May 30, 2014
On May 29, 2014, the California Supreme Court in Duran v. U.S. Bank National Association, No. S200923, unanimously "affirmed in its entirety" the Court of Appeal’s decision reversing a classwide judgment for plaintiffs in a wage-and-hour misclassification class action that was tried based on an assessment of a statistical sample of class members.
Duran represents a significant victory for class action defendants in California, as it unanimously rejected as inconsistent with due process and California law attempts by class action plaintiffs to use statistical sampling and other procedural shortcuts to deprive defendants of an opportunity to present individualized defenses. The Court’s decision also refocuses the class certification inquiry in California towards an assessment of whether classwide adjudication is actually feasible and manageable. The Court followed federal class action law, including Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2561 (2011), to hold that "the class action procedural device may not be used to abridge a party’s substantive rights," including its right to litigate individualized defenses–a precept that "derive[s] from both class action rules and principles of due process." (Slip op. at 30–31.) It also raised the bar for plaintiffs who seek to prove classwide claims via statistical evidence by requiring courts to analyze proffers of statistical proof with "sufficient rigor," and to "consider at the certification stage whether a trial plan has been developed to address" the use of statistical evidence. (Id. at 27.)
Moreover, by bringing California class action law closer in line with federal law on these critical issues, the Court implicitly rejected recent decisions that had interpreted Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), as representing a "renewed direction that class-wide relief remains the preferred method of resolving wage and hour claims, even those in which the facts appear to present difficult issues of individual proof." Martinez v. Joe’s Crab Shack Holdings, Inc., 165 Cal. Rptr. 3d 85, 100 (Ct. App. 2013), review granted, 317 P.3d 1183 (Cal. 2014); see also Williams v. Superior Court, 221 Cal. App. 4th 1353, 1370 (2013) (citing Brinker and reversing order denying class certification even though many putative class members did not work off the clock and "were thus not injured"). After Duran, it is clear that "difficult issues of individual proof" can and will frequently preclude class treatment of wage-and-hour claims.
Summary of the Supreme Court’s Decision
In Duran, the trial court certified a class of 260 "business banking officers" who claimed they had been misclassified as "exempt" outside salespersons and thus were owed overtime pay. (Slip op. at 1–2.) The trial court limited the bench trial to an assessment of an unrepresentative sample of 21 class members (including the two named plaintiffs), and determined that all class members had been misclassified as exempt on the basis of the sample group’s testimony. It then extrapolated the average amount of overtime reported by the sample group to enter a $15 million judgment for the entire class. The court repeatedly rejected the defendant’s attempts to introduce evidence regarding the experiences of class members outside the sample group, and it also removed four individuals from the sample group after they opted out of the class.
In a unanimous opinion authored by Justice Carol A. Corrigan, the California Supreme Court rejected this procedure as "profoundly flawed." (Id. at 2.) The Court explained that "[a]lthough courts enjoy great latitude in structuring trials, . . . any trial must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues." (Id. at 29.) The Court reaffirmed longstanding precedents holding that "the class action procedural device may not be used to abridge a party’s substantive rights," including its right to litigate individualized defenses, and recognized that this "principle derive[s] from both class action rules and principles of due process." (Id. at 30–31 (citing Dukes, 131 S. Ct. at 2561; Lindsey v. Normet, 405 U.S. 56, 66 (1972); Philip Morris USA v. Williams, 549 U.S. 346, 353 (2007)).)
Consistent with its practice of considering federal decisions in construing California’s class certification requirements, the Court also adopted the U.S. Supreme Court’s holding in Dukes that "’a class cannot be certified on the premise that [the defendant] will not be entitled to litigate its statutory defenses to individual claims.’" (Slip op. at 31 (quoting Dukes, 131 S. Ct. at 2561).) Instead, "[c]lass certification is appropriate only if these individual questions can be managed with an appropriate trial plan," and any such "class action trial plan, including those involving statistical methods of proof, must allow the defendant to litigate its affirmative defenses. (Id. at 22, 38.) Further, "the court’s obligation to manage individual issues does not disappear" after certification–"decertification must be ordered whenever a trial plan proves unworkable." (Id. at 23, 27 (emphasis added).)
Recognizing that "class treatment may be appropriate" in certain misclassification cases "[w]here standardized job duties or other policies result in employees uniformly spending most of their time on nonexempt work," the Court noted that, in some circumstances, "it may be possible to manage individual actions through the use of surveys and statistical sampling." (Id. at 26.) But the Court cautioned that "[s]tatistical methods cannot entirely substitute for common proof." (Id.) Instead, "[t]here must be some glue that binds class members together apart from statistical evidence." (Id.; see also Dukes, 131 S. Ct. at 2552.) Indeed, any "statistical plan for managing individual issues must be conducted with sufficient rigor," and "[i]f statistical evidence will comprise part of the proof on class action claims, the court should consider at the certification stage whether a trial plan has been developed to address its use." (Slip op. at 27.)
The Court also grounded its affirmance of the Court of Appeal’s judgment on "the undue restrictions . . . placed on [the defendant’s] ability to support its exemption defense," as well as the "numerous problems" inherent in the trial court’s "attempt to implement random sampling." (Id. at 35.) The sample of 21 class members, which included the two named plaintiffs and was selected "without input from either side’s statistical experts," was too small. (Id. at 40.) Moreover, the sample was not random, and was infected by both nonresponse bias and selection bias, the Court held, effectively underscoring the need to have robust expert evidence (and rebuttal evidence) at the class certification stage. (Id. at 41–44.) And an "[i]ntolerably [l]arge" margin of error resulted–a 43.3 percent margin of error regarding estimates as to overtime hours worked, and a 13 percent margin of error regarding misclassification. (Id. at 44–49.)
Justice Liu joined in the unanimous opinion of the Court but wrote separately "to further elucidate the proper inquiry at the class certification stage of an employee misclassification case and the duty of trial courts to manage individual issues in a class action trial." (Conc. op. of Liu, J. at 2.)
Potential Implications of Duran
Duran is a highly significant development in class action and wage-and-hour jurisprudence, and marks an important win for California employers and other class action defendants. The Court’s decision confirms that due process and California law forbid procedural shortcuts, including statistical sampling, that deprive defendants of an opportunity to present their individualized defenses. It also underscores the responsibility of trial courts to ensure that class actions can be feasibly and manageably tried, without altering the substantive law.
Among other important issues, Duran should provide needed clarity on the following topics that are frequently litigated in wage-and-hour and other types of class actions in California:
1. Feasibility of Certification in Wage-and-Hour Cases. Prior to Duran, several Court of Appeal decisions seized on Brinker’s statement that "[c]laims alleging that a uniform policy consistently applied to a group of employees is in violation of the wage and hour laws are of the sort routinely, and properly, found suitable for class treatment" (Brinker, 53 Cal. 4th at 1033), and sidestepped thorny individualized questions. In Duran, however, the Court cautioned that, "[i]n actuality, . . . Labor Code exemptions frequently depend on how individual employees perform their jobs" and "an employer’s liability for misclassification under most Labor Code exemptions will depend on employees’ individual circumstances." (Slip op. at 18, 33; see also id. at 22, 25 (observing that "difficult manageability challenges" exist in misclassification class actions, as they "ha[ve] the potential to raise numerous individual questions that may be difficult, or even impossible, to litigate on a classwide basis") (emphasis added).) But even where an employer has a uniform classification policy or practice that allegedly violates the Labor Code, "any procedure to determine the defendant’s liability to the class must still permit the defendant to introduce its own evidence, both to challenge the plaintiffs’ showing and to reduce overall damages." (Id. at 35.)
In a refreshing acknowledgment of the significant pressures that class certification places on defendants, the Court warned that "[s]ettlement should never be treated as a foregone conclusion," and "trial courts deciding whether to certify a class must consider not just whether common questions exist, but also whether it will be feasible to try the case as a class action." (Id. at 21–22 (emphasis added).)
2. Conflation of "Calculation of Damages" and "Right to Recover Damages." Many recent Court of Appeal decisions have suggested–based on an erroneous reading of Sav-On Drug Stores, Inc. v. Superior Court, 34 Cal. 4th 319 (2004), and Brinker–that individual issues relating to "damages" are irrelevant to the class certification inquiry. The unanimous opinion in Duran recognized that "'[a]s a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.’" (Slip op. at 22.) Significantly, however, the Court "cautioned that class treatment is not appropriate ‘if every member of the alleged class would be required to litigate numerous and substantial questions determining his individual right to recover following the "class judgment" on common issues.’" (Id. at 23.) Thus, while "[d]efenses that raise individual questions about the calculation of damages generally do not defeat certification," the Court observed, "a defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability." (Id. at 25.) Of course, the U.S. Supreme Court has held that "[q]uestions of individual damage calculations" may "overwhelm questions common to the class" and prevent a finding of predominance. Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433 (2013).
3. Adverse Inferences Against Employers Without Time Records. The Court explained that "[t]he Mt. Clemens rationale" often relied upon by plaintiffs’ class action counsel to draw adverse inferences against defendant-employers from the absence of records "is not sufficient to support the use of sampling to prove an employer’s liability." (Slip op. at 39 (citing Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 687–88 (1946)).)
4. Proper Use of Statistical Sampling. Although the Court did not categorically reject statistical sampling in class actions, it also did not approve its use in all cases. It specifically eschewed "a sweeping conclusion as to whether or when sampling should be available as a tool for proving liability." (Slip op. at 38.) The Court specifically warned about the limits of using statistical methods to justify class certification:
"Statistical methods cannot entirely substitute for common proof, however. There must be some glue that binds class members together apart from statistical evidence." (Id. at 26.)
"[A] statistical plan for managing individual issues must be conducted with sufficient rigor." (Id. at 27.)
"If statistical evidence will comprise part of the proof on class action claims, the court should consider at the certification stage whether a trial plan has been developed to address its use. . . . Rather than accepting assurances that a statistical plan will eventually be developed, trial courts would be well advised to obtain such a plan before deciding to certify a class action. In any event, decertification must be ordered whenever a trial plan proves unworkable." (Id. (emphasis added).)
The Court concluded that it "need not resolve here whether statistical sampling can ever be used in a misclassification action to prove an employer’s liability to absent class members," but that the trial plan in Duran was not sufficiently representative nor did it allow defendant to present its evidence against classwide liability. (Id. at 50.) The Court’s opinion also contains an extensive discussion of statistical methodology. (Id. at 40–45.) Coupled with the U.S. Supreme Court’s ruling in Comcast, this decision underscores the importance of robust expert submissions at the class certification stage in appropriate cases.
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Gibson, Dunn & Crutcher LLP represented amici curiae the National Association of Security Companies, the California Association of Licensed Security Agencies, ABM Security Services Inc., AlliedBarton Security Services, G4S Secure Solutions (USA) Inc., and Securitas Security Services USA, Inc. in Duran v. U.S. Bank National Association and represented Wal-Mart Stores, Inc. in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. in Comcast Corp. v. Behrend.
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