The UCL Practitioner

A little bit of live-blogging: Dukes v. Wal-Mart

I'm now in the courtroom. I've got my mobile device. Unlike the Cal. Supreme Court, the Ninth Circuit allows electronic devices in the courtroom, at least for now, before the argument has begun. Seligman and Boutros are both here. The courtroom is filling up. We have about 45 minutes to wait. I've got a pretty good seat. The courtroom is beautiful, with sturdy wooden benches for seating.

I will need to revert to regular old-fashioned note-taking once the argument starts. The bench consists of two rows of seats, eight in front and three more, elevated, in back. There is no indication of who will sit where, so I must conclude that the judges will be seated based on seniority. The audience is also divided into preferred and non-preferred seating. There is a crowd of people around each counsel table. Then there are special seats for "invited guests" and the press. (I'm press, aren't I?) And then there are seats for the general public, which is where I'm sitting. We now have about 20 minutes left to wait. I've brought other work with me, to which I'm turning now.

Various staff members keep coming in through the back door and placing stuff in front of certain judges' seats. A moment ago someone came out and filled a cup with ice in front of what appears to be Chief Judge Kozinski's seat. Whenever the back door opens, there is a small hush until people realize the judges are not yet coming in. Now someone just brought in the hugest stack of papers yet and placed it in front of Kozinski's chair.

OK we've been told to turn off mobile devices so I'll be going now. Check back in the morning for my argument report.

Oral argument preview: Dukes v. Wal-Mart, Inc.

This afternoon at 2:00 p.m. in San Francisco, an eleven-judge en banc panel of the Ninth Circuit will hear oral argument on rehearing in Dukes v. Wal-Mart, Inc. (see this blog post for more).  In 2007, a three-judge panel (with one judge dissenting) affirmed the trial court's order granting class certification under Rule 23(b)(2) of plaintiffs' Title VII claims for gender discrimination. Dukes v. Wal-Mart, Inc., 509 F.3d 1168 (9th Cir. 2007).

Time permitting, I'm going to attend the Ninth Circuit argument today and provide a report here tomorrow. 

UPDATE:  This morning's Daily Journal reports on the upcoming argument and provides the names of the eleven judges on the en banc panel: Alex Kozinski; Stephen Reinhardt; Marsha Berzon; Michael Daly Hawkins; Barry G. Silverman; Susan P. Graber; Richard A. Paez; Raymond C. Fisher; Pamela Ann Rymer; Carlos T. Bea; and Sandra S. Ikuta.

According to the article, seven were appointed by Democratic presidents.  Kozinski, Rymer, Bea, and Ikuta are "[t]he conservatives on the panel."  John Roemer, "Wal-Mart Will Try (Again) to Block Class Action," Daily Journal (Mar. 24, 2009).   

Judge Hawkins was part of the two-judge majority in the original proceeding. Neither Judge Harry Pregerson, who wrote the majority opinion, nor Andrew J. Kleinfeld, who dissented, is part of the en banc panel.

Ninth Circuit sets Dukes v. Wal-Mart for en banc argument on March 24

As I reported in February (see these two posts), the Ninth Circuit granted en banc rehearing to revisit the 2-1 panel decision in Dukes v. Wal-Mart, Inc., 509 F.3d 1168 (9th Cir. 2007). 

Pursuant to paragraph (3) of the Circuit Advisory Committee Note to Ninth Circuit Rules 35-1 to 35-3, the eleven-judge en banc court decided to hear further argument, but apparently decided not to order further briefing (which appears to be the usual practice).  The argument will take place on Tuesday, March 24, 2009 at 2:00 p.m. in San Francisco (limited to thirty minutes per side).  I'm going to try to attend and report on it here. 

Dukes is currently the second case listed on the Ninth Circuit's "Status of Pending En Banc Cases" page.  The members of the en banc court will soon be listed there.  At this link, you can download a huge, 421-page pdf file with copies of the petition for en banc rehearing, the opposition, the reply, and the extensive amicus filings on both sides. 

More Supreme Court oral arguments set: Miller, Amalgamated, and Arias

This morning, the Supreme Court set the cases listed below for argument on April 7 and 8, 2009 in Los Angeles.  I will be seeking roving reporters to cover these arguments and provide reports, so please email me (uclpractitioner@gmail.com) if you are interested. 

April 7, 2009, 9:00 a.m.

Miller v. Bank of America, no. S149178 (review granted 03/21/07) (this case involves the UCL's "unlawful" prong)

• Issues: Does California law, which provides that a bank account into which public benefit funds or Social Security payments have been electronically deposited is exempt from attachment and execution, prohibit a bank from exercising its right to setoff as to charges - such as overdraft fees and insufficient fund fees - arising out of use of that same account?
• Court of Appeal opinion: Miller v. Bank of America, NT & SA, 144 Cal.App.4th 1301 (2006)

April 8, 2009, 9:00 a.m.: 

Amalgamated Transit Union v. Superior Court (First Transit) , no. S151615 (review granted 06/20/07) (this case involves whether associational standing survived Prop. 64)

• Issues: (1) Does a worker's assignment to the worker's union of a cause of action for meal and rest period violations carry with it the worker's right to sue in a representative capacity under the Labor Code Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.) or the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.)? (2) Does Business and Professions Code section 17203, as amended by Proposition 64, which provides that representative claims may be brought only if the injured claimant "complies with Section 382 of the Code of Civil Procedure," require that private representative claims meet the procedural requirements applicable to class action lawsuits?
• Court of Appeal opinion: Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court, 148 Cal.App.4th 39 (2007)

Arias v. Superior Court (Angelo Dairy), no. S155965 (review granted 10/10/07)

• Issues: (1) Must an employee who is suing an employer for labor law violations on behalf of himself and others under the Unfair Competition Law (Bus. & Prof. Code, § 17203) bring his representative claims as a class action? (2) Must an employee who is pursuing such claims under the Private Attorneys General Act (Lab. Code, § 2699) bring them as a class action?
• Court of Appeal opinion: Arias v. Superior Court, 153 Cal.App.4th 777 (2007)

Yesterday’s Oral Argument in Fairbanks v. Los Angeles Superior Court (Farmers New World Life Insurance) S157001

by Harvey Rosenfield, Founder of Consumer Watchdog, author of Proposition 103

 

Yesterday’s oral argument before the California Supreme Court considered the question of whether the Consumers Legal Remedies Act (CLRA), one of the state’s two principal consumer protection laws, applies to the sale of an insurance policy. The fate of the other major consumer protection law – the Unfair Competition Law – will be determined by the Supreme Court in the Tobacco II case, which was heard a day earlier. The decisions in these two cases will determine the extent of California consumers’ access to the judicial branch to challenge abuses that are endemic to the California marketplace.

 

The Opening Argument

 

Robert Gerstein began his argument for the plaintiffs by posing the issue before the court as “whether California consumers should be denied the protection of the CLRA” when they sue for unfair and deceptive practices by an insurance company.

 

Justice Kennard, who proved to be an avid questioner, jumped in to suggest that the analysis had to begin with “the plain language” of the CLRA, which prohibits unfair practices in any transaction involving “goods or services,” in this case, “selling an insurance policy.” She asked Gerstein to “acknowledge that an insurance policy is not a good.” Securing his assent, Kennard said this left the court to the task of determining whether insurance fell within the “rubric of providing a service.” The Legislature, she noted, defined service as “labor.” Gerstein supplied the balance of the statutory language: “work, labor and services for other than for a commercial or business use...”

 

Gerstein responded by noting a decision issued Monday by the Second DCA (Broberg v Guardian Life Ins. Co.). It followed the Fairbanks opinion, describing an insurance policy as a “contract of indemnity” and concluding that it is not a service for purposes of the CLRA. Gerstein explained that the description of insurance policies as “simply agreements to pay if and when an identifiable event occurs” ignored the analyses in treatises and decisions of federal and California courts. These authorities, he said, revealed that an insurance policy provides two distinct services: the first is the “shifting of risk” from the consumer to the insurance company; the second is the “spreading of risk” among consumers.

 

But Gerstein wasn’t able to further explain his reasoning (he returned to it later) before Justice Kennard moved to a different issue: the Supreme Court’s dictum in the 1978 case, Civil Service Employees Ins. Co. v. Superior Court, 22 Cal.3d 362, 376, where the court made this statement: “insurance is technically neither a ‘good’ nor a ‘service.’” Justice Kennard asked Gerstein his view of the dictum, upon which the Court of Appeal in this case had relied. The dictum was “offhand and erroneous,” Gerstein replied. Kennard said that the federal courts had adopted the dictum, seeming to suggest that that in itself reinforced the validity of the dictum. Gerstein responded that federal courts had “gone both ways” on the issue and that those courts were in the position of trying to predict how the California Supreme Court would answer the question. The dictum, Gerstein suggested, was simply picked up by the federal courts as a clue, but without more analysis – which brought the issue back to the task and forum at hand.

 

During the colloquy with Justice Kennard, the Chief Justice had interjected a question about the legislative history, and Justice Chin asked Gerstein to return to it. Chief Justice George pointed to the Model National Consumer Act, drafted by the National Consumer Law Center in 1969, and upon which the California Legislature based the CLRA. (The Model Act explicitly included insurance in its definition of services: it defined “Services” to “include” privileges with respect to transportation, hotel and restaurant accommodations, education, entertainment, recreation, physical culture, hospital accommodations, funerals, cemetery “and insurance.”) But the California Legislature had “remodeled the definition of services entirely,” the Chief said, and the CLRA as enacted does not contain the language defining “services” to “include” insurance. This led the Chief Justice to conclude that the Legislature’s alteration of the Model Act was an affirmative expression of intent to exclude insurance. Further, he said, the Legislature expressly included “insurance” in the Unruh Act. This “conveyed some idea that the Legislature did not intend to include insurance,” he proposed.

 

Gerstein seemed to agree with the Chief that the California Legislature had taken an entirely different approach to the definitions section of the CLRA. But from that fact he drew the opposite conclusion. While the Model Act employed an expansive list of examples (“services…include (a) work, labor and other personal services…(c) insurance”) to help define its scope, the California Legislature proceeded a different way. The Legislature omitted, Gerstein pointed out, the list of examples set forth in the Model Act as being “include[ed]” within the definition of services. Instead, it opted for a one sentence definition: “services means….”  Gerstein noted that no one has suggested that any of the other items enumerated in the Model Act are not “services” under the CLRA. Gerstein’s point was that the CLRA’s shorter definition is broad enough to cover insurance and other related services without having to itemize them – and that the Legislature’s decision not to include a detailed definition ought not to be construed as an intention to exclude.

 

Justice Moreno asked if Gerstein could cite any “counter authorities from California” for the proposition that the CLRA applied to insurance. Gerstein pointed out a trilogy of cases, including the Supreme Court’s decision in Broughton v. Cigna Healthplans of California (1999), that “made the assumption” that the CLRA applied, but did not discuss the question. Further, he said that of the many states that considered the question, only one determined that “insurance” was not covered in their version of the Model Act.

 

Justice Chin then urged Gerstein to “enlighten us” as to how insurance might be considered a good or service, a question that would have allowed Gerstein to amplify on his initial point about risk sharing and shifting “services” – had not Justice Chin proceeded to raise once again the dictum in Civil Service Employees. Gerstein picked up on the dictum’s use of the word “technically.” Gerstein contrasted that term with the CLRA’s requirement that its language be “interpreted liberally in favor of the consumer,” which, he said, argued that the Court eschew a “technical” approach. Further, he said, Civil Service Employees was not a CLRA case and the issue was not before the court.

 

Justice Corrigan entered the discussion here, asking Gerstein to explain why insurance was a service. This gave Gerstein the opportunity, at last, to expand upon his analysis. Emphasizing the liberal construction mandate, Gerstein began by suggesting that the court utilize a common interpretation of the word “service.”  He then said that when an insurance company agrees to “shift risk” from the consumer to itself, it is “performing a service to each individual insured,” i.e., “making that person secure.”

 

Justice Corrigan asked Gerstein to address his second argument that spreading the risk among insureds was a form of “service” provided by an insurance company. He replied that to “spread and socialize risk that would otherwise fall onto the individual” was the quintessential service provided by insurance, i.e., the pooling mechanism.

 

Justice Moreno queried whether that argument could be applied to render the CLRA applicable to all “intangible goods.” Gerstein disagreed, noting that such intangibles as copyrights and stock shares could not be said to involve “service” in the same sense that insurance companies provide the services people rely upon. What about advice provided by stockholders? That would be a service, Gerstein replied.

 

Justice Corrigan went back to Gerstein’s explication of the “services” provided by an insurance company that sells a policy. She suggested that to the average consumer, it is “a matter of indifference” if the carrier has a contract with other consumers in order to pool risk. Spreading risk, she posited, is “not an inherent part of the contract” with the consumer; a consumer would have no right to rescind the contract if the company failed to spread the risk, for example.

 

Spreading the risk is the “business of insurance,” Gerstein responded. Consumers are “made secure” by an insurance policy; that’s the “service” that he argued the insurance companies provide.

 

Justice Werdegar interjected that she thought the discussion had gone far “afield” from the court’s task, which was to construe the statute. The Legislature’s excision of the term “insurance” in the Model Act was, she said, “one indication of legislative intent.” Another was the Legislature’s express use of the term “insurance” in the Unruh Act. Given these indicia of legislative intent, she said, “this Court would appear to be supplying something the Legislature did not include” were it to rule that the CLRA applied to insurance. This was an “argument better made to the Legislature,” she suggested. As he did before, Gerstein challenged the inference of intent from the omission of the Model Act’s language. Restaurant accommodations, education and entertainment were itemized in the Model Act but aren’t mentioned in the CLRA, he said, but no one has inferred they were not intended to be covered by the CLRA.

 

At this point, Justice Chin turned the discussion to a different subject: the role of insurance regulation.

 

[A personal aside: the Court of Appeal had concluded that the presence of a regulatory framework was a strong policy argument against the application of the CLRA to insurance. In fact, the panel below went so far as to suggest the CLRA would conflict with and undermine the power of the Insurance Commissioner under the Unfair Insurance Practices Act. It was this argument – potential fodder for mischief in the hands of insurance companies in the Proposition 103 context - that led Consumer Watchdog to submit an extensive amicus brief before the Supreme Court.]

 

Gerstein responded to Justice Chin by noting that Consumer Watchdog had submitted for judicial notice a number of briefs written by Insurance Commissioners since the early 1990s, each of which welcomed private enforcement of Proposition 103’s provisions in the civil courts as a “valuable complement to the regulatory scheme administered by the Commissioner.”

 

And with that comment, Mr. Gerstein turned the lectern over to Peter Mason, of the firm Fulbright and Jaworski, counsel for the defendants/respondents.

 

The Defendant’s Argument

 

The Chief Justice asked Mr. Mason to explain how the plain meaning of the CLRA was fleshed out by the legislative history. Mason explained that the legislation as first introduced in Sacramento would have applied to the “conduct of any trade,” but the ultimate legislation, he said, limited and narrowed the CLRA’s application – to exclude insurance.

 

Justice Kennard wondered whether Mason considered it important that the California Legislature had looked to the Model Act as a source for its drafting, yet did not refer to insurance in the CLRA. Mason easily handled this softball, first asserting that it wasn’t even necessary to look at the legislative history: on the plain meaning of the statute alone, the CLRA does not apply to insurance, he said. But if the legislative history is consulted, the absence of the Model Act language would be an important and relevant fact, he said. Next Kennard asked whether the Legislature’s decision to expressly apply the Unruh Act to insurance, in distinction its omission in the CLRA, supported his position. Finally, Justice Kennard made this observation: when the CLRA was about to be enacted, “it became a topic of enormous interest by various groups” of special interests. “All wanted a say,” she said. The Justice read a list of lobbying groups and corporations including General Motors, lenders, oil companies, household finance and the American Bankers Association that participated in the legislative process. But, she said, insurance interests were not on that list. “What inference do you draw” from their absence, she asked.

 

Mason played out the argument. It was unimaginable that the insurance industry would not have been interested, he said. Citing the legislative history recited in Berry v. American Express Publishing, Inc. (2007) 147 Cal.App.4th 224, Mason said that the legislature’s decision not to apply the CLRA to intangible products was the result of a grand “compromise.”

 

The Chief Justice asked Mason whether the inclusion of “insurance” in the Unruh Act and the Unfair Insurance Practices Act (UIPA) suggested that the Legislature was relying on those statutory schemes to regulate the insurance industry, and thus supported the inference that the Legislature intended to exclude insurance from the application of the CLRA. (This was the closest any justice got to the Court of Appeal’s argument that the CLRA would undermine UIPA.)

 

Mason responded by reinforcing an argument made by the Court of Appeal: UIPA was already in effect when the CLRA was enacted, so the Legislature decided that UIPA was all the oversight the industry required.

 

Justice Chin asked Mason to address Gerstein’s argument that “risk spreading” was a service. Mason rejected the notion that the “aggregation of risk” could be “elevated” to the level of a service to consumers.

 

Justice Moreno brought up an issue Consumer Watchdog raised in its amicus brief: the provision of Proposition 103 (Ins. Code section 1861.03(a)) that states that “the business of insurance shall be subject to the laws of California applicable to any other business, including, but not limited to, the Unruh Civil Rights Act [citation], and the antitrust and unfair business practices laws [citation].” Consumer Watchdog contended that if the there was some dispute as to whether the CLRA on its face applied to insurance, the 1988 voters’ desire to have the benefit of all state consumer protection laws would weigh in favor of the CLRA’s application to insurance. Justice Moreno queried Mason on this point.

 

Mason responded by noting that by its terms, Proposition 103 does not apply to life insurance, the subject of this case. He also cited the Supreme Court’s decision in Manufacturers Life Ins. Co. v. Superior Court (1995) 10 Cal.4th 257, in which the Court concluded that because Proposition 103 did not apply to life insurance, it was not authority for the application of the antitrust laws to the defendants in that case. Finally, Mason said, Proposition 103 would not require application of the CLRA because the issue here is not whether insurance is exempted from the CLRA but whether “intangibles” are exempted from the CLRA. The argument he seemed to be making is that the CLRA is not a law “applicable to any other business” for purposes of Proposition 103, because, he contends, it does not apply to certain “intangible goods” across the board.

 

In his first question (by my reckoning), Justice Baxter raised an issue of profound importance.  He asked whether “independent insurance brokers provide a service.” He elaborated: assume a consumer asks an insurance broker to secure a policy that provided certain benefits; the broker conducts an investigation and then sells the consumer an insurance policy. Is that a service?

 

Mason, who had obviously anticipated the question, first tried to distinguish this case from the one posited by Justice Baxter: here, he said, it was an agent of Farmers that sold the deceptive policy to the plaintiff, not an independent broker. Then Mason tried to draw a careful line that would still protect his insurance company client. If the “objective” of the transaction was advice, that might be “close to a service,” he ventured. But if the transaction is tied to the “securing of an intangible product,” then the entire transaction is not a service. Trying to further articulate a rule, Mason asserted that services that are “attendant to” the sale of a product cannot convert the sale of an “intangible good” to a service. Finally, he offered this hypothetical application of his rule: if a consumer goes into store to buy a flat screen TV (the objective) and gets advice from a salesperson, the consumer is paying for the flat screen, not the advice, so the transaction would not involve a service. (I’ll have more to say about this below.)

 

Justice Kennard asked Mason about the dictum in Civil Service Employees. Disagreeing with the plaintiffs’ position, Mason said that in fact the dictum was essential to resolving that case.

 

Mason concluded his argument by paraphrasing Berry to suggest that insurance was excluded as part of a legislative “compromise between consumers and business groups,” and that the Supreme Court was not the proper forum to “undo that compromise.”

 

The Rebuttal

 

In his rebuttal for the plaintiffs, Robert Gerstein again challenged the suggestion that the Legislature’s intent to exclude insurance could be inferred from the changes it made to the Model Act. He also pointed out that, contrary to some comments by the Court and counsel for the defendant, there is no express exclusion for “intangible goods.”

 

Justice Werdegar returned to the argument that “spreading the risk” is a service. She asked Gerstein if “peace of mind” was a service provided by an insurance policy. With Justice Baxter’s earlier query seemingly in mind, Gerstein explained that “insurance policies are bundles of services,” citing Mass Mutual and Hitz v. Interstate Bank (1995) 38 Cal.App.4th 274. A consumer would emphatically “need the services of an insurance agent to help ensure that insurance will be there when needed,” he told the Court. Gerstein also noted that insurance policies provide for “claims” services.

 

He then returned to the CLRA’s mandate that it be “liberally construed in favor of the consumer.” “If there is any plausible argument…any doubt…if it is a question of reading the tea leaves as to legislative intent….that doubt must be resolved in favor of the insured,” he said.

 

Gerstein then turned to the Proposition 103 question Justice Moreno put to Peter Mason. Manufacturers Life, he said, left open the question of whether section 1861.03(a) applied only to the lines of insurance regulated by Proposition 103, or across the board. “This Court should apply it to all lines of insurance,” Gerstein stated.  In a closing note, he reiterated that the Insurance Commissioner has long been supportive of dual civil and administrative enforcement of the Insurance Code.

 

 

Some Concluding Comments

 

Having attended only a handful of Supreme Court arguments, I can make no claim to being able to “read the tea leaves.” However, I heard very little support from the bench for the position of the consumer plaintiffs. And where the Court could have found support for application of the CLRA here, it did not do so.

 

For example, it seemed to me that the legislative history and the “liberal construction” mandate together would dictate that the CLRA applies. But the analyses seemingly adopted by the Court in the course of reviewing the legislative history – the inference of intent to exclude, for example – might be viewed as a departure from existing jurisprudence. Having spent a lot of time in Sacramento, I can say definitively that the absence of insurance industry letters of opposition in the historical file could just as easily reflect (a) the very scattershot filing systems used by legislative committees to this day, or (b) a preference by the insurance industry to communicate through lobbyists (and campaign donations) rather than correspondence, or (c) a strategic decision to preserve the legal argument that came to fruition today, decades later, by not confirming, in written opposition to the legislation, that the CLRA would apply to insurance.

 

Justice Baxter asked Peter Mason what I thought was the most important question of the day: don’t insurance companies and their agents and brokers provide a variety of services in connection with the sale of insurance policies? Given the amount of deception, misrepresentation and fraud we are only now uncovering in the financial marketplace, are all such abuses beyond the reach of the CLRA because the “objective of the transaction” is the sale of an insurance policy or other financial product? If so, the deterrent effect of the CLRA will be gravely undermined, and an awful lot of wrongdoing will evade accountability in the courts.

 

And the issue that really got our attention at Consumer Watchdog – the Court of Appeal’s hostility toward dual, private and public enforcement mechanisms – got almost no notice. Not a word was said about Justice Croskey’s view that Moradi-Shalal erected a shield around the insurance industry that bars most challenges to insurer misconduct in the civil courts. The oral argument made clear that the Court doesn’t need to expand Moradi-Shalal or engage in policy engineering to reach the conclusion that the CLRA does not apply here. As we explained in our amicus brief, whichever way the Court rules on Fairbanks, much mischief could result unless the Court rejects  the Court of Appeal’s discussion of Moradi-Shalal and its other policy assertions.

 

A final caveat: your scrivener has done his best to describe the arguments and the questions from the Court. If I’ve erred, please let me know.

 

[Harvey, thanks so much for spending hours writing up this fantastic report!  – KAK]

COMING SOON: Oral argument report in Fairbanks v. Superior Court

Later today, I hope to have a detailed report of yesterday's oral argument in Fairbanks v. Superior Court, no. S157001.  Neither the Recorder nor the Daily Journal seems to have reported on the case in this morning's papers.  Instead, all eyes are looking forward to today's three-hour argument in the Prop. 8 same-sex marriage cases.   The Recorder's blog, Legal Pad, will not only live-blog but also twitter that argument starting at 9:00 a.m.   The California Channel is also providing cable coverage and a live webcast. 

Oral argument report: In re Tobacco II Cases

Yesterday morning, the Supreme Court heard oral argument in In re Tobacco II Cases, no. S147345.  Attorney Mark P. Robinson of Robinson Calcagnie & Robinson argued for the plaintiffs.  Attorney Daniel P. Collins of Munger, Tolles & Olson argued for the defendants.  Court of Appeal Justice Eileen C. Moore sat in place of Chief Justice Ronald M. George, who was recused. 

Mr. Robinson began his argument by saying that with the UCL, the Legislature and the Supreme Court, for the past 35 years, have sought to protect consumers from deceitful marketing practices by use of the "likely to deceive" standard.  Case law, including Chern and Justice Tobriner in Fletcher, has not required individualized proof of reliance.  That is because, as the court in Fletcher pointed out, it is often impossible to prove in a class setting. The lightened burden of proof is part of the damages trade-off noted by the Court in Bank of the West.  The purpose of the lightened burden is to effectuate the intent of the Legislature.  Proposition 64 changed who can sue, it changed standing. 

Justice Kennard was the first justice to speak and she wanted to get right to "the threshold inquiry."  She asked whether the class was decertified because of the trial court's belief that the heightened standing requirement pertained to every class member.  Mr. Robinson said that Judge Prager read Proposition 64 to require individualized proof of reliance for every member of the class.  Justice Kennard:  So your short answer is yes.  Robinson: Yes. 

Justice Moreno then jumped in and asked whether the Court should make a distinction between the standing of the class representatives and the standing of the class members.  Robinson said that Prop. 64 changed the standing requirement for the class representative.  It also requires use of Code of Civil Procedure section 382 [the class action statute].  The inference would be "the same standing" for the class representative.  Justice Baxter said, "The same standing?" [And I confess I didn't get it either.]  Robinson said under Korea Supply, in order to recover, there has to be money "acquired by means of" the deceptive practice. [I think he meant this means the same thing as "lost money or property as a result of" the deceptive practice.]

Justice Baxter then asked whether there has to be "symmetry" between the class representatives and the class members.  Robinson said Prop. 64 only changed the standing requirement for the class representative.  Justice Kennard then asked, What support do you have for that? Is there plain language?

At this point, Mr. Robinson began talking about the language in Prop. 64's findings and declaration of purpose.  But what I was waiting for him to point out (and what I thought Justice Kennard was getting at) was that section 17203 says that "[a]ny person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of Section 17204 ...." (emphasis added).  That said, the findings and declarations of purpose also supported Robinson's argument.  They refer repeatedly, he pointed out, to "filing" of lawsuits.  The legislative analyst's report talks about "initiating" lawsuits.  The findings talk about preventing suits where "no client was injured."  It wasn't drafted well, he said, but when you look at the text, it talks about "the client," that is, the class representative.

Justice Kennard then asked what approach the federal courts had taken in this regard.  Robinson replied that the Lujan case talks about injury in fact being an invasion of a legally-protected interest.  And in another section of that case they talk about causation being an act fairly traceable to the defendant.  Justice Kennard then said that federal cases hold that standing under federal law applies solely to the named plaintiff and not the class members. 

At this point, Justice Chin asked Mr. Robinson what he meant when he said "yes" to Justice Baxter's question about symmetry.  Robinson said that Judge Prager found the class representatives' claims not only typical, but identical.  His problem was not that.  He read Prop. 64 as changing the reliance requirement, for every individual class member.  In Fletcher, this Court addressed this, Justice Tobriner was interpreting "acquired by means of," which is the same as "as a result of," and said under the UCL it's impossible to prove individualized reliance (and unnecessary).

Justice Chin asked, In this case what is sufficient to show reliance?  Robinson said that from Fletcher and Chern on down, it's "likely to deceive."  The reason for this is there was a trade-off; as said in Kraus, damages are not allowed.

Justice Moreno then threw out a couple of softballs:  Is there any indication in the initiative's history that it was doing away with the UCL substantively?  Robinson said no, nothing, it said nothing about the elements of proof or standards of liability.  Justice Moreno asked what was Prop. 64 aimed at deterring?  Robinson said Trevor Law Group shakedowns where an unaffected plaintiff files and tries to settle without court supervision.  So Prop. 64 changed standing.  The class representative has to be affected; has to have injury in fact; and has to follow section 382.  This changes standing only; it doesn't change the elements of proof or the guts of the UCL.  Robinson then said that Judge Selna in the Anunziato case said you'd change the UCL to common-law fraud if you adopted any other rule.  You'd be abandoning the purposes of the UCL.  Nothing in Prop. 64 says this was intended.

Justice Moreno then asked whether the ballot materials said how Prop. 64 might affect the UCL.  Robinson said the ballot materials reaffirmed that the UCL protects consumers.  Then the materials said that it's going to stop frivolous lawsuits but also make sure that legitimate claims can be brought.  Then the materials talk about standing, but they make no mention of the elements of proof or repealing the class action standards of Fletcher.

Justice Baxter said that this case involves false advertising; does this mean that the class would be defined to include those who may never have heard the ads?  Robinson said that here the class is defined as those who were exposed to the ads.  The test is whether those ads were likely to deceive members of the public or a reasonable consumer.  Under Fletcher, it's up to the trial judge to decide who will be class members.

Justice Baxter said, We have to weigh in on the definition of the class it seems to me.  One issue is whether the injury of the claimant would also pertain to members of the class; in other words, symmetry; must there be symmetry.  Robinson replied that in Vasquez and Massachusetts Mutual, the court used inferred reliance to determine damages. The focus for the liability standard is likely to deceive, were the statements likely to deceive?  You're going to take us back to common-law fraud, which is not appropriate because of the purpose of the UCL and the tradeoff it represents.

Justice Baxter then said, What if you had a prospective class member whose deposition testimony said yes I was exposed to the ads, but that's not why I bought the cigarettes.  Would this person be eligible because they were exposed?  Robinson cited a case called Boekan v. Philip Morris, in which an expert testified that the individual plaintiffs' inability to recall being exposed to any particular ad doesn't mean it didn't cause them to buy cigarettes.  That's the cleverness of advertising.  It's called associative learning.  This is the problem Justice Tobriner was talking about in Fletcher.  The standard is still whether the general public is likely to be deceived.

Mr. Robinson then mentioned that under Branick, the class representative can be changed if he or she isn't proper.

Justice Werdegar then said, You've been talking about the ultimate showing.  Have we addressed what showing the class representative has to make, what "as a result of" means? Robinson:  Justice Tobriner said it best.  It means "acquired by means of."  It's a mirror image, depending on the perspective.  One is from the manufacturer's perspective; the other is from the consumer's. 

Justice Werdergar then asked are you saying that the showing for the representative and the class members is the same?  Robinson said yes, as Mervyn's said, Prop. 64 did nothing to change the substance.  That was the law under Justice Tobriner's opinion in Fletcher.  Justice Werdeger said I'm trying to figure out the relevance of Fletcher.  After Prop. 64, the class rep has to have injury in fact standing as a consequence of an advertisement that was likely to deceive?  Robinson: Yes.

And that was the end of Mr. Robinson's time.  He reserved seven minutes for rebuttal. 

Mr. Collins pointed out, first of all, that Prop. 64, by requiring that the named class representatives must satisfy standing and section 362, establishes a requirement that both the class representatives and the class members must share.  Justice Kennard asked where do you get that from?  Mr. Collins replied it comes from settled class action principles.  We need to look at the language.  "Claimant" means the person bringing the suit.  The source of the requirement comes from settled class action law.  First, that all class members must have standing.  Second, that the claim can’t look different when looked at through the class action lens.  This is settled law under City of San Jose: when you aggregate claims, you can’t transform them. 

Justice Moore then spoke for the first time.  She asked, whatever we hold on the issue of class member standing, does the Court have to take into account the possibility that a lawsuit may be filed just for injunctive relief?  Mr. Collins said that in such a case, "as a result of" still has to be shown. 

Justice Moore pointed out that there was a lot of back and forth in the ballot materials about a suit for an injunction only.  (And here she gave an example of such a case involving tobacco products.)  It seems as though "as a result of" may be different in that situation.  For example, in a suit brought by the parents of a minor (they might have paid for an addiction program for their child), for members of the class they would be seeking an injunction only.  Do your arguments apply in cases where only injunctive relief is sought?

Mr. Collins said yes, there's no exception for injunctive relief cases.  The plaintiff must have lost money or property "as a result of" to obtain any relief under the UCL.  The theory presented in this case is that the plaintiff lost money by paying for cigarettes.  Trial court correctly found this is an individualized issue. 

Justice Moore then said that the statute does not say that defendant has acquired anything.  It says “lost” money or property.  Mr. Collins said that plaintiffs are incorrect in saying that the standard for causation is the same as in Fletcher.  There, Court relied on the “may have been acquired by means of” language from the UCL [section 17203].  This would not preclude certification in Fletcher.  The "as a result of" requirement is present in many statutes.  This is an ordinary causation requirement.

Justice Moreno said, You cite Massachusetts Mutual in which the court said no individualized proof was required.  Does Prop 64 change this?  Mr. Collins said that the substantive standard -- "likely to deceive" -- is unchanged under Mervyn’s.  The proposition was not intended to affect the Attorney General’s authority in any respect.  So the substantive standards are not changed.  Prop. 64 only changed the standing requirements for private parties.

Mr. Collins explained that Judge Prager made four class certification rulings in this case.  He initially denied certification; then, he granted certification of the UCL claim and denied the CLRA claim; then he decertified the UCL claim.  If causation is an element it will overwhelm any common issues.  The trial court initially found causation wholly outside the scope of the UCL.  When Prop 64 passed, that put the issue of causation into the case.  Then he went back to his analysis on the CLRA—a ruling clearly supported by substantial evidence.

Justice Kennard asked whether the misrepresentation must be a substantial factor in causing plaintiff’s injury?  Mr. Collins said yes, it means ordinary causation, proximate, legal causation.  Does this devolve into an issue of reliance into some cases?  Some courts say it does.  He said you don’t have to reach that here because causation was analyzed separately.  It’s academic on these facts whether reliance is also required.  Judge Prager held that causation applied to all members of the class, so it was "in the bucket of issues" to be considered.  There are still some cases in which class action would be appropriate, like Mass Mutual.  [That argument is a stretch in my opinion and not consistent with the overall thrust of the defense position.]

Justice Kennard asked whether the plaintiffs have to show reliance on a specific misrepresentation?  A case called Whiteley v. Philip Morris was mentioned.  Collins said that Judge Prager didn’t decertify based on that.  Justice Kennard:  But it is your view plaintiffs would have to show that?  Collins said that plaintiffs would have to show they received information by exposure and it had a causal effect on the purchasing decision.  Prager said that’s individualized.  Differences on the question of exposure; whether plaintiffs believed the ads; then with causation you have the influence of other factors.  Information about the effects of tobacco use comes from sources other than the ads.  Prager looked at all those issues and his decision was supported by substantial evidence.

Justice Moreno asked whether it was Collins' argument that class members must have injury in fact based on section 382 not section 17204?  Mr. Collins said the statute says "as a result of" and "the claimant," which means the person who filed.  Our position comes from section 382 and settled class action case law.  One of the justices then asked at what point do the absent class members have to show they have standing?  When ascertained?  When they prove their damages?  Collins replied when class certification is decided; that issue is in the bucket of issues that have to be decided. 

Justice Chin asked what is your response to the argument that “the claimant” means the class rep.?  Collins said I've conceded that.  But it says that the claimant must satisfy section 17203 and section 382, and that’s where the standing requirement comes from.  This is part of what it means to bring a UCL claim.  That requirement can’t be sheared off when you bring a class action.  He mentioned that some of the amici argued otherwise, but that's wrong because section 382 also addresses associational actions.  This was what Prop. 64 was meant to address.  Associational standing is no longer permitted after Prop. 64.  It’s not a redundancy for Prop. 64 to refer to section 382; different language would have had different meaning.

Justice Baxter said, so if an individual can’t satisfy standing, than that same individual should not be allowed to proceed as part of a class?  Mr. Collins said yes, this comes from the rule that the class action procedure can’t transform the claims it aggregates.  Justice Baxter then said when the class action cases talk about symmetry, is this what they mean?  [Not sure what cases he's referring to here.]  Collins said yes, otherwise there would be an odd atypicality.  This court's decision in Meyer and the decisions of other courts show that at the least, it's proximate or legal causation. 

He then mentioned that the question is whether the trial court abused its discretion under Sav-on.  He said the findings were supported by substantial evidence.  He said that the Whiteley case makes clear and confirms the individualized nature of the issue.  On page 39 of Whiteley, it says the plaintiff didn’t rely on any presumption of reliance.  The requirement was still there that information had to get through to her and did it change her behavior.  Whiteley supports the view that this is highly individualized.

And that was the end of Mr. Collins' time.

In rebuttal, Mr. Robinson said that on pages 680 to 681 of Whiteley, the court said defendants contended that the plaintiff did not show that she heard any of the misrepresentations.  Whiteley did not have to prove that she saw or heard the misrepresentations.  It is sufficient that they went to the public. 

Justice Kennard said, Turning to this case, on causation, I assume you disagree that causation is akin to proximate cause.  What is your view on this issue?  He said Mr. Collins relies on Collins v. Safeway, a case at law, not an equitable case.  He cites the CLRA, which is not applicable.  Justice Kennard:  What must be shown in your view?  Mr. Robinson:  Likely to deceive; then it is up to the trial court to decide who is in the class.  Justice Baxter:  How would you define it?  Mr. Robinson:  Altria v. Good gives us the right to reopen the preemption argument in our light cigarettes case.  [In other words, Robinson was saying that in Altria v. Good, the U.S. Supreme Court interpreted federal preemption less broadly than did the Cal. Supreme Court in the other Tobacco case, In re Tobacco Cases II, 41 Cal.4th 1257 (2007).]  Experts will testify to what proportion of people were likely to be affected by the fraud.  This is the way it has to be because otherwise you let it become common-law fraud.

Justice Corrigan: How would you define the class?  Mr. Robinson:  Those likely to be deceived by the representation.  Then it's up to the trial court.  Justice Kennard:  Isn’t that a broad standard?  Mr. Robinson:  Yes it is, since Korea Supply.  Otherwise the UCL becomes common-law fraud, but with no right to damages.  Justice Baxter:  But you would include likely to deceive [in the class definition]?  Robinson:  Yes, as a causation standard.  That’s been the law.  And you said in Mervyn’s nothing previously prohibited is now permitted.  Also Fletcher. 

Justice Werdegar then asked, what does it mean to you when it says the claimant must comply with section 382?  Mr. Robinson:  They didn’t want representative actions.  They wanted to eliminate those.  Justice Werdegar:  And what does section 382 require?  Mr. Robinson:  it depends on the underlying claim—e.g., UCL versus CLRA.  Justice Wendegar:  What are the practical differences between a class action and a representative action?  Mr. Robinson:  The practical impact is what it was in Fletcher.  No individualized proof of reliance.  [At this point, it might have been helpful to explain that, with a pre-Prop. 64 representative action, class notice was not required; court approval of any settlement was not required; the res judicata effect was different; etc.  The argument could have been that those are the changes Prop. 64 meant to impose by incorporating section 382, not to create a standing requirement that otherwise expressly applies only to "the claimant"; leads to imposition of new substantive elements (such as actual reliance instead of likely to deceive); and would, as a practical matter, eliminate the possibility that section 382 could ever apply to any UCL "fraudulent" prong case.] 

Mr. Robinson then invoked Branick, and asked that he be permitted to seek leave to amend and revisit the preemption issue. 

The final question was from Justice Kenard:  Must the misrepresentations be a substantial factor in causing the plaintiff’s conduct?  Mr. Robinson replied that the misrepresentation had to be material and likely to deceive the general public.  He cited Harper v. 24 Hour Fitness, then concluded it’s up to the trial court to decide how the class is defined. 

And that was the end of the argument.

"Justices Air Standing for UCL Class Actions"

Mike McKee's report on today's argument in the Tobacco case is already up on The Recorder's website:

Just a few weeks ago, the California Supreme Court ruled that lawsuits under the Consumer Legal Remedies Act can only be filed by individuals who suffer real damage from unlawful business practices.

But during oral arguments on Tuesday it wasn't clear where the court stood on applying that same rule to every participant of class actions filed under the state's Unfair Competition Law.

I'm working on typing up my notes and will have my complete report up tomorrow morning.

Oral argument previews: In re Tobacco II Cases and Fairbanks v. Superior Court

Today and tomorrow, the Supreme Court will hear oral argument in two cases of interest, In re Tobacco II Cases, no. S147345, and Fairbanks v. Superior Court, no. S157001.

The Tobacco case is third on this morning's calendar, and will be webcast live starting at approximately 11:00 a.m. on The California Channel. My plan is to attend the argument and provide my own written report here tomorrow.

I will not be able to attend the Fairbanks argument, but a blog reader who is planning to be there has promised to provide a report for posting here on Thursday. I would be very glad to receive additional reports from anyone who attends the Fairbanks argument. Please forward them to uclpractitioner@gmail.com.

Meanwhile, here is background information about the two cases:

In re Tobacco II Cases, no. S147345 (review granted 11/1/06)

• Issues: (1) In order to bring a class action under Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.), as amended by Proposition 64 (Gen. Elec. (Nov. 2, 2004)), must every member of the proposed class have suffered "injury in fact," or is it sufficient that the class representative comply with that requirement? (2) In a class action based on a manufacturer's alleged misrepresentation of a product, must every member of the class have actually relied on the manufacturer's representations?
• Court of Appeal opinion: In re Tobacco II Cases, 142 Cal.App.4th 891 (2006) (Fourth Appellate District, Division One)
• Briefs: Some of the briefs are collected at these links.

Fairbanks v. Superior Court (Farmers New World Life Ins. Co.), no. S157001 (review granted 11/14/07)

• Issue: Is insurance a "good" or a "service" that is subject to the Consumers Legal Remedies Act (Civ. Code, § 1750)?
• Court of Appeal opinion: Fairbanks v. Superior Court, 154 Cal.App.4th 435 (2007)
• Briefs: Some of the briefs are collected at these links.

California Channel to televise argument in In re Tobacco II Cases

Yesterday, the Supreme Court granted The California Channel's request for extended media coverage in In re Tobacco II Cases, no. S147345.  The California Channel's website does not mention Tobacco yet, but presumably they will provide coverage on their cable station as well as a live webcast.

Many thanks to the blog reader who informed me of this development and forwarded a copy of the order.

UPDATE:  The Supreme Court issued this press release today confirming that The California Channel will offer a live webcast as well as cable TV coverage:

The California Channel, a public affairs cable network, will broadcast live coverage of the oral argument on many cable stations throughout the state. It also will carry a live streaming Webcast at www.calchannel.com. California Channel reaches 5.5 million viewers statewide.

 

Chief Justice George recused from panel in In re Tobacco II Cases

According to the Supreme Court's oral argument calendar notice, Justice Eileen C. Moore of the Fourth Appellate District, Division Three, will be sitting in place of Chief Justice George in In re Tobacco II Cases, no. S147345.

A quick Westlaw search shows that Justice Moore has authored a few opinions involving UCL claims in recent years.  In R & B Auto Center, Inc. v. Farmers Group, Inc., 140 Cal.App.4th 327 (2006), for example, she touched on both of the issues on review in Tobacco:

Truck Insurance says that R & B lacks standing, under Business and Professions Code section 17204, to maintain the unfair competition cause of action because it has not alleged that it has “lost money or property as a result of unfair ... competition.” With this assertion, we certainly disagree. R & B alleges that it paid premiums for illusory coverage and it had to make payment on a lemon law claim that it would not have had to pay had the Truck Insurance policy said what it was represented to say. This is an allegation of loss caused by the purported misrepresentations concerning the scope of coverage. The standing requirement is met.

Next, Truck emphasizes that R & B cannot seek injunctive relief on behalf of the general public unless it meets the requirements of Code of Civil Procedure section 382, with reference to class actions. “Code of Civil Procedure section 382 authorizes class actions ‘when the question is one of common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court....’ The party seeking certification has the burden to establish the existence of both an ascertainable class and a well-defined community of interest among class members. [Citation.] The ‘community of interest’ requirement embodies three factors: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class. [Citation.]” (Sav-on Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 326, 17 Cal.Rptr.3d 906, 96 P.3d 194.) Truck Insurance states that R & B may only seek class action injunctive relief if it can demonstrate compliance with these requirements. However, Truck Insurance does not assert that R & B cannot do so.

R & B contends that it can meet the class certification requirements and points us to its offer of proof with respect to the anticipated testimony of Fena, Rusich and Sweet. R & B requests that this court remand the matter so that it will have an opportunity to show that it can satisfy the requirements of Code of Civil Procedure section 382. It is only fair to grant this request, since at the time R & B filed its third amended complaint it was not required to comply with Code of Civil Procedure section 382.

Id. at 360-61.  (Here is my original blog post on R&B.)  The argument in Tobacco will take place on Tuesday, March 3, 2009 at 9:00 a.m. in San Francisco.

MORE BREAKING NEWS: Oral argument set in CLRA case, Fairbanks v. Superior Court

Thanks to the blog reader who pointed out that yet another case of interest has been set for argument during the first week of March.  In Fairbanks v. Superior Court, no. S157001, the Supreme Court will consider whether insurance is a "good" or a "service" within the meaning of the CLRA.  Fairbanks is set for argument on Wednesday, March 4, 2009 at 9:00 a.m.

The Court of Appeal's opinion is Fairbanks v. Superior Court, 154 Cal.App.4th 435 (2007), and some of the briefs are collected at these links. 

Oral argument report: Meyer v. Sprint Spectrum

Many thanks to attorney Kelly Chen for attending Wednesday's argument in Meyer v. Sprint Spectrum, no. S153846.  Here is her report: 

This Wednesday morning in Los Angeles, the California Supreme Court heard oral argument in Meyer v. Sprint Spectrum. This case presents the following issues:

(1) Has a person suffered "damage" within the meaning of the CLRA, such as to allow that person to bring an action under the CLRA if that person is a party to an agreement containing an unconscionable term, even though no effort has been made to enforce the unconscionable term?

(2) Did plaintiffs have standing to seek declaratory relief?

J. David Franklin and Monique Olivier argued on behalf of the plaintiffs/appellants (i.e., consumers).  Raymond A. Cardozo and Donald M. Falk argued for the defendant/respondent.

****************

I missed the first half of Mr. Franklin’s argument (my apologies).

When I walked into the moot court, Justice Kennard seemed to be grilling Mr. Franklin about specifically what “damages” his clients suffered, and Justice Baxter suggested that plaintiffs are asking this court to issue what’s close to an advisory opinion.

At this time, Chief Justice George asked Mr. Franklin about the practical consequences if plaintiffs were to get declarative relief. Mr. Franklin responded that the practical consequences would be for plaintiffs to seek class actions to have these unconscionable provisions removed from these sorts of contracts. Mr. Franklin added: “Do we have to remove the class action waiver every time we have an unconscionable waiver involved in a class action?”

Justice Kennard then interjected: “How do you respond to the idea that declarative reliefs generally resolve controversies…In this case, there seems to be no controversy.” [I missed Mr. Franklin’s long response to this…]

Justice Werdegar then referred to the code section, which states: “the court may refuse to grant declarative relief…[in any case where its declaration or determination is not necessary or proper at the time under all the circumstances.]” (I think this is from CCP § 1061.) Mr. Franklin’s response seems to focus on the word “may” in the statute; he argued that the problem is that the lower court did not exercise its discretion at all.

Justice Moreno jumped in and asked a hypothetical from the context of an insurance contract: “In an insurance contract, for example, even in the absence of a controversy over coverage, can an insured seek declarative relief simply because he wants to remove a provision from the contract?” Mr. Franklin answered this hypo by referring to the purposes of declarative relief, one of which, he said, is to prevent future violations. He pointed to the arbitration clause in this type of commercial contract (and the line of cases brought against big corporations that continue to insert arbitration clauses in commercial and employment contracts). He further pointed out how these contracts (like the Spirit contracts) ask consumers to waive jury, suggesting that declarative relief is necessary to stop this type of practice.

Baxter then asked: “how do you deal with a provision that is unfair to regular consumers but not to companies [in a business to business contract]...?” In other words, Justice Baxter was asking Mr. Franklin about the definition of unconscionability and how broad it should be (I think). (Interestingly, during his questioning, Baxter again states that plaintiffs are seeking an advisory opinion from this court.) Mr. Franklin responded by saying that unconscionability is determined by the circumstances at the time of contract formation.

****************

Ms. Olivier, counsel for amicus curiae National Consumer Law Center, also argued on behalf of the Plaintiffs/Appellants.

Ms. Olivier started by addressing the earlier question from Justice Kennard about what exactly are plaintiffs’ damages in this case. Ms. Olivier pointed out that §1770(a)(19) of the CLRA specifically prohibits the insertion of unconscionable contract provisions, and that §1780 speaks of one who suffers any damages, not just pecuniary damages.

At this time, Chief Justice George jumped in and asked: “So you are saying that the actual damage is the insertion of unconscionable provision? If plaintiffs never suffer any ‘practical damage,’ they still have standing to file a claim? ” Ms. Olivier responded that there has to be a nexus between the violation cited in section 1770 and the lawsuit (i.e., a causal connection).

After the discussion about the causal connection, Justice Kennard interjected: “Is that ‘damage’ in your view?” She then continued: “No matter how you define [damage], the customer just isn’t damaged when a provision is inserted in to a contract.” Ms. Olivier responded: “I would disagree, Your Honor. CLRA prohibits this…” She then discussed how the word “inserting” was actually used in the language of section 1770. Thus, CLRA does not just simply prevent unconscionability at the time of contract enforcement, it also prevents the insertion of unconscionablity at the time of contract formation.

At this time, Justice Moreno voiced about a “chilling effect to consumers.” Ms. Olivier agreed: “This is absolutely the case, as we are dealing with consumers who may not be so sophisticated.” She then went on and discussed the violations prohibited by section 1770 of CLRA and how several of them don’t require “damage.”

Justice Chin interjected: “Section 1780 talks about 5 remedies….all of which are available for a consumer who suffers ‘any damages.’ He asked how plaintiffs can get around with the term “any damage?” Ms. Olivier responded, “I don’t think we need to get around that, Your Honor.” She then stressed how the CLRA prohibits unconscionable provisions not just at “enforcement” of the contract, but also at the “formation” of the contract, as its goal is to stop unlawful business practices.

Justice Werdegar then asked the last question about whether what plaintiffs are seeking serves as “a deterrent effect of unlawful terms.” Ms. Olivier said yes, and when she tried to explain more, Justice Werdegar stopped her with a smile and said: “that’s it.”

****************

Mr. Cardozo argued on behalf of the defendant/respondent.

He first discussed the statutory language in section 1780 which says “any consumer who suffers any damages ‘as a result of’ the use or employment by any person of…an [unlawful act]….” He said the inclusion of the phrase “as a result of…” requires something more than just the violation itself. Rather, there must be some kind of “consequential loss.”

Justice Werdegar then interjected: “Why wouldn’t a deterrent effect be the damage?” I don’t have notes on Cardozo’s response, but I recall he discussed the potential exposure to Sprint and the implication that anyone can bring a lawsuit. 

Before I had a chance to write any notes on Cardozo’s response, Justice Kennard jumped in: “You started your argument by focusing on section 1789 … in trying to figure out what the word ‘damage’ means ….  Black's Law Dictionary says it means ‘harm suffers from victim … to person or property.” Isn’t your view, given this definition, that plaintiff has suffered no harm, and consequentially no damage?” Mr. Cardozo affirmed and, again, reiterated his position that loss or damage must be a consequence of a violation.

Justice Moreno then asked a follow-up question: “What about being subject to it and the chilling effect on consumers?” Mr. Cardozo argued that simply being subject to the unconscionable provision is not enough.

Mr. Cardozo then proceeded to differentiate Kagan v. Gibraltar Sav. & Loan Assn., 35 Cal.3d 582 (1984), which the plaintiffs/appellants relied on heavily in their briefs, from the facts of this case. He pointed out how in Kagan the fees were actually deducted from an account; thus, there was a monetary loss. Also, he respectfully suggested to the court that: “what matters is not what Kagan said in 1984, but it’s what this court says today going forward.”

Justice Kennard then asked if it was Mr. Cardozo’s view that the opposing side (i.e., plaintiffs) misstated Kagan. She asked: “Your position is that Kagan is not on point?” Mr. Cardozo affirmed this position.

At this time, Mr. Cardozo moved to the issue of declarative relief. He pointed to P. 36 of his brief and pointed to how the authority to grant declarative relief is permissive one because of the word “may.”

Justice Werdegar asked: “What do you say to plaintiffs’ argument that no discretion was exercised?” Mr. Cardozo responded that he was surprised by that argument. He then talked about the history of the amended complaints in this case and referred to the language employed by the trial court in response to each amended complaint.

Justice Baxter then asked: “So when would declarative judgment be proper? Does plaintiff have to wait until plaintiff wants to sue?” Mr. Cardozo responded by pointing out to the court that the critical issue is whether there is an actual controversy. He then explained that, in order to have actual controversy, there must be a lawsuit, a dispute, or something imminent (e.g., a letter from counsel, a demand letter, etc.).

Before Mr. Cardozo had an opportunity to finish his argument, Justice Kennard cut him off and said: “I thought … you said the trial court would be first court to go to, blah blah blah … what then do you made by this decision by the federal court in Ting v. AT&T …. I realize we are not bound by federal decisions, but the court there granted declarative relief … so it has been done before.”

Mr. Cardozo questioned whether Ting v. AT&T is a replication of this case. Just right before his time was up, he said: “I’m left puzzled by that decision.”

****************

Mr. Falk, counsel for the U.S. Chamber of Commerce as amicus curiae,  also argued on behalf of Sprint.

He began his argument by pointing to the possible consequence of adopting an abstract definition of “damage” -- one consequence, he said, would be to “open the court doors to triviality.” His argument focused on “opening the backdoor to injury-less lawsuits.” “There are plenty of consumers who are [actually] injured,” he said. He then suggested that after Prop. 64 passed, courts started to see “uninjured” plaintiffs bringing lawsuits under CLRA. “The problem with CLRA is that it is so broad,” he argued. He worried that such broad language under CLRA might led to a situation where a consumer “thinking about” buying a TV can come to court and talk about what “might have happened.”

Justice Moreno asked Mr. Falk to respond to the argument that consumers are damaged when they signed the contract with the unconscionable provision. In response, Mr. Falk stressed that there must be some “tangible” loss -- it might not be pecuniary loss, but there must be some kind of loss which isn’t present in this case. (But he didn’t give an example).

Mr. Falk then proceeded to talk about how the CLRA is not an “advisory act.” He said CLRA outlaws misrepresentation, for example, but only those who are “damaged” by misrepresentation may come into the court.

****************

Plaintiffs’ rebuttal was presented by Ms. Olivier. First, she suggested that Sprint is asking the court to allow it to retain these unconscionable provisions in these contracts. “This is the action that the CLRA prevents,” she argued.

Justice Baxter asked if this means a consumer may seek declarative relief to have such unconscionable provisions removed from a contract, so that he/she can enter into a contract without such a provision. In response, Ms. Olivier said that because consumers will be bound by the unconscionable provision, consumers should be able to get injunctive and declarative relief with respect to these provisions under CLRA.

With respect to the opposition’s position on Kagan, Ms. Olivier pointed out that the Kagan court noted two things. First, she said, the Kagan noted the specific acts/prohibitions enumerated in Section 1770. Second, Kagan noted the importance of injunctive relief which is to prevent further violations. She indicated that plaintiff did not allege specific economic harm.

Finally, with regard to Mr. Falk’s mentioning of Proposition 64, Ms. Olivier beautifully argued that the CLRA is not Proposition 64. She pointed to the specific language in Proposition 64 (i.e., "loss of money or property.” She said the language in CLRA does not say that. She ended her rebuttal by suggesting that defendant is asking this court to rewrite CLRA (or something to that affect).

PREDICTIONS:

ISSUE 1: Werdegar and Moreno: for the plaintiffs. Kennard and Baxter: for defendants. George, Chin, Corrigan: not sure.

ISSUE 2: Werdegar and Moreno, George: for the plaintiffs. Kennard and Baxter: for defendants. Chin, Corrigan: not sure.

Thank you, Kelly, for providing an extremely interesting report on the argument. Now, what do you think?

poll by twiigs.com

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Oral argument preview: Meyer v. Sprint Spectrum

This morning at 9:00 a.m., the Supreme Court will hear oral argument in Los Angeles in an important CLRA case, Meyer v. Sprint Spectrum, no. S153846. These are the issues on review in Meyer:

(1) Has a person suffered "damage" within the meaning of the Consumer Legal Remedies Act (Civil Code, section 1780, subd. (a)), such as to allow that person to bring an action under the Act if that person is a party to an agreement containing an unconscionable term (see Civil Code, section 1770, subd. (a)(19)), even though no effort has been made to enforce the unconscionable term? (2) Did plaintiffs have standing to seek declaratory relief?

The Court of Appeal said "no" to both questions. Meyer v. Sprint Spectrum L.P., 150 Cal.App.4th 1136 (2007) (review granted). See these two blog posts for more on the Court of Appeal's opinion.

An intrepid roving reporter is attending the argument on my behalf, and I hope to be able to put up an argument summary tomorrow or Friday.  Meanwhile, here are some of the briefs from the case.  Many thanks to the several people who helped me obtain copies of these: 

• Opening Brief on the Merits (filed 11/13/07)
• Answer Brief on the Merits (filed 12/12/07)
• Reply Brief on the Merits (filed 01/04/08)
• Amicus Curiae Brief of National Consumer Law Center (filed 02/15/08)
• Amicus Curiae Brief of U.S. Chamber of Commerce (filed 02/15/08)
• Answer to Chamber of Commerce Amicus Brief (filed 02/26/08)
• Answer to NACA Amicus Brief (filed 03/06/08)

Supreme Court sets CLRA case for argument: Meyer v. Sprint Spectrum

On Wednesday, the Supreme Court scheduled oral argument in a case raising CLRA issues, Meyer v. Sprint Spectrum, no. S153846. The argument will take place on December 3, 2008 at 9:00 a.m. in Los Angeles. These are the issues on review in Meyer:

(1) Has a person suffered "damage" within the meaning of the Consumer Legal Remedies Act (Civil Code, section 1780, subd. (a)), such as to allow that person to bring an action under the Act if that person is a party to an agreement containing an unconscionable term (see Civil Code, section 1770, subd. (a)(19)), even though no effort has been made to enforce the unconscionable term? (2) Did plaintiffs have standing to seek declaratory relief?

The Court of Appeal said "no" to both questions. Meyer v. Sprint Spectrum L.P., 150 Cal.App.4th 1136 (2007) (review granted). See these two blog posts for more on the Court of Appeal's opinion.

Supreme Court sets attorneys' fees case for oral argument: Vasquez v. Superior Court

The Supreme Court has set Vasquez v. Superior Court, no. S143710, for oral argument on September 3, 2008 at 9:00 a.m. in San Francisco. The Court will be deciding this issue:

Does the rule that, in order to receive attorney fees under Code of Civil Procedure section 1021.5, the plaintiff must first reasonably attempt to settle the matter short of litigation, apply to this case? (See Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 557; Grimsley v. Board of Supervisors (1985) 169 Cal.App.3d 960, 966-967.)

The Court of Appeal determined that the party opposing the fee award waived that issue by not raising it below. Vasquez v. State of California, 138 Cal.App.4th 550 (2006) (Fourth Appellate District, Division Two).

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 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?

Oral argument preview: Murphy v. Kenneth Cole Productions

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.