CA Court Vacates Arbitration Decision Awarding Punitive Damages

Michael Donner 
Michael Donner
March 8, 2017

California’s Fourth Appellate District recently issued an interesting, but fact-specific, opinion regarding an arbitrator’s award in Emerald Aero, LLC v. Kaplan (2/28/17) 2017 DJDAR 1819.

In Emerald Aero, the plaintiff investors sued the defendant for breach of fiduciary duty in connection with a self-storage investment gone awry.  Plaintiffs sought compensatory damages and declaratory relief, but did not seek punitive damages. The arbitrator held a telephonic arbitration merits hearing (i.e., trial), after which he awarded plaintiffs $30 million without specifying the grounds for the award. Although the award did not specify the nature of the damages, the parties agreed that a substantial portion consisted of punitive damages.

The Court’s decision is notable for several reasons:

First, it underscores the unusual nature of arbitration and private judging. When parties elect to litigate outside of the court system, they are bound by the rules and procedures of their chosen private alternative dispute resolution forum. Ordinarily, arbitrators follow the law and case administrators follow the forum’s internal procedures and processes. But this is not always the case. If arbitrators or case administrators do make a mistake, opportunities for appellate review are few. (Indeed, this arbitration was governed by the California Arbitration Act, which offers fewer bases to overturn arbitration awards than does the Federal Arbitration Act.) The grounds for reversal must be manifest and severe.

Second, it underscores the importance of correctly and completely pleading all claims, prayers for damages, and defenses in an arbitration. Practitioners tend to think of arbitral forums as being less formal than trial courts, and often, they are correct. Arbitrators sometimes (but not always) exercise a degree of “flexibility,” particularly with respect to evidence and pleading, that otherwise is absent from judicial forums. But as this case demonstrates, it’s best not to rely on the perceived informality of arbitrations. If plaintiffs in Emerald Aero asserted a claim that entitled them to punitive damages, they should have plainly asked for an award of such damages (or, if they did not want such damages, they should have made clear to the arbitrator that such damages were not being sought). Their failure to do so opened an expensive can of worms that ultimately unwound an advantageous award in their favor and forced them to incur fees litigating on appeal.

CA Court Refuses To Enforce NY Choice-Of-Law Clause And Jury Waiver

Candice Shih 
Candice Shih
February 6, 2017

California’s First District Court of Appeal issued an interesting new ruling that will affect contracts calling for another state’s laws to govern.

In Rincon EV Realty LLC v. CP III Rincon Towers, Inc. (Cal. Ct. App., Jan. 31, 2017, No. A138463) 2017 WL 429267, the plaintiffs borrowed $110 million to finance the purchase of a San Francisco apartment complex.  After the plaintiffs defaulted on the loan, the lender commenced foreclosure proceedings.  One of the defendants, CP III Rincon Towers, Inc., purchased the property at a nonjudicial foreclosure sale.  In an effort to set aside the sale, the plaintiffs sued the purchaser, the lender, and others involved in the transaction for breach of contract, fraud, unfair competition, slander of title, violation of California’s Uniform Trade Secrets Act, and accounting.

The plaintiffs demanded a jury trial.  However, the contracts at issue had two key provisions:

  1. A New York choice-of-law clause, including a waiver of any claim that any other state’s law would govern, and
  2. A waiver of the right to a jury trial.

After the trial court held that New York law applied and that the jury waiver was enforceable under New York law, the plaintiffs appealed.

In its decision, the appellate court noted that contractual choice-of-law provisions are not always enforceable. Indeed, in Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, the California Supreme Court ruled that, to be effective, (1) there has to be a rational nexus to the chosen state; (2) the other state’s law cannot deprive California citizens of important rights or impugn significant California public policy; and (3) California cannot have a “materially greater interest” in enforcing its laws over those of another state.

Employing the Nedlloyd test, the Court determined that New York had a substantial relationship to the parties and the transaction. However, it held that the right to a trial by jury was “inviolate” in California and that New York law on the enforceability of jury waivers was contrary to fundamental California public policy.  Finally, the Court held that California had a “materially greater interest than New York” in determining how legal proceedings are conducted in California courtrooms. Hence, it concluded that the contractual jury waiver – enforceable in New York – was unenforceable under California law.

The Rincon decision reminds parties and legal practitioners alike to give considerable thought to choice-of-law provisions in contracts.  If the contract involves California parties and the chosen state’s laws deprive them of important California rights, the choice-of-law provision might not be enforceable.

Ninth Circuit Deepens Circuit Split and Rejects Ascertainability Requirement for Class Certification

Geoff Pittman 
Geoff Pittman
January 17, 2017

In a detailed opinion published last week in Briseno v. Conagra Foods, Inc., No. 15-cv-55727 (9th Cir. Jan. 3, 2017), the Ninth Circuit held that Federal Rule of Civil Procedure 23 neither provides nor implies that demonstrating an “administratively feasible” way to identify class members is a prerequisite to class certification.

The Court employed traditional canons of statutory construction to reason that the plain language of Rule 23(a) and Rule 23(b)(3), as well as the U.S. Supreme Court precedent of Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) dictate that no separate “administrative feasibility” or “ascertainability” requirement need be satisfied in order to obtain class certification. As summarized by the Court, “the language of Rule 23 does not impose a freestanding administrative feasibility prerequisite to class certification. Mindful of the Supreme Court’s guidance, we decline to interpose an additional hurdle into the certification process delineated in the enacted rule.”

In its opinion, the Court also expressly rejected the justifications provided by the Third Circuit – (1) mitigating administrative burdens; (2) safeguarding the interests of justice; and (3) protecting the due process rights of defendants – for an independent ascertainability requirement for class certification. In doing so, the Court concluded that “Rule 23’s enumerated criteria already address the interests that motivated the Third Circuit . . .”

Briseno involved a challenge to the “natural” labeling statements on Conagra’s Wesson Oil products based on the claim that the products allegedly contained unnatural genetically modified (GMO) ingredients. Like many defendants in other food labeling class actions, Conagra argued that none of the 11 proposed classes should have been certified, in part because plaintiffs could not demonstrate an administratively feasible method for identifying class members, and the only evidence of class membership would be unreliable affidavits claiming product purchases unsupported by any receipts or other reliable evidence that the products were actually purchased.

Several Circuit Courts of Appeal (the Second, Third, Fourth, and Eleventh Circuits) have held that ascertainability is a prerequisite to class certification, and have denied certification where plaintiffs have failed to demonstrate an administratively feasible and reliable way of identifying class members, most notably in consumer class action cases where absent class members lacked receipts for the products they purchased and where the challenged labeling statements differed on the product packaging.  The leading decision supporting defendants’ ascertainability arguments is the Third Circuit’s decision in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013).  With the Briseno decision, the Ninth Circuit rejected Carrera and its progeny, and joined the Sixth, Seventh, and Eighth Circuit Courts of Appeal in holding that there is no separate ascertainability or “administrative feasibility” requirement for class certification.

The Briseno decision thus further deepens the divide between the Circuit Courts of Appeal on this important class certification issue.  We anticipate that the issue will be heard by the Supreme Court in the appropriate case.

Current Issues In Class Actions

Eric Junginger 
Eric Junginger
September 29, 2016

On September 16, 2016, I attended a conference in San Francisco regarding current class action issues.  Below is a summary of some key takeaways from that event.

  • The United States Supreme Court issued three significant class action rulings during its 2015-2016 term: (1) Tyson Foods, Inc. v. Bouaphakeo, 135 S.Ct. 2806 (plaintiffs can rely on representative or statistical evidence for issues common to the class); (2) Spokeo, Inc. v. Robins, 135 S.Ct. 1892 (Article III standing requires a concrete and particularized injury or risk of harm); and (3) Campbell-Ewald Co. v. Gomez, 135 S.Ct. 2311 (unaccepted settlement offer for full amount of lead plaintiff’s claim does not moot a class action).  Collectively, these decisions keep the door wide open to class action litigation nationally.
  • One of the proposed changes to Federal Rules of Civil Procedure (“FRCP”) Rule 23 is that no financial payment can be made to counsel for class members objecting to a proposed settlement unless such payment is disclosed and approved by the court after a noticed hearing. Further, no payment can be made to an objector’s counsel in connection with either withdrawing an objection or dismissing an appeal from a judgment approving the settlement.  Collectively, these changes should reduce the likelihood that attorneys will object to a settlement or appeal a final judgment for the purpose of getting additional compensation from the settling parties in exchange for dropping their objection or appeal.
  • Other proposed changes to FRCP Rule 23 include: (1) the court will give notice of a proposed settlement to all class members only after considering whether there has been adequate representation, arm’s length negotiations, adequate relief offered to all class members (side agreements have to be disclosed to the court), and all class members are equitably treated relative to each other; and (2) notice to class members can be given by email or posting notice on the company’s website instead of just U.S. Mail.
  • Courts are more closely scrutinizing class action settlement agreements because: (1) parties want to expand the class and claims being released beyond the scope of the initial complaint following settlement discussions; (2) defendant’s agreement not to object to plaintiff counsel’s fees can be evidence of collusion; (3) if interests are divergent between FRCP Rule 23(b)(2) and FRCP Rule 23(b)(3) classes, both classes would need to have separate counsel or else there would be inadequate representation; (4) courts are rejecting “kicker” provisions, where any money reverts to defendant if the court does not approve plaintiff counsel’s entire fees or if class members do not cash checks; and (5) courts reject settlements when cy pres provision is not pertinent to the issue raised by the class.  As such, counsel should no longer expect the court to rubber-stamp the parties preliminary settlement agreement.
  • Even though the U.S. Supreme Court’s opinion in Clapper v. Amnesty, 133 S.Ct. 1138 (2013) stands for the proposition that no recovery is allowed for injuries that have not in fact occurred, even if they appear likely or probable, more circuit courts are allowing data breach class actions to proceed if there is an increased risk of fraudulent charges or identity theft. However, there has not yet been a single case where plaintiffs certified a class action in a data breach case, except for settlement purposes.
  • Class members must be definite and ascertainable at class certification stage. There are three ways to achieve ascertainability:  (1) easily identifiable class members; (2) objective criteria to define the class; or (3) class does not include people who did not suffer a common injury.  Cases are currently pending in the 9th Circuit to further clarify this ascertainability analysis.
  • Even though class actions are rarely tried to verdict, at trial, defense counsel should focus on any differences between named plaintiff’s claims and other class members to show lack of commonality and that individual interests predominate. Conversely, plaintiff’s counsel will want to have both named class representatives and absent class members testify to generate more sympathy with the jury.

Follow HB Briefly for further developments in class action law.

California Passes Law Requiring Data Breach Notification for Stolen Encryption Keys

Everett Monroe 
Everett Monroe
September 14, 2016

Governor Brown signed into law AB 2828, which will update California’s breach notification statute.  The law addresses encrypted Personally Identifiable Information that has been breached in the event that the encryption keys are also compromised. The law will go into effect January 1st.

AB 2828 seeks to close a loophole in California’s current data breach notification law, Civil Code Section 1798.82, under which a business must notify affected persons of a data breach where unencrypted personal information is lost. Presently, Section 1798.82 does not expressly require notification where the lost data was encrypted and the encryption key was also lost or improperly disclosed. That data would be at as much risk as unencrypted information, but there is no requirement to notify affected individuals. But requiring companies to report all data breaches where encrypted information was lost but the key remains secure may result in notifications to individuals who are not in serious risk of identity theft, fraud, or loss of privacy.

Continue reading California Passes Law Requiring Data Breach Notification for Stolen Encryption Keys

In Bristol-Myers, CA Supremes Find Contacts Insufficient For General Jurisdiction, But Expand the Scope of Specific Jurisdiction

Merton Howard 
Merton Howard
August 30, 2016

Non-resident companies across the United States have been anxiously awaiting the California Supreme Court’s decision in Bristol-Myers Squibb Company v. Superior Court (San Francisco) regarding the reach of the state’s personal jurisdiction statute.  In an opinion authored by Chief Justice Cantil-Sakauye, a 4-3 majority held that Bristol-Myers Squibb (BMS) is subject to jurisdiction in California on suits by non-resident plaintiffs injured outside the state, but limited its holding to claims based on specific jurisdiction only.

The underlying actions, some 592 consolidated claims by non-resident plaintiffs, had been challenged by BMS via a Motion to Quash for lack of personal jurisdiction.  BMS argued that the company is incorporated in Delaware, headquartered in New York City, and maintains substantial operations in New Jersey.  Furthermore, BMS claimed that none of the at-issue complaints contained any claims that the non-resident plaintiffs‘ injuries occurred in California or that they had been treated for their injuries here.  As such, it believed neither specific nor general personal jurisdiction could be exercised over it for claims by non-resident plaintiffs.

After some procedural back and forth on the applicability of general jurisdiction in light of the United States Supreme Court’s decision in Daimler AG v. Bauman (2014) 571 U.S. ___ [134 S.Ct. 746] (Daimler), the Court of Appeal for California heard the BMS cases on transfer, and held that it was specific personal jurisdiction, and not general, which California had the right to exercise over BMS.  It was this decision that the State Supreme Court yesterday affirmed.

Continue reading In Bristol-Myers, CA Supremes Find Contacts Insufficient For General Jurisdiction, But Expand the Scope of Specific Jurisdiction

To Qualify For ERISA’s ‘Church Plan’ Exemption, 9th Circuit Rules The Pension Plan Must Be Established By A Church, Not A Hospital

Eric Junginger 
Eric Junginger
August 17, 2016

While it seems straightforward that a church must establish and maintain a pension plan in order to qualify for the “church-plan” exemption to the Employee Retirement Income Security Act of 1974 (“ERISA”), it has taken three federal District Court decisions in the United States to convey this message to many hospitals.  On July 26, 2016, the Ninth Circuit Court of Appeal in Rollins v. Dignity Health (7-26-2016) (16 C.D.O.S. 7916) became the latest district to join the Third Circuit [Kaplan v. Saint Peter’s Healthcare Sys., 810 F.3d 175, 180-81 (2015)] and the Seventh Circuit [Stapleton v. Advocate Health Care Network, 817 F.3d 517, 523-27 (2016)] in rendering this interpretation in regard to hospital pension plans.

In Rollins, an employee of San Bernardino Community Hospital, which became affiliated with Catholic Healthcare West (“CHW”) and whose name was later changed to “Dignity Health”, was advised that CHW considered her pension plan to be a church plan exempt from ERISA.  This determination was based on two factors: (1) CHW was initially formed by the merger of two nonprofit hospital systems established by two church congregations, and the CHW pension plan was combined with five other individual hospital plans or church plans into the employee’s existing pension plan; and (2) a 1983 General Counsel Memorandum from the I.R.S. which opined that a pension plan may qualify as a church plan if it is maintained by the Catholic Church, regardless of what entity established the plan.  See I.R.S. Gen. Couns. Mem. 39,007 (July 1, 1983).

The Ninth Circuit expressly disagreed with the I.R.S. opinion letter and Dignity Health’s position that it had a “church plan” because both ignored the express language in the ERISA statute and its Legislative History.  First, ERISA states that “church plans”, which are established and maintained by a church or association of churches, are exempt from the applicable requirements of ERISA.  Both elements are required to qualify for the exemption.  See 29 U.S.C. at §§ 1002(33) and 1003(b)(2).  Second, the Legislative History makes clear that when these laws were originally enacted in 1974, these same two requirements existed.  The subsequent amendments in 1980 did not eliminate the requirement that a church plan be established by a church; rather, they expanded the definition of employees eligible to participate in a church plan and expanded the entities that could maintain such plans (e.g., church-controlled or church-affiliated pension boards instead of just the church itself).

Why does losing the church plan ERISA exemption matter to Dignity Health and other hospitals around the country (e.g., Saint Peter’s Healthcare System; Advocate Health Care Network)?  For years, these hospitals have not complied with the funding requirements of ERISA and hundreds of thousands of hospital employees are facing a shortfall of billions of dollars in their pensions.  Because these hospitals are facing significant financial liability, they have petitioned the U.S. Supreme Court to weigh in on the requirement that a church must establish a pension plan in order to qualify for the church plan ERISA exemption.

Three Lessons from the Federal Trade Commission’s LabMD decision

Everett Monroe 
Everett Monroe
August 10, 2016

The Federal Trade Commission (FTC) has made good data security practices a focus of its mission in recent years. It has issued guidance, held workshops, and brought enforcement actions against businesses that fail to implement common sense measures to protect their data. The Third Circuit’s opinion in Wyndham v. FTC acknowledged the Commission’s authority to hold companies accountable for claiming to have better data security then they do. Now, the Federal Trade Commission’s opinion and order In the Matter of LabMD, Inc. makes clear that good security practices are a must, regardless of claims a business makes to consumers.

The unanimous opinion by the Commission includes a long list of LabMD’s data security failures, but it focuses on employees’ administrative access to the computers. This access allowed an employee to install peer to peer file sharing software, and configured it so that it made patients’ sensitive medical data available outside the company. A security firm found the vulnerability, acquired some of the sensitive data, and then informed LabMD of the vulnerability in conjunction with an offer to provide security services. Here are three lessons that all businesses can glean from the FTC opinion.
Continue reading Three Lessons from the Federal Trade Commission’s LabMD decision

Baral v. Schnitt: The Roadmap For Anti-SLAPP Motions Has Dramatically Changed

Neil Bardack 
Neil Bardack
August 9, 2016

The California Supreme Court in Baral v. Schnitt, No. S225090 (filed 8/1/2016),  has clarified a “perplexing” conflict among several Districts of the Court of Appeal about the application of  Code of Civ. Proc. Section 425.16(b)(1) (the Anti-SLAPP statute) when applied to strike allegations in a mixed cause of action,  where it combines allegations of activity protected by the statute with allegations of unprotected activity.

Protected activity arises out of the defendant’s exercise of the constitutional rights of free speech or petition.  When pleadings assert a cause of action that implicates both those activities and unprotected activities, there was a disagreement in the appellate districts and even divisions as to whether the statute supported applying the Anti-SLAPP motion to the whole cause of action, which often resulted in the denial of the motion.  In essence, by artful pleading of intertwined allegations, a plaintiff could avoid dismissal of the cause of action and potential exposure to attorney’s fees in those courts that held that the motion lay only to strike an entire count as pleaded in the complaint, even where  protected activity was alleged.  This result thwarted the purpose of the statute. which is to shield a defendant’s constitutionally protected conduct from the undue burden of frivolous litigation.

In Baral, the plaintiff pleaded in a single cause of action that Schnitt committed both libel and slander by knowingly providing false information about Baral’s possible misappropriation of company assets to an outside accounting firm hired to investigate the company owned by them; this was protected activity.  However, the plaintiff linked this assertion with allegations that, once discovered as false,  Schnitt refused to correct.  The false information was ultimately published, which was not protected activity and would not be reachable by Schnitt’s  Anti-SLAPP motion.  The trial court’s denial of the motion was upheld by the Court of Appeal, which found that the Anti-SLAPP statute applied only to entire causes of action as pleaded, or to the complaint as a whole, not to isolated allegations with causes of action.

The Supreme Court determined that this result unduly limited the relief contemplated by the Legislature in enacting the Anti-SLAPP statute.  It approached the resolution by starting with the definition of a “cause of action” as intended to be subject to the motion to strike.  The high court held that the Legislature intended to require a plaintiff to show a probability of prevailing on “the claim” arising from protected activity, and this result should not depend on the form of the pleading.  The purpose of the statute is to protect activity, and courts may rule on the plaintiff’s specific claim of protected activity.

To assist the litigants, the Supreme Court provided the following roadmap of the showings and findings required by under section 425.16(b):

At the first step, the moving defendant bears the burden of identifying all allegations of protected activity, and the claims for relief supported by them.  When relief is sought based on allegations of both protected and unprotected activity, the unprotected activity is disregarded at this stage. If the court determines that relief is sought based on allegations arising from activity protected by the statute, the second step is reached. There the burden shifts to the plaintiff to demonstrate that each challenged claim based on protected activity is legally sufficient and factually substantiated.  The court, without resolving evidentiary conflicts must determine whether the plaintiff’s showing, if accepted by the trier of fact, would be sufficient to sustain a favorable judgment. If not, the claim is stricken.  Allegations of protected activity supporting the stricken claim are eliminated from the complaint, unless they also support a distinct claim on which the plaintiff has shown a probability of prevailing.

Although there was much confusion in applying the Anti-SLAPP motion to allegations which were purposefully jumbled to avoid this special motion to strike, is the solution now cleared of the mud?

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