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Some of my Friday posts (and most of my occasional Saturday posts) relate to blogging generally and law blogging in particular. If anyone out there is thinking about starting a new law blog, I recommend reading "The 12 Phases of Becoming a Blogger" at meritocracy.net. It's a short, concise list and it captures my own experience almost exactly, especially phases 7 through 12.
On Wednesday night, I attended a meet-up of Bay Area law bloggers organized by Professor Eric Goldman of Santa Clara University School of Law (High Tech Law Institute). There are a great many more of us than I had previously realized. Professor Goldman has an interesting summary of the meeting on his own blog, Goldman's Observations. I finally met in person people whom I'd previously known only by email, such as Kevin Underhill (Lowering the Bar) and journalist Andrew Tolve, as well as people whom I knew only by reading their blogs, like Joe Gratz and Beth Grimm. I also re-connected with people I've met before, such as Kurt Opsahl (Deep Links; winner of a CLAY award for his work on the Apple v. Bloggers case), Cathy Kirkman (Silicon Valley Media Law Blog), and Mary Minow (Library Law Blog).
And most interesting of all, I met the anonymous Mr. Ed, Editor of Blawg Review, who dressed all in black, enigmatically, and wouldn't give his name, but favored us with a series of interesting observations about the world of law blogging. (Of course, to protect his privacy and anonymity, I can't share those observations here.) In sum, it was a great event and I'm looking forward to the next one.
Federal Civil Practice Bulletin points to a new law review article, "Mootness in the Class Action Context: Court-Created Exceptions to the 'Case or Controversy' Requirement of Article III," 26 Rev. Litig. 77 (Winter 2007). The "mootness" issues addressed in this article come up in California class actions as well. See, e.g., Shapell Industries, Inc. v. Superior Court, 132 Cal.App.4th 1101 (2005) (discussed in this blog post).
The Ninth Circuit has handed down three CAFA decisions since March 2, 2007. I've already discussed one of the three, Progressive West Ins. Co. v. Preciado, ___ F.3d ___, 2007 WL 725717 (9th Cir. Mar. 6, 2007), at this post. Here are the two others:
In Lowdermilk v. United States Bank, NA, ___ F.3d ___ (9th Cir. Mar. 2, 2007), the court addressed the burden of proof that applies when the plaintiff's complaint expressly pleads less than the CAFA jurisdictional amount, yet the defendant removes anyway, asserting that the amount-in-controversy requisite has been met. The court preserved the rule that the plaintiff is the master of his or her complaint, and held that "the party seeking removal must prove 'with legal certainty' that the amount in controvery is satisfied, notwithstanding the prayer for relief in the complaint." Slip op. at 2. Judge Kleinfeld filed a dissenting opinion.
In McAtee v. Capital One, F.S.B., ___ F.3d ___ (9th Cir. Mar. 16, 2007), the court addressed an issue very similar to the one raised in Progressive West. Both cases addressed what kinds of amendments to the complaint "commence" a new action for CAFA purposes. In McAtee, the court held that amending the complaint to substitute a named defendant in place of a "Doe" defendant under California Code of Civil Procedure section 474 does not "commence" a new action under CAFA. The McAtee opinion spends a lot of time explaining Progressive West, decided ten days earlier. This is a good thing, because Progressive West was very unclear in my opinion, especially its analysis of the "relation back" doctrine. Essentially, McAtee explains that under Progressive West, an action filed in California state court is "commenced" for CAFA purposes when the original complaint is filed, regardless of any subsequent amendment and regardless of whether the subsequent amendment "relates back" under California law or not. This holding creates a split among the Circuits. The earliest Circuit court opinions to address this question held that a new action is "commenced" only if the amendment in question does not "relate back" under the law of the state where the action was filed. See, e.g., Phillips v. Ford Motor Co., 435 F.3d 785 (7th Cir. 2006) (discussed in this post); Knudsen v. Liberty Mut. Ins. Co., 435 F.3d 755 (7th Cir. 2006) (discussed in this post). In the Ninth Circuit, under McAtee and Progressive West, the "relation back" doctrine is wholly irrelevant.
In Lee v. Southern California University for Professional Studies, ___ Cal.App.4th ___ (Mar. 16, 2007), the Court of Appeal (Fourth Appellate District, Division Three) affirmed an order denying a motion to compel arbitration, holding that if the class representative did not sign a contract with an arbitration clause, such a motion may not be granted even if members of the putative class did. The first paragraph of the opinion reads:
Plaintiff Patricia Lee sued the Southern California University for Professional Studies for violation of the Consumer Legal Remedies Act (Civ. Code, § 1750 et seq.) and Business and Professions Code section 17200. The complaint includes class action allegations. Because some of the potential class members — not including Lee — signed a contract including an arbitration clause, defendant filed a motion to compel arbitration, which the trial court denied. We affirm and find that no grounds exist for compelling arbitration when the only plaintiff currently before the court never agreed to arbitrate her claims. The question of whether she is an adequate class representative for those who did, and all other matters pertaining to whether the action is appropriate for class treatment, are issues for the trial court to decide when Lee moves to certify the class.
Slip op. at 2. The opinion also makes the interesting point that the class certification motion need not exactly track the class definition pleaded in the complaint:
Lee has not, as of yet, brought a motion to certify any class. It is quite possible that when she does so, she will seek to narrow the definition of the class to law students only, none of whom signed arbitration agreements, according to SCUPS’s own evidence. She is certainly entitled to do that — SCUPS offers no authority for the proposition that a plaintiff is bound by a preliminary class definition set forth in the complaint. It is also possible (and this court takes no position on this) that however Lee defines the class, any motion for class certification will be denied for other reasons. We cannot know this, of course, because there has, as of yet, been no such motion. Lee is the only plaintiff before the court at the moment, and she is not bound by an arbitration agreement; therefore, she cannot be compelled to arbitrate.
Slip op. at 5 (footnote omitted). Finally, the opinion reiterates the rule, adopted by the Supreme Court in 2003, that UCL injunctive relief claims are not arbitrable in any event:
SCUPS next argues that because the UCL claim is a representative action, Lee is bound by the arbitration agreements of some of the individuals she seeks to represent. Lee’s UCL claim, however, seeks only injunctive relief. Even if Lee had consented to an arbitration clause, she would not be required to arbitrate a claim under the UCL that seeks only injunctive relief on behalf of the public, as opposed to restitution and/or disgorgement of profits. (Cruz v. PacifiCare Health Systems, Inc. (2003) 30 Cal.4th 303, 315-316 (Cruz).) Thus, if she had signed an agreement with an arbitration clause, Lee’s claim for damages under the CLRA would be arbitrable. But her claims for injunctive relief, under either the CLRA or UCL, would not be. (Id. at pp. 311-316.)
Slip op. at 5-6.
The Supreme Court has posted a 64-minute video recording of the Murphy v. Kenneth Cole oral argument, which took place on March 7, online at this link. My lengthy summary of the argument is here.
My colleague, Jessica Grant, is quoted in this article (subscription) in Monday's Daily Journal. The article reports that Judges Kramer and Munter will share the San Francisco Superior Court's complex litigation caseload:
Jessica Grant, a partner with class-action specialist Furth Lehmann & Grant, praised the decision to have Kramer and Munter jointly handle the cases, which can involve 50 lawyers and plaintiffs with divergent interests. "Having Kramer and Munter share duties will maximize the efficiency of complex litigation so it's a win/win for everyone and a really good solution."
The article does not say when the caseload-sharing will begin.
UPDATE: As a reader pointed out in the comments, we should not assume that the caseload-sharing arrangement is a done deal. The article does note that the court's executive committee voted unanimously in favor of the recommendation, but it still requires final approval from the Administrative Office of the Courts.
The 100th weekly issue of Blawg Review — the law blog carnival — went up this past Monday. It's an interesting one because it summarizes and provides links to each of the prior 99 issues. If you've never checked out Blawg Review before, this week is a good time to do so.
The Winter 2007 issue of Yale Law Report has an interview with Professor Jack Balkin, author of the group blog Balkinization. A snippet:
Blogging changes the relationship between law professors and their audiences because professors can reach more people. It changes the relationship between law professors and journalists because law professors don’t need journalists to get their ideas out to the broader public; conversely, blogging makes it easier for journalists to find the right experts to interview. It changes the timing and pace of legal scholarship because law professors can talk about cases the day they come down, driving the discussion forward in a very short time rather than through a series of law review articles that may take years to appear. Just as the Internet collapses the news cycle, it also collapses the publication and discussion cycle. It produces a type of legal writing that is more journalistic, more personal, and more driven by current events.
[Via Law Blog Metrics]
Yesterday's Daily Journal had a focus article (subscription) on Daugherty v. American Honda Motor Co., 144 Cal.App.4th 824 (2006), in which review was recently denied.
Monday's Daily Journal had another article (subscription) on Pioneer Electronics (USA), Inc. v. Superior Court, ___ Cal.4th ___ (Jan. 25, 2007). The first paragraph of the (rather oddly-titled) article reads:
Has the California Supreme Court changed the balance between the right to discovery and privacy rights in class actions? The answer is probably "no," but reasonable minds may differ. The court has now spoken on the issue, but did it really change anything? And what about class actions that are not about consumer products, such as employment and health care actions? A very good argument could be made that the court's opinion does not address privacy issues in those areas.
The article goes on to argue that Pioneer Electronics should have no impact on non-consumer cases.
Yesterday, the Supreme Court depublished the Court of Appeal's opinion in Sony Electronics, Inc. v. Superior Court (Hapner), 145 Cal.App.4th 1086 (2006). That was the decision in which the Court of Appeal discussed the "ascertainability" prong of class certification. My original post on Sony Electronics is here.
Yesterday, the Supreme Court granted review in Miller v. Bank of America, no. S149178. In Miller, the Court of Appeal reversed an enormous judgment, approaching $300 million in compensatory damages and restution, plus even more in statutory penalties, holding that the defendant bank's conduct did not violate the UCL or the CLRA. Miller v. Bank of America, NT & SA, 144 Cal.App.4th 1301 (2006). My original post on Miller is here, and today's Recorder reports that "Supreme Court Takes Up $1B Banking Case" (subscription). UPDATE: Here is a non-subscription version of the Recorder article.
Today, the Supreme Court disposed of all of the "grant and hold" Prop. 64 retroactivity cases, which have been pending in appellate limbo since Mervyn's and Branick were decided in July 2006. The cases have all been transferred back to their respective Courts of Appeal for further proceedings. These are the affected cases:
BIVENS v. COREL CORPORATION • S132695 • D043407 • Dismissed - to CA 4/1
BIVENS v. GALLERY CORPORATION • S140396 • D045557 • Dismissed - to CA 4/1
COHEN v. HEALTH NET • S135104 • G033868 • Dismissed - to CA 4/3
CONSUMER ADVOCACY GROUP v. KINTETSU ENTERPRISES • S135587 • B158840 • 2/8 Transferred after hold
HARTFORD FIRE INSURANCE v. S.C. (TURNER) • S140272 • A109257 • 1/1 Transferred after hold
LYTWYN v. FRYS ELECTRONICS • S133075 • D042401 • Dismissed - to CA 4/1
SCHULZ v. NEOVI DATA CORPORATION • S134073 • G033879 • 4/3 Transferred after hold
SCHWARTZ v. VISA INTERNATIONAL SERVICE ASSOCIATION • S138751 • A105222 • Dismissed - to CA 1/2
THORNTON v. CAREER TRAINING CENTER • S133938 • D044598 • Dismissed - to CA 4/1
YOUNG AMERICA CORPORATION v. S.C. (LYNCH) • S141766 • C049337 • 3 Transferred after hold
The Supreme Court seems to have forgotten one of the "grant and hold" cases, Benson v. Kwikset Corp., no. S132443, in which a "grant and hold" order was issued in April 2005.
I've had more time to read the majority and concurring opinions in Regents of the University of California v. Credit Suisse First Boston (USA), Inc., ___ F.3d ___ (5th Cir. Mar. 19, 2007). The majority unabashedly decides core merits questions in the context of a Rule 23(f) interlocutory appeal from an order granting class certification. In the words of the concurring opinion:
According to the majority, because the banks did not make public misstatements and had no duty to disclose vis-à-vis Enron’s shareholders, their participation with Enron in fraudulent transactions that lacked any independent business purpose is beyond the reach of Section 10(b); because the banks’ conduct is not actionable under Section 10(b), the plaintiffs cannot invoke a classwide presumption of reliance; and because reliance cannot be presumed on a classwide basis, individual issues of reliance predominate over common issues. In sum, the upshot of the majority’s reasoning is that plaintiffs are not entitled to maintain a class action because the conduct for which they seek to recover — to take the majority’s example, Merrill Lynch’s alleged conduct in connection with the so-called “Nigerian Barges Transaction” — is not actionable under Section 10(b).
Slip op. at 24-25 (emphasis added). One of the main authorities the majority cites to justify its approach to this appeal is In re IPO Securities Litigation, 471 F.3d 24 (2d Cir. 2006), an opinion from late last year that has created a lot of buzz among class action practitioners due to its departures from precedents that everyone thought were well-established. Regents v. Credit Suisse takes IPO Securities one step further down the same road. The majority's discussion of merits issues consumes about 95% of the opinion. Its analysis of whether common questions predominate — the basis for reversing the class certification order — occupies a single sentence on the last page (slip op. at 19).
The majority acknowledges that its approach "makes substantial merits review on a rule 23(f) appeal inevitable." Id. It went on to say:
If, as is probably the case here, [the] legally appropriate examination makes interlocutory appeals in securities cases practically dispositive of the merits, we take comfort in two observations. First, the availability of broad presumptions in this area means that the legal merit of securities cases is somewhat less likely than that of other cases to be contingent on facts that have been only incompletely developed at the time of class certification. Second, as we observed in Castano, 84 F.3d at 746, class certification is often practically dispositive of litigation like the case at bar. If the certification decision is so entangled with the merits as to make interlocutory appeal dispositive of the substantive litigation, it is incidentally but perhaps happily more likely that the legal merit and practical outcome of securities cases will coincide.
Id. (emphasis added). I cannot agree with either of these justifications for deciding the case at the class certification stage. I differ from the majority for two primary reasons — the very reasons why most courts conclude that merits determinations are improper at the class certification stage to begin with: (1) class certification is usually decided relatively early in a case, before all the discovery that the plaintiff might need to defeat a summary judgment motion has been completed; and (2) the class certification motion procedure does not afford the protections of the summary judgment motion procedure, or even the dismissal motion procedure, which usually affords at least one opportunity to amend the complaint.
The majority purported to resolve several substantive securities law questions based on the complaint's allegations, as if the court were reviewing an order granting a Rule 12(b)(6) motion to dismiss (or, in California parlance, sustaining a demurrer). However, the majority opinion makes no mention of when the operative complaint was filed, how many times it has been amended, what discovery may have been conducted since, or whether the complaint might be further amended to satisfy the new rules of law the majority adopts. Nothing indicates whether facts about the status of the complaint, discovery, and any prior amendments are even part of the appellate record. This is just one reason why it is dangerous for appellate courts to try to decide merits issues when reviewing orders on class certification motions that have been briefed as such at the trial court level.
In sum, I agree with the concurring judge's conclusion that "Rule 23(f) does not permit review of every issue that, if resolved against the plaintiffs, would destroy the class action." Slip op. at 27. This decision should not be followed outside the jurisdictions where it is binding. It is, in fact, possible that we will see U.S. Supreme Court involvement. The opinion not only takes class action procedure into new and uncharted territory, it also exacerbates a pre-existing split among the Circuits as to at least one important substantive securities law question. See this post from ScotusBlog for more on that.
Yesterday, in Regents of the University of California v. Credit Suisse First Boston (USA), Inc., ___ F.3d ___ (5th Cir. Mar. 19, 2007), the Fifth Circuit reversed an order granting class certification of plaintiffs' securities claims against a group of investment banks allegedly involved in the Enron scandal. This was a Rule 23(f) discretionary interlocutory appeal. One judge filed a concurring opinion expressing his agreement with the outcome, but not the reasoning. An article in this morning's New York Times quotes Bill Lerach as saying he plans to seek U.S. Supreme Court review.
[Hat tips: How Appealing; Blawgletter]
In Alan v. American Honda Motor Co., ___ Cal.4th ___ (Mar. 15, 2007), the Supreme Court did not address the appealability of orders denying class certification per se. Its discussion would apply to any appealable interlocutory order. The opinion contrues Rule of Court 8.104(a), which triggers the 60-day time to file a notice of appeal. Rule 8.104(a) states:
Rule 8.104. Time to appeal
(a) Normal time
Unless a statute or rule 8.108 provides otherwise, a notice of appeal must be filed on or before the earliest of:
(1) 60 days after the superior court clerk mails the party filing the notice of appeal a document entitled "Notice of Entry" of judgment or a file-stamped copy of the judgment, showing the date either was mailed;
(2) 60 days after the party filing the notice of appeal serves or is served by a party with a document entitled "Notice of Entry" of judgment or a file-stamped copy of the judgment, accompanied by proof of service; or
(3) 180 days after entry of judgment.
(Emphasis added.) Rule 8.104(f) is also relevant:
(f) Appealable order
As used in (a) and (e), "judgment" includes an appealable order if the appeal is from an appealable order.
In Alan, the trial court heard argument on plaintiff's motion for class certification and took the matter under submission. A few days later, the court clerk mailed a written statement of decision denying the motion, along with a minute order stating that the court had ruled on the motion and issued its statement of decision. While the minute order included the date of mailing, the statement of decision did not. And while the statement of decision was file-stamped, the minute order was not. Slip op. at 2-4.
The Court of Appeal held that the two documents combined triggered the 60-day period of Rule of Court 8.104(a)(1). Alan v. American Honda Motor Co., 131 Cal.App.4th 886 (2005). The Supreme Court disagreed:
Because no “document entitled ‘Notice of Entry’ ” (rule 8.104(a)(1)) exists, the clerk’s mailing cannot have triggered the 60-day period for noticing an appeal unless it contained “a file-stamped copy of the judgment” (ibid.) or appealable order (rule 8.104(f)). But the clerk’s mailing contained no such document. While it did contain a copy of the appealable minute order, that order is not file stamped. The typed or printed notation that appears at the bottom of that order—“MINUTES ENTERED 01/02/03 COUNTY CLERK”—is not a file stamp. (In re Marriage of Taschen (2005) 134 Cal.App.4th 681, 686.) Accordingly, the clerk’s mailing did not satisfy rule 8.104(a)(1), and Alan’s notice of appeal was timely filed under rule 8.104(a)(2).
Slip op. at 8. The Court explained that all of the elements of Rule of Court 8.104(a)(1) must be satisfied in a single document:
For these reasons, we conclude that rule 8.104(a)(1) does indeed require a single document—either a “Notice of Entry” so entitled or a file-stamped copy of the judgment or appealable order—that is sufficient in itself to satisfy all of the rule’s conditions, including the requirement that the document itself show the date on which it was mailed. That having been said, we see no reason why the clerk could not satisfy the single-document requirement by attaching a certificate of mailing to the file-stamped judgment or appealable order, or to a document entitled “Notice of Entry.” Obviously a document can have multiple pages. But the rule does not require litigants to glean the required information from multiple documents or to guess, at their peril, whether such documents in combination trigger the duty to file a notice of appeal. “Neither parties nor appellate courts should be required to speculate about jurisdictional time limits.” (Van Beurden Ins. Services, Inc. v. Customized Worldwide Weather Ins. Agency, Inc. (1997) 15 Cal.4th 51, 64.)
Slip op. at 12-13. Because the clerk's mailing was insufficient to trigger the 60-day period of Rule of Court 8.104(a)(1), the 60-day period of Rule of Court 8.104(a)(2) was triggered instead when the defendant served a formal "Notice of Entry of Order and Statement of Decision Denying Class Certification," with copies of both the minute order and the statement of decision attached to it. Id. at 13-14.
[Cross-posted to The Appellate Practitioner]
Yesterday's Notice of Forthcoming Filing says that the Supreme Court will hand down its opinion in Alan v. American Honda Motor Co., no. S137238, today at 10:00 a.m. This case addresses the timeliness of a notice of appeal from an order denying class certification. When posted online, the Supreme Court's opinion will be available at this link. Meanwhile, the Court of Appeal's opinion is here, and my original post on this case is here.
UPDATE: The opinion is now up. A quick scan reveals that the Supreme Court unanimously held that the notice of appeal from the order denying class certification was timely. The Court of Appeal's contrary holding has been reversed. I will try to put up more on the decision later, most likely tomorrow. UPDATE: I will have more on this decision next week, rather than tomorrow.
Monday's Daily Journal had an article (subscription) about an Orange County Superior Court misclassification case in which a judge apparently granted the defendant's motion to deny class certification. The article identifies the case as "Williams v. AZ3 Inc., JCCP4385; BCBG Overtime Cases, 02CC00378 (Orange Super. Ct., filed Dec. 24, 2002)."
Defendants proactively attack class action allegations in three different ways that I've heard of: (1) demurring to or moving to strike the class allegations, which is a pleadings motion; (2) moving to decertify the class after certification has been granted; and (3) moving to deny class certification, which is an evidentiary motion. It sounds like this one was an evidentiary motion — as opposed to an attack on the pleadings — in support of which the defendant presented declarations to prove that the elements of certification could not be established. I agree with the several lawyers quoted in the article that defense motions to deny class certification are very rare. In fact, I've seen them only in federal court. This may be because the California Rules of Court don't expressly permit such motions. I don't recall hearing of such a motion being granted in a California state case before. Anyone?
In Progressive West Ins. Co. v. Preciado, ___ F.3d ___ (9th Cir. Mar. 6, 2007), plaintiff Progressive West filed a breach of contract action against one of its insureds. On February 17, 2005, the day before CAFA went into effect, the insured filed a cross-complaint for violation of the UCL. The original cross-complaint pleaded the UCL claim as a non-class, representative action. In approximately August 2006, the insured filed an amended cross-complaint that added formal class allegations to the UCL claim. Thereafter, Progressive West removed the action to federal court, asserting CAFA jurisdiction. The district court granted the insured's motion to remand, and the Ninth Circuit affirmed.
The opinion contains two holdings of note. First, the court held that the filing of the original, representative UCL cross-complaint on February 17, 2005 "commenced" the action for CAFA purposes — not the later filing of the amended cross-complaint with the formal class allegations. Slip op. at 3-4. Second, the court held that even if CAFA applied, Progressive West still could not remove the action to federal court because it was not the "defendant":
CAFA does not alter the longstanding rule ... that precludes plaintiff/cross-defendants from removing class actions to federal court. For this reason, Progressive would lack statutory authority to remove the action pursuant to CAFA even if the action had commenced after CAFA’s effective date.
Slip op. at 9-10. Interestingly, this same lawsuit resulted in a published California Court of Appeal opinion at the end of 2005, Progressive West Ins. Co. v. Superior Court (Preciado), 135 Cal.App.4th 263 (2005), in which the Court of Appeal held that the trial court properly overruled Progressive West's demurrer to the UCL claim. The amended complaint with the class action allegations must have been filed after that opinion issued. My original post on that opinion is here.
In Main Drug, Inc. v. Aetna U.S. Healthcare, Inc., ___ F.3d ___ (11th Cir. Jan. 16, 2007), the plaintiffs filed suit in state court, the defendants removed the action under CAFA, the district court denied the motion to remand, and the plaintiffs filed a notice of appeal. The Eleventh Circuit dismissed the appeal for lack of jurisdiction, holding that it would be "too much of a stretch" to interpret a notice of appeal as a petition for permission to appeal under CAFA (28 U.S.C. §1453(c)(1)), which is the required procedure for seeking appellate review of a CAFA remand order. One judge on the panel was a Ninth Circuit judge sitting by designation.
The blog Wage Law has a nice report on the argument, compiled by Michael Walsh from notes provided to him by several attorneys who attended. The post concludes with a round-up of outcome predictions. The common theme is that everyone seems to expect a split decision. Try as we might to be objective, the defense attorneys all predict a win for the employer, while the plaintiffs' attorneys expect the employee to emerge victorious. My own lengthy report on the argument is at this link.
This morning's Recorder has this report on the argument in Murphy v. Kenneth Cole Productions. My own report on the argument is in the post immediately below.
Yesterday, in Murphy v. Kenneth Cole Productions, the California Supreme Court heard oral argument on whether the "additional hour of pay" mandated by the Labor Code for meal period and rest break violations is compensation, governed by a three-year statute of limitations, or a penalty, governed by a one-year statute of limitations. Donna M. Ryu of the Hastings Civil Justice Clinic argued on behalf of plaintiff John Paul Murphy. Robert W. Tollen of Seyfarth Shaw LLP argued for defendant Kenneth Cole Productions. Mr. Tollen shared his time with Steven Drapkin, counsel for amicus curiae California Employment Law Council.
Ms. Ryu began her argument by pointing out that the primary purpose of Labor Code section 226.7 is to provide compensation where no compensation previously existed. Section 226.7 provides compensation for tangible harms, including fatigue, stress, the inability to make personal phone calls, etc. These are real harms that employees suffer when they do not take their meal periods and rest breaks.
Justice Kennard wasted no time. "Let's get to the heart of the issue—the applicable provisions," she said. "I assume you place your primary reliance on Labor Code section 226.7, subdivision (a)," and then she quoted the provision. She asked whether it was correct to say that for two weeks straight, the plaintiff was required to give up his entire lunch period and work through it. Ms. Ryu said yes, and in fact, due to Kenneth Cole's policies, for two years, plaintiff got no rest breaks at all, and he got meal periods only about once every two weeks. Justice Kennard then quoted Labor Code section 226.7, subdivision (b), and said, "What is your argument to this Court regarding the applicability of this provision?" Ryu said that this provision tells us that the additional hour of pay is compensation, not a penalty. The legislature used the word "pay." They didn't use the word "penalty," and in fact rejected that word.
Justice Kennard continued: "Would you be so kind as to differentiate between a wage, or pay, and a penalty?" Ryu responded that for purposes of the statute of limitations, a statute is a penalty if it is primarily intended to penalize or punish. Justice Moreno then interjected, "Is it your position that this provision is unambiguous on its face?" Ryu said yes. The use of the word "pay" is unambiguous. Also, the word "penalty" is used in two other statutes. Justice Werdegar asked whether the statute we're concerned with is in the section of the Code relating to penalties. Ryu said that it began in a section where there was a true penalty element. Justice Chin then spoke up: "What does the legislative or administrative history say about section 226.7?" (That would turn out to be Justice Chin's only question during the entire argument.) Ryu explained that they started with a remedial scheme with both a compensatory and a penal component. The legislature then dropped the penal component. What remained was the compensatory element. They changed this so that it would be a vested right. With respect to the IWC, the IWC specifically said we're creating this as compensation beyond injunctive relief (the only form of relief previously available). They specifically invoked an analogy to premium pay. This is like overtime, they said.
Justice Baxter then asked, "Does the fact that the amount to be paid is pegged to the employee's hourly rate, does that help or hurt you?" Ryu said it helps. It operates a lot like other forms of pay. It's written in such a way that it's vested. Justice Moreno then said, "What weight do we give to the conflicting IWC letters and references to overtime penalties?" After Ryu started to explain what the Labor Commissioner said, Justice Moreno interrupted and said, "He calls it a penalty." Ryu said, "Yes." Justice Moreno said, "Are we bound by that?" Ryu responded that the Commissioner wasn't talking about it in terms of the statute of limitations.
Justice Moreno then said, "What about other forms of premium pay, such as split shift and reporting time premiums? Are they pay or a penalty?" Ryu said they are pay. They all operate the same way. They are meant to shape or prod the employer's behavior. This is why overtime is referred to as the primary mechanism for enforcing the wage standards. Justice Moreno then asked how that analysis applies to the extra hour of pay for meal and rest break violations. Ryu explained that this is the only compensation available to employees for missed meal and rest breaks. It gives an incentive to the employer to comply with the law. Justice Moreno asked, "What about the argument that the amount doesn't bear a reasonable relationship to the harm? With overtime, it does." Ryu responded that it's still compensation. It's the only compensation that exists. The question is does it fit the violation? It's based on the employee's regular hourly rate. It's a modest form of compensation.
Justice Werdegar then jumped back into the discussion. She pointed out that 30 minutes are required for lunch periods, but the law requires an hour of pay. So the employee has been paid. This gives the employee not only thirty minutes extra but double that. Why is that not a penalty? Ryu said, "An employee is entitled to be paid for time worked." Justice Werdegar said, "Yes, and he gets that." Ryu said it's capped at one hour of compensation for the real harms that employees suffer when they miss their breaks.
Justice Kennard then said, "You acknowledge that they get paid for the half hour. But if here, the defendant violated this by requiring the employee to work through the break, then under section 226.7(b), it becomes an additional hour of pay .... Then under the statute, it's not just a half hour of pay but double. One could make an argument, and reasonably so, because this comes across as a penalty." Ryu said it's important to look at it in the context of the statute of limitations. It's still compensation. We may quibble with how the Legislature decided to provide it, but it's still compensation. She suggested comparing it to split shift pay. The employee may wait around two hours between shifts. Maybe that's not such a serious harm. But what if the employee is required to wait around four hours. That could be a serious disruption, the employee might go home and incur travel expenses, etc. Still, in both situations, the employee gets one hour of pay. Maybe this isn't a perfect fit, but it's a close fit, and more important, it's the only compensation provided.
Justice Kennard then offered a clarification of her prior question, pointing out that under the Labor Code, meal periods are not paid (if taken). Ryu said yes, with rest periods, the time is paid, with meal periods, it's not. (This also served to clarify Justice Werdegar's prior question.) Justice Kennard went on: "You're asking us to agree with your position because it's reflected in the pretty clear statutory scheme, the use of the word 'pay' in (b)." Ryu said, "Yes." Justice Kennard then said, "Let's assume we say, yes, that's a pretty good argument, but also, there's a pretty good argument on the other side, you'd agree that we can then look at extrinsic sources to interpret the statute. Explain how you win."
Ryu said that you have to look at it in the context of the Labor Code. It looks, acts, feels, behaves identically to other premium pay devices. For the plaintiff to win, the Court need only to decide that the payment is not a penalty. (That is because Code of Civil Procedure section 338(a) provides a three-year statute of limitations for "[a]n action upon a liability created by statute, other than a penalty or forfeiture.") The legislative and regulatory history, Ryu said, show a penalty scheme was considered and rejected. What was adopted was a compensation scheme, to compensate employees for real harms. There's no other compensation in the statutory scheme, and the defendant has not identified any.
Justice Moreno asked, "Do penalty provisions exist in other parts of the Labor Code?" Ryu said, "They absolutely do." Justice Moreno said, "How do you differentiate those" from section 226.7? Ryu said that the Legislature knew how to draft a penalty provision when it wanted to. For example, Labor Code section 203 talks about waiting time penalties. It uses the word penalties. Justice Moreno said, "And those were awarded here, weren't they?" Ryu said they were. She said that section 203 creates a penalty amount that is in addition to other compensation. Here, this is the only compensation in the code.
Justice Baxter then threw a heavy wrench into the discussion: "I'm interested in the income tax treatment. Is there any impact on the tax treatment?" Ryu said that wasn't part of the case, but she believes there is an IRS ruling that treats compensation as a wage. "And if it is a penalty?" asked Baxter. Ryu said she was sorry, but she didn't know. (This issue was not mentioned in the briefs that I read.)
Ryu then resumed her argument by saying, "Because the statute is designed to compensate, it must be governed by a three-year statute of limitations." Justice Werdegar broke in: "Excuse me, but the Court of Appeal disagreed with the first part of your argument. To say it's compensation is conclusory; we have to determine whether it is or isn't." Ryu suggested looking to some cases to illustrate the point. She mentioned the Hansen case (phonetic) from the 1920s. In that case, a statute required power companies to provide power to all persons living within a certain distance from their power plants, or pay a $1,000 fee plus $100 per day. The Supreme Court said that's a penalty because there was no harm to be compensated.
Justice Moreno interrupted, saying these aren't Labor Code cases. Ryu acknowledged that none of the prior cases addressing the statute of limitations issue is a Labor Code case. This will be the first time that the issue will be decided in the Labor Code context.
Justice Werdegar then asked, "What do we do with the fact that the most pertinent agency has come forth with an interpretation that this is a penalty?" Ryu said that in this case, the DLSE was counsel with her for Mr. Murphy, and the DLSE argued on his behalf that it was a wage. Nothing has changed since then. The law hasn't changed; the regulations did not change. What changed was the administration (from Governor Davis to Governor Schwarzenegger). Justice Werdegar said, "Did they explain their change in position? Certainly they wouldn't explain it the way you did." The courtroom laughed rather heartily at that. Ryu said they did not. The new interpretive letter gives a very cursory analysis to the question, she said.
Ryu then resumed her argument, saying again that because the statute is intended to compensate, it must be governed by the three-year statute of limitations. Mr. Murphy's remedy should not be cut short by two years; it makes no sense to let Kenneth Cole off for those two years. Justice Moreno then mentioned Labor Code section 226(e) (which relates to remedies for an employer's failure to provide an accurate itemized wage statement). Ryu's response was that in section 226(e) cases, the employee can prove up actual damages or obtain the penalty, which distinguishes it from 226.7 cases.
Justice Moreno then turned the discussion to the second question on which the Court granted review, which was (to quote the docket): "When an employee obtains an award on a wage claim in administrative proceedings and the employer seeks de novo review in superior court, can the employee pursue additional wage claims not presented in the administrative proceedings?" Justice Moreno pointed out that the trial court elected to consolidate all of Mr. Murphy's claims, including those not expressly addressed during the administrative proceeding. Ryu said yes, in this case Mr. Murphy took the administrative route. He did his best to explain what the problem was but he wasn't aware of all of the ramifications. He won before the Labor Commissioner; Kenneth Cole filed suit to challenge the ruling; counsel came in and they noticed other legal claims.
And that was the end of Ryu's time.
Mr. Tollen started out by saying, "I assume from most of the argument and the questions that the Court's primary interest is in section 226.7. But if the court will indulge me, I would like to speak for a moment about the jurisdictional issue." The main point he made, which he said was not addressed in the briefs, related to the plaintiff's argument that while an administrative proceeding is pending before the Labor Commissioner, the time (i.e., the statute of limitations) will run out. He said it's written into the statute to provide a speedy remedy, quoted various deadlines provided by the statute, and said it's a total of 145 days. The administrative proceeding will be resolved less than five months from the time the plaintiff first goes to the Labor Commissioner. If the "plaintiffs' bar" thinks that the Labor Commissioner is violating these provisions by taking too long, then they should file an administrative enforcement action against him.
He then went on to section 226.7. He said that the question is what is the effect or function of the statute, not what the Legislature intended. Nevertheless, to the extent the Court might consider intent, "I don't understand" how counsel can contend that the Legislature intended to enact something that is not a penalty, when it told us what it was doing. First, the statute included a $50 penalty. That was stricken. Then, the words we now have were adopted. The Legislature wrote that it was deleting the provisions relative to penalties and instead was adopting the lower penalty amounts that the IWC had promulgated. In addition, the Department of Industrial Relations and the DLSE told the governor that the bill supported the underlying purpose of providing a penalty.
Tollen then addressed Ryu's point relating to the DLSE's representation of Mr. Murphy early in the case. He said that the DLSE (which he referred to as "the Labor Commissioner's agency") is required by statute to provide counsel to an unrepresented employee who wins in the administrative proceeding, and whose victory is challenged in a de novo appeal. The DLSE is required to argue on the employee's behalf. This doesn't affect the official position taken by the Labor Commissioner.
Justice Moreno then interjected: "Back to AB 2509, weren't there other amendments to the Labor Code where they retained the 'penalty' language?" Tollen said the reason the Legislature retained the language that is used in section 226.7 is because they adopted, lock, stock and barrel, the words the IWC adopted in early 2000, just before this bill was introduced. Justice Moreno said, "But they kept the 'penalty' language in sections 203.1 and 226 in the same bill." Tollen said that's because those provisions weren't adopting something that the IWC had previously done. He pointed out that section 203 talks about employer liability for 30 days' additional "wages" as a "penalty." He said that the even when the Legislature uses the word "wages," that can actually mean a "penalty."
Here, Chief Justice George spoke for the first time. "But that's very different from this section, which doesn't use the word 'penalty,'" he said. Tollen said, "Yes, but my position is that use of the word 'wage' does not mean it's not a penalty." Chief Justice George continued, "But couldn't one argue even more persuasively that if it doesn't use the word 'penalty,' it's not a penalty?" Tollen said, "No, I don't think it can be interpreted that way, especially when they told us what they intended to do." Chief Justice George said, "You don't place much weight on its placement within the Labor Code?" Tollen said yes, it's in a row of statutes that also include penalties. Section 226.3 provides a civil penalty; section 227 provides for a fine or imprisonment. They put 226.7 smack in the middle.
Justice Baxter then interjected with: "I have a concern. As I understand it, the amount of a penalty generally follows the culpability of the conduct. The worse the conduct, the higher the penalty. Yet here, the failure to provide meal or rest breaks for a person earning minimum wage is significantly less than for a person with a higher position. I can't see any difference in the conduct. From the employer's perspective, there's no difference between violating the law for a low-level employee than for a high-level employee. To me, that strikes me more as compensation. Whereas if it were a uniform figure, that would seem more like a penalty. I can't imagine the Legislature would want to go on record saying that denying breaks to a minimum wage employee is less important than a higher-level employee."
Tollen said that the Legislature has done that in section 203 for termination penalties. It's going to vary from a low-level to a high-level employee, yet they're all going to get 30 days' pay. Tollen observed that it's an interesting argument, not one that the plaintiff has made. Plaintiffs argue it's compensation. We say that to be compensation, it must be proportionate to the violation. What are the consequences of the violation? The employee may be fatigued, but what's not mentioned is that the employee might be actually injured from working while fatigued, or the employee may not be injured at all. This payment is not designed to analyze whether the employee is injured or the extent of the injury.
Justice Baxter said, "But it's pinned to the employee's compensation." Tollen said it's a mixed situation. Yes, it's pegged to compensation. That's what our opponent grabs onto. But on the other hand, it's not related to the injury.
Justice Corrigan then spoke for the first time: "You'd take the position, then, that even though they're denied the break, they're paid for the work?" Tollen said yes. The employee is compensated for time worked, plus the employee gets an extra compensation, a full hour of pay. It makes no difference the extent of the loss, the length of the lost time. Justice Corrigan said that if an employee is required to work through two 15-minute breaks, they are entitled to: (a) pay for 30 minutes and (b) an extra hour of pay. "So double." Tollen said there is a distinction for rest breaks. Justice Corrigan said but in the context of rest breaks they get double pay. Tollen said yes, but it's more than double pay. They get 20 minutes of pay and an additional hour. (Here, Tollen was correcting Justice Corrigan. The Labor Code requires 10-minute, not 15-minute, rest breaks.) Justice Corrigan asked how it would work differently in the context of meal breaks. Tollen said that if an employee takes the meal break, they are not paid. If the employer violates the law by requiring an employee to work through the meal break, there are two consequences. The time worked must be paid, and the employer has to pay an additional hour of pay even though the employee only lost a 30-minute meal period. Justice Corrigan said, "Thank you."
Tollen resumed his argument by saying, "I want to go back to the intent of enacting 226.7, the letter that the author of the bill sent to Governor Davis." He then quoted parts of the letter where the word "penalty" was used. Then, he referred back to some of the earlier questioning about reporting time and split shift payments, but Justice Kennard interrupted. She pointed out that he may be out of time and that she had hesitated to ask him further questions for that reason. Chief Justice George then informed Tollen that he was out of time.
Before the argument started, the clerk came out and addressed the waiting audience about the procedure. He confirmed that Tollen planned to take 15 minutes of argument time, and to give the other 15 minutes to Mr. Drapkin. Tollen then specifically asked the clerk whether the Chief Justice would notify him when his 15 minutes were up. The clerk said the Chief Justice would. However, he did not. By the time Justice Kennard mentioned that Tollen might be out of time, more than 15 minutes had clearly passed. But Tollen certainly can't be blamed here for not keeping track of the time himself. He was told that the Chief Justice would interrupt when his 15 minutes were over.
In any event, Mr. Drapkin then rose and prefaced his argument by saying that he had a lot to say. He referenced back to Justice Kennard's question at the outset about what a penalty is. He said that the Court has defined the term "penalty" consistently for the past 100 years in the statute of limitations context and related contexts. A penalty is an amount a plaintiff is allowed to recover against a wrongdoer without reference to injury. An alternative test, from Ballarino (phonetic), is for an act in the nature of a public wrong. This is the definition. It's been applied again and again.
Justice Kennard said, "If we were to agree with you, would it cause some problems with the principle that the Court must construe the statute liberally in favor of the employee? If we agree with you, would we have to go against that?" Drapkin said that this case is primarily about the Code of Civil Procedure, not the Labor Code. Further, if you were interpreting the Labor Code, there are countless cases saying that the rule of liberal construction is not a substitute for legislative intent.
Justice Kennard replied sardonically, "You mean this case is strictly about the Code of Civil Procedure? And here I thought we were dealing with the Labor Code." (In my opinion, it was crystal clear from the first 40+ minutes of the argument, especially the very beginning when Justice Kennard took the time to actually quote subdivisions (a) and (b) of section 226.7, that the Court thinks this case is about interpreting the Labor Code.) Tollen stuck to his guns, saying no, we're dealing with the Code of Civil Procedure, the statute of limitations, in a particular context. So, cases interpreting the Code of Civil Procedure are entirely relevant.
He said that some Labor Code provisions have been interpreted as a penalty. He mentioned the Hansen case (phonetic) against the power company, in which the Court found a penalty. He said it could be that failure to provide utilities might cause no injury or great injury. Yet the penalty doesn't vary. That's our case here.
At this point Justice Baxter interrupted with another question about the tax consequences of the holding that the payment is a wage vs. a penalty. I believe, but did not catch every word, that Drapkin said that wages are deductible by the employer, which is what Justice Baxter seemed to be interested in.
Drapkin then referred back to the prior question about the fact that the amount payable is higher or lower based on the employee's rate of pay. He said that this may, in fact, be irrational. It may be unconstitutional. It may constitute a penalty upon penalty and there may be due process concerns (although this has not been argued here). He said the function is what controls. He observed it was interesting that there had been no discussion of the plaintiff's hybrid theory.
He said he agreed that the primary purpose of section 226.7 was to secure or compel compliance with the law. Injunctive relief wasn't strong enough. This is where the penalty came from. Employer groups came forward and said the IWC doesn't have the power to impose a penalty. That's where this came from. There was no discussion in the legislative history about compensating for fatigue etc. The only focus was to secure compliance with the law. And that's the hallmark of a civil penalty.
Plaintiffs say, well, it's a hybrid. Well, if it is, which we vehemently disagree with, then he has a new case to cite. 13 Cal.2d 285. The Court found the payment in question was damages. But the Court said where damages are given wholly to the plaintiff, the action is not penal.
(It is not clear how this argument supports his position. The cited case does include this language: "Where the damages are given wholly to the party injured as compensation for the wrong and injury, the statute having for its object more the indemnification of the plaintiff than the punishment of the defendant, the action is not penal, properly so called, but remedial." Agudo v. County of Monterey, 13 Cal.2d 285, 289-90 (1939). But that language supports the plaintiff's position. The extra hour of pay under section 226.7 is "given wholly to" the employee who missed a meal or rest break. Therefore, under the cited case, it would not be a penalty.)
Mr. Drapkin pressed on. He said that where the primary purpose is to compel or coerce compliance, it is a penal purpose. This goes back forever in the case law. Mr. Drapkin's final point was that the DLSE's contemporaneous analysis to Governor Davis was that the payment was a penalty. Governor Davis was told that the provision was needed to compel compliance with the law.
On rebuttal, Ms. Ryu had not uttered a single word before Justice Corrigan said, "If an employee who is compelled to work through rest breaks and lunch and they are paid for the time they work, and the employer is compelled to pay an additional hour of pay, that seems like a penalty." Ryu said, "Absolutely not." Justice Corrigan said, "OK, then help me." Ryu said let's use an example, a farm worker. The worker knows that under the law they will work for 7 hours and 40 minutes and get paid for 8 hours of work. They also know they will get to rest twice. Justice Corrigan interjected, "And if they don't get it and they are paid, they are compensated and the employer is punished. Isn't that right?" Ryu said, "No. They worked all day in the sun. Even if the employer pays 8 hours, they really haven't been compensated for working under these more strenuous conditions. There is no other compensation in the Labor Code for this."
Justice Werdegar said, "But as opposing counsel observed, it's not tied to the injury. Which sounds like a penalty." Ryu said you have to remember we're talking about conduct within a certain scope and range of behavior. The question is for this to be a penalty, does there have to be an exactly perfect fit? For example, the 50% overtime requirement. The employee doesn't have to prove that he worked 50% harder to get the overtime pay. It's rough justice. But it's close enough.
Justice Werdegar further said, "What do you say to the defense argument that we're talking about the Code of Civil Procedure, not the Labor Code?" Ryu said this Court would disagree. Its precedents say that the Court must look at the entire statutory scheme. This is a case about the Labor Code.
Justice Kennard summed up: "And according to your view, the Labor Code is very much at issue here because at the outset you and the Court talked about the language of the Labor Code section. The question is whether its language is clear or ambiguous. So in short, your view is we're not just dealing with the Code of Civil Procedure, but also the Labor Code." Ryu replied, "Yes, that's absolutely right." Then Chief Justice George announced that her rebuttal time was up.
In light of the justices' remarks and questions, I would not be surprised to see a split decision in the employee's favor. The opinion will be due in 90 days, or by June 5. Comments?
This afternoon at 1:30, the Supreme Court will hear oral argument in Murphy v. Kenneth Cole Productions, no. S140348. Although Murphy is neither a UCL action nor a class action, I'm planning to cover the oral argument today and report on it here tomorrow. The primary legal issue has raised a lot of interest in wage and hour class action circles:
Is a claim under Labor Code section 226.7 for the required payment of "one additional hour of pay at the employee's regular rate of compensation" for each day that an employer fails to provide mandatory meal or rest periods to an employee (see Cal. Code Regs., tit. 8, § 11010, subds. (11)(D), 12(B)) governed by the three-year statute of limitations for a claim for compensation (Code Civ. Proc., § 338) or the one-year statute of limitations for a claim for payment of a penalty (Code Civ. Proc., § 340)?
Last week, a request for extended media coverage (presumably, cameras) was filed, and promptly denied. So old-fashioned print/web coverage will have to do. Meanwhile, for everyone's reading pleasure, here are the main briefs:
Opening Brief on the Merits (filed 06/08/06)
Answer Brief on the Merits (filed 08/21/06)
Reply Brief on the Merits (filed 10/11/06)
Omnibus Response to Employer Group Amici Briefs (filed 12/19/06).
Many thanks to the reader who graciously provided copies of these briefs.
I just found out that my colleague, Jessica Grant, is pictured on the cover of this month's issue of California Lawyer. She is the recipient of a California Lawyer of the Year award for her work on the Wal-Mart case. Congratulations, Jessica!