Source: http://robertfitzpatrick.blogspot.com/2014/
Timestamp: 2019-01-19 04:24:42
Document Index: 104108147

Matched Legal Cases: ['§ 3', '§ 2510', '§ 1030', '§ 2710', '§ 1750', '§ 502', '§ 3', '§ 3', '§ 3']

Fitzpatrick on Employment Law: 2014
Posted by Robert B. Fitzpatrick at 11:49 AM 3 comments
FLSA Pleading – Your Way, My Way, and the “Middle” Way
In Davis v. Abington Mem’l Hosp., the Third Circuit, with Judge Chagares writing for the unanimous panel in an FLSA overtime case, affirmed the district court’s dismissal on the ground that plaintiffs’ third amended complaint did not state a plausible claim of an overtime violation. Nos. 12-3514, 3515, 3521, and 3522, 2014 U.S. App. LEXIS 16472 (3d Cir. Aug. 26, 2014). This question has “divided courts around the country.” Nakahata v. N.Y.-Presbyterian Healthcare Sys., Inc., 723 F.3d 192, 200 (2d Cir. 2013).
At the outset of its analysis, the Third Circuit identifies both the most “lenient” and most “stringent” approaches to pleading standards. The most stringent, in the Court’s view, is exemplified by Jones v. Casey’s Gen. Stores, 538 F. Supp. 2d 1094, 1102-03 (S.D. Iowa 2008). There, the Judge held that a complaint alleging that the plaintiffs “regularly worked regular time and overtime each week but were not paid regular and overtime wages” was “implausible on its face.” (internal quotation marks omitted). See also Villegas v. J.P. Morgan Chase & Co., 2009 U.S. Dist. LEXIS 19265, 2009 WL 605833 at *5 (N.D. Cal. Mar. 9, 2009) (granting motion to dismiss where the plaintiff “attempt[ed] to state a claim by reciting that she did not receive properly computed overtime wages . . . . because it is not much more informative than an allegation that she was not paid for overtime work in general"); Bailey v. Border Foods, Inc., 2009 U.S. Dist. LEXIS 93378, 2009 WL 3248305 at *2 (D. Minn. Oct. 6, 2009) (granting motion to dismiss where the plaintiff "failed to identify their hourly pay rates, the amount of their per-delivery reimbursements, the amounts generally expended in delivering pizzas, or any fact that would permit the Court to infer that [plaintiffs] actually received less than minimum wage”).
The most lenient, by contrast, is characterized by the approach of the federal district court for the District of Maryland in Butler v. DirectSat USA, LLC, 800 F. Supp. 2d 662, 668 (D. Md. 2011). In Butler, Judge Deborah K. Chasanow held that “[w]hile defendants might appreciate having Plaintiffs’ estimate of the overtime hours worked at [the pleading stage],” an FLSA complaint will survive dismissal so long as it alleges that the employee worked more than forty hours in a week and did not receive overtime compensation. See also Uribe v. Mainland Nursery, Inc., 2007 U.S. Dist. LEXIS 90984, 2007 WL 4356609 at *3 (E.D.Cal. Dec. 11, 2007) (denying motion to dismiss where plaintiffs alleged they were "non-exempt employees for a wholesaler of plants who have not been paid the applicable overtime wages under the FLSA"); Xavier v. Belfor, USA Group, Inc., 2009 U.S. Dist. LEXIS 11751, 2009 WL 411559 at *5 (E.D.La. Feb. 13, 2009) (denying motion to dismiss where the plaintiff alleged that "they were paid on an hourly basis, that they routinely worked in excess of 40 hours per week, and that they were not paid an overtime premium").
Rather than adopt either the Jones or Butler approaches, the panel stated that it agreed with “the middle-ground approach” adopted by the Second Circuit in Lundy v. Catholic Health Sys. of Long Island, Inc., 711 F.3d 106 (2d Cir. 2013). In that case, Chief Judge Dennis Jacobs, writing for the unanimous panel, stated: “[I]n order to state a plausible FLSA overtime claim, a plaintiff must sufficiently allege [forty] hours of work in a given workweek, as well as some uncompensated time in excess of the [forty] hours.” Id. at 114.
Having adopted the Lundy approach, the Third Circuit held that the plaintiffs’ allegations in Davis, the case at issue, failed to satisfy the Lundy test. In Davis, the named plaintiffs alleged that they “typically” worked 37.5 hours per week and “occasionally” worked an additional 12.5 hour shift or “slightly longer”. Plaintiff also indicated that she “typically” worked during thirty-minute meal breaks, and was not compensated for this work. Plaintiff argued that these allegations were sufficient to plausibly plead that at least some uncompensated work was performed during weeks when the plaintiffs’ total work time was more than forty hours.
The Third Circuit disagreed. While noting that the determination whether a plausible claim has been pled is context-specific, the Court found that none of the named plaintiffs had alleged a single workweek in which they worked at least forty hours and also worked uncompensated time in excess of forty hours. Accordingly, the court found the allegations to be insufficient and declined to provide plaintiffs with an opportunity to file a fourth amended complaint. In rejecting plaintiffs’ pleadings, the Court cited and quoted at length from Lundy and an earlier Second Circuit decision, Nakahata v. N.Y. Presbyterian Healthcare Sys., Inc., 723 F.3d 192, 200 (2d Cir. 2013). In Nakahata the Court held that “[p]laintiffs must prove sufficient detail about the length and frequency of their unpaid work to support a reasonable inference that they worked more than forty hours in a given week”.
The Court then went on to state that it was not holding that a plaintiff must identify the exact date(s) and time(s) that s/he worked overtime. The Court stated: “for instance, a plaintiff’s claim that she ‘typically’ worked forty hours per week, worked extra hours during such a forty-hour week, and was not compensated for extra hours beyond forty hours he or she worked during one of those forty hour weeks would suffice.” (footnote omitted). Finally, on the pleading issue, the Court emphasized that it read Lundy to hold only that “a plaintiff must connect the dots between bare allegations of a ‘typical’ ‘forty-hour workweek’ and bare allegations of work completed outside of regularly scheduled shifts, so that the allegations concerning a typical forty-hour week include an assertion that the employee worked additional hours during such a week, and we believe that this middle-ground approach is the correct one.”
Posted by Robert B. Fitzpatrick at 6:09 PM 3 comments
Ward & Solomon – The D.C. Circuit Can Be Quite Accommodating
In Ward v. McDonald, the D.C. Circuit addressed the case of an individual who had requested that she be permitted to work from home on a full-time basis as a reasonable accommodation for her medical condition. No. 12-5374, 2014 U.S. App. LEXIS 15402 at *1-*2 (D.C. Cir. Aug. 12, 2014). In Ward plaintiff had been diagnosed with a medical condition which rendered her unable to sit for long periods of time. Id. In addition, plaintiff required “routine daily care at home”. Id. at *5. These daily treatments required 1 to 3 hours, and sometimes required that plaintiff disrobe. Id. *4 to *5. Plaintiffs job was “the quintessential desk job”, and required little or no physical exertion – indeed, the by far the bulk of plaintiff’s work was performed sitting at her desk. Id. at *4, *8.
Although plaintiff “struggled at times” to perform her job, she nevertheless was rated “[f]ully [s]uccessful or better” on her performance reviews. Id. at *5. Nevertheless, the long periods of sitting exacerbated plaintiff’s condition, and she applied for a reasonable accommodation to be permitted to work at home. Id. at *5 to *6. There followed a series of conversations between plaintiff and her supervisors regarding her requested accommodation, during which time period plaintiff provided additional documentation regarding her medical condition, the basis for her requested accommodation, and how it would enable her to perform her job duties. Id. at *6 to *9. During these conversations, plaintiff’s employer indicated that it could allow her to work from home on a part-time schedule. Plaintiff’s supervisors indicated that, as she would need to sit for long periods of time regardless of her work location, and due to the substantial time needed for her treatments, they were concerned about her ability to maintain a full-time work schedule. Id. at *7. In that communication, defendant requested additional information regarding plaintiff’s ability to work a full time schedule. Id. Plaintiff failed to respond, instead tendering her resignation. Id. at *9.
Although plaintiff tendered her resignation, she indicated that consideration of her resignation be delayed. Id. In response to plaintiff’s resignation, defendant indicated that it had not denied any requested accommodation. Id. at *9 to *10. Defendant also indicated that it would consider allowing plaintiff to “try work-from-home on a full-time basis.” Id. at *10. Plaintiff never responded to that communication. The district court granted summary judgment for defendant. In so doing, the district court found that the defendant had participated in the interactive process and had offered plaintiff the very accommodation which she sought while, on the other hand, plaintiff had failed to participate in the interactive process and had not demonstrated that she could perform the essential functions of her job.
On appeal, the D.C. Circuit issued a split decision. The dispute centered primarily around the employer’s requests for additional information regarding plaintiff’s medical condition. The majority found that plaintiff’s failure to respond to the employer’s request for medical information constituted a failure to participate in the interactive process. Affirming the district court’s grant of summary judgment, the majority explained that “[plaintiff] did not provide the requested information. Instead, she resigned. No reasonable juror could have found that the [defendant] denied [plaintiff’s] request for an accommodation, then, because [plaintiff] abandoned the interactive process before the [defendant] had the information it needed to determine the appropriate accommodation.” Id. at *22.
By contrast, the dissent emphasized that the employer did not need any of the information which it requested to reasonably accommodate plaintiff, nor did the information requested relate to any essential function of plaintiff’s job. Id. at *30. Indeed, the employer had admitted that this was the case. In the dissent’s view the employer had discriminated against plaintiff by “needlessly prolonging” the process of applying for defendant’s flexi-place program, and emphasized that “[plaintiff’s] increasing inability to properly treat her [condition] in the office was literally endangering her life, making the delay caused by her supervisors’ unjustified factual detours acutely harmful.”
The plaintiff in Solomon v. Vilsack had been denied her requested accommodation of a flexible work schedule (a “maxiflex” schedule) despite apparently similarly situated employees being permitted to make use of such a schedule. No. 12-5123, 2014 U.S. App. LEXIS 15671 (D.C. Cir. 2014). The court’s decision focuses primarily on whether such flexible work schedules can be, as a matter of law, “reasonable” accommodations under the Rehabilitation Act. Id. at *16 to *17. The Court found that such schedules can, as a matter of law, be reasonable accommodations. Id.
As an initial matter, it is worth noting that plaintiff’s medical expert provided evidence that “to a reasonable degree of medical certainty [defendant’s actions] substantially worsened [plaintiff’s] condition” to the point that she was eventually rendered unable to work. Id. at *10. Although plaintiff took a disability-related retirement, the Court held that she was not precluded from pursuing a disability discrimination claim because her retirement application “never stated that she would have been unable to work if she had been afforded the accommodations she sought”. Id. at *13. However, the Court appears to have limited her claim to “spring and summer of 2004” – in other words, prior to the worsening of her condition due to the employer’s actions. Id. at *13.
As noted above, the Court seems to have cut off liability at the time after which plaintiff’s conditions worsened to the point that she could no longer work. Id. at *13, *38. This is true even though plaintiff’s medical expert proffered evidence that plaintiff’s worsened condition was due, at least in part, to the employer’s actions. Id. While the Court devotes little time or analysis to this issue, a paragraph at the end is telling:
Finally, Solomon points to her requests in late May to telecommute or to work part-time. But for that period of time, correspondence from Solomon herself and Dr. Cozzens led Solomon's supervisors to believe that her condition had deteriorated to the point that she was medically unable to work in any capacity. Even if the supervisors incorrectly assessed Solomon's condition, and the Department was thus obligated to provide reasonable accommodation, Solomon must still present evidence casting doubt on the sincerity of the Department's proffered non-retaliatory justification for its action.
Id. at *38 to *39.
Posted by Robert B. Fitzpatrick at 6:04 PM 1 comments
Check Your Privilege – Does Judicial Privilege Apply to Cease & Desist Letters?
Your client signs a non-compete agreement and later leaves to go work for another employer. Your client’s former employer sends a “cease and desist” letter to the new employer, resulting in your client being terminated or suffering other damages. Does your client have a claim? This basic, and increasingly common, scenario, has played out in numerous courts across the country to widely disparate outcomes.
In Murphy v. LivingSocial, Inc., 931 F. Supp. 2d 21 (D.D.C. 2013), Judge Sullivan held that the defendant’s letter to plaintiff and plaintiff’s new employer, which asserted that plaintiff had violated her non-compete agreement with defendant, was insulated from plaintiff’s libel claim on the ground that the letter was protected by the judicial proceedings privilege because it was clear that defendant was seriously considering litigation. The court stated that “the Travelzoo [the new employer] Letter was written by LivingSocial’s attorney, to advise Travelzoo of plaintiff’s contractual obligations, explained that plaintiff’s actions appeared to have been taken in violation of the contract, stated that LivingSocial reserved its rights to take all legal and equitable action to protect its business interests, and demanded that Travelzoo immediately cease and desist from any further solicitation of LivingSocial employees, customers, or prospective customers.” In dismissing the case, the Court noted that the non-compete agreement provided that LivingSocial was permitted to communicate the terms of the non-compete agreement to a perspective or current employer of plaintiff.
By contrast, in SCI Funeral Servs. of Fla., Inc. v. Henry, the District Court of Appeal for the Third District of Florida found that the “litigation privilege” did not extend to a cease and desist letter seeking to enforce a non-compete agreement. 839 So. 2d 702 (Fla. App. 2002). In SCI Funeral, defendant moved to dismiss plaintiff’s claims, arguing that its demand letter was absolutely privileged under the “litigation privilege”. This privilege “bars causes of action in tort for statements made in connection with a judicial proceeding.” The court, however, found that defendant’s conduct was not protected by the litigation privilege, reasoning that “an employer cannot threaten an employee with litigation over a non-compete agreement which has expired. If the employer wrongly does so, thus causing the employee to lose his or her job, there must necessarily be a judicial remedy for such conduct.”
This position finds indirect support in the treatment of such claims by other courts. For example, in Hidy Motors, Inc. v. Sheaffer, the Court of Appeals of Ohio focused on the enforceability of the non-compete agreement in addressing plaintiff’s claims based on the transmission of a Cease & Desist letter to plaintiff’s new employer. 916 N.E.2d 1122 (Ohio App. 2009). Although it does not appear that the employer raised a “litigation privilege” defense, the employer did contend that it was “privileged to protect [its] legitimate business interest[s]”. Id. at 1131. The Court, however, noted because “[t]he trial court did not address whether the covenant not to compete…was enforceable” that “[it] erred in assuming that the covenant not to compete could be relied on as the basis for [defendant’s] privilege defense[.]” Id. at 1132. Other courts have also endorsed such analysis on similar facts. See Gentile v. Olan, No. 12-cv-3664, 2013 U.S. Dist. LEXIS 64472, 2013 WL 1880771 (S.D.N.Y. 2013) (finding that cease and desist letter may constitute actionable tortious interference when defendant’s letter was “unwarranted” by plaintiff’s conduct and when “a material question of fact exists as to whether Plaintiff ever signed [the] agreement”);Voorhees v. Guyan Machinery Co., 446 S.E.2d 672 (W. Va. 1994) (no privilege where the plaintiff’s alleged “competition” was “so insignificant as to render [defendant’s] claim that it was protecting its business interests by enforcing the noncompetition agreement [with plaintiff] absurd.”); Carter v. Aramark Sports & Entm’t Servs, Inc., 835 A.2d 262 (Md. Ct. Spec. App. 2003) (tortious interference claim can be based on at-will relationship); but see Bonds v. Philips Electronic N.A., No. 2:12-cv-10371, 2014 U.S. Dist. LEXIS 6845, 2014 WL 222730 (E.D. Mich. Jan. 21, 2014) (“Defendant’s actions cannot be improper because they were motivated by legitimate business reasons”).
Posted by Robert B. Fitzpatrick at 6:02 PM 8 comments
In Green v. Donahoe, No. 13-1096, 2014 U.S. App. LEXIS 14290, 2014 WL 3703823 (10th Cir. July 28, 2014), a panel of the 10th circuit, Judge Hartz writing, held that a claim for constructive discharge does not accrue at the time when plaintiff resigns. Instead, the claim accrues on the date of the employer’s last misconduct. In Green the plaintiff, a postal employee, agreed to resign his employment on December 16, 2009, but was permitted to use accrued annual and sick leave until March 31, 2010, at which point he could choose either to retire or accept a significantly lower position at a facility some 300 miles distant. Plaintiff filed an informal charge of retaliation with an EEO counselor on January 7, 2010, but did not file a formal charge until February 17, 2010. On February 9, 2010, plaintiff notified his employer that he planned to retire, pursuant to their earlier agreement, effective March 31, 2010. Plaintiff initiated EEO counseling on March 22, and filed another formal charge of retaliation on April 23, alleging constructive discharge for his forced retirement. Plaintiff’s eventual lawsuit was dismissed when the district court held that it was untimely because plaintiff had not contacted an EEO counselor about it within 45 days.
In reviewing the lower court’s decision, the Tenth Circuit first examined the nature of a constructive discharge claim. The Court explained that “c]onstructive discharge occurs when an employer unlawfully creates working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign.” Green, 2014 U.S. App. LEXIS 14290 at *19, quoting Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1133 (10th Cir. 2013). The key issue before the court was when the constructive discharge claim accrued. The Court framed its analysis by noting that “[f]or most federal limitations periods, the clock starts running when the plaintiff first knew or should have known of his injury.” Green, 2014 U.S. App. LEXIS 14290 at *22 (internal quotations omitted). In the employment context, this generally means that the claim accrues when the “disputed employment practice” occurs. Id. (internal quotations omitted).
However, the Tenth Circuit found this general rule to be inappropriate in the context of constructive discharge claims. The Tenth Circuit distinguished constructive discharges from other adverse actions, stating “[a] constructive discharge involves both an employee’s decision to leave and [the employer’s] precipitating conduct.” Id. (emphasis in original) (alterations in original) (quotations omitted).
The Tenth Circuit went on to identify the core question for resolution – whether the date of the accrual of plaintiff’s constructive discharge claim “can be postponed from the date of the employer’s misconduct until the employee quits or announces his future departure.” Id. at *22. The Court framed this question as a choice between accrual at the time when the “employee quits or announces his future departure” and when the last “discriminatory act” occurs. As an initial matter, the Court noted that most courts to consider this issue had “no occasion” to choose between these approaches. See, e.g., Jeffery v. City of Nashua, 163 N.H. 683, 48 A.3d 931, 936 (N.H. 2012) (plaintiff unsuccessfully argued that claim accrued on effective date of resignation, not when she gave notice of resignation); Patterson v. Idaho Dept. of Health & Welfare, 151 Idaho 310, 256 P.3d 718, 725 (Idaho 2011) (same); Whye v. City Council, 278 Kan. 458, 102 P.3d 384, 387 (Kan. 2004) (same); Hancock v. Bureau of Nat'l Affairs, Inc., 645 A.2d 588, 590 (D.C. 1994) (same) However, the Court did identify “several” decisions holding that the claim accrued on the date of the resignation, on the rationale that the resignation was a “distinct discriminatory act”. See Flaherty v. Metromail Corp., 235 F.3d 133, 138 (2d Cir. 2000); Draper v. Coeur Rochester, Inc., 147 F.3d 1104, 1111 (9th Cir. 1998); Young v. Nat'l Center for Health Servs. Research, 828 F.2d 235, 237-38 (4th Cir. 1987).
The Court rejected that approach. Declaring that “we cannot endorse the legal fiction that the employee's resignation, or notice of resignation, is a ‘discriminatory act’ of the employer”, the Court sided with the Seventh and D.C. Circuits in holding that a claim for constructive discharge must be filed such that there is at least one “discriminatory act” by the employer within the statutory limitations period. See Mayers v. Laborers' Health & Safety Fund, 478 F.3d 364, 367, 370, 375 U.S. App. D.C. 134 (D.C. Cir. 2007) (notice of resignation was within limitations period but no discriminatory act of employer was); Davidson v. Ind.-Am. Water Works, 953 F.2d 1058, 1059-60 (7th Cir. 1992) (same). In so holding, the Court reasoned that “delaying accrual past the date of the last discriminatory act and setting it at the date of notice of resignation would run counter to an essential feature of limitations periods by allowing the employee to extend the date of accrual indefinitely.” Green, 2014 U.S. App. LEXIS 14290 at *25 to *26.
This leaves us with three distinct approaches to the accrual of constructive discharge claims for limitations purposes:
1) The limitations period runs from the date on which the employee provides notice of her resignation. This is the approach adopted by the Second, Fourth, and Ninth Circuits.
2) The limitations period runs from the date of the final discriminatory act, which cannot be the employee’s resignation. This is the approach adopted by the Seventh, Tenth, and D.C. Circuits.
3) The limitations period runs from the date on which the employee actually ceases to work for the employer. This appears to be a minority position, but has been endorsed, for example, by the Court of Appeals for Oregon. See Hernandez-Nolt v. Wash. Cnty., 315 P.3d 428 (Ore. App. 2013).
Posted by Robert B. Fitzpatrick at 6:00 PM 8 comments
Cy pres is a legal doctrine under which courts, when unable to effectuate a direct monetary payment to plaintiffs, undertake to distribute moneys to provide an indirect benefit to plaintiffs. The term cy pres originally comes from French. Literally, the phrase means “so near/close” though a more figurative translation would be “as near as possible” or “as near as may be”. Black’s Law Dictionary, p. 349 (5th Ed. 1979). Cy pres remedies are important to plaintiffs both because they may be in the position of negotiating such remedies in appropriate cases, and because certain charitable or legal organizations which serve low-income populations may find themselves eligible to receive cy pres moneys. E.g. Public Justice, “Cy Pres Donations: Serving the Class and the Public Interest” (available at: http://publicjustice.net/support-us/cy-pres-donations-serving-class-public-interest). The ALI’s Principles of the Law of Aggregate Litigation, which are discussed in more detail below, provide that cy pres awards should be made to organizations “whose interests reasonably approximate those being pursued by the class.” § 3.07(c); See also In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24 (1st Cir. 2009) (cy pres distribution to cancer or patient related charities was appropriate where defendant was accused of price inflation for a cancer drug).
The Supreme Court recently declined to review the class action settlement in Marek v. Lane, 134 S. Ct. 8 (Nov. 4, 2013) (denying petition for certiorari). However, the Chief Justice issued a statement, concurring in the denial of certiorari indicating that cy pres provisions of settlements raise “fundamental concerns.” The Chief Justice also noted that cy pres remedies are a “growing feature of class action settlements.”
The original complaint, which originated as a challenge to a Facebook program known as “Beacon”, which automatically shared purchase and other personal information with both Facebook and the users’ friends lists, sought both monetary and injunctive relief. Marek, 134 S. Ct. at 8. The settlement eventually agreed to between the parties, and which gave rise to the challenge which is the subject of Marek, provided the vast majority of class members with neither remedy. Id. The underlying settlement at issue in Marek provided no monetary damages to the class at large. Id. The named plaintiffs received “modest incentive payments”, and class counsel received approximately $2.5 million. See Marek, 134 S. Ct. at 8-9. Instead of providing monetary relief to the class, the settlement created a grant-making organization, the Digital Trust Foundation (the “DTF”), the mission of which would be to educate the public about online privacy. Id. at 9; see also Mike Keefe-Feldman, “The Digital Trust Foundation: Facebook’s Unwanted Child”, Nonprofit Quarterly (June 2, 2014) (available at: https://nonprofitquarterly.org/policysocial-context/21895-the-digital-trust-foundation-facebook-s-unwanted-child.html). The Foundation would be run by a three-member board, including Facebook’s public policy director. Marek, 134 S. Ct. at 9. In addition, the settlement provided for the creation of a “Board of Legal Advisors”, consisting of counsel for the plaintiff class and Facebook, to “advise and monitor the DTF”. See Lane v. Facebook, 696 F.3d 811, 818 (9th Cir. 2012). Further complicating the settlement, the class of those barred from future litigation included not just individuals injured by the specific program during the time period cited in the original complaint, but also all individuals injured by subsequent iterations of the program at time periods not covered by the original complaint. Id. As the Chief Justice notes, “Facebook thus insulated itself from all class claims arising from the Beacon episode by paying plaintiffs’ counsel and the named plaintiffs some $3 million and spending $6.5 million to set up a foundation in which it would play a major role.” Id.
The Chief Justice notes dryly that, when this settlement was challenged by class members, the District Court, Judge Richard Seeborg, found it to be “fair, reasonable, and adequate.” Id., citing Fed. R. Civ. P. 23(e)(2); Lane v. Facebook, Inc., Civ. No. C 08-3845, 2010 U.S. Dist. LEXIS 24762, 2010 WL 9013059 (N.D. Cal. Mar. 17, 2010). On appeal, a panel of the Ninth Circuit affirmed the District Court’s determination by a vote of 2-1.
In that decision, authored by Circuit Judge Hug, with a dissent by Judge Kleinfeld, the Ninth Circuit indicated that its responsibility was to “evaluate the fairness of a settlement as a whole, rather than assessing its individual components.” Lane, 696 F.3d at 818. As to the adequacy of cy pres remedies, the Ninth Circuit indicated that the Court must ensure that the remedy “account[s] for the nature of the plaintiffs’ lawsuit, the objectives of the underlying statutes, and the interests of the silent class members.” Id. at 819-20 (internal quotations omitted). Plaintiffs raised two principal challenges to the settlement – the amount and the use of a cy pres remedy. Id. at 820. Here, we focus only on the latter, which the Ninth Circuit characterized as the strongest objection to the settlement. Id.
First, the Court turned to plaintiff’s argument that the cy pres remedy was inappropriate because the presence of Facebook executives on DTF’s board would “create[] an unacceptable conflict of interest that will prevent DTF from acting in the interests of the class.” Id. Finding that the cy pres remedy here was proper, the court explained that “we do not require…that settling parties select a cy pres recipient that the court or class members would find ideal.” Id. at 820-21. The only requirement was that the cy pres remedy should account for the interests of the lawsuit, the statute, and silent plaintiffs. Id. Finding the notion “[t]hat Facebook retained and will use its say in how cy pres funds will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is…unremarkable” and declining to “undermine those negotiations by second-guessing the parties’ decision”, the Court upheld the arrangement. Id. at 822.
The dissent, noting the potential for embarrassment created by the “Beacon” program, also pointed out that mediation and settlement occurred prior to any class certification. The class was only certified for settlement purposes. Id. at 828. Other details contained in the dissent cast further doubt on the utility, if not the validity, of the settlement. For instance, while Facebook agreed never to relaunch the “Beacon Program”, this term was defined to include only programs “bearing the ‘Beacon’ name” – in other words, the same program under a different name would not be a “Beacon Program”. Judge Kleinfeld’s dissenting opinion notes that “[t]he injunctive relief the class received was no relief at all, not even a restriction on future identical conduct.” Id. Regarding the monetary relief, Judge Kleinfeld explained “Facebook users…got no money, not a nickel, from the defendants. Even those who…were arguably entitled to statutory damages…got nothing. Class counsel, on the other ha[n]d, got millions.” As to the “incentive payments”, only $39,000.00 of the $9 million settlement was allocated to those payments. Id. at 829.
Judge Kleinfeld’s spirited dissent is worth reading in its entirety for its detailed exposition of the numerous conflicts to which class actions are susceptible – and which arose in this case. A flavor, however, can be gleaned from this excerpt:
Defendant and class counsel, in any class action, have incentives to collude in an agreement to bar victims' claims for little or no compensation to the victims, in exchange for a big enough attorneys' fee to induce betrayal of the interests of the purported "clients." The defendant's agreement not to oppose some amount for the fee creates the same incentive as a payment to a prizefighter to throw a fight. A real client may refuse a settlement that is bad for him but benefits his lawyer, but a large class of unknown individuals lacks the knowledge or authority to say no. It is hard to imagine a real client saying to his lawyer, "I have no objection to the defendant paying you a lot of money in exchange for agreement to seek nothing for me." "The absence of individual clients controlling the litigation for their own benefit creates opportunities for collusive arrangements in which defendants can pay the attorneys for the plaintiff class enough money to induce them to settle the class action for too little benefit to the class (or too much benefit to the attorneys, if the claim is weak but the risks to the defendants high).
Over a dissent written by Judge Milan D. Smith, and joined by five of her colleagues, including Chief Judge Kozinski, the Ninth Circuit denied rehearing en banc. The dissent focused what, in its view, constituted several major departures from the Ninth Circuit’s prior case law on the subject of cy pres remedies. Among the problems identified by the dissenters are the lack of any track record on the part of the DTF, and the divorce between the DTF’s goals and the objectives of the underlying statutes. Lane, 709 F.3d at 793-794. As to the former, the dissenters explained that the DTF “has no record of service” and that, given this lack, there is simply no way of knowing how the settlement funds will be used in the level of detail required by the Court’s prior cy pres precedent. Id. at 793. The dissenters argue that there is no assurance that the class members will “actually benefit” from DTF’s activities, and that DTF’s mission statement amounts to little more than promising that “DTF will do some ‘stuff’ regarding some more ‘critical stuff.’” Id. at 794. Regarding the latter, the dissenters explain that the statutes cited by the original plaintiffs all, with one exception, have the goal of preventing “unauthorized access or disclosure of private information.” Id. (emphasis in original) (citing the Electronic Communications Privacy Act, 18 U.S.C. § 2510; the Computer Fraud and Abuse Act, 18 U.S.C. § 1030; the Video Privacy Protection Act, 18 U.S.C. § 2710; the California Legal Remedies Act, Cal. Civ. Code § 1750, and the California Computer Crime Law, Cal. Penal Code § 502). The dissenters note that DTF’s stated goals focus on educating users on controlling their private information, but not in the issue central to this case – controlling the unauthorized use of personal information which even educated users cannot anticipate, prevent, or direct. Id. at 794.
Returning to Chief Justice Roberts’ statement concerning the denial of certiorari, we can glean several insights into the concerns about cy pres settlements. Although the Chief Justice joined the Court’s decision to deny certiorari, his rationale is telling:
Marek’s challenge is focused on the particular features of the specific cy pres settlement at issue. Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation[.]
Marek, 134 S. Ct. at 9. Among the Chief Justice’s concerns are: 1) When, if ever, cy pres remedies should be considered; 2) How to assess the fairness of cy pres remedies; 3) Whether new entities may be established as part of cy pres relief; 4) How existing entities should be selected; 5) What role is to be played by both the Judge and the parties in shaping a cy pres remedy; and 6) How closely the goals of any organization selected must correspond to the interests of the class. Id. It may be of note that the Chief Justice referenced Redish, Julian, & Zyontz’s article in the Florida Law Review, entitled “Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis”. 62 Fla. L. Rev. 617, 653-56 (2010) (available at: http://www.floridalawreview.com/wp-content/uploads/2010/01/Redish_BOOK.pdf). The Chief Justice concluded with an open invitation to further challenges, noting that “[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies.” Id.
Another vivid example of the potential problems in using cy pres remedies in the class action context is provided by In re Baby Prods. Antitrust Litig., 708 F.3d 163 (3d Cir. 2013). See Wasserman, Rhonda, Cy Pres in Class Action Settlements (March 24, 2014). Southern California Law Review, Vol. 88, 2014, Forthcoming; U. of Pittsburgh Legal Studies Research Paper No. 2014-14. Available at SSRN:http://ssrn.com/abstract=2413951 (“Wasserman”). In Baby Products, the plaintiffs alleged that defendants had conspired to set a “floor price” on select products. Wasserman at 32. Unlike in Lane, the district court certified a class of purchasers, and various subclasses, well in advance of settlement. Id. While the formula for distributing the funds was somewhat complex, assuming adequate moneys were available, plaintiffs would be eligible to receive up to treble damages, with any remainder to be donated to a charitable organization selected by the Court from among those proposed by the parties. Baby Products, 708 F.3d at 171. However, because most class members were unable to provide proof that they purchased a qualifying product, only roughly ten percent of the $35.5 million settlement fund was used to compensate class members.
As an initial matter, the court held that “[w]e join other courts of appeals in holding that a district court does not abuse its discretion by approving a class action settlement agreement that includes a cy pres component.” Id. at 173. However, the Court immediately cautioned that “direct distributions to the class are preferred over cy pres” remedies. Id. The Court noted that the ALI has published recommendations limiting the use of cy pres awards:
American Law Institute Principles of the Law of Aggregate Litig. § 3.07, comment b (2010) (the “Principles”). The Principles provide that the cy pres doctrine should be used as a last resort only when other methods of distribution are not practicable, whether due to the unknown composition of the plaintiff class or due to the impracticability of cost-effectively distributing numerous small awards. See Karen Shanley, The Institute in the Courts: Principles of the Law of Aggregate Litigation, The ALI Reporter (available at: http://www.ali.org/_news/reporter/summer2012/07-institute-courts-aggregate-litigation.html). The Principles indicate that cy pres is an inappropriate remedy where there was still a possibility of compensating plaintiffs. Id.; see also Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468 (5th Cir. 2011) (use of cy pres remedy denied. Court, citing section 3.07 of the Principles, reasoned that “a cy pres distribution to a third party…is permissible ‘only when it is not feasible to make further distributions to class members.”). The Principles provide guidance as to when distribution of settlement proceeds to class members is viable. Principles § 3.07(a); Shanley at 1. Factors courts should consider include whether class members can be “identified through reasonable effort” and whether “the amounts involved are too small to make individual distributions economically viable” as well as “other specific reasons that would make such further distributions impossible or unfair.” Principles at § 3.07(b); Shanley at 2.
To assess whether a settlement containing a cy pres provision is “fair, reasonable, and adequate” the Third Circuit indicated that courts should consider “the number of individual awards compared to both the number of claims and the estimated number of class members, the size of the individual awards compared to claimants’ estimated damages, and the claims process used to determine individual awards.” Baby Products, 708 F.3d at 174. More particularly, the Court advised that, in general, “cy pres awards should generally represent a small percentage of total settlement funds.” Finally, the Court opined that if Defendants refused to alter the claims process to result in a higher payout to the class, “the Court will need to determine whether the class received sufficient direct benefit to justify the settlement as fair, reasonable, and adequate.” Id. at 176. As part of its order remanding the matter, the Court vacated the $14 million attorneys’ fee award, as the settlement was no longer in effect. Id.
The Baby Products opinion is part of a line of cases that have expressed concern about the implications of the cy pres doctrine. Joshua Dunlap, Closer Scrutiny for Cy Pres Distributions?, FirstClassDefense Blog (March 8, 2013) (available at: http://pierceatwood.typepad.com/first_class_defense/2013/03/closer-scrutiny-for-cy-pres-distributions.html). In In re Compact Disc Minimum Advertised Price Litig., the district court for the Federal District of Maine expressed skepticism of the benefit of a cy pres award to the class plaintiffs. No. 2:00-MD-1361, 2005 U.S. Dist. LEXIS 11332 (D. Me. June 10, 2005). In Compact Disc, the Court actually reduced the fee award to class counsel “in light of the modest benefit” received as a result of the cy pres award. Id.
Of course, despite criticism, courts continued to employ cy pres awards out of a belief that they are superior to the alternatives. In general, if a cy pres award is not available, then the settlement funds would revert to either the Defendant or the government. Wasserman at 10-12. In the former case, courts have expressed concern that that such a remedy would risk “undermining the deterrent effect of class actions by rewarding defendants for the failure of class members to collect their share of the settlement.” Baby Products, 708 F.3d at 172. This is especially true where statutory objectives include deterrence or disgorgement. Wasserman at 11; Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1308 (9th Cir. 1990). Of course, where compete distribution is impossible, the preference is to increase the award to class members before engaging in cy pres distribution. See In re Lupron Mktg. & Sales Practices Litig., 677 F.3d 21 (3d Cir. 2012). Commentators have long complained of the use of cy pres awards for numerous reasons, including the due process and First Amendment rights of class members. See Ilya Shapiro, “Curbing Class Action Settlement Abuses”, Cato at Liberty Blog (Aug. 28, 2013) (available at: http://www.cato.org/blog/curbing-class-action-settlement-abuses). Chief Justice Roberts’ concurrence to the denial of certiorari in Marek raises the possibility that these arguments may soon receive a hearing before the Court.
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