’s prior purchase of pizza can be construed as express consent to receive text message advertisements is a common question that will predominate over any individual inquiries. 2012 WL 5473719, at *8. Moreover, since Papa John’s is in the best position to come forward with evidence of individual consent, it will not be precluded from presenting admissible evidence of individual consent if and when individual class members are permitted to present claims. 2012 WL 5473719, at *11. Further, the court concluded that Papa John’s assertion that resolving the common questions regarding its involvement in the campaign will require individual examination of “many interactions” between Papa John’s employees and its franchisees belies its position that it played little or no role in franchisees’ marketing decisions. Finally, the court rejected the legal foundation for Papa John’s argument that individualized issues regarding whether recipients were charged for the text message advertisements will overwhelm common questions because the TCPA does not require plaintiffs to show that they were charged for text message advertisement sent to their cellular phones. Therefore, the Court found that the Plaintiffs had satisfied the predominance inquiry. The Court also found that the Plaintiffs had satisfied the remaining requirements of Rule 23 of the Federal Rules of Civil Procedure.
Have you received unsolicited advertisements via text message? If so, please tell us your story.
As we previously explained in our May blog post, which covered the N.Y.S. Department of Financial Services Probe Into Force-Placed Insurance, in order to obtain a mortgage, lending banks usually require homeowners to maintain insurance on their property. If a homeowner fails to maintain his/her required insurance, pursuant to the terms of the mortgage agreement, the bank is entitled to forcibly place insurance on the property (i.e. purchase insurance for the home and then charge the homeowner/borrower the full cost of the premium). Numerous lawsuits have been brought by homeowners against different banks alleging that the forced placed insurance practices are unfair because their lender: (i) purchased exorbitant insurance coverage that costs far greater than the homeowner’s previous coverage; (ii) received commissions or kick-backs from the insurer for the forced-placed coverage; (iii) billed homeowners for additional coverage that was not required under their mortgage agreement; and (iv) allowed the homeowner’s existing coverage to lapse without providing notice that it would purchase force-placed insurance.
Last month, U.S. District Judge Jan E. Dubois of the Eastern District of Pennsylvania denied in part defendants HSBC Mortgage Corporation and HSBC Mortgage Service, Inc.’s motion to dismiss a class action lawsuit involving force-placed insurance. A copy of the decision can be found here.
In the HSBC litigation, a married couple living in Pennsylvania brought a class action lawsuit against the defendants alleging that the premiums on their force-placed insurance policies were unreasonably high and that defendants profited unlawfully by accepting kickbacks from insurers and purchasing unnecessary insurance policies. Plaintiffs asserted claims for breach of contract, unjust enrichment, and violations of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.
Judge Noel Hillman in the U.S. District Court of New Jersey denied the defendants’ motion to dismiss in a consumer class action suit involving “Skinnygirl Margarita” beverages. Plaintiffs alleged that the Skinnygirl Margarita drinks were marketed as “all natural” but actually contained a chemical preservative, sodium benzoate. See Stewart v. Beam Global Spirits and Wine, Inc., No. 11-5149 (D.N.J. June 29, 2012). The false and misleading marketing campaign occurred in a number of states, including New York and New Jersey. See id. at 4. Plaintiffs point out that the chemical preservative when mixed with citric acid can become a potential carcinogen. See id.
Plaintiffs brought claims under New Jersey’s Consumer Fraud Act, in addition to negligent misrepresentation, breach of express and implied warranties, and unjust enrichment. See id. at 5. The defendants moved to dismiss the unjust enrichment claim.
In New Jersey, a claim for unjust enrichment requires the plaintiff show that the “defendant received a benefit and that retention of that benefit without payment would be unjust.” VRG Corp. v. GKN Reality Corp., 641 A.2d 519, 526 (N.J. 1994). And because unjust enrichment imposes quasi-contractual liability, New Jersey requires “some direct relationship between the parties.” Callano v. Oakwood Park Homes Corp., 219 A.2d 332, 335 (N.J. 1966).
In Stewart, the court distinguished from a New Jersey Supreme Court case in order to explain New Jersey’s rejection of a bright line rule for the “some direct relationship” element. In Callano, an individual contracted to purchase a house from a developer. While the house was being built, the soon-to-be homeowner contracted with a plant nursery to landscape the property. But the individual never paid the nursery, and he died before he purchased the property. Callano, 219 A.2d at 334. Thereafter, the developer sold the property to another individual, which included the newly planted shrubbery. Id. The developer had no knowledge of the non-payment by the deceased individual. Id. The plant nursery sued the developer for unjust enrichment. In finding no unjust enrichment, the Callano court explained that there were “no dealings with the developer.” Id. at 335. The developer was entirely unaware of any agreement between the deceased and the nursery. See id. Moreover, the nursery still had a claim against the decedent’s estate. Importantly, the court emphasized that the developer did not engage in any fraudulent activity. See id.
After a review of other New Jersey Supreme Court precedent, the court in Stewart held that the “‘some direct relationship’ element of an unjust enrichment claim does not . . . preclude a consumer from ever brining an unjust enrichment claim against a manufacturer simply because the consumer purchased the product . . . from a third-party retailer and not directly from the manufacturer.” Stewart, No. 11-5149, Slip Op. at 18–19. The court viewed the “some direct relationship” element not as requiring privity but more broadly as a means to limit recover from a defendant “whose involvement is to far removed or too attenuated from the facts” surrounding the plaintiff’s claims. See id. at 19. The court pointed out that this manufacturer was not an innocent third-party, according to the plaintiffs’ pleadings. See id. The manufacturer engaged in a misleading and fraudulent national marketing campaign consisting of billboards, signs, and print and Internet advertisements. See id. at 20. In concluding, Judge Hillman stated, “This court is of the view that it would be inequitable to suggest that the [defendants] can insulate themselves from liability on an unjust enrichment claim simply by asserting that retail sales by liquor stores cut off any relationship between the consumers and the manufacturer. This is particularly true in this case where plaintiffs cannot seek a remedy directly from the liquor stores based on misrepresentations allegedly made by the [manufacturer defendants] themselves as the to the ‘all-natural’ nature of Skinny Girl Margarita.” Id. at 20–21.
As the court in Stewart points out, a few other courts have reached the same conclusion. Unjust enrichment claims will survive a motion to dismiss where, in addition to showing the other elements of the claim, some benefit is conferred on the defendant, which may be indirectly conferred on the defendant, e.g., where a product was bought through a retailer after it was previously purchased from a manufacturer.
On May 30, 2012, the Honorable John R. Padova of the United States District Court for the Eastern District of Pennsylvania denied defendant Saxon Mortgage Services, Inc.’s motion to dismiss plaintiff’s class action claims for breach of contract, promissory estoppel and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Laws. Cave v. Saxon Mortg. Servs., 2012 U.S. Dist. LEXIS 75276 (E.D. Pa. May 30, 2012).
In Cave, plaintiffs brought breach of contract and other claims arising out of Saxon’s failure to permanently modify home mortgage loans. The plaintiffs alleged, among other things, that Saxon breached its contract by not offering them a permanent modification at the end of a three month trial period. Alternatively, plaintiffs’ complaint also alleged that even if plaintiffs were not qualified for a permanent modification, Saxon breached its contract because it did not send them a timely written denial explaining why they were not qualified. In this case, it took Saxon over a year after plaintiffs applied for a HAMP modification to inform them that they did not qualify.
We conclude that Plaintiffs have plausibly alleged that Saxon breached its implied duty [of good faith and fair dealing] to perform its TPP obligations in a diligent fashion by not informing them that they did not qualify for a permanent modification until over a year after Plaintiffs applied for a permanent modification, and months after actually determining that Plaintiffs did not qualify. Indeed, as the TPP contains no express provision stating when Saxon had to send a written denial, the implied covenant of good faith and fair dealing may ultimately be the only aspect of the TPP that Saxon breached.
There are still arenas where common sense prevails in the changing world of litigation concerned with the enforcement of contractual arbitration provisions.
The beginning for all discussions on this subject is the axiom that arbitration “is a matter of contract and a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.” Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960).
However clear that principal may appear, if the underlying contract is silent or ambiguous with respect to the particular matter in dispute, it is not at all obvious how it should be applied.
In addressing such disputes over the years, the courts have delineated two “interpretive rules” to bridge the gap in the contract. Howsam v. Dean Witter Reynolds, 537 U.S. 79, 83 (U.S. 2002).
Where the dispute arises out of “any doubts concerning the scope of arbitrable issues [it] should be resolved in favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (U.S. 1983).
However, the presumption is reversed where the dispute arises out of the question of who should decide arbitrability. First Options v. Kaplan, 514 U.S. 938, 944-945 (U.S. 1995) (“In this manner the law treats silence or ambiguity about the question ‘who (primarily) should decide arbitrability’ differently from the way it treats silence or ambiguity about the question ‘whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement.'”).
The [former] question arises when the parties have a contract that provides for arbitration of some issues. In such circumstances, the parties likely gave at least some thought to the scope of arbitration. And, given the law’s permissive policies in respect to arbitration, one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. On the other hand, the [latter] question — the “who (primarily) should decide arbitrability” question — is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers.
Id. The question of arbitrability is simply, in the view of the Supreme Court of the United States, too “arcane” an issue to assume the parties have considered it.
For that very sensible reason, in the absence of “clear and unmistakable” evidence of the parties’ intent to the contrary, the courts decide questions of arbitrability. Id. at 944 (“Courts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so.”) (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986)).
Although the liberal federal policy favoring arbitration has been elevated above state law and perhaps even the mandates of other federal statutes, important limitations remain. It is important for litigators and, in particular, class action litigators, to keep the presumptions described above in mind.
A class-action suit against Facebook is underway in the District Court for the Northern District of California. On February 21, 2012, Magistrate Judge Paul S. Grewal denied a motion for a protective order to prevent the deposition of a plaintiff who is seeking to be dismissed from the case. Fraley v. Facebook, No. C 11–1726 LHK (PSG), 2012 WL 555071 (N.D. CA Feb. 21, 2012) (Fraley II).
The case concerns the social networking site’s use of members’ names and photos in advertisements as part of its “Sponsored Stories” feature. Plaintiffs claimed that Facebook misappropriated their images in violation of California’s Right of Publicity Statute (CRPS), Unfair Competition Law (UCL), and the doctrine of unjust enrichment, by using their names and photos in paid advertisements without their consent. See Fraley v. Facebook, No. 11–CV–01726–LHK, 2011 WL 6303898 (N.D. CA Dec. 16, 2011) (Fraley I).
On December 16, 2011, District Judge Lucy Koh granted in part, and denied in part, Facebook’s motion to dismiss the plaintiffs’ claims. Fraley I., 2011 WL 6303898. In upholding the claims under the CRPS and UCL, Judge Koh wrote that the plaintiffs “articulated a coherent theory of how they were economically injured by the misappropriation of their names, photographs, and likenesses for use in paid commercial endorsements.” Id. at 14.
In doing so, Judge Koh distinguished the current case from Cohen v. Facebook. No. 10-cv-5282-RS, 2011 WL 3100565 (N.D. Cal. June 28, 2011). In Cohen, the plaintiffs were unable to show how they had suffered damages when Facebook used their names and images to promote its “Friend Finder” service. However, in the current case, Judge Koh found that the plaintiffs “made specific allegations that their personal endorsement of Facebook advertisers’ products are worth two to three times more than traditional advertisements on Facebook.” Fraley I, 2011 WL 6303898, at 29. Their evidence included statements from Facebook executives extolling the effectiveness of using members’ images to promote products to friends who would value their endorsement. Id. at 14–15.
As to the claim for unjust enrichment, California courts have recently held that unjust enrichment is not a stand-alone cause of action in the state. See, e.g., Hill v. Roll Int’l Corp., 195 Cal. App. 4th 1295, 1307 (2011) (“Unjust enrichment is not a cause of action, just a restitution claim.”). Therefore, Judge Koh granted Facebook’s motion to dismiss on the third cause of action. Fraley I, 2011 WL 6303898, at 36.
Then, in February 2012, two of the named plaintiffs in the case, Angel Fraley and Paul Wang, sought to withdraw as class representatives. Fraley based her motion “on privacy concerns and potential embarrassment” from details that could emerge during the proceedings. Fraly II, 2012 WL 555071, at 1. In addition, Fraley asked for a protective order barring Facebook from conducting her deposition. Id.
Judge Grewal ruled on February 21 that Fraley failed to show good cause for issuing the protective order, holding that her “legitimate desire to protect her privacy does not outweigh the relevance or propriety of [a deposition].” Id. at 3. Moreover, “by agreeing to be a class representative, she understood that she would have to participate in discovery and provide testimony.” Id. Following Judge Grewal’s ruling, Judge Koh granted Fraley and Wang’s motion for dismissal on March 13, leaving three plaintiffs remaining as class representatives. See Fraley v. Facebook, No. 11–CV–01726–LHK, 2012 WL 893152 (N.D. CA Mar. 13, 2012).
The plaintiffs’ brief in support of a motion for class-certification was submitted in early March. Keep checking this blog for updates on the case, as they develop.
In our July 2011 blog post, we reported about Judge William J. Hibbler’s decision to deny IndyMac Mortgage Servicers, FSB’s (a division of OneWest Bank, FSB) motion to dismiss a class action lawsuit related to its failure to comply with guidelines established by the Home Affordable Modification Program (“HAMP”). See Fletcher v. OneWest Bank, FSB, 2011 U.S. Dist. LEXIS 72562 (N.D. Ill. June 30, 2011)(order denying OneWest’s motion to dismiss plaintiff’s class action claims for breach of contract, promissory estoppel and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”)). Abbey Spanier is lead counsel in the Fletcher litigation.
On July 15, 2011, OneWest filed a motion to stay the Fletcher litigation pending the U.S. Court of Appeal for the Seventh Circuit’s decision in Wigod v. Wells Fargo Bank, N.A., Appeal No. 11-1423 (7th Cir. Feb. 22, 2011). In Wigod, Judge Manning dismissed the plaintiff’s claims stemming from defendant Wells Fargo’s alleged non-compliance with HAMP. Like the Fletcher litigation, plaintiff Wigod’s class action complaint alleged violations of Illinois law under common-law contract and tort theories and under the ICFA. The district court’s reason for dismissing Wigod’s complaint was primarily that Wigod alleged Wells Fargo had violated HAMP, a federal statute which it determined did not allow for a private right of action. See Wigod v. Wells Fargo Bank, N.A., No. 10 CV 2348, 2011 WL 250501 (N.D. Ill. Jan. 25, 2011). After the Wigod appeal, OneWest argued that a stay was warranted in the Fletcher litigation because the issues raised were virtually identical to those pending before the Seventh Circuit Court of Appeals. During a status hearing with the Court, plaintiff consented to OneWest’s motion for a stay so long as the status quo was to be maintained.
On March 7, 2012, the Seventh Circuit issued its opinion in Wigod v. Wells Fargo Bank, N.A., No. 11-1423, 2012 U.S. App. LEXIS 4714 (7th Cir. March 7, 2012), a copy of which is located here. Relying in part on Judge Hibbler’s June 30, 2011 opinion denying OneWest’s motion to dismiss, the Seventh Circuit reversed the judgment of the Wigod district court on breach of contract, promissory estoppel, fraudulent misrepresentation and ICFA claims. In its decision, the Seventh Circuit determined that plaintiff Wigod’s state law claims are not preempted or otherwise barred by federal law.
In light of the Seventh Circuit’s decision reversing the district court’s decision in Wigod, the Court has lifted the stay in the Fletcher litigation and the case will now proceed. Abbey Spanier intends to aggressively litigate the Fletcher action and seek compensation for homeowners who have been harmed by OneWest’s deceptive practices. If you have been harmed by OneWest’s improper practices, please tell us your story here.
In related news, on March 26, 2012, Judge Hibbler unexpectedly passed away at the age of 65. Abbey Spanier passes along its sincere condolences to Judge Hibbler’s family, friends and colleagues at the Northern District.
The mainstream distribution of music through digital media has been around for over a decade now, yet many questions about the relative rights of record companies and artists in this medium remain unsettled. One indicator of the uncertainty brought on by digital distribution in the music industry is the class action suit brought by Rob Zombie (of Rob Zombie and White Zombie fame), David Coverdale (of Whitesnake), Dave Mason (of Traffic and other groups), and the estate of singer Rick James against Universal Music Group in James ex rel. James Ambrose Johnson, Jr. 1999 Trust v. UMG Recordings.
Contractually, UMG and other labels set aside dramatically different royalty percentages for the “sale” as compared to the “licensing” of sound recordings. For a “sale,” artists are typically paid between 10 and 20 percent of gross revenues as royalties. The label’s greater percentage reflects the costs associated with manufacturing, shipping, and selling recordings at retail locations. However, for a “licensed” use, the royalty rates are far more favorable to the artists; typically edging closer to a 50-50 split of revenue.
Obviously, this means a lot of money rides on whether or not a particular use is a “sale” or a “license.” The plaintiffs allege that the digital distribution of their sound recordings via digital music services (such as iTunes or Amazon), as “mastertones” (cell phone ringtones, waiting tones, etc.), and through other services were “licenses” of their recordings, not “sales.” After all, the labels’ greater share of royalties associated with “sales” was designed to offset the costs associated with the production, distribution, and sale of physical media like CDs, DVDs, and tapes. In the case of revenues accumulated through digital distribution, there are minimal costs borne by the label in offering the recording to the consumer.
The plaintiffs’ claims rely on the Ninth Circuit case F.B.T. Productions, LLC v. Aftermath Records, decided in September 2010. In F.B.T. Productions, the Ninth Circuit held that agreements that allow “distributors, cellular phone carriers, and other third-parties to. . . produce and sell permanent downloads and mastertones [of sound recordings] in exchange for periodic payments based on volume of downloads. . . [are] ‘licenses.’” In this way, the Ninth Circuit indicated that distribution of physical products were “sales” of copies (with the associated costs for “packaging” and “shipping” and “breakage”), while any digital downloads, cell phone ringtones or waiting tones, or other similar services were to be construed as “licenses.” Despite strenuous objections from music industry groups, the Supreme Court denied certiorari.
This presents a problem for UMG and other music labels, who had previously defined digitally distributed recordings as “sales” and collected their 80-90% “sale” royalties on everything from sound recording downloads through iTunes and Rhapsody to ringtone distribution through Verizon, Sprint, AT&T, and T-Mobile.
Under F.B.T. Productions, these uses are now considered to be “licenses,” and as a result record labels might well owe artists substantial sums of money. In F.B.T Productions, the amount in question was somewhere between $17-20 million in unpaid royalties for a single litigant: the production company who discovered the rapper Eminem. If F.B.T Production’s ruling were to be enforced on a large scale, conservative calculations indicate that labels could owe artists as much as $2.15 billion in royalties from iTunes sales alone!
The artists who stand to gain the most from this suit are those older “catalog artists” whose music sells consistently and whose contracts were “form” contracts drafted before the advent of digital distribution. While most modern record contracts include provisions that expressly deal with digital distribution royalties, there are a huge number of contracts with no such provision, as the idea of “digital distribution” on a large scale has only been around for just over a decade.
In surviving UMG’s motions to dismiss and transfer in James ex rel. James Ambrose Johnson, Jr. 1999 Trust v. UMG Recordings this past November, the plaintiffs have won the first major engagement in the dance of motions. The music industry is watching this case intently. It’s only fitting, then, that such a “rock star” of a case was brought by real rock stars!
Joshua Druckerman is a second-year law student at New York Law School and a member of its Law Review.
On February 1, 2012, The United States Court of Appeals for the Second Circuit reversed, for the third time, the District Court’s decision granting American Express’ (“Amex”) motion to compel arbitration pursuant to the Federal Arbitration Act (“FAA”).
The plaintiffs included merchants who were required to pay above-market-rate fees in order to accept payments from customers using American Express cards. The plaintiffs sued in the Southern District of New York, alleging that the fees resulted from a “tying arrangement,” an antitrust violation pursuant to the Sherman Act. In re Am. Express Merchs. Litig., No. 03 CV 9592, 2006 WL 662341 (S.D.N.Y. 2006).
The District Court concluded that plaintiffs’ substantive antitrust claims, as well as the question of whether or not the class action waivers were enforceable, were subject to arbitration and dismissed plaintiffs’ claims.
In In re American Express Merchants Litigation (“Amex I”) the Court of Appeals held that the class action waiver in Amex’s Card Acceptance Agreement was a matter for the court to decide and not subject to arbitration and also held that the class action waiver in the agreement was unenforceable “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” 554 F. 3d. 300 (2d Cir. 2009).
In Amex I the Court of Appeals ruled that the class action waiver could not be enforced because to do so would grant Amex “de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.” Citing Green Tree Financial Corp.-Alabama v. Randolph 531 U. S. 79 (2000).
Amex appealed to the Supreme Court.
Undeterred, Amex appealed again following the Supreme Court’s decision in AT&T Mobility v. Concepcion.
In Concepcion, the Supreme Court held that the Federal Arbitration Act preempted state laws that prevented defendants from enforcing most class-action waivers found in arbitration clauses. Amex argued that Concepcion overruled the Second Circuit’s prior holding and that the plaintiffs were not entitled to class-action status under the Card Acceptance Agreement.
Finding that each “class action waiver must be considered on its merits” is a good decision for plaintiffs; however, we believe that this is not the final word in this case and that the Court of Appeals’ decision will likely be reviewed by the Supreme Court.
The Fifth Circuit Court of Appeals upheld a decision that found that a mandatory arbitration clause used by 24 Hour Fitness was illusory because it allowed the company to make changes to the policy retroactively. The decision in Carey v. 24 Hour Fitness is a victory for employees who have been subjected to unfair arbitration agreements by their employers.
The plaintiff in Carey was a former sales representative who was employed by the fitness chain in Texas. He filed a class-action suit against the company in the Southern District of Texas on behalf of employees who were allegedly denied overtime pay in violation of the Fair Labor Standards Act.
24 Hour Fitness moved to stay the action and compel arbitration per a provision in the company’s Employee Handbook. The provision stated that “24 Hour Fitness has the right to revise, delete, and add to the” handbook by giving employees written notice. Judge Nancy Atlas rejected the company’s motion, holding that the agreement was unenforceable under state law.
On appeal, the Fifth Circuit affirmed the lower court’s decision. Citing the Supreme Court’s holding in CompuCredit v. Greenwood, the Fifth Circuit acknowledged that federal courts were expected to favor arbitration agreements under the Federal Arbitration Act (FAA). However, as the Supreme Court remarked in AT&T v. Concepcion, federal courts must still look to state contract law in order to determine whether an arbitration agreement existed.
The Fifth Circuit held that under Texas law arbitration agreements are invalid unless they specify that unilateral changes made by an employer will not have a retroactive effect against the employee. Because the 24 Hour Fitness agreement lacked such a restriction, the plaintiff was not bound by the agreement and could pursue his claims in district court.
The Court distinguished its holding in Carey and Morrison from its decision in In re Halliburton, where an arbitration agreement was found to be enforceable even though it allowed for unilateral revisions. In that case, the agreement included a “savings clause” that provided that such revisions would not apply to disputes that were already underway.
The Fifth Circuit’s decision in Carey offers a silver lining for plaintiffs after the Supreme Court’s decisions in Concepcion and CompuCredit. Carey demonstrates how plaintiffs can successfully utilize state laws to defeat unfair arbitration agreements that might otherwise stand under the FAA. The California Court of Appeal reached a similar outcome in Sanchez v. Valencia Holding in November 2011, which found that the FAA did not apply to an arbitration agreement that was unconscionable under state law.
As we have discussed several times in this blog, since the Supreme Court’s decision last June in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), defendants in lawsuits throughout the country have asked the courts to de-certify previously certified class actions. Most recently, in In re Motor Fuel Temperature Sales Practices Litigation MDL, 2012 U.S. Dist. LEXIS 6163 (D. Kan. Jan. 19, 2012), the court, after being asked to reconsider its class certification order, determined that Dukes did not affect the classes that had been previously certified. Although the Court did modify the previously certified classes, it was not due to Dukes.
On May 28, 20201, the court in Motor Fuel, certified classes under Rule 23(b)(2) as to the liability and injunctive relief aspects of the plaintiffs’ claims, bifurcated the claims and did not certify plaintiffs’ claims for damages. In that lawsuit, the plaintiffs alleged that because defendants sell motor fuel for a specified price per gallon without disclosing or adjusting for temperature expansion, they are liable under Kansas law for unjust enrichment, civil conspiracy and violating the Kansas Consumer Protection Act. 2012 U.S. LEXIS 6163, at *10-11.
Following the decision in Dukes, Defendants moved for reconsideration and argued that Dukes required the Court to decertify the (b)(2) classes. Specifically, Defendants argued that the plaintiffs’ claims did not satisfy the commonality requirement of Rule 23(a)(2) and do not qualify for class certification. In responding to defendants’ motion, plaintiffs asked the court to redefine the already certified Rule 23(b)(2) classes and to certify classes under Rules 23(b)(3) and (c). Although the plaintiffs asked the court to recalibrate the class definitions, the changes did not affect the court’s original class certification decision.
The court found that although Dukes arguably heightened the commonality requirement and narrowed the permissible scope of classes certifiable under Rule 23(b)(2), it was not fatal to the class action before it. In so finding, the court distinguished Dukes. In Motor Fuel, the plaintiffs alleged a common practice by all defendants that applied to the entire class uniformly. Thus, they alleged the same injury. Although the case involved a large class, the claims do not turn on a number of variables like in Dukes, i.e. different jobs at different levels with difference supervisors in 50 different states governed by different regional policies. The cases differed because Motor Fuel involved a single price that defendants allegedly implemented uniformly with respect to all class members. Because the plaintiffs alleges a common practice that caused class members a common injury, the court determined that, class wide proceedings would “generate common answers apt to drive the resolution of the litigation” and any dissimilarities within the proposed class do not “impede the generation of common answers.” 2012 U.S. LEXIS 6163, at *47-48, citing Dukes, 131 S. Ct. at 2551 (quoting Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 131-32 (2009). The Court also held that significant proof that defendants operated under a general policy of selling motor fuel by the gallon without disclosing or adjusting for temperature was sufficient to satisfy the commonality requirement with respect to both the liability and injunctive relief aspects of plaintiffs’ claims. Id. at *47.
In addition to its determination that the previously certified classes are not barred by Dukes, the Motor Fuel court also confronted the question of when issues classes can be certified under Federal Rule of Procedure 23 (c)(4). Pursuant to Rule 23(c)(4), when appropriate, an action may be brought or maintained as a class action with respect to particular issues.
In Motor Fuel, the court had already certified classes under Rule 23(b)(2) as to the liability and injunctive relief aspects of plaintiffs’ claims. Defendants asked the Court to reconsider that ruling and to clarify what constitutes the “liability aspects” of plaintiffs’ claims. In response, plaintiffs asked the Court to certify limited (b)(3) issues classes under Rule 23(c)(4) as to the liability aspects of their three claims. The court noted that the circuit courts are split on whether courts can use issue certification under Rule 23(c)4 to certify a (b)(3) class as to parts of a claim without first finding that the whole claim satisfies the predominance requirements (and presumably all the requirements of) Rule 23(b)(3). The Court noted that the Tenth Circuit had not yet addressed these issues. 2012 LEXIS 6163, at *30. Thus, the Court determined to follow the approach of the Second, Seventh and Ninth Circuits, which have used Rule 23(c)(4) to certify only parts of claims where doing so “would materially advance the disposition of the litigation of the whole.” Id. at *32-33. Although the defendants pointed out that the cases the Court relied on in following the approach of the Second, Seventh and Ninth Circuits were decided before Dukes, they did not argue that Dukes undermined their rationale or persuasive value. Id. at *32. The Court explicitly declined to follow the more strict approach of the Fifth Circuit that has held that “the proper interpretation of the interaction between subdivisions (b)(3) and (c)(4) is that a cause of action, as a whole, must satisfy the predominance requirements of (b)(3) and that (c)(4) is a housekeeping rule that allows courts to sever the common issues for a class trial.” Id. at *30, citing Castano v. Am. Tobacco Co., 84 F.3d 734, 745 n.21 (5th Cir. 1996).
Earlier this year the Supreme Court ruled 8-1 to reverse a decision from the Ninth Circuit and enforce a provision in a credit-card agreement requiring plaintiffs to arbitrate claims over unfair lending practices. The decision in CompuCredit Corp. v. Greenwood is the latest Supreme Court case to limit plaintiffs’ rights under the Federal Arbitration Act of 1925 following its decision last year in AT&T v. Concepcion.
The plaintiffs filed a class-action suit in the Northern District of California against CompuCredit under the Credit Repair Organization Act (the CROA). The CROA applies to credit card companies that cater to low-income people and promise customers a way to build credit history and improve credit scores. Plaintiffs alleged that CompuCredit provided misleading promotional materials and charged hidden fees that totaled more than $250 on average on an initial credit line of $300 in the first year alone.
CompuCredit moved to dismiss the complaint and class certification and enforce a mandatory arbitration clause contained in the customer credit agreement. The District Court rejected the motion, and the Ninth Circuit affirmed, holding that §1679c(a) of the CROA gave plaintiffs “a right to sue” in court in order to enforce the Act’s provisions. Section 1679c(a) requires companies to include a disclosure in customer agreements stating that: “You have a right to sue a credit repair organization that violates the [CROA].” Moreover, §1679f invalidated “[a]ny waiver by any consumer of any protection provided by or any right of the consumer under” the Act, thereby making the arbitration clause unenforceable.
The Supreme Court’s majority voted to reverse the lower courts’ decisions, holding that §1679c(a) did not give the plaintiffs a substantive right to sue, but only the right to “receive the statement” contained in §1679c(a). Therefore, §1679f did not incorporate the right to sue and did not make the arbitration clause unenforceable.
Additionally, the majority held that other sections of the Act did not give plaintiffs an express right to sue in court because it left the parties free to choose their own forum. Therefore, plaintiffs who sign arbitration agreements must begin their cases there, and may only resort to traditional courts if necessary to enforce or review awards.
The majority came to its conclusion in light of the strong presumption in favor of arbitration clauses given by the Federal Arbitration Act of 1925 (FAA). The Court acknowledged that the disclosure contained in §1679c(a) of the CROA was “imprecise,” but reasoned that Congress would have specifically invalidated mandatory arbitration clauses in the CROA, if it had intended to do so.
Justice Ginsberg in her dissent argued that §1679c(a) should be read to give plaintiffs the right to sue in court in keeping with the section’s plain meaning because “Congress’ target audience in the CROA is not composed of lawyers and judges accustomed to nuanced reading of statutory texts, but laypersons who receive a disclosure statement in the mail.” Since “a right to sue” typically implies the right to sue in court– not arbitration—consumers should not be able to waive that right, per §1679f. Ginsberg concluded that the majority’s decision would allow companies “to deny consumers, through fine print in a contract, an important right” contained in the CROA.
The outcome in CompuCredit only increases the disadvantage given to plaintiffs under the Court’s holding in Concepion, which undermined state laws protecting consumers against class-action waivers in arbitration clauses. Taken together, the decisions allow credit companies to deny plaintiffs–particularly low-income ones–the benefit of class-action status, while forcing their claims into the forum that is most favorable to the companies.
On this blog we have written extensively on why we need the Arbitration Fairness Act now.
The National Labor Relation Board’s (NLRB) recent ruling in D.R. Horton Inc. answered an important question presented by the U.S. Supreme Court’s ruling last Spring in AT&T Mobility LLC v. Concepcion: does federal policy favoring arbitration apply equally in the consumer and employment contexts?
The NLRB’s response was an emphatic “no,” largely agreeing with arguments advanced by dozens of organizations, including the National Employment Lawyers Association (NELA), dedicated to representing individuals who often cannot safeguard their fundamental labor protections in the workplace without class or collective actions.
Although Concepcion arose in the consumer context, some have construed the Supreme Court’s ruling broadly as stating the Court’s approval of forced arbitration provisions in other contexts, including the employment context. Indeed, the Arbitration Fairness Act, which was first proposed in 2009, was reintroduced in response to the Concepcion ruling and, if passed, will eliminate forced arbitration clauses in consumer, employment and civil rights contexts. As we wrote here last year, Abbey Spanier, LLP supports this legislation.
The particular contractual provision at issue in D.R. Horton required plaintiff and other D.R. Horton Inc. employees to agree, as a condition of employment, that they would not pursue class or collective litigation of claims in any forum, arbitral or judicial. Although the general intent of the Federal Arbitration Act (FAA) manifests a liberal federal policy favoring arbitration agreements, the NLRB found that such a provision runs afoul of the National Labor Relations Act (NLRA).
The NLRA is a 1935 United States federal law that limits the means with which employers may react to workers in the private sector who create labor unions, engage in collective bargaining and take part in strikes and other forms of concerted activity in support of their demands. The NLRA does not apply to workers who are covered by the Railway Labor Act, agricultural employees, domestic employees, supervisors, federal, state or local government workers, independent contractors and some close relatives of individual employers.
In ruling against D.R. Horton Inc., the NLRB concluded that “employees who join together to bring employment-related claims on a class-wide or collective basis in court or before an arbitrator are exercising rights protected by Section 7 of the NLRA,” which provides employees with the right “to engage in… concerted activities for the purpose of collective bargaining or other mutual aid or protection” (29 U.S.C. § 157) and that such “forms of collective efforts to redress workplace wrongs or improve workplace conditions are at the core of what Congress intended to protect by adopting the broad language of Section 7.” Slip Op., p.3.
Likewise, the NLRB found that the prohibition of individual agreements imposed on employees as a means of requiring that they waive their right to engage in protected, concerted activity lies at the core of the prohibitions contained in Section 8, which makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise” of such right (29 U.S.C. § 158(a)(1)). Slip Op., p.5.
The NLRB decision provides a lengthy discussion of the FAA and the Supreme Court precedent, including Concepcion, which you can read in full here, but explains why D.R. Horton seems to diverge as follows: it “rests not on any conflict between an agreement to arbitrate and the NLRA, but rather solely on the conflict between the compelled waiver of the right to act collectively in any forum in an effort vindicate work-place rights and the NLRA.” Slip Op., p.13.
The NLRB got it right and, in our view, restored some order to a corner of jurisprudence cast into disarray Concepcion. To have reached any other result, as the U.S. Supreme Court has recognized, “could frustrate the policy of the [NLRA] to protect the right of workers to act together to better their working conditions.” Eastex, Inc. v. NLRB, 437 U.S. 556, 567 (1978).
A recent decision from the Third Circuit Court of Appeals has given class-action plaintiffs some helpful guidance in addressing the Supreme Court’s decision in Walmart Stores Inc. v. Dukes.
In Dukes, the Supreme Court held that female Walmart employees could not bring a nationwide class-action suit against the retailer for alleged gender discrimination because they could not show that their claims arose from a single discriminatory policy or action.
On December 20, the Third Circuit Court of Appeals interpreted Dukes as permitting certification of two classes in a case against diamond producer De Beers, in Sullivan v. DB Investments. Plaintiffs, who included both direct and indirect purchasers of diamonds, alleged that De Beers engaged in anticompetitive practices in violation of both state and federal laws.
In a lengthy dissent, Judge Jordan argued that Dukes prevented certification of the class of indirect purchasers because some of its members came from states whose laws would preclude their claims. Jordan argued that because “some class members lack a claim” as a matter of law, the class could not be certified under Rule 23 of the Federal Rules of Civil Procedure and the federal Rules Enabling Act. In Jordan’s view, Dukes should be read to require a showing that class members had a common, cognizable claim, in addition to a showing that defendants’ conduct applied to all members.
A similar outcome was reached in Espinoza v. 953 Associates, which this blog reported on in December. There, the District Court for the Southern District of New York found that Dukes did not preclude class-action certification for restaurant employees seeking the return of withheld wages. Judge Scheindlin noted that plaintiffs had successfully alleged a common injury caused by the same policies and practices. Moreover, questions about individual claims spoke to differences in damages—not defendants’ liability—an issue that went beyond the scope of the Dukes holding.
The Dukes decision has made it more difficult for plaintiffs to receive certification for some class-action claims. However, as cases such as Sullivan and Espinoza show, plaintiffs may prevail at the certification stage by showing that defendants’ conduct and policies were common to all of the class members.
Is the Rejection of Cy Pres Distributions of Class Action Settlement Funds Becoming a Trend?
Earlier this month, we reported on the decision in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), in which the Fifth Circuit rejected a cy pres distribution of the remaining funds in a class action settlement. This may be a growing trend, as the Ninth Circuit also recently rejected a cy pres distribution in a class action against AOL.
In Nachshin v. AOL, LLC, No. 10-5129, 2011 U.S. App. LEXIS 23244 (9th Cir. Nov. 21, 2011), the Court reversed the district court’s approval of the cy pres distributions because it found that the distributions did not comport with the Ninth Circuit’s standards. The Court objected to the distributions because although the donations were made on behalf of a nationwide class, they were distributed to geographically isolated and substantively unrelated charities. In fact, two-thirds of the donations were to be made to local charities in Los Angeles, California.
In August 2009, four plaintiffs brought this class action against AOL on behalf of a putative class of more than 66 million paid AOL subscribers alleging that AOL wrongfully inserted footers containing promotional messages into e-mails sent by AOL subscribers. The parties entered into a voluntary mediation that resulted in a settlement that called for the certification of a settlement class consisting of “all current AOL members.” The settlement required certain remedial measures to be taken by AOL. In addition, all parties agreed that since monetary damages were small and difficult to ascertain, in lieu of a cost–prohibitive distribution of monetary damages, AOL would make a series of charitable donations. Because the more than 66 million class members were geographically and demographically diverse, the parties claimed they could not identify any charitable organization that would benefit the class or be specifically germane to the issues in the case. Thus, the parties agreed that AOL would donate $25,000 to three charities: (1) the Legal Aid Foundation of Los Angeles; (2) the Federal Judicial Center Foundation; and (3) the Boys and Girls Club of America (shared between the chapters in Los Angeles and Santa Monica). In addition, the parties agreed to compensate the class representatives by awarding $35,000 to four charities of the class representatives’ choice, including: (1) New Roads School of Santa Monica; (2) Oklahoma Indian Legal Services; and (3) the Friars Foundation.
The Court found that the cy pres distribution failed to meet any of the standards set forth by that Court in Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1307-08 (9th Cir. 1990). Specifically, the Court found that the proposed award failed to: (1) address the objectives of the underlying statues; (2) target the plaintiff class; or (3) provide reasonably certainty that any member will be benefited. The Plaintiffs’ claims were brought for breach of electronic communications privacy, unjust enrichment and breach of contract, yet none of the cy pres donations to the Legal Aid Foundation, Boys and Girls Club or the Federal Judicial Center Foundation have anything to do with the objectives of the underlying statutes upon which plaintiffs based their claims. Moreover, even though a small portion of the class members did reside in Los Angeles, there was no indication that those class members would benefit from the donations to the charities in Los Angeles.
In addition, the Court was not persuaded that the size and geographic diversity of the class members made it impossible to select an appropriate charity to receive the cy pres donations within the guidelines set forth by the Ninth Circuit. The Court pointed out that all class members used the internet and their claims against AOL arose from a purportedly unlawful advertising campaign that exploited users’ outgoing email messages. Therefore, the Court posited, the parties should have selected an appropriate charity from a number of non-profit organizations that work to “protect internet users from fraud, predation and other forms of online malfeasance.” Finally, the Court suggested that if a suitable cy pres beneficiary could not be located, the district court should consider escheating the funds to the United States Treasury.
Given these recent decisions rejecting cy pres distributions, counsel should use care in selecting the recipients of any cy pres to ensure that the recipients are substantively and/or geographically related to the Class and its claims in the litigation.
In recent years, New York has received attention for its application of Section 196-d of the Labor Law, which prohibits employers from retaining a gratuity or a charge that purports to be a gratuity. In a 2008 decision, Samiento v. World Yacht Inc., 10 N.Y.3d 70, 79 (N.Y. 2008), the Court of Appeals held that a mandatory service charge may be viewed as a gratuity owed to employees within the meaning of Section 196-d.
However, New York is not the only state with such a law. The Minnesota Fair Labor Standards Act (the “MLFSA”) states that “any gratuity received by an employee . . . is the sole property of the employee.” Like New York, Minnesota law says that mandatory charges may purport to be a gratuity, and cannot be kept by the employer.
In Luiken v. Domino’s Pizza, LLC, Civil No. 09-516 (DWF/TNL), 2011 U.S. Dist. LEXIS 135780 (D. Minn. Nov. 14, 2011), Judge Donovan W. Frank granted a motion for class certification in an action brought by two Domino’s Pizza delivery drivers who alleged that Domino’s retained a $1.00 “delivery charge”, in violation of the MFLSA. The drivers alleged that the “delivery charge” might reasonably be construed by the customer as a sum to be given to the employee who was delivering the pizza.
In opposing class certification, Domino’s argued that common proof would not predominate over individualized proof because an examination must be made into the facts of each transaction. Domino’s argued that each customer’s experience was different, and inquiry must be made into whether a customer had previously ordered from Domino’s, as well as the size of the order the customer made, and whether the customer had any discussions with Domino’s employees about the delivery charge.
The Luiken decision may be persuasive to other courts deciding class certification. Like the MFLSA, the New York Court of Appeals has held that the question of whether a charge purports to be a gratuity is objective, and is to be measured by what a reasonable customer would believe. Although few class certification decisions have been rendered on Section 196-d claims since World Yacht, those courts that have faced the issue have recognized that the Court of Appeals’ reasonable patron test “obviate[es] the need to closely examine each individual customer’s frailties or idiosyncrasies.” Spicer v. Pier Sixty LLC, 269 F.R.D. 321 (S.D.N.Y. 2010). This objective standard should eliminate an argument frequently used by defendants in opposition to class certification: that individual inquiries must be made into each customer’s state of mind.
There has been a surge in the number of motions to compel arbitration filed in consumer class actions since the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) this spring.
Some may have been warranted, but a surprising number clearly were not.
Concepcion overturned Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), in which the California Supreme Court ruled that an arbitration clause was unenforceable because the subject class action waiver would exculpate Discover Bank from liability for wrongdoing involving small sums of money. Perceived as a bright line rule rendering other similar provisions unenforceable as a matter of law, some claims were litigated although the plaintiff was party to an arbitration agreement. But whether that narrow category of cases should continue to be litigated was cast in doubt on April 27, 2011 when Concepcion was decided.
However, a number of motions to compel purportedly filed in response to Concepcion concerned arbitration provisions that were totally silent as to class arbitration and/or concerned large sums of damages, taking them outside the Discovery Bank rule. Because defendants in those cases were never precluded from moving to compel arbitration in the first instance, such motions were clearly not warranted, at least insofar as their timeliness was tied to the Concepcion ruling.
For example, in an action against the California School of Culinary Arts, Career Education and a number of lending institutions, which the parties had been actively litigating for over three years, defendants filed a motion to compel arbitration immediately following Concepcion, although the arbitration clause at issue did not contain a class action waiver.
The Court found that Concepcion did not excuse the defendants’ failure to file the motion sooner and, as plaintiffs generally urge the courts to do in these cases, focused its analysis on whether the defendants had actually waived their right to arbitration. Vasquez, et al., v. Calif. Sch. of Culinary Arts, Inc., et al., Case No. BC393129, slip op. (Ca. Super. Ct. Nov. 21, 2011).
The Court applied the following standard: “[W]aiver may be found where the party seeking arbitration has (1) previously taken steps inconsistent with an intent to invoke arbitration, (2) unreasonably delayed in seeking arbitration, or (3) acted in bad faith or with willful misconduct.” Id. at 1, citing Davis v. Continental Airlines, 59 Cal.App.4th 205, 211 (1997).
In holding that the defendants had waived the right to arbitration, the Court found that they had taken a range of steps inconsistent with an intent to invoke arbitration, including taking discovery of the plaintiffs. Vasquez, slip op. at 3-4. The extent of the discovery and the costs incurred by the plaintiffs supported a finding of prejudice to the plaintiffs. Id. at 5-6.The defendants’ delay of over three years was unreasonable, particularly given that the plaintiffs had accumulated over $3 million in attorney fess and costs in connection with responding to defendants discovery requests. Id. at 4-5.
Vasquez is just one of many examples of defendants wrongfully attempting to pile on to recent U.S. Supreme Court rulings that, while potentially game-changing within a limited universe, bear no relation whatsoever to the particular claims they are actually defending.
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm, with experience opposing motions to compel arbitration.
Counsel representing parties defending against class action suits routinely seek discovery of absent class members, but it is generally not permitted. The sharp limits on class member discovery were first articulated in a classic class action ruling handed down almost 40 years ago: Clark v. Universal Builders, Inc., 501 F.2d 324 (7th Cir. 1974).
Clark, 501 F.2d at 327. Plaintiffs’ case went to trial, after which the district court judge granted defendants’ motion for directed verdict finding “plaintiffs have not painted a pretty picture of the defendants, but that picture is a picture of exploitation for profit, and not racial discrimination.” Id.
On their appeal, plaintiffs challenged the trial court’s grant of a directed verdict, but also a number of evidentiary and procedural rulings, including the “propriety of dismissing with prejudice class members who failed to answer interrogatories or appear for depositions.” Id. at 340.
In addition to finding plaintiffs’ case should have been put before the jury, Id. at 334, the appellate court found that the district court erred in dismissing the claims of absent class members, Id. at 340-1.
The interrogatories sought answers to questions that would have required the assistance of technical and legal advice in understanding the questions and formulating responsive answers thereto. Indeed, certain of the questions pertained to allegations that were proved at trial through the use of expert witnesses. In addition, some of the interrogatories sought information on matters already known to defendants.
Id. citing Brennan v. Midwestern United Life Ins. Co., 450 F.2d 999, 1005 (7th Cir. 1971).
Today, it is well-established that class member discovery is prohibited unless the proponent can show (1) that seeking such discovery is not a tactic to take advantage of the class or to reduce the number of class members; (2) the discovery is necessary; (3) that understanding the discovery requests and formulating responses do not require technical or legal advice; and (4) that the discovery does not seek information on matters already known to the defendants. See, e.g., Kline v. First W. Gov’t Secs., 1996 U.S. Dist. LEXIS 3329, *8-9 (E.D. Pa. Mar. 11, 1996).
Discovery of absent class members is generally not appropriate. As later cases make plain, there is good reason to set such a stringent standard. “One of the principal advantages of class actions over massive joinder or consolidation would be lost if class members were routinely subjected to discovery.” Manual for Complex Litigation § 21.41, (4th ed. 2004).

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