Class Action Settlement Principles to Take With You into the Next Mediation

The following paper is being presented today to an audience of workers' and consumer class action advocates at the Impact Fund's 12th Annual Class Action Conference by Bryan Schwartz, the principal of Bryan Schwartz Law.

It is the day we are all waiting for. Game Day. Today is the day all of your client-building, discovery-grinding, certification-motion-filing efforts have precipitated: mediation.

Your firm has spent 1,246.7 hours on the case so far, but everything will happen in these 12 hours. By the end of the day, you are so emotionally exhausted from the mediator pounding on you, and so happy to have the mediator come in with a number that you can tolerate, that you walk out with a pending mediator’s proposal that only says the gross dollar value of the global settlement. Perhaps you leave the mediation with a handshake agreement but without nailing down the details of the Memorandum of Understanding.

Oops. The devil was in those particular details. It turns out the $5M they wanted to pay was really $5M reversionary, so they really expect to pay closer to $2.5M. It turns out that as part of that $2.5M they expect your clients and the class to pay the employer’s payroll taxes on the back wages owed. So now it is more like $2.3M. It appears now that they expect the class definition to encompass about twice the number of people you thought were in the class, so the people you thought you were representing are only getting $1.15M. Turns out they expect for that $1.15M to have your clients execute a general release (in California, a Civil Code §1542 waiver) that might impact other valuable claims you have not even contemplated in your lawsuit – further devaluing what is actually being paid regarding the claims you actually brought. For them, each of these terms is “non-negotiable.” Suddenly, you have a settlement that is unsettled. Back to the drawing board.

Everyone who has negotiated a class action settlement has probably had some term he or she forgot to address at mediation, or in the MOU, that returned in drafting the “final” agreement as a big headache and put the deal at risk. I have. I have thought, at many class action mediations, “I wish I had a checklist so I would remember all the key terms.” Here it is.

1. Non-Reversionary Settlement
Whether or not your class action settlement needs a claims process (e.g., if it is a federal Fair Labor Standards Act (FLSA) case that requires plaintiffs to opt-in under 29 U.S.C. §216(b)), you need to know how much the employer really plans to pay. A common defendant pitch during a class action mediation is for a “reversionary” settlement, where the defendant will recoup any amount not claimed during a claims process. Among other disadvantages, this puts the parties’ interests during the settlement administration process in conflict –instead of aligning them, with all parties hoping for maximum participation (or, as defendants would see it – the maximum number of releases). We want the class to participate fully and recover as much as possible. Defendants will want the same sweeping release of the class members’ claims, with as much of the settlement fund as possible unclaimed and thus reverting to the defendants. It is intuitive – they want to pay less, for more. Do not let them.

The judiciary is attuned to the pitfalls of the reversionary settlement. The Federal Judicial Center publishes “Managing Class Action Litigation: A Pocket Guide for Judges” (available online), which explains:
“A reversion clause creates perverse incentives for a defendant to impose restrictive eligibility conditions and for class counsel and defendants to use the artificially inflated settlement amount as a basis for attorney fees.”

In this vein, California and federal courts have been articulating a distaste for reversionary settlements for years, especially where the attorneys try to claim fees as a percentage of the whole fund, rather than the actual pay-out, and where all the class members’ claims are released, whether they get paid or not. See, e.g., Kakani v. Oracle Corp., 2007 WL 1793774 (N.D.Cal. June 19, 2007) (Alsup, J.). Cf. Glass v. UBS Financial Services, Inc. (9th Cir. 2009) 331 Fed.Appx. 452, 456 (reversionary settlements generally “problematic”). Some courts have unequivocally rejected all reversionary settlements, as a matter of policy. See, e.g., the Alameda County Superior Court Complex Division’s former Guidelines for Preliminary Approval of Class Action Settlements (“The Court will not approve a settlement that contains a reversion to a defendant.”). Courts evaluate, at a minimum, the real cash value of a settlement to class members and how much the case was discounted for settlement purposes – which is difficult to do at preliminary approval, when an unknown portion of the settlement fund will revert to defendants. See Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116.

Instead of reversion to defendants, the Federal Judicial Center proposes that the unclaimed funds be allocated pro rata to those participating, based upon their initial allocations, i.e., someone getting $1,000 in the initial allocation will receive $2 of the unclaimed funds for every $1 received by a class member whose initial allocation was $500. This can be done in a second payment, or (more cost-effectively) by increasing the allocations before the initial distribution. Unclaimed funds may also go to a suitable cy pres recipient.

In 2009, I wrote an article called “Death to the Reversionary, Claims Made Settlement”, and I have made this issue regarding reversion the first debate I have in every class action mediation since that time. Simply put, though opposing counsel and the mediators almost always try to push the reversionary settlement, I say up front: I will not agree to one. Defendants may object (particularly in the FLSA context) that they should not have to pay the same amount regardless of the number of settlement participants. They may object that the lack of a reversion will provide a “windfall” to the participants. But, it turns out, companies principally care what they will have to pay ultimately for the release of the claims alleged in the suit. As to the windfall, there is none. You are compromising from full relief in agreeing to your settlement, and the pro rata increase to allocations only gets the participating class members a little closer to the claimed full relief.

Mediators will usually admonish you that they cannot get you the same amount in a non-reversionary, “all-in” settlement – and my response is to say that I understand the number may be lower – but, it will be a real value to the class, and, perhaps most importantly, defendants and plaintiffs’ counsel will be aligned in trying to achieve maximum participation in the settlement. Once defendants have agreed to pay the full amount with no possibility of reversion, they will have no motivation at all to discourage participation, and will not be lukewarm or neutral about participation, either. On the contrary, defendants will cooperate enthusiastically in encouraging everyone to participate for the same $2M they are paying, since the money is all spent and none is reverting to them. They may send communications to the class – apart from the notice – urging everyone to participate in the fair settlement you have negotiated, reassuring absent class members that no retaliation will befall anyone who does. They will provide phone numbers and emails for follow-up by the administrator and class counsel. I have averaged over 80% affirmative opt-in rates in non-reversionary settlements – and have achieved up to 94% participation.

This term – “all-in” or “non-reversionary” – needs to be part of any mediator’s proposal or MOU because, more than any other (other than the gross dollar value of the settlement), it is a term that cannot be left to negotiate later.

2. Employer’s Share of Payroll Taxes
If your settlement involves back wages, then it involves payroll taxes. Do not be surprised that the employer’s vision of a “global” settlement includes the notion that your clients will pay the employer’s taxes. Yet, an employer is required to withhold taxes from wages pursuant to 26 U.S.C. §§ 3102(a) and 3402(a), and to pay an employer’s share of FICA pursuant to § 3111. The same is true under FUTA, 26 U.S.C. §§ 3301, et seq. The Internal Revenue Service website advises employers that they must “withhold part of Social Security and Medicare taxes from your employees' wages and . . . pay a matching amount yourself.” The guidance further states that employers must pay the federal unemployment tax (FUTA) “only from [their] own funds” and that “[e]mployees do not pay this tax or have it withheld from their pay.” See here.

Do not let your defendants shift their duty to your clients. Ultimately, the employers’ attorneys’ are principally or only interested in the bottom line – how much will the client have to write a check for – and you should be clear that the check includes the employer’s own share of its taxes separate from and in addition to the class relief – e.g., the $500,000 settlement is really for $517,255.56, since one third of the class members’ payments were W2 wages, regarding which the employer must pay federal and state unemployment taxes (FUTA and SUTA), Social Security and Medicare taxes, and FICA. Courts note favorably where the employer covers its share. See, e.g., Rosenburg v. International Business Machines Corp., 2007 WL 2043855, at *3 (N.D. Cal. July 12, 2007). Being clear on this term at every step of the process will put a lot more money in your clients’ and the class members’ pockets – anywhere from 5-15% more.

A final note on point – particularly important if defendants have any solvency issues: make sure the full amount to cover the employer’s share is deposited in trust or secured by a letter of credit at the same time as the overall settlement amount, because the settlement administrator will not mail any checks until the amount is there, and – irrespective of your agreement – if the employer has not put forward its share of the taxes, it will come out of the class members’ settlement (or your fees, or be deducted from the cy pres remainder) when it comes time for disbursement.

3. Scope of Class and Release
Make sure it is clear what you are, and are not, negotiating. While it is commonplace for representative plaintiffs receiving enhancements to sign a broad release of claims – and indeed, such provides some justification for their enhanced payments – the class members’ release should be narrowly drafted to impact only the claims raised in the suit or, at a maximum, those which could have been raised in a suit premised on the same facts pled. If it is a wage/hour settlement, there is no reason your class members should be releasing, e.g., their disability discrimination claims, to get their back wages with penalties and interest. The Kakani decision and a host of federal and state authorities (in California, see Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134, and cases following it) reaffirm the basic principle that class members should be compensated based upon the claims they are releasing.

In the same vein, make sure the class period (in California, four years before the complaint was filed, and through preliminary approval, frequently) and job titles encompassed in the settlement are mutually understood – yours would not be the first case in which defendants tried to sweep additional class members into an all-in settlement who you never contemplated sharing in the relief. Do not permit defendants to water down the settlement payments by doubling the size of your class – those encompassed in your complaint should be those benefiting from the settlement, or, defendants should pay more to compensate the additional class members.

4. Timing of Payment
Particularly with a financially-shaky employer (or any company, especially a closely-held one, where bankruptcy is a ready option), make sure the money (including, as noted above, the employer’s share of any payroll taxes) is in the bank. In circumstances involving a small or otherwise potentially insolvent employer make the timing of the deposit into a Qualified Settlement Fund – where it becomes unreachable by the defendant, even perhaps in the event of a bankruptcy claw-back – a core condition of a MOU, or request that it be part of a mediator’s proposal. Having the money in the bank also helps avoid delay in negotiating additional settlement documents like the final settlement agreement and class notice/claim form, any joint motions, etc. If the money has been paid, the employer has no reason to drag its feet (i.e, it is no longer accruing interest on the money in its bank after the settlement amount has been fully paid). If the employer does not have the wherewithal to put all the money in the external trust account immediately, find out when it will be there (within ten days of the signing of the MOU? within five days of preliminary approval? 30 days before the final approval hearing?), and/or require the employer to provide a letter of credit from a viable financial institution, guaranteeing that all the money will be there when it is required.

Also, generally, your clients and the class members want to get paid as soon as possible, so there is no justification for a settlement term that conditions the disbursement of payments on the expiration of time for appeals, if no one properly objected or even expressly opted-out of the agreement. Such only drags out an already long process for your class members.

5. Failure of Settlement
You have not even consummated the settlement but you should nonetheless contemplate it failing. Namely, what number or percentage of opt-outs will “blow up” the settlement? Choosing too small a number or percentage is highly risky – 10% is appropriate. Moreover, insist on a provision that the employer will own any administration costs incurred before the settlement failed – another good reason to have the settlement fund amount deposited early.

6. Nature of the Payments
Will the payments to class members be considered all wages (subject to a W2), half wages-half interest/penalties (subject to a 1099), or one-third each for wages, penalties, and interest. This is one area where your view and the defendants’ may converge: they do not want to pay more wages (leading to a larger employer payroll tax burden), and your client would rather not have deductions taken. Settlement administrators, however, are becoming more attuned to this issue, and no one wants an IRS or state tax audit. Moreover, some argue that in the long term it is better for clients to be paid wages because they ultimately (perhaps on retirement) will receive the benefit of the employer’s payroll tax contributions. Regardless of your strategy, this issue should be addressed at mediation.

7. Injunctive Relief
Though it goes beyond the scope of this short paper to describe all of the possible forms of injunctive relief that could be part of your settlement, such should be outlined in the MOU or mediator’s proposal explicitly – do not assume that defendants paying a settlement regarding a wage/hour misclassification class action will reclassify the position at issue (though, they should!) unless it is explicitly provided by your agreement. When the injunctive relief is agreed upon, ensure that defendants are prepared to assist in quantifying the value of that relief, so you can use the information in describing to the court at preliminary and final approval, and in seeking your fees, the real value of your settlement. Also, seek to specify a timeline for compliance and a monitoring mechanism, if needed, from the outset.

8. Attorneys’ Fees – Costs – Enhancements
Once a settlement becomes “all-in,” and defendants are paying the entire amount regardless of the level of participation by the class, they will have little incentive to oppose the fees, costs, and enhancements you think are appropriate. Still, it is important to agree in advance what amounts defendants will not oppose as to each, with a further agreement that any amounts not approved by the court go to the class, and do not revert to defendants. Bring your lodestar and documentation of all fees-costs to the mediation to assist in the negotiations.

9. California PAGA Allocation
If you have a Labor Code case in California, and you have not exhausted or pled PAGA, defendants may yet want a PAGA release – which will necessitate you exhausting PAGA and agreeing to amend the complaint to include PAGA, by stipulation. I see no reason to oppose adding and releasing PAGA claims, if you are settling the underlying wage claims – certainly from defendants’ perspective, it is reasonable that they would be expecting to buy peace and not want to have to address a separate suit alleging PAGA claims arising from the same underlying violations after your settlement is done. If they raise a PAGA amendment and waiver, you must determine how much of the class members’ portion of the common fund to allocate to PAGA – knowing that 75% of this amount will have to be sent to the Labor Workforce Development Agency. Most attorneys are allocating only a small amount to PAGA claims in their settlements, but this should be agreed upon, since some defendants will want a more substantial allocation to avoid any protest from the court or LWDA. I believe the latter is extremely uncommon, and as yet, I believe there to be no published case law establishing the need for a large PAGA allocation in a settlement.

10. Settlement Administration Process and Cy Pres
Try to agree on a settlement administrator (assuming you decide to use one) or that defendants will allow you to establish and maintain all relationship with the administrator. Seek payment of the administration costs separately from the common fund amount. Agree on such concepts as: the length of time to opt-into the agreement – again, all parties will favor a longer (e.g., 90 days) opt-in period if the settlement is non-reversionary, to ensure maximum opportunity for participation; the means of finding and following up with the class (reminder postcard, National Change of Address database search, distribution to email addresses, reminder phone calls); a process for disputing allocations by class members, which requires defendants’ full cooperation (since they tend to own the relevant information for resolving the dispute); opt-out/objection procedures; a website about the settlement (do not tell class members they can go to the courthouse to seek relevant case documents if they want more information); and the means of communication of the settlement to the public (press release vrs. limited confidentiality). On the subject of confidentiality, do not let defendants assume that confidentiality is part of your deal (especially for non-profits, this can be a deal-breaker), or that keeping your deal quiet has no price.

Defendants should delegate to plaintiffs’ counsel the task of discerning an appropriate settlement allocation formula among class members – and probably will be indifferent, assuming it is an all-in settlement.

Finally, reach agreement with defendants on the appropriate cy pres designee if, after the settlement checks are distributed (with initially unclaimed funds being added pro rata to the checks of those filing claims), any funds remain undisbursed (i.e., if checks are uncashed after a discrete period of time, e.g., 60 days). Defendants may allow you to choose unilaterally, but regardless, keep in mind recent jurisprudence requiring cy pres designees to relate to the purpose of the underlying suit. See, e.g., Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2013). Funds in an employment suit should go to the Impact Fund, Legal Aid Society-Employment Law Center, NELA Institute, FAIR, or some other organization dedicated to workers’ rights, and not to the metropolitan opera (unless you are representing opera singers!).

Disclaimer: Everything in this article is intended to be commentary of general interest and not meant to provide legal guidance on a particular case or establish any attorney-client relationship with the reader. For more information about representation by or co-counseling with Bryan Schwartz Law, contact the author.

Real Estate Appraisers and Review Appraisers Should Be Paid Overtime, According to Conditionally Certified Collective Action

Appraisers are not exempt "administrators" or "learned professionals" – they are production employees entitled to overtime pay, according to a class and collective action lawsuit against Bank of America brought by Bryan Schwartz Law. On December 11, the United States District Court for the Central District of California, Hon. David O. Carter, ruled in favor of Plaintiff residential appraisers Terry Boyd and others by granting Plaintiffs’ motion for conditional class certification under the federal Fair Labor Standards Act ("FLSA"). The case is Boyd, et al. v. Bank of America Corp., LandSafe, Inc., et al. (No. 13-CV-561-DOC), and the Court's order is available here.

Bryan Schwartz Law, along with co-counsel Schonbrun DeSimoneSeplow Harris & Hoffman LLP, represents the Plaintiffs, who are current and former residential appraisers and review appraisers for Bank of America / LandSafe ("BofA"). They claim that BofA misclassified them as "exempt" from the overtime requirements of federal law – the FLSA – and California state law (see our earlier posts regarding this and a similar case brought by Bryan Schwartz Law, here and here).

Residential appraisers inspect properties (usually single-family homes) day in and day out, churning out appraisal reports that provide an estimated value of the property as a necessary step in issuance of mortgages or other financial products sold by BofA. BofA appraisers are compensated under a plan that is designed to incentivize their increased production of appraisal reports, and appraisers are evaluated and paid based on their productivity. Review appraisers apply established criteria in making sure appraisal reports comply with regulatory and company requirements. Many BofA appraisers and review appraisers often work upwards of 60 hours per week, including weekends and holidays, without receiving overtime pay.

The Court’s ruling in December considered whether BofA appraisers and review appraisers across the United States are sufficiently "similarly situated" that they should be conditionally certified as a "collective action" under the FLSA, so that over 1,000 appraisers nationwide should receive a Court-approved Notice of the case, giving them an opportunity to join the suit. In concluding that BofA appraisers were entitled to certification, the Court relied on declarations from appraisers across the country demonstrating that their compensation plans and their duties are extremely similar, if not identical, throughout the company.

As the lawsuit progresses, the dispute will likely focus on whether appraisers fall within the exemptions to the federal overtime laws for "administrative" or "professional" employees. Plaintiffs maintain that the "administrative" exemption is not intended to cover employees like appraisers, but is meant to apply to personnel who are determining the strategic decisions of the company, who advise the company's top managers directly, who act in a supervisory or managerial role, or who bind the company to major financial or policy decisions. BofA appraisers do not supervise anyone. They do not have the power to bind the company. They do not set policy or advise management.

In addition, federal regulations state that in order to fall within the administrative exemption, an employee must exercise "discretion and independent judgment with respect to matters of significance." Although appraisers are legally required to have some level of independence from the Bank's underwriting department when arriving at the valuation of a home, their discretion is closely restricted by BofA and regulatory requirements about the manner in which appraisal reports must be completed. In addition, each appraisal that an appraiser conducts relates only to an appraisal report costing several hundred dollars, for a single mortgage transaction, not to "matters of significance" to the "administration" of the Company -- as contrasted, for example, with the policy-makers who decide on BofA/LandSafe's appraisal practices generally.

Likewise, the "learned professional" exemption under California and federal law is meant to apply to individuals -- like lawyers, doctors, certified public accountants, and teachers -- who undergo a prolonged course of specialized instruction (typically, a year or longer) necessary to performing their job duties. Although appraisers undoubtedly acquire a lot of training in their years working in the field, the sort of apprenticeship and on-the-job learning they do, paired with just several weeks of classroom instruction, does not entitle BofA to deprive appraisers of overtime pay. In fact, many appraisers have a high school diploma -- not an advanced post-graduate degree -- and becoming an appraiser requires no specialized degree.

Because Plaintiffs believe these exemptions do not apply, they expect to prove that BofA misclassified them as exempt, and owes them back-wages for unpaid overtime work.

For more information about this case, or if you are interested generally in class actions seeking wages, please contact Bryan Schwartz at Bryan@BryanSchwartzLaw.com.

Federal Court Deals Setback to Employers Seeking to Strip Employees’ Class Claims Through Arbitration

Today, the United States District Court for the Central District of California, Hon. Josephine Staton, ruled in favor of Plaintiffs Kenneth Lee and Mark Thompson, denying Defendant JP Morgan Chase & Co.’s motion to compel arbitration on an individual basis. The Court’s decision is a victory for employees generally who seek to challenge improper pay practices on a class or collective basis. The case is Lee, et al. v. JPMorgan Chase & Co., et al. (No. 13-CV-511-JLS).

JPMorgan Chase’s motion arose after both parties had agreed that the merits of the case – whether Appraisers in the commercial lending division of JPMorgan Chase were improperly denied overtime pay – should be decided by an arbitrator. The arbitration agreements signed by some of the Plaintiffs stated that “[a]ny and all disputes that involve or relate in any way to [the employee’s] employment” would be submitted to arbitration, but the agreements did not discuss class-wide or collective claims. The issue presented to the Court was who should decide whether the Plaintiffs’ arbitration claims could proceed on a class-wide basis: the Court itself, or the arbitrator. JPMorgan Chase argued that the Court should decide the issue and should hold that the language of the Arbitration Agreements required each of the Plaintiffs to pursue his claims in an individual arbitration, rather than as part of a class-wide arbitration. The Court rejected JPMorgan Chase’s argument.

In ruling for Plaintiffs, the Court held that whether the Plaintiffs could proceed on a class-wide basis was a “procedural” question within the scope of the arbitrator’s authority to decide, not a question of “arbitrability” (i.e., whether the dispute was subject to arbitration in the first place), which would have been a question for the Court to decide. The Court noted that the U.S. Supreme Court had recently described this particular issue as an open question, see Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 1068 n.2 (2013), but the Court found guidance in an earlier Supreme Court decision, Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (plurality), and a decision from the Third Circuit Court of Appeals, Vilches v. Travelers Companies, Inc., 413 F. App’x 487 (3d Cir. 2011).

Today’s decision reinforces this blog’s prior view (expressed here and here) that employers that seek to compel class cases into arbitration should be careful what they wish for: they may escape Court litigation only to find themselves bearing the considerable cost of class-wide and/or multiple individual arbitrations.

Bryan Schwartz Law represents the Plaintiffs in Lee, along with the firm of Goldstein, Borgen, Dardarian & Ho.

The Court’s order is available here. For more information about this case on behalf of commercial appraisers and review appraisers, or generally about class actions seeking wages, please contact Bryan Schwartz at Bryan@BryanSchwartzLaw.com.

Disability Issues in the Workplace: Bryan Schwartz Law Principal Appears on NPR Talk Show Discussing New Disability Laws and Regulations

The Americans with Disabilities Act (ADA) Amendments Act of 2008 (link to the EEOC's guidance), followed by the promulgation of new disability regulations adopted by California's Fair Employment and Housing Council this year (link to the regulations), have broadened protections for workers with disabilities, especially in California.

Today, Bryan Schwartz Law's Principal discussed the impact of these new laws and regulations on NPR, along with John Hyland of Rukin Hyland Doria & Tindall, and host Chuck Finney, on the "Your Legal Rights" radio show, on KALW 91.7 FM in the Bay Area, with a syndicated version broadcast around California and available online.

Listen to the show here.

Click on "Listen" to hear the illuminating discussion of this complex area of law that affects so many workers and employers.

Sonic-Calabasas v. Moreno: California Supreme Court Holds the Unconscionability Doctrine Survived the U.S. Supreme Court's Concepcion Assault

Workers, consumers, and regular folks of all stripes have some hope, if they live in California. Though the U.S. Supreme Court has marched relentlessly toward completely eviscerating our rights to challenge big corporations when they discriminate or retaliate against us unlawfully or steal from us in various ways, "states' rights" still carry some sway in applying basic contract law. And, California's basic contract law recognizes that some contract terms are just unconscionable, and thus unenforceable.

Today, Justice Goodwin Liu, writing for the Supreme Court, in Sonic-Calabasas v. Moreno, S174475 (Sonic II), in a seventy-page majority opinion, joined by Chief Justice Cantil-Sakauye, and Justices Kennard, Werdegar, and Corrigan, gave new life to our right to challenge contracts that are unconscionable - that is, so unfair, they cannot be enforced. Read the decision here.

Though this Supreme Court (unlike the U.S. Supreme Court) has had a high number of unanimous decisions and harmony, not so, in this case. Justice Corrigan added a three-page concurrence with her two cents, and Justice Chin (joined by Justice Baxter) wrote a 29-page dissent that would not have found the agreement in this case unconscionable.

The Supreme Court in Sonic-Calabasas was reconsidering its prior decision, in Sonic-Calabasas, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I), in light of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (Concepcion). In Concepcion, as I have written and spoken about previously on this blog here and here, the U.S. Supreme Court rejected California's presumption of unconscionability concerning class action waivers in arbitration agreements (the Discover Bank rule), holding the presumption was discriminatory against arbitration, in violation of the Federal Arbitration Act (FAA). Concepcion drastically undermined our rights as workers and consumers to challenge big companies' indiscretions on a level playing field.

In Sonic I, California's Supreme Court had held that the Federal Arbitration Act did not preempt a state law rule allowing employees to have a hearing with California's Labor Commissioner at the Division of Labor Standards Enforcement (DLSE) (a Berman hearing, as it is called). In light of Concepcion, that holding of Sonic I is dead, according to today's decision. If you signed an arbitration agreement with your employer, you do not have a right to a Berman hearing anymore.

But, that is not the end of the story, fortunately. Today's decision holds:

"Although we conclude that the FAA preempts a state-law rule categorically requiring arbitration to be preceded by a Berman hearing, our holding does not fully resolve the unconscionability claim in this case." Slip Op. at p. 27. "After Concepcion, courts may continue to apply unconscionability doctrine to arbitration agreements." Slip Op. at p. 32.

In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, California's Supreme Court laid out the unconscionability doctrine in the context of arbitration agreements - describing what sorts of arbitration terms go too far in tilting the playing field toward the more powerful party. Armendariz survives, the Supreme Court held today.

The decision by Justice Liu gives several examples of unconscionable terms which are still unacceptable:

• one that effectively gives the more powerful party (which is imposing its own arbitration agreement - called an "adhesion contract") the right to choose a biased arbitrator (Slip Op. at p. 29, citing Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 826–827);
• where "an equal division of costs between employer and employee has the potential in practice of being unreasonably one-sided or burdening an employee's exercise of statutory rights" (citing Armendariz);
• where there is a high threshold for an arbitration appeal that decidedly favors defendants in employment contract disputes (citing Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1076);
• "an arbitration agreement with a damages limitation clause under which the customer does not
  even have the theoretical possibility he or she can be made whole" (citing Harper v. Ultimo (2003) 113 Cal.App.4th 1402, 1407);
• "an arbitration agreement that, among other things, impos[ed] upon [the employee] the obligation to pay [the employer's] attorney fees if [the employer] prevails in the proceeding, without granting her the right to recoup her own attorney fees if she prevails" (citing Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 799–800);
• and "where a consumer enters into an adhesive contract that mandates arbitration, it is unconscionable to condition that process on the consumer posting fees he or she cannot pay" (citing Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77).

As the Court explained:

Unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that have been variously described as "overly harsh" (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1532), "unduly oppressive" (Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925), "so one-sided as to shock the conscience" (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (2012) 55 Cal.4th 223, 246), or unfairly one-sided (Little, supra, 29 Cal.4th at p. 1071). All of these formulations point to the central idea that unconscionability doctrine is concerned not with "a simple old-fashioned bad bargain" (Schnuerle v. Insight Communications Co. (Ky. 2012) 376 S.W.3d 561, 575), but with terms that are "unreasonably favorable to the more powerful party" (8 Williston on Contracts (4th ed. 2010) § 18.10, p. 91).

Slip Op. at p. 31.

Significantly, the Court maintained the stance rejecting arbitration agreements that "impair the integrity of the bargaining process or otherwise contravene the public interest or public policy" (Slip Op. at pp. 31-32), though such public policy-driven arguments seemed threatened by American Express, Inc. v. Italian Colors, from June 20, 2013.

Ultimately, Sonic II is a major victory for employees, consumers, and their advocates. The California Supreme Court's analysis, while allowing arbitration agreements to eliminate the Berman hearing right, maintained everything the Berman hearing was designed to accomplish, saying:

The Berman statutes include various features designed to lower the costs and risks for employees in pursuing wage claims, including procedural informality, assistance of a translator, use of an expert adjudicator who is authorized to help the parties by questioning witnesses and explaining issues and terms, and provisions on fee shifting, mandatory undertaking, and assistance of the Labor Commissioner as counsel to help employees defend and enforce any award on appeal. Waiver of these protections does not necessarily render an arbitration agreement unenforceable, nor does it render an arbitration agreement unconscionable per se. But waiver of these protections in the context of an agreement that does not provide an employee with an accessible and affordable arbitral forum for resolving wage disputes may support a finding of unconscionability. As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement‘s substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided. In the present case, we remand to the trial court to conduct this fact-specific inquiry.

Slip Op. at p. 33(emph. added).

These days, with a U.S. Supreme Court overtly hostile to workers' and consumers' rights, this is about the best we can hope for.

If you have questions relating to your rights as an employee, or about an arbitration agreement you signed, contact Bryan Schwartz Law today.

Ninth Circuit Holds that Your Disability Leave Application May Not Deprive You of the Right to Reasonable Accommodations

Disabled employees are sometimes caught between the desire to work and the practical need to apply for disability leave through the Social Security or State Disability Insurance (SSDI or SDI) systems, the Family Medical Leave Act (FMLA) or California Family Rights Act (CFRA), or a disability retirement plan through a public employer. For example, an employee who becomes disabled on the job may find her employer denying her reasonable accommodation, thereby leaving her with no better choice than to seek some form of disability leave. FMLA leave is available for temporary conditions that make an employee unable to perform the essential functions of her job. In the past, an employee had reason to fear that statements made about her inability to perform essential job functions in an application for FMLA leave would be used against her if she later sued her employer for failure to provide reasonable accommodation in the workplace.

Fear no more. Last month, the Ninth Circuit provided a green light for disabled employees to apply for FMLA leave while asserting their right to reasonable accommodation under the Americans with Disabilities Act (ADA). In Smith v. Clark County School District, D.C. No. 2:09-civ-02142-RLH-LRL (9th Cir. Aug. 21, 2013), the Ninth Circuit made it clear that bringing a claim under the ADA does not inherently conflict with making a claim for FMLA disability leave. The Court of Appeals explained that this is because FMLA applications do not account for an employee’s ability to work with reasonable accommodation.

In Smith, the Court also provided guidance for employees seeking to apply for FMLA leave while preserving their reasonable accommodation claims. Smith involved an elementary school employee who aggravated her back while on the job, and applied for medical leave under the FMLA, as well as state retirement and private insurance disability benefits. The Court reasoned that the FMLA and the other claims were not inconsistent with the plaintiff’s ADA cause of action because the statements made on her applications did not account for her ability to perform her job with reasonable accommodation, or her ability to work in the future. The Court held that the teacher had given sufficient explanation for the inconsistencies between her ADA claims and her benefits applications to survive summary judgment, and genuine issues of material fact remained regarding whether the teacher or school district proposed a reasonable accommodation that would allow the teacher to retain her employment. Thus, an employee who becomes disabled on the job may apply for FMLA leave, and maintain a reasonable accommodation claim, if statements made in her FMLA application do not directly conflict with the conclusion that the employee could either perform her job with “reasonable accommodation,” or her ability to work in the future.

In arriving at its conclusion, the Ninth Circuit applied a two part test set forth in Cleveland v. Policy Management Systems Corporation, 526 U.S. 795 (1999). In Cleveland, an employee’s application for SSDI was at issue. Subsequently, other appeals courts have determined that Federal Employee Retirement System (FERS) benefits and state-police pension benefits do not conflict with ADA claims. In Smith, the court denied summary judgment as to not only the FMLA issue, but also Nevada Public Employees’ Retirement Systems disability retirement and private insurance benefits. A general pattern seems to be emerging, and employees should note and take heart.

If you have questions about disability discrimination under the ADA or California’s Fair Employment and Housing Act (FEHA), contact Bryan Schwartz Law today.

NOTE: Nothing in this posting is intended to provide legal advice about your particular case and it does not form an attorney-client relationship with any reader. It is intended to be information about a subject of general interest for the general public. In order for Bryan Schwartz Law  to represent you, you must have a signed representation agreement with the firm.

California Courts Split on Exhausting Whistleblower Claims Under Labor Code

Better to exhaust than be sorry.

This week, California’s Third Appellate District issued a decision dealing with whistleblower-retaliation claims under Labor Code that begs for a judicial or legislative response. In MacDonald v. State of California, Case No.C069646, the court held that an employee must exhaust the administrative remedy set forth in section 98.7 before filing suit in superior court for retaliatory discharge in violation of Labor Code sections 1102.5 and 6310. The court recognized that its decision directly and deliberately conflicts with the Second Appellate District’s decision in Lloyd v. County of Los Angeles (2009) 172 Cal. App. 4th 320, which holds that no such requirement exists.

Labor Code section 98.7 provides a statutory scheme that allows any person to file a complaint with the Labor Commissioner if that person “believes that he or she has been discharged or otherwise discriminated against in violation of any law under the jurisdiction of the Labor Commissioner.” The plain language of the code is discretionary, allowing that an aggrieved employee “may file a complaint” within six months of the alleged adverse action.

Over the years, federal district courts have taken conflicting positions on whether an employee who has been a victim of whistleblower retaliation under section 1102.5 must first file a complaint with the Labor Commissioner under section 98.7. See MacDonald, Slip op. 6, n.4. But federal courts can only speak persuasively regarding the requirements of California Law.

Some employees and their counsel have treated the complaint process as permissive, and for good reason. In 2007, the DLSE issued an opinion letter advising that: “The DLSE’s position is that the wiser course is not to require exhaustion of Labor Code section 98.7 procedures prior to raising a statutory claim in a civil action.” Later, in Lloyd v. County of Los Angeles (2009) 172 Cal. App. 4th 320, the Second Appellate District held that “[t]here is no requirement that a plaintiff pursue the Labor Code administrative procedure prior to pursuing a statutory cause of action” for retaliation; rather, section 98.7 “merely provides the employee with an additional remedy, which the employee may choose to pursue.”

According to the court in MacDonald, the Second Appellate District got it wrong in Lloyd (and by extension, so did the DLSE in its 2007 opinion letter), by failing to consider Campbell v. Regents of University of California (2005) 25 Cal.4th 311. The Third Appellate District held:

The rule of exhaustion of administrative remedies is well established in California jurisprudence. “In brief, the rule is that where an administrative remedy is provided by statute, relief must be sought from the administrative body and this remedy exhausted before the courts will act.” (Campbell, supra, 35 Cal.4th at p. 321, quoting Abelleira [v. District Court of Appeal (1941)] 17 Cal.2d [280], 292). This is so even where the administrative remedy is couched in permissive, as opposed to mandatory, language. (See Williams v. Housing Authority of Los Angeles (2004) 121 Cal.App.4th 708, 734.) Here, an administrative remedy is provided in section 98.7. Thus, in accordance with Campbell, we conclude that plaintiff was required to exhaust that remedy prior to pursuing the underlying action.

Slip op. at 6.

With conflicting decisions in the Third and Second Appellate Divisions, cautious employees and counsel will take care to file a complaint with the Labor Commissioner before they consider filing section 1102.5 or 6310 claims in court. The DLSE can expect to process an increased volume of retaliation complaints going forward.

The Supreme Court or the State Legislature would be wise to speak decisively on the issue of exhaustion raised by MacDonald and Lloyd, as well as related issues arising from the conflict, so as to provide clarity for employees, lower courts, and the DLSE.

NOTE: Nothing in this posting is intended to provide legal advice about your particular case and it does not form an attorney-client relationship with any reader. It is intended to be information about a subject of general interest for the general public. In order for Bryan Schwartz Law to represent you, you must have a signed representation agreement with the firm.