The UCL Practitioner

Oral argument report: County of Santa Clara v. Superior Court (ARCO)

Yesterday, in County of Santa Clara v. Superior Court (ARCO), the Court of Appeal for the Sixth Appellate District heard oral argument on whether public entities may hire private attorneys to represent them on a contingency-fee basis. The panel consisted of Acting Presiding Justice Patricia Bamattre-Manoukian, Justice Nathan D. Mihara, and Justice Richard J. McAdams. They are the same justices who issued a prior opinion in this case, County of Santa Clara v. Atlantic Richfield Co., 137 Cal.App.4th 292 (2006).

Owen J. Clements of the San Francisco City Attorney's office presented the County's argument. Philip H. Curtis of Arnold & Porter argued on behalf of ARCO. Both of them were extremely well prepared and presented excellent arguments.

Mr. Clements began his argument by pointing out the importance of the legal question and the fact that the issue is of very great importance to public entities across the state (as borne out by his participation in the case). He characterized the question as whether public attorneys can ever retain private attorneys on a contingency-fee basis in a public nuisance case. The trial court held that there is an absolute bar, relying on Clancy (People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985)). But Clancy is distinguishable. The private attorney in Clancy appeared in place of the government attorneys, rather than to assist them.

Justice Bamattre-Manoukian then broke in, saying that many helpful briefs had been filed, and that there are strong policy arguments on both sides and language in Clancy that supports both sides. She pointed out that the trial court was concerned about a number of things. First, what recovery was being sought and where the money for the contingency fee would come from. Second, even if you assume there's assistance by private counsel, the briefs say that the public attorneys are going to exercise complete control over the case. The trial court said how can you ensure this? Third, even if you can ensure this, the issue in Clancy is neutrality. Shouldn't this determination be made at the end of the case? Isn't this premature?

Turning to the first issue, Justice Bamattre-Manoukian then asked what is the recovery being sought? Is the case limited to abatement [of the public nuisance]? Mr. Clements replied that no damages are being sought, but abatement can take several forms. Until abatement has actually been awarded, it's hard to say what the contingency fee might look like. He referred to a similar case pending in Rhode Island, and said that abatement was being sought there, and that there are many possibilities for what abatement might look like here. [The Rhode Island Supreme Court case cited in the briefs is State of Rhode Island v. Lead Industries Ass'n, 898 A.2d 1234 (R.I. 2006).] The common fund doctrine and the substantial benefit doctrine may also be asserted as a possible basis for fees. One possible remedy would be for this Court to send the case back to the trial court with instructions to monitor the proceedings. But don't ban at the outset an arrangement that's very helpful to the public attorneys.

Justice Bamattre-Manoukian pointed out the County's argument that they are being deprived of counsel of their choice. The law seems clear, maybe, that you can hire outside lawyers on an hourly basis. Mr. Clements said yes, that's conceded in this case, and it's an absolute necessity because not all public entities have in-house lawyers. [An aside: For a number of years in the 1980s, my dad was City Attorney of the City of Porterville. The City of Porterville had no attorneys on staff. My dad stayed with his private firm throughout his tenure as City Attorney.]

Justice Bamattre-Manoukian said that Clancy requires "absolute neutrality," and then she read a lengthy quotation from the case. Mr. Clements said that Clancy requires neutrality of the decision-maker. Justice Bamattre-Manoukian said that may or may not be "complete" or "absolute" control; it may be "what's necessary," for example, if private counsel is in court handling a hearing, making objections, etc., they're in control. Mr. Clements said yes, as they would be if they were paid by the hour. Justice Bamattre-Manoukian said, so "complete" or "absolute" control is not necessary. Clements said the concern is whether the power of the government is being used by the private attorney for private gain.

Justice McAdams pointed out what appeared to him to be an inconsistency in the County's position. The public attorneys are saying they don't have the resources or expertise to handle some of this litigation, yet on the other hand you say you're exercising complete control over the outside attorneys. Clements said that absolute control is not possible, but control that involves making strategic decisions, deciding what motions to file, what experts to retain, approving settlement terms, is possible. Those are the concerns that Clancy addresses. It's not necessary under Clancy to have "absolute" control.

Justice Bamattre-Manoukian asked, "Do you have to be present at every deposition and every hearing? What does 'control' mean?" Clements said we don't have to be omnipresent, looking over the shoulder of the outside attorneys. But we'll oversee to make sure there's no overreaching. This is all Clancy requires. It's the same thing we do with our hourly co-counsel. Our contract with the outside lawyers says so.

Justice Bamattre-Manoukian then said: You're asking us to make this statement. How do we know whether you're in compliance with Clancy until the trial court looks at the proceeding. Don't we wait until the end of the case to determine whether the public entity has exercised neutrality (and here she quoted more language from Clancy) and then let the trial court determine, if there is any recovery, whether a contingency fee would be appropriate, the amount of the fee, and whether the award is in the public interest? Clements said that's what happening in Rhode Island. That's one way to do it. This Court could overturn the trial court's ruling and say there's no absolute bar. The trial court should not assume that there will be misconduct. The rules say you don't presume that attorneys will act unethically. You wait for evidence of misconduct.

Justice Bamattre-Manoukian broke in to say we're an intermediate court. We have to follow the Supreme Court. We have one case before us. Other states are struggling with the issue of neutrality. She then quoted some more language from Clancy, saying that certain language suggested that contingency-fee arrangements are antithetical to the principle of neutrality, but that footnotes 4 and 5 suggest otherwise. Shouldn't a pronouncement on this come from the Supreme Court? Isn't it sufficient to say a determination should be made at the end of the case as to whether there's been neutrality? Shouldn't we take an intermediate position at this point?

Clements replied that he understands that might improve judicial economy and provide a better record for the Supreme Court. But he wants to argue for a higher ruling (by which he meant that the Court should go ahead and rule that there is no per se bar to contingency-fee arrangements). Later cases interpreting Clancy say that the issue is the degree of control and this is what ensures neutrality. He cited Philip Morris, Inc. v. Glendening, 709 A.2d 1230 (Md. 1988) and City and County of San Francisco v. Philip Morris, 957 F.Supp. 1130 (N.D. Cal. 1997). Justice Bamattre-Manoukian said the second one is a tort action. She said this Court can make that ruling as a matter of law, because we can't really tell right now. Clements said the trial court will always have jurisdiction to deal with it if there's evidence of misconduct. He said in the most recent case, Grass Valley [2007 U.S. Dist. LEXIS 8917], the court said look at the fee contract and see if there's any provision that constitutes an improper delegation of public power. For example, a contract that gave the private attorney the power to veto a settlement. Such a pronouncement from this Court would not preclude the trial court from keeping an eye on what's happening.

Justice Bamattre-Manoukian: Is there any statutory authority for recovery of attorneys' fees in public nuisance abatement cases? Clements: No, except equitable theories such as common fund or substantial benefit theories. Bamattre-Manoukian: There are no criminal proceedings associated with this enforcement case? Clements: No. That's a second basis on which to distinguish Clancy.

Justice McAdams then pointed out that there were First Amendment issues in Clancy. Clements said yes. The City of Corona was trying to shut down a bookstore. There was no question in that case that the city sought a prior restraint on speech. That's another way to distinguish that case from this one. Also, this case will involve no ongoing supervision of business conduct, as in Clancy. The conduct in this case has been banned by law since 1978.

Justice Mihara then spoke for the first time. You'd like us to focus on the holding of Clancy vs. other language in Clancy suggesting a broader approach. The fact that attorney James Clancy was in total control. How does that affect neutrality? This case is different, wouldn't you say? Clements caught the softball: I would say. Clancy was the only attorney who appeared. There was an undertone of vendetta against the bookstore owners. Here, we have city attorneys who are very involved. He then pointed out footnote 3 in Clancy, where the Court distinguished Sedelbauer [v. State, 455 N.E.2d 1159 (Ind. App. 1983)] on that basis.

Justice Mihara then said, reviewing the fee agreement, the facts show that the private attorneys have a subordinate role and that the public attorneys have total control, and your argument is that's perfectly acceptable because it protects neutrality. Clements: That's correct. Mihara: Looking at this case from an analytical point of view -- how the court should tackle this -- the issue in the main is the validity of the fee agreement. Clements: Yes, that's what this case is all about. The agreements have been modified to make the issue of control clearer. If there's a problem, the remedy is to modify the fee agreement rather than disqualify counsel.

Justice Mihara went on: Is there any evidence that would suggest a conflict of interest that would impede neutrality? Clements: Only the suggestion that contingency-fee arrangements inherently undermine neutrality. However, private outside counsel are ethically bound to subordinate their interests to those of their clients, the People, just like hourly attorneys. Justice Mihara: You're saying we control this case, we have outside counsel assisting us, let us try this case. If any problem comes up, opposing counsel will bring it to the court's attention. But as far as the fee agreements are concerned, there is no difficulty, and the trial court would have the opportunity to ferret out any improper exercise of control?

Clements: Yes. We have had 7 years of litigation and there is no specific evidence of bias or misconduct. There is no need to categorically bar the contingency-fee arrangement. The approach this Court is suggesting is much wiser.

Justice McAdams: What is the practical effect on the hiring of counsel if we leave this to the end of the case? Clements: That's the reason why I'm arguing for what I called a "higher ruling" -- that there's nothing wrong with this arrangement absent evidence of wrongdoing. Leaving it to the end creates more risk for the outside attorney. Of course, the outside attorney is already bearing a lot of risk, including the risk that the case will not succeed.

Justice Bamattre-Manoukian: Hourly work also creates problems. There is self-interest inherent in hourly fee relationships as well. Clements: Yes. Bamattre-Manoukian: How do you interpret footnote 3 of Clancy? Clements: It's the control that any client has to say I want you to file this suit. In Clancy the public attorney wasn't involved in those decisions. In this case we have a much higher level of control than in other cases -- strategic decisions regarding the exercise of government power are made by the public attorneys.

And that was the end of Clements' argument.

Mr. Curtis pulled no punches. The first words he said were, "The poison is already in the system. It's been in the system since those agreements were signed." He said he was pleased to hear the Court quote Clancy (and he repeated part of the quotation). There's a lot at stake here about the system. We've repeatedly heard about "private attorneys," "private attorneys," "private attorneys." The attorneys with power to bring this case are public attorneys. I disagree with the idea that Clancy contains language supporting both sides.

Justice Bamattre-Manoukian broke in with another quotation from Clancy: "Nothing we say herein should be construed as preventing the government, under appropriate circumstances, from engaging private counsel. Certainly there are cases in which a government may hire an attorney on a contingent fee to try a civil case." [Clancy, 39 Cal.3d at 748.] Curtis: I agree with that completely. The distinction is between a proprietary action vs. a representative action. [This public nuisance case is considered a "representative" action.] The rule that Clancy laid down applies to a public representative action. There are no exceptions.

Justice Bamattre-Manoukian then asked if neutrality is preserved, why should a contingency-fee agreement be precluded if the trial court addresses it at the end of the case and the trial court finds that the public attorneys retained control so as to preserve neutrality, that the interests of the public have been served, and there has been no misuse of public funds? How does it offend the sense of neutrality? There is no criminal prosecution in this case. Many counties lack resources. Some have very few staff attorneys. How does that offend Clancy?

Curtis: Clancy answered that question. The attorney argued I'm an independent contractor. The Court said "a lawyer cannot escape the heightened ethical requirements of one who performs governmental functions merely by declaring he is not a public official. The responsibility follows the job: if Clancy is performing tasks on behalf of and in the name of the government to which greater standards of neutrality apply, he must adhere to those standards." [Clancy, 39 Cal.3d at 747.] There's no "control exception" in that language. Clancy recognized the big issues in play regarding public confidence -- if the public prosecutor is tainted by personal gain that undermines public confidence. It's the agreement itself that's the problem. Clancy sets down a categorical rule that a government lawyer (and these private attorneys are government lawyers) -- if they have a financial stake in the outcome we have a very serious problem. There's no control exception.

Curtis went on: There are two foundations to Clancy. One is constitutional and the other is ethical. The constitutional foundation is in the language that's been read into the record today at pages 746-747 ("When a government attorney has a personal interest in the litigation, the neutrality so essential to the system is violated." [Clancy, 39 Cal.3d at 746]) and also in the four cases the Clancy Court cited. All four are constitutional authorities.

Justice Bamattre-Manoukian interjected: All of those cases have facts distinguishable from the facts we have here. Curtis: Clancy says those cases are not to be distinguished. Clancy is the controlling authority and says those distinctions don't matter. Toomey [phonetic] makes clear that the United States Supreme Court recognizes that there's a difference between some types of biases and the government officer having a personal financial stake in the outcome. Clancy says the first type of bias might be tinkered with by the Legislature but the other can't be. "The responsibility follows the job." [Clancy, 39 Cal.3d at 747.]

Justice McAdams: How is this different from any other contingency-fee contract? Curtis: The difference is who the client is. That's a good way to turn to the ethical strain in Clancy. The client is the sovereign; it has a duty to ensure justice is done. This means its agents can't have a personal financial stake in one side or another. Not even twelve dollars or twenty-five dollars. In Rhode Island, the plaintiffs are seeking billions of dollars in relief and they're going to try to get their fees out of it. The issue is going to the court right now. Briefing is about to be submitted [he might have said already submitted; can't recall].

Curtis continued: There is no "supervision exception" in Clancy. It's been made from whole cloth in these other cases, which were either not public nuisance cases or wrongly decided. The question came up of what use Clancy made of Sedelbauer. He said the issue the Court was addressing was how the case should be styled under the Code of Civil Procedure. They were saying it should be brought in the name of the District Attorney. In footnote 3, the Sedelbauer footnote, the Court was grasping at straws. It cited an Indiana case. It's inconceivable that the Court was articulating a "supervision exception" in footnote 3 because on page 750 the Court says that on remand the case must be styled "People ex. rel [District Attorney] Dallas Holmes" -- it's okay for Holmes to hire Mr. Clancy. [The language from Clancy reads: "Thus on remand the action herein should be brought in the name of Dallas Holmes, the Corona City Attorney. The City may hire Clancy to represent Holmes. (Gov. Code, § 37103.)." Clancy, 39 Cal.3d at 750 n.5.]

Curtis went on: The Court understood perfectly well what a towering principle it was dealing with. We will have a neutral judge and neutral public lawyers. This does not mean the lawyers can have a profit stake without running afoul of the ethics rules.

Justice McAdams then referred to some of the language in ARCO's brief: "incentive to maximize the monetary award by any means possible." You argue that the mere existence of the contingency-fee agreement creates this incentive. How would the private attorney do this if their actions are being controlled by the public attorney? [An aside: I thought it was interesting at this point that Justice McAdams continued to refer to the outside lawyer as a "private attorney," despite Curtis' argument that a private attorney acting on behalf of a government entity becomes a "public attorney."] How does it play out as a practical matter?

Curtis said that no court will ever be in the conference room where strategy decisions are made. We're never going to know where there's an impact. The attorneys with billions of dollars at stake are not going to be potted plants. For example, there has been some success in cases dealing with childhood lead exposure. [This case involves "the public nuisance created by lead paint." County of Santa Clara, 137 Cal.App.4th at 298.] A neutral might not think it's a good idea to hire thousands of workers to abate every single one. There are lots of different ways that influence can be brought to bear. In the Louis Vuitton case, the court rejected a "harmless error" argument. It said we're dealing with a fundamental, systemic problem. We don't look at harmless error. In the federal system, for a public prosecutor to have a financial interest in a prosecution is "a go-to-jail offense." Those exercising the government's discretion may not have a financial interest in the outcome.

Justice McAdams said but couldn't the same argument be made by the hourly attorney -- who's no shrinking violet -- saying to the meek public attorney, let's not settle this case; let's go all the way. Curtis said of course. Hourly retentions have conceivably some issue. But what's so troublesome about the contingency-fee arrangement is that it depends on the outcome as to the defendant. Clancy and other authorities say it's so erosive to our system of law and government that we're not going there. We understand that the risk of influence, and the public perception of the risk of influence, is too overwhelmingly great.

Justice Bamattre-Manoukian then asked Curtis the same question she asked Clements: Is there any statutory authority for fees in a public nuisance case? Curtis said what they're asking for is common fund -- it's mentioned in the agreements. These attorneys are not in the business of working for free. That's why this is not premature. You're entitled to neutrality from the beginning of the case.

Justice Bamattre-Manoukian then said: What about the Rhode Island case where they decided to wait? (And she read a quotation from the Rhode Island case.) Curtis said: I think the Rhode Island Supreme Court got it wrong. I think the United States Supreme Court and the California Supreme Court got it right. Rhode Island chose not to recognize the principle. Go back to Clancy and look at how the court dealt with Sedelbauer.

At this point, Mr. Curtis spent quite a while parsing the County's writ petition (specifically, pages 29-31) and basically arguing that the petition misrepresented the holding of Clancy. He concluded that part of his argument by emphasizing "the principles upon which the Clancy opinion was based -- constitutional and ethical principles. If you're acting on behalf of the government, you must act with neutrality. Clancy controls. The trial court got it right. This is a problem that has to be nipped in the bud."

From the tone of his voice, that sounded like the end of his argument. But no, there were more questions. (The same thing happened near the end of Clements' argument.)

Justice Bamattre-Manoukian said what about cases where small counties have no funds to pursue these cases? Pursuing the case is in the public interest, but the only way they can pursue it is if private lawyers step up. You would say to them that Clancy precludes that? Curtis replied, We've got to decide the case before us. This case involves ten counties. They have hundreds of employees and budgets that add up to billions. But even in your more extreme case, the constitution and ethics cannot give way there. When an attorney exercises government power, that government attorney cannot have a financial stake in the outcome against the defendant.

Justice Bamattre-Manoukian then summarized the Court's three options for disposing of the case. First, the Court could affirm, which would likely lead to further review before the Supreme Court. Second, the Court could remand for the issue to be resolved by the trial court at the end of the case. Mr. Curtis jumped in to say that that is contrary to Clancy and "the federal constitutional authorities I've cited." Justice Bamattre-Manoukian then said that the Court's third option is to hold that the trial court didn't get it right, and instruct that court to monitor the case. Curtis objected to that proposal by saying that if there are exceptions to Clancy (which is what such a holding would imply), it's for the California Supreme Court to identify them.

And that was the end of his argument.

On rebuttal, Mr. Clements said Mr. Curtis was advancing a reading of Clancy as an absolute, categorical rule. That's not the holding of Clancy. It's the job of courts to look at cases and distinguish them. Clancy is distinguishable.

Justice Bamattre-Manoukian said that footnote 5 of Clancy says you can hire Mr. Clancy back, but presumably on an hourly basis. Mr. Clements replied that you'd still have an issue regarding delegating authority on an hourly basis. They're inferring a lot from footnote 5. Footnote 5 relates to how the case should be captioned. Bamattre-Manoukian: But it does seem a little inconsistent with their holding, which was to disqualify Mr. Clancy. Justice Bamattre-Manoukian and Mr. Clements then talked back and forth about the fact that the footnote doesn't specify hourly vs. contingency nor does it specify whether Mr. Clancy could be hired as the sole attorney for the DA, as opposed to working in a co-counsel capacity with the DA. Mr. Clements said that no court has extended Clancy as an absolute rule that applies when private attorneys are co-counseling and assisting public attorneys and when the public attorneys retain control.

Justice Bamattre-Manoukian said that there were no California cases that address the issue at all. Clements said that the Grass Valley case, which is the opinion of a federal district court in California, did. He also cited the "interest of justice" provision in Code of Civil Procedure section 128 [which relates to the trial court's power to control the proceedings before it] and a case called People of Santa Monica, which recognized a balancing test.

Responding to Curtis' argument that the Court should decide just the case before it, Clements said this is a case that will make a rule for all. It will affect all public entities including those who don't have an in-house attorney. There's a public interest in deciding issues on the merits, especially in a case like this.

Clements went on: You need actual evidence of improper bias or violation of ethical duties, and there's none of that in this case after seven years. The order should be that the trial court got it wrong and the rule should be that contingency-fee agreements are acceptable if the agreement preserves the government attorney's control. Justice Bamattre-Manoukian broke in: It's not really "misconduct," is it? Rather, it's neutrality and control. Clements replied that "excessive delegation" might be a better way to put it. There are five lines of defense here. The first line of defense is the ethical duty of all attorneys. Courts do not assume that attorneys are going to breach their ethical duties. The second line of defense is the public officials who will be supervising the private lawyers. The law presumes that public officials discharge their duties. Third, the fee contracts have been approved by the public entities, here, the Board of Supervisors. Fourth, able defense counsel are on the watch. And fifth, the trial court will take action if any evidence of excessive delegation arises.

That was the end of the argument. As I mentioned early this morning, my sense at the conclusion of the argument was that the justices were leaning in favor of the County's position. I think they will either adopt the County's legal argument, or remand for the trial court to consider, at the end of the case, whether the government attorneys exercised sufficient control throughout the litigation so as to make an award of contingency fees proper. Either result would be a victory for the County. An opinion will be due by mid-April.

Yesterday's oral argument: County of Santa Clara v. Superior Court (ARCO)

I attended yesterday's argument in County of Santa Clara v. Superior Court (ARCO) and will put up my report later today. For now, suffice it to say that the presentations were excellent and that the justices' comments suggest that they are leaning in favor of the County's position.

Oral argument preview: County of Santa Clara v. Superior Court (ARCO)

This morning at 9:30, the Court of Appeal for the Sixth Appellate District will hear oral argument in County of Santa Clara v. Superior Court (ARCO), no. H031540. In this case, the issue is whether a public prosecutor may hire private outside counsel to represent it on a contingency-fee basis. Barry Barnett of Blawgletter has an interesting post on some of the practical ramifications of the case.

I'm planning to attend the argument and will provide a report most likely tomorrow. Meanwhile, here are the trial court's order and some of the appellate briefs:

• Petition for Writ of Mandate (filed 05/11/07)
  

• Return by Real Parties in Interest to Petition for Writ of Mandate (filed 07/30/07)
  

• Petitioners' Reply to Real Parties' Return (filed 08/20/07)
  

• Amici Curiae Brief of the California State Association of Counties and the League of California Cities (filed 08/29/07)
  

• Amicus Curiae Brief of the Association of California Water Agencies (filed 08/29/07)
  

• Amici Curiae Brief of Public Justice, P.C., Healthy Children Organizing Project, and Western Center for Law and Poverty (filed 08/29/07)
  

• Amici Curiae Brief of the Chamber of Commerce of the United States and the American Tort Reform Association (filed 08/29/07)
  

• Amicus Curiae Brief of American Chemistry Council (filed 09/10/07)
  

• Real Parties' Response to Amici Curiae Briefs of (a) Association of California Water Agencies and (b) Public Justice, P.C., Healthy Children Organizing Project, and Western Center for Law and Poverty (filed 09/13/07)
  

• Petitioners' Response to Amicus Curiae Brief of American Chemistry Council (filed 09/25/07)
  

Many thanks, again, to Santa Clara County Counsel Ann Miller Ravel for providing copies of these briefs.

Oral argument report: Farm Raised Salmon Cases

My sincere thanks to Kelly Chen, who just passed the bar (congratulations, Kelly!), for attending Tuesday's argument in Farm Raised Salmon Cases, no. S147171, and for providing the following detailed report (complete with an outcome prediction):

Case Name: FARM RAISED SALMON CASES
California Supreme Court
Case No.: S147171 December 4, 2007 -- 9 a.m.

This morning in Los Angeles, the California Supreme Court heard oral argument in Farm Raised Salmon Cases. The issue presented before the court is: Does the Federal Food, Drug, and Cosmetic Act (“FDCA”) impliedly preempt plaintiffs' state law claims, including claims based on the UCL and CLRA?

Craig R. Spiegel argued on behalf of the plaintiffs (i.e., consumers). Rex S. Heinke argued for the defendants. Justice George recused himself from the case, and Justice Mihara from the court of appeal was assigned as justice pro tempore for this case. Justice Kennard took over the role as chief justice in this session.

Mr. Spiegel started his argument by discussing the reasoning behind the court of appeal’s holding that section 337(a) of the FDCA preempts plaintiffs’ state claims. Citing to the history of the regulation on the use of coloring on food, Mr. Spiegel discussed how California enacted regulations concerning this area as early as in 1905, long before the FDCA (which was enacted in 1938).

Justice Kennard then interjected and asked: Isn’t there another section of the FDCA that would help the argument against preemption? Specifically, Kennard referred to section 343-1, which permits states to establish standards concerning the use of coloring on food so long as those standards are “identical” to those imposed by FDCA. She asked: “Am I right to say that the language of these provisions helps your position?” Mr. Spiegel affirmed.

Note: Congress enacted section 343-1 in the Nutrition Labeling and Education Act of 1990 (“NLEA”).

Mr. Spiegel then discussed how Congress enacted section 337 in 1938, but in 1990, Congress via the enactment of section 341-1 permitted the states to establish and continue in effect regulations that are identical to the federal requirements.

Justice Moreno then jumped in and asked: “Are you relying on any of the FDCA violations?” Spiegel: “No.” Spiegel then explained that plaintiffs are relying on UCL violations, and that plaintiffs are only claiming that Congress via the enactment of section 341-1 says that states may establish or continue in effect regulations that are identical to the FDCA requirements.

Justice Kennard interjected and asked whether Spiegel’s reasoning is based on the language in section 341-1, which says that no states may establish or continue in effect a requirement for labeling of food “that is not identical to the requirement” of FDCA. Spiegel affirmed.

Justice Kennard continued: “So section 343-1 expressly preempts only non-identical state labeling requirements?” Spiegel: “Yes.”

Justice Kennard then asked: “What about the police power … as being another argument?” Spiegel agreed that the police power is another argument against preemption.

At this time, Justice Mihera jumped in (but I missed the question). Mr. Spiegel’s response talked about two cases that were cited against plaintiffs’ position, one of which is Buckman (where the USSC held that section 337(a) is clear evidence that Congress intended FDCA be enforced exclusively by the federal government). Spiegel nicely distinguished Buckman from the present case, explaining that the plaintiff in Buckman alleged “fraud on the FDA” -- thus, there was no police power argument in Buckman, because fraud on a federal agency is not within the realm of the police power.

Justice Moreno asked Spiegel whether FDA has a position regarding state enforcement. Spiegel was very prepared to answer this question. He cited a 1993 official rule and quoted “nothing in this act will preclude the states from enforcing their own requirement under their own [law].”

Spiegel then went on to talked about the interplay between sections 343 and 343-1 and 337(b), noting that 343 and 343-1 were adopted as part of the FDCA in 1990. I think his main idea was that if Congress meant to create FDCA preemption in section 337, then why did Congress bother to enact section 343-1, which permits states to “establish or continue in effect” state requirements?

Justice Mihera noted that barring non-identical state requirements seems to infer that identical state requirements will be okay. He then asked about defendants’ argument based on NLEA section 343-1, subsection 6(c)(3).

At this point, Justice Kennard pointed to subsection 6(c) of section 343-1 which states that NLEA “shall not be construed to preempt any provision of State law, unless such provision is expressly preempted….” Justice Kennard asked: “Is there any express preemption in the statute?” Response: “No.”

Mr. Heinke then argued on behalf of the defendants.

Justice Baxter jumped in with his first question: “Why wouldn’t Congress want private enforcement of these requirements?” Justice Chin then asked about the plain language of NLEA which seems to say there is no preemption if state requirements are identical to those required by NLEA. Mr. Heinke responded by explaining that the question presented is whether there can be private enforcement, citing section 337. Mr. Heinke noted that Congress in 1938 via section 337 said there is no private enforcement of FDCA. He added: “Did Congress really intend to change that by section 334-1? If yes, then Congress would have just said that it overturned the bar on private enforcement instead.”

Mr. Heinke then emphasized that section 334-1 didn’t say anything about “private enforcement.”

Justice Kennard, at this point, interjected and asked about the language in NLEA. She specifically asked why this court should agree with defendants’ arguments? Mr. Heinke’s response was that NLEA is not the basis for defendants’ argument. Instead, he noted that defendants are arguing section 337 as the basis for preemption. He then argued that Congress didn’t change a word in section 337 (since its enactment).

Justice Mihera jumped in: “But they added section 334-1!” Mihera then asked: “Who bears the burden?” Response: “There is no burden.” Mihera: “There is!”

Justice Mihera then explained that because there is no express preemption, the defendants are relying on “implied” preemption -- which means that the defendants will need to establish an “obstacle to a federal objective.” He then asked what is the obstacle that will result in the private enforcement of state law that is identical & parallel to FDCA?

In response, Heinke cited the preamble of NLEA and talked about legislative history of what Congress is doing concerning private enforcement.

Justice Kennard then asked about the two USSC cases cited by the plaintiffs (i.e., Bates and Medtronics, in both cases the USSC upheld state private actions as long as they are not inconsistent to the federal requirement). Mr. Heinke’s response focused on 337 and the idea that there is no private enforcement of FDCA. First, he indicated Bates is not about FDCA. Second, he noted Medtronics was an FDCA case, but Medtronics did not discuss section 337, and therefore is not controlling here. Heinke then noted it is Buckman that should be looked at here.

Justice Moreno asked: “But one of the principles of Medtronics is to allow private enforcement of claims?” Response: “Yes, but that’s without looking at section 337.”

Justice Mehera and Mr. Heinke then had some discussion back and forth about the language in 334-1. Mr. Heinke said that Congress changed the language to “state enforcement” and not “private enforcement.” Justice Mehera corrected him by noting that section 334 does not use the word “enforcement” -- rather, it only talks about state “establishment” of it own requirements.

At this point, Justice Werdegar asked her first question: “What’s the policy reason [for no private enforcement]?” Response: Congress wants to ensure expertise -- private parties don’t have expertise in this area (and I think he mentioned something about plaintiffs’ lawyers and fees!).

Justice Baxter then said: “Congress did not provide private enforcement in the federal courts?” Response: “Exactly.”

Justice Kennard then jumped in: “You were saying you are not relying on NLEA, right? But just a moment ago you cited Congressman Waxman's comment which started out with ‘The NLEA….’” Justice Kennard was basically saying that in one context Mr. Heinke is relying on NLEA; whereas, in another context, he chose not to rely on NLEA.

At this time, it was Mr. Spiegel’s turn again. He started out indicating that the defendants had mischaracterized plaintiffs’ argument. Spiegel clarified that plaintiffs are basically arguing that defendants’ claim concerning section 337 is incorrect.

He then talked about how defendants are arguing Congress in 1938 through section 337 basically decided that there should be no more state law claims (without saying a word about it in the statute). He also noted that the cases defendants have cited all concerned FDA “approval” process and that states have never regulated such approval processes.

Justice Werdegar then asked questions that focused on “private enforcement” and the policy reason of whether private enforcement is a problem. Mr. Spiegel indicated the issue of private enforcement of FDCA has nothing to do with this case.

Justice Baxter then asked why shouldn’t section 334(b)[??] control? Mr. Spiegel explained because that section says “enforcement of FDCA.” Justice Baxter followed up with a question on section 337. Spiegel’s response talked about Buckman. He again explained that the claim in Buckman is preempted because the plaintiff there only relied on FDCA violations (and not state claims).

Predictions:
Mihera, Kennard, Chin, Moreno: for the plaintiffs.
Werdgar, Baxter: for defendants.
Corrigan: not sure.

Thank you, Kelly, for providing such a detailed and interesting report of the argument! Yesterday's Daily Journal also had a (much less detailed) report on the argument, and also predicted that the plaintiffs are the likely winners: "Court Backs Salmon-Labeling Suit" (subscription). The decision is due by early March.

Still more on the Gentry argument

Wage Law has a detailed report today on the Gentry argument.

Oral argument report #2: Gentry v. Superior Court

Thanks to Anthony Zaller and Brian Van Vleck, authors of California Labor & Employment Defense Blog, for sending in their perspective on the Gentry argument:

We probably can’t improve much on Kelly Chen’s excellent factual reportage of the oral arguments in Gentry. Kelly concludes, however, that “as a recent law school graduate, I have to humbly admit I’m too junior to make a prediction.” Our predictions are surely no better than Kelly’s but we aren’t constrained by her prudent good sense. Consequently, below is our take on the hearing as well as some speculation about where we think the Justices may be heading with their eventual opinion.

Certain aspects of the hearing had an unmistakable “play within a play” quality. For example, the respective parties and their counsel were arguing first and foremost about whether the particular arbitration agreement drafted by Circuit City and signed by Mr. Gentry would be upheld and enforced. On the other hand, the assembled observers (and the larger community of class action practitioners), were more intently focused on just one sub-issue -- i.e, the enforceability of the agreement’s provision prohibiting Gentry from pursuing a class-wide arbitration.

Based on the representations of counsel at the hearing (and, as a disclaimer, we are not independently familiar with the briefs or appellate record), the record appears to contain more than enough ammunition for the Court to shoot down Circuit City’s agreement based on the application of familiar Armendariz factors, including lack of mutuality, a purported waiver of certain damages, a shortened statute of limitations, etc. But will the Court simply strike down the agreement based on the “totality of the circumstances,” and thereby leave open the possibility that a class arbitration ban could be upheld if it were part of a less unconscionable agreement? Or will the Court use Gentry as a vehicle to create a categorical rule that invalidates all pre-dispute restrictions on class arbitration?

Cliff Paleski, appearing on behalf [of] amici, argued forcefully in favor of a nearly per se rule that would prohibit any restrictions on class arbitration under any circumstances in employment disputes. His advocacy, while forceful and persuasive as always, was based essentially on public policy arguments. Moreover, to our bourgeois ears at least, his arguments had a radical flavor – advocating for example, that “all employment is inherently oppressive,” and that leaving the door open even a crack will lead to “no end of mischief” by avaricious employers seeking to strip workers of their rights.

As legal support for their proposition that employees can never waive their right to act as a class representative in arbitration, Gentry’s team could only cite to Labor Code section 923. This is nothing more than a vague Depression-era proclamation that collective bargaining is favored by public policy. We’ve never heard of anyone invoking Section 923 as support for employee class action rights and the argument didn’t seem to get a foothold with any of the justices either. All things considered, we’d have to rate this Section 923 argument as a prohibitive long shot.

Justice Kennard was by far the most active questioner and we wouldn’t be surprised if she is the author [of] the majority opinion. Some of her questions implied that she might have reservations about whether there was any principled basis for a broad ruling on the permissibility of class arbitration waivers. Justice Chin also focused on the tension between the competing public policies to enforce agreements and yet allow class wide procedural remedies. Chin seemed to come down on the side of enforcing arbitration agreements. The other Justices, by and large, avoided the big issues and focus[ed] more on the facts of this particular case that might render the agreement procedural or substantive unconscionability.

So what’s the bottom line? Our prediction is that the Court will hold the Circuit City agreement to be unenforceable. We are also willing to bet that, while the Court’s opinion may contain some language that the class arbitration ban contributed to this result, it will stop short of announcing any categorical rule against such provisions. As a result, a case-by-case analysis will be required and a properly drafted arbitration agreement may still offer an arguable defense to class certification. But it goes without saying that we could be wrong.

Thanks, Anthony and Brian, for that analysis. In addition to Kelly's summary, two readers (one of whom is Michael Walsh of the blog Wage Law) provided their thoughts in the comments to this post.

A couple of the reports on the argument mentioned Armendariz, but it will also be interesting to see how Discover Bank plays out as precedent in the employment context. As mentioned in these posts, I noticed a while back that the Supreme Court appeared to be granting review in cases upholding no-class-action arbitration clauses, and denying review in cases striking them down. The outcome predictions so far in Gentry are consistent with the idea that the Supreme Court felt that Discover Bank was being applied too leniently, or at least that lower courts needed more guidance. It would not be unreasonable for the Court to conclude that a public policy favoring access to the judicial system (which is what the class action device facilitates) should outweigh any countervailing public policy favoring a procedural device (arbitration) that serves to limit access. To a large degree, Discover Bank stands for exactly that proposition.

Oral argument previews: Prachasaisoradej and Tobacco

Two cases involving UCL claims are set to be heard this morning at 9:00 a.m. in Los Angeles. Prachasaisoradej v. Ralph’s Grocery Co., no. S128576, is a UCL/employment case (decided on preemption grounds below). In re Tobacco Cases II, no. S128576, is a preemption case. For more detail, see these posts. If you attended one or both of these arguments, it would be great if you'd send me a report by email for posting here (with or without attribution). Meanwhile, the first report I received on the Gentry argument is immediately below.

Oral argument report: Gentry v. Superior Court

Many thanks to Kelly Chen, a recent graduate of U.C. Hastings Law School, who attended the Gentry argument yesterday and wrote up this detailed report:

Kelly Chen’s Notes Re: Gentry Oral Argument
California Supreme Court Case No. S141502
June 5, 2007 -- 2pm

(NOTE: I observed the argument from a staff lounge on a 28” tv with a room full of about 40 people. It was quite difficult to “see” anything. Although I could distinguish the voices amongst the female justices, I was unable to differentiate the voices of the male justices.)

This afternoon in Los Angeles, the California Supreme Court heard oral argument regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California's wage and hour laws. Michael Rubin and Cliff Palefsky argued on behalf of the employees. Rex Berry argued for Circuit City.

Mr. Rubin started by pointing to the exculpatory purpose and effect of class action bans in employment cases. He argued that such a class action ban is inconsistent with the policy underlying Labor Code section 923, which provided that employees shall be free from employers' interference in “concerted activities” for the purpose of “mutual aid and protection.”

Justice Kennard quickly jumped in and asked: “Would this court take into consideration the relatively small awards in wage and hour cases?” She then cited the statistical average of $6,000 in individual wage claims. Mr. Rubin indicated that in overtime claims where the statute of limitation is running, some workers in a class might have begun work at the end of the claim period.

One of the male justices (not Moreno) then asked: “Would you say that the public policy in favor of class actions should trump the public policy in favor of arbitration?” Mr. Rubin indicated that he would not characterize it that way. He explained that Gentry’s position actually furthers the public policy regarding arbitration -- that is, a “fair” policy of arbitration. He argued that employers can not have an arbitration policy that undermines the policy of a fair arbitration.

Another male justice (Moreno I think) then interjected by saying that this case is not like Discover Bank where the contract of adhesion was sent in stuffed mails. Mr. Rubin responded by arguing that there is still a procedural unconscionability issue here, because this case involved a scenario where employees were asked to “take it or leave it.” Rubin explained that the nature of the work environment itself is inherently oppressive.

At this time, Justice Kennard interjected and asked about the employment handbook. Mr. Rubin said that the employment handbook indicated the oppressive nature of the agreement, given that Circuit City retained the right to unilaterally change the terms of the agreement. “That goes beyond the reasonable expectations of the employees,” Mr. Rubin argued. Mr. Rubin articulated that certain special provisions just cannot be "buried" in the handbook, including things like a class action bar, the unilateral change of the terms, and the reduction of the statute of limitations. He argued that these special provisions must be explained in a “pre-dispute” scenario.

One of the male justices (Baxter or George) then asked if it is Mr. Rubin’s opinion that his client's claims cannot be adequately adjudicated through a Berman hearing? Mr. Rubin indicated that individual claimants in a Berman hearing have to pay for attorneys fees; he then focused on his class action argument. The Justice commented that isn’t it the purpose of the Berman hearing that the employees can represent themselves in these wage claims without representation. The Justice did not seem eager to hear the class action argument. Rather, the Justice pursued his original inquiry and asked Rubin: “What’s wrong with the Berman hearing process? Or arbitration?”

At this time, Mr. Rubin’s time was up. Mr. Rubin quickly answered the questions. With the Berman hearing, Mr. Rubin pointed to the limited resources and attorneys fees as two problems. I wish Mr. Rubin had had a little bit more time to discuss the inadequacy of the Berman process in a more comprehensive manner.

Mr. Palefsky argued also on behalf of the employees.

I missed the beginning of Mr. Palefsky’s presentation and the first question posed by Justice Corrigan.

A male justice (George, Chin, or Baxter) asked a hypothetical of whether it would make a difference if the plaintiff is an employment specialist working at a law firm who is capable of understanding the terms of the employment agreement. Mr. Palefsky responded in the negative. Mr. Palefsky’s position was that employers just can’t prohibit class actions.

Justice Moreno then asked if Circuit City gave up its rights in any way in the agreement. Mr. Palefsky firmly responded: “No!” Mr. Palefsky then argued that that if one has to waive his right to a jury, etc… you can’t do it in a document with a title “Receipt.”

Justice Kennard eagerly interjected: “Is it your view that class action waiver is always invalid? Or is it a case by case analysis?” Mr. Palefsky answered that class action bars (in this context) are always invalid. He, like Mr. Rubin, cited Labor Code section 923. At one point, Mr. Palefsky used the phrase “in a wage case” during his response to Justice Kennard’s question. Upon hearing the phrase, Justice Kennard commented: “ah….you just said the magic term! It is this case!” Mr. Palefsky then used “in an employment case” when he moved on to explain the pre-dispute waiver in this case (and how it shouldn’t be allowed).

Justice Werdgar then asked whether the particularity of this case is irrelevant (i.e., whether the fact that the relevant provisions were buried in the handbook?). Mr. Palefsky indicated that the particularity of this case tells us the importance of a clear cut rule. He argued that we just can’t open the door to a class action bar with an opt-out process; hence, there must be a clear cut rule.

Justice Werdgar then followed up by asking about Gentry’s options to resolve his dispute: “If he had opted out, what are you saying it will happen to him?” Mr. Palefsky went on with his argument, but the justices interrupted and asked him to directly answer the question. “Retaliation!” Mr. Palefsky responded.

At this time, Mr. Berry argued on behalf of Circuit City. He started out by arguing that there are two flaws to Gentry’s arguments. First, he pointed to what’s on the record -- the agreement. One of the male justices (George I think) then interjected and asked about the “voluntariness” of the context of the agreement -- whether it is a contract of adhesion. Berry responded: “absolutely not… if he (i.e., Gentry) felt coerced, I suppose he could put a declaration before the Superior Court…but he did not.”

Justice Werdgar asked: “We’ve been told that Labor Code section 923 prohibits class action waivers. Is that correct?” Berry responded in the negative and argued that assertion is a stretch.

Berry then moved on and focused his arguments on the pro-arbitration public policy.

Justice Werdgar then commented that the opposing counsels focused on the class action part, not arbitration part. She asked: “Are we not talking about class action waivers?”

Berry then argued that Gentry is asking this court to render the agreement unenforceable because there was a class action waiver. He argued that this is not a commercial contract of adhesion. He indicated that employees were given a presentation about the terms of the agreement and an opportunity to opt out. At this time, one of the male justices added: “didn’t they go beyond and advise…the employees to counsel with attorneys?” (I really couldn’t “see” which of the male justices said this.)

Justice Chin (I think) then said that he sees this as a tension between class action policy verses the arbitration policy. He asked if they are both legislative policies? Berry said that the policy concerning arbitration is a legislation policy, but the policy concerning class actions is a “judicial” policy. Justice Kennard then quickly pointed out that the policy concerning overtime wages is a legislative concern. She said: “why are we in dangerous territory? I think we’re simply looking at whether a class waiver is okay. I think everyone will agree that arbitration is favored. But legislature also concerns overtime…etc…”

Justice Kennard then asked Berry to articulate what is (and what is not) in the employment handbook. She specifically asked for examples like: (i) the reduction of the statute of limitation from four to one year, and (ii) the restriction of backpay to one year. Berry didn’t address Kennard’s question directly. Instead, he talked about the presentation to the employees and how even till now no one else indicated to them what they should have said to the employees. Kennard interjected and asked Berry to respond to the question posed. Berry said “yes” and indicated that the employees signed a receipt, etc.

Justice Moreno then asked Berry to address to the issue regarding reciprocity of the contractual terms, specifically whether Circuit City gave up some rights? “Absolutely,” said Berry. He explained that his clients gave up appellate review (i.e., given that arbitration awards are not subject to appellate review). Also, he gave an example of how Circuit City also gave up suing its employees (i.e., something about collecting money from employees about traveling expenses -- I thought this was weak in comparison to the rights that the employees are giving up…for obvious reasons).

At this time, it’s Mr. Rubin’s turn again. Justice Kennard asked Mr. Rubin, in response to Berry’s earlier assertions, whether the employment handbook indeed expressly contained certain explanations about things like the reduction of the statute of limitations, etc? Mr. Rubin responded with confidence: “No!” He then referenced specific page numbers in the handbook. Rubin said: “It doesn’t say ‘no statute of limitation of more than 1 year’ or ‘no punitive damages.’” He then took the opportunity and went back to Justice Moreno’s question regarding reciprocity by referencing a page in the handbook which expressly bars lawsuits “brought by associates.”

One justice asked about Labor Code section 923 and how Circuit City claimed this section only applies to a collective bargaining situation. One of the male justices asked: “Is there any legislative intent you can cite that favors class action over arbitration?” Mr. Rubin once again indicated that they are not making such a distinction (see above). The Justice then asked about the term “concerted activity” in the section 923. Mr. Rubin responded by saying that federal courts have permitted people to apply the term “concerted activity” to consolidate cases.

At this time, Mr. Rubin articulated that a class action bar in pre-dispute employment cases (as in Gentry’s case) is unenforceable “if it is reasonably foreseeable that the ‘effect’ is to eliminate non-waiveable statutory claims.” I thought this point beautifully tied to his opening remark!

Justice Werdgar then asked: if this court were to agree with you….are you saying that class action arbitration is not okay?” Mr. Rubin said: “Oh, no.” Werdgar then cleared out two issues: (1) class action waiver, and (2) the arbitration agreement itself. She asked if Gentry’s first position is to strike out the entire agreement, and the second position is to allow arbitration without the class action bar. Rubin affirmed.

The next question posed at Mr. Rubin is whether a class action waiver is never enforceable. Mr. Rubin responded, again, that it is unenforceable in a pre-dispute situation in the employment context if it is reasonably foreseeable that the effect is to eliminate non-waiverable statutory claims.

As a recent law school graduate, I have to humbly admit I’m too junior to make a prediction.

Thanks, Kelly! Readers, what do you think? Feel free to post a comment based on Kelly's summary as well as the summary posted by a reader in the comments to this post. I'm hoping to receive at least one more summary later today.

Oral argument preview: Gentry v. Superior Court

This afternoon at 2:00 p.m., the Supreme Court will hear oral argument in the no-class-action arbitration case, Gentry v. Superior Court, no. S141502. The argument will take place in Los Angeles, and I hope to be able to post at least one report here tomorrow. Meanwhile, for everyone's reading pleasure, the Court of Appeal's opinion is here: Gentry v. Superior Court (Circuit City Stores, Inc.), 135 Cal.App.4th 944 (2006) (Second Appellate District, Division Five).

UPDATE: A reader who attended the argument today has put up a nice summary as a comment to this post. I'm expecting to receive additional reports shortly.

Recording of Murphy v. Kenneth Cole oral argument available online

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.

More on the Murphy v. Kenneth Cole oral argument

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.

"Calif. High Court Grapples With Limitations Period in Meal-Pay Law"

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's oral argument: Murphy v. Kenneth Cole Productions

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 Just