Between A Rock and A Hard Place -- Ricci v. DeStefano Addresses the Conflict Between Disparate Treatment and Disparate Impact Theories

The U.S. Supreme Court decision in Ricci v. DeStefano is very much in the tradition of the Court's affirmative action jurisprudence of the last 40 years.  In other words, it is confusing and provides little or no practical guidance to real-world employers.

The factual scenario in Ricci placed the employer (the New Haven Fire Department) in an excruciating dilemma.  It had taken great pains to design and administer a promotion test that would be job related and fair to members of all ethnic groups.  But when the results came back, the only candidates eligible for promotion were white.  The minority candidates threatened a lawsuit if the test results were used.  And the white candidates threatened a lawsuit if they were thrown out.

The hapless City chose to be sued by the white firefighters.  In throwing out the test results, the City admittedly acted for  racially discriminatory reasons -- i.e. because "too many" whites had passed the test.  The City argued, however, that avoiding a lawsuit over the unintended  disparate impact of its test should be a legal justification for its intentional disparate treatment in voiding the results for racial reasons.

The Court recognized that employers may be faced with a conflict between potential liability for "disparate treatment" and  "disparate impact."  The Court's resolution was to create a new affirmative defense under which an employer may be immunized from liability for an adverse employment action if it had a "strong-basis-in-evidence" to believe that its action was necessary to avoid liability under another theory of discrimination.

This is a strange rule because it basically directs employers to put themselves on trial and reach a legal conclusion as to how they are most likely to be found liable (even where they believe they have done nothing wrong under any theory) . 

It also goes without saying that this "strong-basis-in-evidence" standard is inevitably in the eye of the beholder. After all, the Supreme Court ruled in favor of the white firefighters on the ground that the evidence of intentional disparate treatment was slam-dunk compared to the very weak claim for disparate impact from the test.  However, the First Circuit panel whose decision was overruled (including soon-to-be Supreme Court Justice Sonia Sotomayor) had looked at the same record and found the opposite to be true.    

Binding Effect of PAGA Decisions Is An Alternative To Class Certification -- Arias v. Superior Court

The California Supreme opinion in Arias v. Superior Court has created a potent new alternative to class actions for enforcing Labor Code provisions.

The Supreme Court granted review to decide whether plaintiffs must obtain formal class certification in order to bring claims under two different statutes --  the Unfair Competition Law (the "UCL," Business and Professions Code section 17200, et seq.) and the Labor Code Private Attorney General Act of 2004 ("PAGA," Labor Code section 2698, et seq.).  The answers were "Yes" as to the UCL, and "No" as to PAGA.

The really interesting part of the decision, however, was the Supreme Court's elucidation of how principles of collateral estoppel should apply in a representative PAGA action which has not been formally certified as a class action.  To understand the due process issues raised by such an action the Court first explained the burdens imposed on a defendant by the prospect of "one-way intervention."

Unfairness may result from application of collateral estoppel when, for example, various plaintiffs in separate lawsuits against the same defendant assert claims presenting common issues. Because collateral estoppel may be invoked only against a party to the prior lawsuit in which the issue was determined, and because in our example the defendant would be a party to every lawsuit while each of the various plaintiffs would be a party in only one lawsuit, the defendant would in later lawsuits be bound by any adverse determination of the common issues, while none of the plaintiffs would be similarly bound by prior determinations in the defendant's favor. Thus, one plaintiff could sue and lose; another could sue and lose; and another and another until one finally prevailed; then everyone else would ride on that single success.  (Internal Citations omitted).

The Court went on to explain, however, that this "one-way intervention" problem cannot arise as to employee claims for the penalties provided solely by PAGA itself. 

Because an aggrieved employee's action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. . . . Accordingly, with respect to the recovery of civil penalties, nonparty employees as well as the government are bound by the judgment in an action brought under the act, and therefore defendants' due process concerns are to that extent unfounded.

Just as significantly, however, the Court went on to specifically approve "one-way intervention" for employees who wish to "piggyback" on a favorable PAGA ruling by seeking wages and other remedies which are not provided by PAGA itself.

 [I]f an employee plaintiff prevails in an action under [PAGA] for civil penalties by proving that the employer has committed a Labor Code violation, the defendant employer will be bound by the resulting judgment. Nonparty employees may then, by invoking collateral estoppel, use the judgment against the employer to obtain remedies other than civil penalties for the same Labor Code violations. If the employer had prevailed, however, the nonparty employees, because they were not given notice of the action or afforded any opportunity to be heard, would not be bound by the judgment as to remedies other than civil penalties.

In short, as construed by the Supreme Court, an action under PAGA  represents the best of both worlds for plaintiffs' attorneys.  On the one hand, they need not obtain class certification to bring an action on behalf of an entire group of employees.  And yet, a favorable decision on the merits will still bind the employer on a class-wide basis as to both PAGA and non-PAGA claims.

Arias v. Superior Court - Class Action Requirements Clarified By California Supreme Court

In almost every employment law class action filed, the plaintiff alleges a cause of action under California’s unfair competition law, found in California’s Business & Professions Code section 17200. Likewise, plaintiffs’ routinely allege causes of action under California Labor Code Private Attorneys General Act of 2004, found in Labor Code section 2698. These claims can be filed by one plaintiff as a “representative action” in which the individual plaintiff is seeking remedies on behalf of all other employees.

The issue decided by the California Supreme Court in Arias v. Superior Court was whether the plaintiff bringing a "representative action" must have the class certified as a class action when pursing a unfair competition claim and a Private Attorneys General Act claim. The Supreme Court held that a plaintiff must have the class certified as a class action when pursuing a Business & Professions Code section 17200 claim, but the plaintiff does not have to certify a class action to maintain a “representative action” under the Private Attorneys General Act.

The Court explained, “[a] party seeking certification of a class action bears the burden of establishing that there is an ascertainable class and a well-defined community of interest among the class members.” If a class is certified by a trial court, then everyone who fits the class definition receives notice that they are automatically in the class (unless they affirmatively opt out), and are bound by the ultimate outcome of the case.

Claims Under The Unfair Competition Law Must Be Certified As a Class Action

The Supreme Court explained that the unfair competition law prohibits “any unlawful, unfair or fraudulent business act or practice . . . .” Furthermore, in 2004, California voters passed Proposition 64 that amended Business & Professions Code section 17200 to only allow a plaintiff to bring a representative action under if he or she “suffer injury in fact and has lost money or property as a result of such unfair competition” and that the action must comply with California Code of Civil Procedure section 382, which (generally) allows for class actions under California law. The Supreme Court explained the intent of the voters in passing Proposition 64:

A thorough review of the Voter Information Guide prepared by the Secretary of State for the November 2, 2004, election at which the voters enacted Proposition 64 leaves no doubt that, as discussed below, one purpose of Proposition 64 was to impose class action requirements on private plaintiffs’ representative actions brought under the Unfair Competition Law.

Therefore, the Court held that claims brought under Section 17200 must be certified as a class action.

Claims Under The Private Attorneys General Act of 2004 Do Not Need To Be Certified As A Class Action

The Private Attorneys General Act (sometimes referred to as the bounty hunter law) was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws. As the Court noted in its opinion, at the time the legislation passed, the state’s labor law enforcement agencies did not have enough resources or staffing necessary to keep up with the rapid growth of California’s workforce. Therefore, the Act allows aggrieved employees to act like a private attorney general in collecting civil penalties for Labor Code violations. The employee must give 75% of the collected penalties to the Labor and Workforce Development Agency, and the remaining 25% is to be distributed among the employees affected by the violations.

Employees seeking recovery under the Private Attorneys General Act must comply with requirements that place the Labor and Workforce Development Agency and the employer on notice that the employee will be seeking remedies under the Act and give the Agency a chance to investigate itself. If the Agency does not investigate, then the plaintiff can proceed with the claim.

The Supreme Court did not agree with defendants' arguments that Private Attorneys General Act claims must be certified as a class action. The defendants argued that by not requiring class certification for these claims deprives defendants of their due process rights. Defendants explained that there is a scenario where plaintiffs could continually bring Private Attorneys General Act claims against their employer over and over for the same issues until they eventually prevail if the class certification is not required. The Supreme Court explained that this is not a concern:

Because an aggrieved employee’s action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties “is fundamentally a law enforcement action designed to protect the public and not to benefit private parties."

Therefore, because all employees on whose behalf the representative plaintiff seeks remedies are bound by the ultimate outcome of the case, defendants are not faced with this possibility.

The Supreme Court Tweaks Burden of Proof for Age Discrimination -- Gross v. FBL Financial Services, Inc.

The U.S. Supreme Court decision in Gross v. FBL Financial Services, Inc. has been hailed by the news media and some commentators as effecting a significant change in the law which makes it "much harder" to prove age discrimination.  The reality, however, is that the decision will have little or no impact in real world cases.

Under the prior rule if a plaintiff submitted direct evidence at trial (such as an admission by a person involved in his termination decision) that his age was a "motivating factor" in selecting him for termination, the burden of proof would then shift to the employer to demonstrate that it would have made the same decision regardless of age.  Gross v. FBL says that the burden should remain with the employee in this situation.

This might sound like a big deal.  But the "mixed motive" issue only arises after an employee has already submitted not only a prima facie case -- but strong "direct evidence" of a discriminatory motive.  At this point, arguing about who bears the ultimate burden of proof is a mostly metaphysical question. 

The jury will either believe discrimination was the real reason for the termination decision, or it won't.  But the burden of proof would only be dispositive in the highly unlikely event that the jury determines that the evidence submitted by both sides is in perfect equipoise.  This is simply not the way real jurors think or act.   

Furthermore, the decision applies only to claims under the federal ADEA and has no application to cases decided under Title VII or California anti-discrimination law.  And, in any event, the adverse publicity will cause Congress to legislatively overule the opinion in short order.  For all of these reasons, employers should take no comfort from Gross v. FBL.  

A Bad Idea Whose Time Has Come? -- Government Mandated Paid Sick Leave Under The Healthy Families Act

Federal legislation to require paid sick leave is currently working its way through Congress.  As currently drafted House and Senate versions of the Healthy Families Act would require seven paid sick days per year for most worker.    

Passage is by no means certain but a number of thorny enforcement issues will clearly arise if the bill becomes law.  For example, how sick do you really have to be to take a day off?  How is this to be verified? What if the employer is skeptical about the need for the day off?

Everyone who has ever tried to leave a sick-sounding message for their boss saying that they can't make it in to work knows that using sick days is an art and not a science.  Employees tend to get sick on Mondays and Fridays, and tend to take periodic "mental health days" when they can enjoy them rather than waiting for a serious injury to strike.  Employers who currently offer paid sick leave know this and are generally willing to accept the cost in order to provide this sort of quasi-vacation time as a fringe benefit. 

Foisting the same requirement on other, more cost-conscious employers will spawn an infinite number of petty disputes over the use of sick days.  These disputes will, in turn, spawn a whole new crop of federal litigation.   

In the long run, employers would presumably adapt to the requirement by treating it as one-weeks' paid vacation with no questions asked and will pay for the benefit by reducing employee base compensation accordingly.  Imposing European-style vacation benefits may arguably be good policy.  But it would certainly be easier to do so directly instead of creating a dispute-generating sick leave law.

Incentive Awards for Class Representatives -- Rodriguez v. West Publishing Corporation

Class settlement agreements typically provide that individuals serving as class representatives may recovery special monetary payments, known as "enhancements" or "service awards."    In the recent decision of Rodriguez v. West Publishing Corporation the appellate court discussed when such payments are proper and when they may cross the by creating potential conflicts of interest with other class members

The Rodriguez decision arose when objectors challenged the lower court's approval of a $49 million settlement in an anti-trust action against the providers of the Bar-Bri and Kaplan bar review courses.  The objectors claimed that a conflict of interest existed because Class Counsel and certain class representatives had agreed at the outset of the action to seek specific awards based on the amount of any future settlement.  In particular:

[I]f the [settlement] amount were greater than or equal to $500,000, class counsel would seek a $10,000 award for each of them; if it were $1.5 million or more, counsel would seek a $25,000 award; if it were $5 million or more, counsel would seek $50,000; and if it were $10 million or more, counsel would seek $75,000.

The Court began its analysis by noting that there is nothing wrong or unusual about incentive awards to class representatives in general.

Incentive awards are fairly typical in class action cases. Such awards are discretionary, and are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general. Awards are generally sought after a settlement or verdict has been achieved.  (Internal citations omitted)

The Court proceeded to explain, however, that any agreement that purports to tie a class representative's compensation to particular settlement  target may result in perverse incentives and conflicts of interest.

[O]nce the threshold cash settlement was met, the agreements created a disincentive to go to trial; going to trial would put their $75,000 at risk in return for only a marginal individual gain even if the verdict were significantly greater than the settlement. The agreements also gave the contracting representatives an interest in a monetary settlement, as distinguished from other remedies, that set them apart from other members of the class. Further, agreements of this sort infect the class action environment with the troubling appearance of shopping plaintiffships. If allowed, ex ante incentive agreements could tempt potential plaintiffs to sell their lawsuits to attorneys who are the highest bidders, and vice-versa. In addition, these agreements implicate California ethics rules that prohibit representation of clients with conflicting interests.

 The Rodriguez decision thus seems to stand for the proposition that any "ex ante" agreement to seek a specific enhancement for class representatives is disapproved and may jeopardize the validity of any class settlement.  Admittedly, this was a highly unusual arrangement to begin with.  (As bar review customers the class representatives in Rodriguez were presumably lawyers or lawyers-to-be, which probably accounts for the unusually self-serving deal.)

Nevertheless, Rodriguez v. West Publishing is still an important decision because it expressly recognizes and approves of enhancement awards generally, as well as its discussion of the interplay between the financial incentives and fiduciary duties of class representatives.            



Employment Ruling At Center Stage For Sotomayor Confirmation

As judge for the Second Circuit Court of Appeals in 2007, Judge Sotomayor affirmed a lower court’s ruling that 17 white and two Hispanic firefighters were not discriminated against in violation of Title VII and the equal protection clause of the U.S. Constitution. The case is Ricci vs. DeStefano.  This ruling is being closely examined in Judge Sotomayor's confirmation to the US Supreme Court and is drawing many criticisms.  

The firefighters argued that the city of New Haven discriminated against them on the basis of their race when it threw out the results of a test that qualified the 19 firefighters for a promotion. The city threw out the results on the basis that none of the 27 black firefighters who took the exam, and passed, scored high enough to qualify for the promotion.

The lower court judge, Janet Bond Arterton, ruled that the city did not discriminate against the white and Hispanic firefighters. She said the city’s attempt to avoid discriminating against minority firefighters was "race neutral," because "all the test results were discarded, no one was promoted, and firefighters of every race will have to participate in another selection process." The firefighters’ appeal of the decision brought the case in front of Judge Sotomayor and two other judges for the Second Court of Appeals.

Judge Sotomayor and the other two judges upheld the lower court’s ruling in a two-paragraph opinion citing the reasons set forth in the lower court’s “thorough, thoughtful, and well-reasoned opinion.” The Los Angeles Times reports that other judges in the Second Circuit thought the opinion was inadequate, but a move to have it reconsidered was stopped by a vote of 7-6 by the judges.

The United States Supreme Court accepted review of the case. Oral arguments took place in April 2009, and a ruling from the Supreme Court is expected this month.

Managers Who Provide Table Service May Share in Tip Pool -- Appellate Court Reverses Award Against Starbucks

As we previously blogged, Starbucks was hammered last year with a class restitution award of $105 million in a fight over the ownership of the change dropped in its tip jars.   The central issue was whether store managers who also served customers could share in the tips which were left for all servers.  The trial court took the technical line that Labor Code section 351 prohibits any "agent" of the employer from sharing in tips -- period.

The Appellate Court reversed and took a considerably more common sense approach, explaining

There is no decisional or statutory authority prohibiting an employer from allowing a service employee to keep a portion of the collective tip, in proportion to the amount of hours worked, merely because the employee also has limited supervisory duties. Accordingly, we reverse the judgment and order the trial court to enter judgment in Starbucks's favor.

 Employers should not jump to the conclusion, however, that managers now have free reign to sharing in employee tips.  Rather, the rule in  Chau v. Starbucks decision  applies only where (a) There is a "collective tip box" or analogous circumstances in which "a customer would necessarily understand the tip will be shared among the employees who provide the service;" and (b) the managerial employee is part of the "team" that provided the service.