Ninth Circuit Underscores The Importance Of Carefully Crafting Class Action Settlements

Matthew Peck 
Matthew Peck
March 6, 2018

In Brown v. Cinemark USA, Inc., 876 F.3d 1199 (9th Cir. 2017), the Ninth Circuit considered an issue of first impression: whether it had jurisdiction to consider an appeal of an order denying class certification where the individual plaintiffs seeking to represent the class settled their individual claims.

In Brown, Plaintiffs Silken Brown and Mario De La Rosa filed a class action complaint against Defendants Cinemark USA, Inc. and Century Theater, Inc. alleging various wage and hour claims.  The Defendants removed the case to federal court, where it was then consolidated with similar pending actions.

The district court dismissed the Plaintiffs’ direct wage statement claim and denied certification of Plaintiffs’ meal and rest break, reporting pay, off the clock work, derivative wage statement, and direct wage statement claims. Defendants then moved for summary judgment on the remaining individual claims, and the district court issued a tentative ruling granting in part and denying in part the motion.  Thereafter, the parties stipulated to the tentative ruling and settled the Plaintiffs’ remaining individual claims.  Importantly, the settlement agreement reserved the Plaintiffs’ rights to challenge the district court’s ruling denying certification of the Plaintiffs’ direct wage claim and dismissing Brown’s direct wage statement claim.

Plaintiffs appealed the issues reserved by the parties’ settlement agreement to the Ninth Circuit. On appeal, Defendants argued that the Ninth Circuit lacked jurisdiction under 28 U.S.C. § 1291 to consider an appeal of the district court’s interlocutory judgment in light of the Supreme Court’s decision in Microsoft Corp. v. Baker, 582 U.S. ____, 137 S.Ct. 1702, 198 L.Ed.2d 132 (2017).¹ The Ninth Circuit distinguished Baker, first noting that appeal pursuant to terms of the parties’ settlement agreement did not raise the same concerns as the voluntary dismissal in Baker because, unlike the Baker plaintiffs, the Brown Plaintiffs continued litigating their remaining individual claims following denial of certification.  Moreover, in stark contrast to Baker, no facts before the Circuit suggested that the Brown Plaintiffs engaged in “sham tactics” to achieve an appealable final judgment because the appeal resulted—not from a unilateral dismissal of claims—but pursuant to the terms of a bargained-for settlement  between the parties, which expressly preserved certain claims for appeal.  That is, Plaintiffs did not “openly intend[] to sidestep Rule 23(f) when they voluntarily dismissed their  claims.”

As a result, the Ninth Circuit concluded that it had jurisdiction under 28 U.S.C. § 1291 to consider the class certification ruling in Brown on the merits.  By contrast, in Bobbit v. Milberg, ____ Fed.Appx. ____, 2018 WL 654157, at *1 (9th Cir., Feb. 1, 2018), the Circuit ruled, on remand from the Supreme Court, that Baker compelled it to dismiss for want of jurisdiction an appeal of a ruling denying class certification where the individual plaintiffs had stipulated to voluntary dismissal of their personal claims and allowed another party to intervene for the purpose of pursuing the appeal. In contrast to Brown, the plaintiffs did not agree to preserve any claims for appeal.

The clear lesson is that settlements of individual claims in the class action context must be carefully drafted to avoid the creation of avenues to appellate relief that might otherwise be unavailable.

***

¹ In Baker, the district court denied class certification, and the appellate court declined discretionary interlocutory review of that denial.  The plaintiffs then voluntarily dismissed their own claims to create an appealable final judgment.  The Supreme Court ruled that the voluntary dismissal did not qualify as a “final decision” and noted that approval of such tactics would undermine 28 U.S.C. § 1291’s firm finality principal which is “designed to guard against piecemeal appeals, and subvert the balanced solution Rule 23(f) put in place for immediate review of class-action orders.”

Court Grants Reprieve from Warning Obligations Related to Glyphosate for California Proposition 65 on Basis of Inadequate Scientific Evidence

Merton Howard Shannon Nessier 
Merton Howard and Shannon Nessier
March 2, 2018

In a significant decision out of the Eastern District of California, Judge William Shubb issued a preliminary injunction staying warning obligations related to the addition of glyphosate to a list of chemicals in California under its so-called “right to know” statute, Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986, Cal. Health & Safety Code §§ 25249.5-25249.14 (“Proposition 65”). In issuing the injunction, the Court found that there is not sufficient evidence to support the determination that glyphosate is known to the State of California to cause cancer, and therefore the warning requirements set to take effect this July as a result of its listing are constitutionally invalid compelled speech.

The stay of the warning obligations is an important victory for a number of key food and agribusiness companies, but likely not the end of this battle.

Background

California’s Proposition 65 prohibits any person in the course of doing business from knowingly and intentionally exposing anyone to certain listed chemicals without providing a “clear and reasonable” warning. Failure to comply can result in penalties up to $2,500 per day for each failure, and subject the manufacturer/seller to costly enforcement actions by designated government/agency attorneys, as well as private citizens who may recover attorney’s fees. Cal. Health & Safety Code § 25249.7(b).

A chemical may be added to the Proposition 65 list after any one of certain entities, including the Environmental Protection Agency (“EPA”), the Food and Drug Administration (“FDA”), and the International Agency for Research on Cancer (“IARC”), provide confirmation of its status as a carcinogen or reproductive toxicant. In 2015, IARC classified glyphosate as “probably carcinogenic” to humans based on evidence that it caused cancer in experimental animals and limited evidence that it could cause cancer in humans, despite the fact that several other organizations, including the EPA and agencies within the World Health Organization, concluded that there is no evidence that glyphosate causes cancer.

As a result of IARC’s classification of glyphosate as probably carcinogenic, OEHHA listed glyphosate as a chemical known to the state of California to cause cancer on July 7, 2017, and thus the attendant warning requirement would take effect on July 7, 2018.

Current Action

In response to the listing and impending warning obligations, a collaboration of agribusiness companies and retailers, spearheaded by Monsanto, as well as chambers of commerce from a number of states, filed this motion for an injunction staying the listing of glyphosate and/or the enforcement of the attendant warning obligations. They claimed the listing and the warning obligation, when based on insufficient evidence, were violations of their First Amendment right against compelled speech. On Monday, the District Court issued its order agreeing that the compelled warning is a violation of the First Amendment given the lack of evidence of glyphosate’s link to cancer in humans.

In issuing the injunction staying enforcement of the warning obligations, the Court found the matter ripe, that the moving parties were likely to prevail on the merits (at least as to the warning obligation), and that if not stayed, the warning obligation would cause them irreparable harm.

The Court rejected defendants’ claims that the challenge was unripe because plaintiffs may not have to provide any warning if their products’ glyphosate levels are below the anticipated “safe harbor” level. Instead, it found that regardless of the State’s possible enactment of a safe harbor level, there is undeniable evidence from prior listings that plaintiffs face the significant risk of injury from still being subject to enforcement actions notwithstanding a defense of compliance with the safe harbor level. The court further noted that even forcing plaintiffs to pay to test their products, given the insufficient evidence on glyphosate’s carcinogenic impacts, is a cognizable harm.

The Court rejected the argument by plaintiffs that the mere listing of glyphosate is a violation of the First Amendment, instead focusing on the warning obligations set to take effect in July.

The Court explained that in cases of compelled speech, the State has the burden of demonstrating that a disclosure requirement is purely factual and uncontroversial, not unduly burdensome, and reasonably related to a substantial government interest. Here, the Court found that the required warning would be misleading to the ordinary consumer.

Despite hollow attempts by defendants to suggest that plaintiffs could use a less misleading warning to reflect the uncertain nature of the link between glyphosate and cancer, the Court got to the heart of the matter in speaking to the incredible burden of the Proposition 65 warning provisions: “Under the applicable regulations, in order for a warning to be per se clear and reasonable, the warning must state that the chemical is known to cause cancer. California regulations also discourage, if not outright prohibit, language that calls into doubt California’s knowledge that a chemical causes cancer.” Given these guidelines, the Court rightly understood no lesser warning would avoid the risk to plaintiffs of unmerited lawsuits and thus irreparable harm.

In speaking to these issues with the evidence related to the status of glyphosate as a carcinogen, the Court went on to say that “the required warning for glyphosate does not appear to be factually accurate and uncontroversial because it conveys the message that glyphosate’s carcinogenicity is an undisputed fact, when almost all other regulators have concluded that there is insufficient evidence that glyphosate causes cancer.”

Finally, the Court also addressed the public interest in enforcing the warning requirement, again finding for the plaintiffs. Judge Shubb found that misleading or false labels undermine California’s interest in accurately informing its citizens of health risks at the expense of plaintiffs’ First Amendment rights.

Because only the warning enforcement was stayed and not the listing itself, this fight is far from over. We can expect significant efforts from both sides as this issue moves forward, and the fate of glyphosate under California’s Proposition 65 remains unclear.

Class Certification Bid ‘Deflated’ by Court of Appeal for Lack of Ascertainability

Kaylen Kadotani 
Kaylen Kadotani
March 1, 2018

In a recent decision, the California Court of Appeal reinforced the ascertainability requirement for class certification under state law. In Noel v. Thrifty Payless, Inc. (2017) 17 Cal.App.5th 1315, the First District of the California Court of Appeal affirmed an order by the Marin County Superior Court which denied Plaintiff’s Motion for Class Certification on grounds that Plaintiff failed to demonstrate that the proposed class was ascertainable.  Just this week, the California Supreme Court granted review of this decision.

In this consumer class action, Plaintiff alleged that Defendant Thrifty Payless, Inc. dba “Rite Aid” (“Rite Aid”) violated the Unfair Competition Law (“UCL”), the False Advertising Law (“FAL”) and the Consumer Legal Remedies Act (“CLRA”)1 by selling an inflatable swimming pool that turned out to be smaller than the pool pictured on the product’s box. Plaintiff’s proposed class included: “All persons who purchased the Ready Set Pool at a Rite Aid store located in California within the four years preceding the date of the filing of this action [i.e., November 18, 2013].” (Id. at 1326.) Before filing his Motion for Class Certification, Plaintiff learned, through written discovery, that Rite Aid had sold more than 20,000 inflatable swimming pools, for a potential class of 20,000 individuals. Notably, however, Plaintiff did not seek any discovery as to the location and nature of any records maintained by Rite Aid relating to the identity of the purchasers, or how their identities might otherwise be ascertained. This critical omission proved fatal to Plaintiff’s attempt to certify a class.

As is well-established under California Code of Civil Procedure section 382, a motion for class certification may be granted where there is “an ascertainable class and a well-defined community of interest among class members.” (Id. at 1324) (citing Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 326.)   The ascertainability requirement depends on: (1) class definition, (2) class size, and (3) means of identifying class members. (Id.) (citing Sotelo v. Medianews Group, Inc. (2012) 207 Cal.App.4th 639, 648.) The party seeking class certification carries the burden to establish the existence of ascertainability. (Id. at 1325) (citing Sav-On, 34 Cal.4th at 326.) The trial court found that Plaintiff failed to carry this burden since he “presented ‘no evidence’ to establish ‘what method or methods will be utilized to identify the class members, what records are available (either from Defendant, the manufacturer, or other entities such as banks or credit institutions), how those records would be obtained, what those records will show, and how burdensome their production would be. . . .'” (Id. at 1323.)

On appeal, Plaintiff argued that the trial court used the wrong legal standard for ascertainability, and that it should have followed the rule announced in Estrada v. FedEx Ground Package Systems, Inc. (2007) 154 Cal.App.4th 1, 14, which provides that a class is ascertainable “if it identifies a group of unnamed plaintiffs by describing a set of common characteristics sufficient to allow a member of that group to identify himself as having a right to recover based on the description.” (Id. at 1326) (Italics removed.) Thus, Plaintiff argued, based on his proposed class definition, he had identified an ascertainable class. The Court of Appeal disagreed, noting that “[t]he theoretical ability to self-identify as a member of the class is useless if one never receives notice of the action.” (Id. at 1327) (citing Sotelo, 207 Cal.App.4th at 649.) “The ascertainability requirement is a due process safeguard, ensuring that notice can be provided ‘to putative class members as to whom the judgment in the action will be res judicata.’ . . . ‘Class members are ‘ascertainable’ where they may be readily identified without unreasonable expense or time by reference to official records.'” (Id.) (citing Sotelo, 207 Cal.App.4th at 647-648.)

The Court of Appeal agreed with the trial judge, and reasoned that other than pointing to the number of inflatable pools sold, the number of returns, and the gross revenue earned by Rite Aid, Plaintiff failed to submit any evidence which offered “insight into who purchased the pool or how one might find that out. . . . Unless [Plaintiff] could propose some realistic way of associating names and contact information with the 20,000-plus transactions identified by interrogatory response, there remained a serious due process question in certifying a class action.” (Id. at 1328.)

In its decision, the Court acknowledged an apparent conflict with another recent case, Aguirre v. Amscan Holdings, Inc. (2015) 234 Cal.App.4th 1290, in which the appellate court held that the means of identification requirement under Sotelo did not require a plaintiff to prove there is a way to give absent class members personal notice, and that the court need only consider the available means to identify class members “at the remedial stage.” (Id. at 1330) (citing Aguirre, 234 Cal.App.4th at 1300.) Disagreeing with the Aguirre approach, the Noel court pointed out that longstanding principles of due process and public policy support the requirement that a plaintiff make some showing of a means of identifying the class and a description of how notice may be given. (Id. at 1332.) The Court further noted that class action litigants should be able to address this inquiry quite easily in the early stages of the action, i.e., through the discovery that Plaintiff here neglected to pursue. (Id. at 1333.)

In summary, the Noel case, at least for now, reinforces the requirement that class action plaintiffs present an ascertainable class at the class certification stage by establishing a means of identifying the class members and providing notice.  As noted above, the California Supreme Court has just recently granted review of this decision, though we are not yet aware of the issues to be addressed on appeal. We will be following this decision closely, so make sure to check back for updates.

***

1 The Court’s discussion and ruling as to Plaintiff’s CLRA claim is not included in this blog entry. For reference, the Court also denied class certification as to CLRA, but for different reasons than the claims under the UCL and FAL.

Meet-and-Confer Rules Expand to Motions to Strike and for Judgment on the Pleadings

Candice Shih 
Candice Shih
February 9, 2018

Two years ago, a new rule was put into place requiring any party planning to demur to a pleading to meet and confer with the party that filed the pleading.  (Code Civ. Proc. Section 430.41.)

Hopefully, you have received some practice at this because now it is mandatory to meet and confer before moving to strike a pleading or moving for judgment on pleadings.

As of January 1, 2018, a party moving to strike a pleading under Code Civ. Proc. Section 435 is required to meet and confer with the party that filed the pleading under Section 435.5.  Also as of January 1, 2018, a party moving for judgment on the pleadings under Code Civ. Proc. Section 438 is required to meet and confer with the party that filed the pleading under Section 439.

If you are familiar with the meet-and-confer rules for demurrers, then you will know the rules for motions to strike and for judgment on the pleadings.  Aside from changing the name and nature of the procedure and stylistic changes, the three sets of rules on meet and confer are mostly the same.

As with the rules for demurrers, both new meet-and-confer rules require that the moving party meet and confer in person or by telephone with the party who filed the pleading and identify with legal support the basis of the perceived deficiencies. The non-moving party then must respond with legal support as to why its pleading is legally sufficient.  If a live-time conference does not take place by the deadline, the moving party can file a declaration saying it made a good faith effort to meet and confer and why it did not happen, and it will receive an automatic 30-day extension to file its motion.

A couple differences between (1) the rules for demurrers and (2) the rules for motions to strike and for judgment on the pleadings are:

  • Both the meet-and-confer rules on moving to strike and moving for judgment on the pleading do not apply to a special motion brought pursuant to Section 425.16 (anti-SLAPP) or to a motion brought less than 30 days before trial.  (Sections 435.5(d), 439(d).)
  • The deadline to meet and confer for moving for judgment on the pleading is five days before the motion is filed, rather than five days before it is due.  (Section 439(a)(2).)  Notably, this section does not state that the deadline to meet and confer is related to when the motion is due or when it must be filed, likely because there is no statutory deadline to move for judgment on the pleadings.

Note that if you are planning to demur and move to strike simultaneously that you will be subject to both sets of meet-and-confer rules.  You may want to determine if that is your strategy first before picking up the telephone to meet and confer so that you can address both subjects and comply with both sets of rules.

Disqualification: A Painful Reminder of the Pitfalls of Using Inadvertently Disclosed Attorney-Client Privileged Information

Neil Bardack 
Neil Bardack
August 21, 2017

In California, State Compensation Insurance Fund v. WPS, Inc. 70 Cal.App.4th 644 (1999), has served as the rule book for attorneys who obtain inadvertently disclosed and obvious attorney-client information on how to avoid certain disqualification from representation.  Under State Fund, regardless of how the attorney came into possession of the information, once it is concluded that the document appears to be attorney-client privileged, the attorney must notify the holder of the privilege and refrain from using it until the parties or court has sorted out the disclosure or finds a waiver of the privilege.  The receiving attorney’s reasonable belief that there has been a waiver is not a defense to disqualification that may result if the attorney uses the document in advance of resolving the waiver issue.

A recent example of how courts apply the rule in State Fund is found in McDermott Will & Emery v. Superior Court, 10 Cal.App.4th 1083 (2017).  The document involved was clearly attorney-client privileged on its face as it contained an opinion of counsel, but the manner in which came into possession of counsel raised a strong argument of waiver.

There, McDermott had been sued for malpractice by a former client who alleged the firm had represented him and other family members, creating a conflict of interest.  McDermott was represented by Gibson Dunn.  The document in question had been drafted by the client’s attorney and clearly contained legal advice pertinent to the malpractice claim.  However, the client had sent the document to other non-lawyer family members and it ended up with McDermott pre-suit because the firm had been counsel to family members and a family-owned company.  This relationship had given rise to the conflict of interest claim being made.

Over objections, the client’s attorney Gibson Dunn had used the document in the litigation arguing that not only had it come from its client’s files and not by inadvertent disclosure in discovery, but it also had passed through the hands of several non-lawyers and any privilege had been waived.  Gibson Dunn made the wrong call, and that caused its disqualification from representing McDermott by the trial court.

On appeal, a divided Court of Appeal upheld the disqualification by finding there was no evidence of any intention to waive the privilege by the holder even in the face of several intermediate disclosures that had been made before McDermott had obtained the document from a family member who did not hold the privilege. Disqualification was proper because Gibson Dunn did not follow the guidelines set in State Fund but instead used the document, knowing it was presumptively privileged and that the document should have been either returned or that Gibson Dunn should have sought a court order obtained permitting its use.  Disqualification was necessary to prevent future harm and to protect the integrity of the judicial system.

The circumstances causing disqualification in McDermott show how important it is that an attorney refrain from using a document that at least could be argued as attorney-client privileged, no matter how strong the arguments may be that the privilege was waived. Only the holder of the privilege or a court can make that determination. It is a no-win situation and no matter how tempting the document may be, its use outside of State Fund’s ethical pathway will almost certainly result in an expensive and embarrassing disqualification of a client’s choice of counsel.

Commercial Defamation Update: California Imposes New Hurdle on Ability to Ascertain Identity of Anonymous Internet Posters

Michael Donner 
Michael Donner
August 4, 2017

California defamation law continues to evolve as the courts synthesize well-settled legal principles with ever-changing technological realities. On July 21, 2017, California’s First District Court of Appeal issued a published opinion in ZL Technologies v. Does 1-7 (July 21, 2017) 2017 DJ DAR 6999. In its opinion, the Court amplified existing defamation law as it relates to Internet postings and imposed new hurdles on the ability of parties to ascertain the identities of people who post defamatory statements on the Internet.

It is unlawful for an individual to damage a company by saying or writing something about it that is materially false. However, the courts typically bend over backwards to protect First Amendment rights. Accordingly, they created an exception to defamation for what they call “nonactionable opinion,” that is, statements for which no defamation claim may lie because the statements constitute mere expressions of opinion rather than assertions of fact.

It often can be frustratingly difficult, even for lawyers, to distinguish actionable defamation from nonactionable opinion. In part, this is because people tend to pepper their opinions with facts to support or emphasize them. The advent of the Internet has made this analysis even more complex, because now everyone with a cell phone has the ability to immediately share their views, and entire companies and Internet communities have been formed for the singular purpose of facilitating such discourse. In recent years, the California courts have tried to create some ground rules for distinguishing actionable defamation from nonactionable opinion on the Internet. Under those rules, judges are required to assess not only the specific language the internet poster used (the “what”), but also the online forum in which the poster used that language (the “where”). If the poster’s language is exaggerated or appears on websites that lend themselves to “rants and raves,” rather than considered thought, the California courts tend to view the postings as nonactionable opinion, notwithstanding the fact that it might contain some false facts.

Frequently, even if a company believes it can establish a claim for defamation, its battle to obtain relief has only just begun. One common characteristic of Internet posting is its anonymity. Posters sometimes use online monikers and the websites on which they publish their statements actively shield the posters’ identities. Hence, while a company might want to sue, it cannot readily do so because the identity of the person to be sued remains unknown. To address this issue, some businesses file lawsuits against “Doe” defendants and then take discovery to ascertain the posters’ identities. Discovery like that can be expensive and is not always successful.

In ZL Technologies, several anonymous individuals posted allegedly false statements about a company on Glassdoor.com, an employee review website. The company subpoenaed Glassdoor to obtain the posters’ e-mail addresses and other identifying information so the company could sue the posters for defamation. Although Glassdoor was insulated from defamation liability under federal law (as a mere forum for postings), it fought the subpoena on behalf of the posters.

The Court of Appeal allowed the company to proceed both with the case and its efforts to ascertain the identities of the anonymous posters. However, it tried to strike a balance between the company’s interest in obtaining relief and the posters’ interest in remaining anonymous. It held that litigants seeking to subpoena websites to determine the identities of anonymous posters must first (1) give notice of the subpoena to the posters (through the website) so the posters can fight the subpoena; and (2) establish a prima facie case of defamation on par with that necessary to defeat an anti-SLAPP motion. California never applied these two tests before in connection with this type of discovery.

In the aftermath of ZL Technologies, companies may still subpoena websites to ascertain the identities of anonymous posters who write defamatory things about them. However, before doing so, they must now give the posters a chance to challenge the legal propriety of their subpoenas. They also must marshal their evidence and prepare a nearly dispositive motion on their defamation claim, establishing that the posted statements were factual, actionable, material, false, and damaging. These hurdles will require considerably more time and resources to satisfy.

Los Angeles Judge Elects Generalized “Common Issue” to Justify Class Certification

Shannon Nessier 
Shannon Nessier
July 18, 2017

Walt Disney (“Disney”) suffered a loss last week in an adverse employment action based on its use of information in consumer reports as part of its employment screening process.  The plaintiffs have alleged that they were injured when inaccurate credit reporting information, which they had no opportunity to challenge or correct, became a factor in Disney’s denial of employment.  On July 13, 2017, the Court entered an order granting class certification over objections by Disney to, among other issues, the existence of predominant common questions of fact.  In reaching its decision, the Court elected to define the commons issues as framed by the more generalized issues advanced by plaintiffs than the specific factual issues Disney identified would be necessary to assess the class members and their alleged damages.

Continue reading Los Angeles Judge Elects Generalized “Common Issue” to Justify Class Certification

China Enacts Data Privacy Law Under Guise of Cybersecurity

William Kellermann 
William Kellermann
May 11, 2017

On November 11, 2016, the Standing Committee of the National People’s Congress promulgated the “Internet Security Law of the People ‘s Republic of China” commonly referred to as the “Cybersecurity Law of China.”  Unlike the EU’s General Data Protection Regulation (GDPR) which gave businesses two years to prepare, the new law becomes implemented June 1, 2017.

The law affects almost every business in China, and anyone else doing business in China.  The law targets “critical infrastructure,” which is broadly defined and includes transportation, travel, network software and equipment suppliers, telecommunications, finance (banking, insurance, mutual funds), health care, online shopping platforms, information technology services (Internet Data Center, electronic information delivery and distribution, Internet Service Provider, Internet Content Provider), education, energy, marketing and advertising, social media, gaming, applications and public service.  The new law applies to any entity that 1) maintains a computer network and 2) attaches that network to the internet.

Continue reading China Enacts Data Privacy Law Under Guise of Cybersecurity

Court: Arbitration Agreements That Waive Injunctive Relief Under CA Consumer Statutes Are Unenforceable

Neil Bardack 
Neil Bardack
April 25, 2017

In McGill v. Citibank, N.A., No., S224086  (Cal. Apr. 6, 1017), the California Supreme Court recently held that pre-dispute arbitration agreements that purport to waive the remedy of injunctive relief under California consumer statutes that have the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the public in any forum, are contrary to California public policy and are thus unenforceable under California law.  The court further held that the Federal Arbitration Act (FAA) does not preempt California law nor require enforcement of such contractual waiver provision.

The dispute in McGill arose out of an account agreement for a “credit protector” plan to a Citibank credit card that contained a broadly worded agreement to arbitrate that sought to require arbitration of all claims related to the account no matter the theory or relief sought.  Specifically, claims brought as a class action, private attorney general, or other representative action, could only be brought on an individual basis and relief awarded only to the individual and not to anyone not a party to the agreement.  The provision also stated that such claims would be governed by the FAA.

McGill brought claims under the California consumer remedy statues (Unfair Competition Law, California Legal Remedies Act and False Advertising Law) seeking damages and injunctive relief prohibiting Citibank from continuing to engage in allegedly illegal and deceptive practices.  The trial court severed and kept the injunctive relief cause of action but ordered arbitration of all other claims; the Court of Appeal reversed and remanded concluding that AT &T Mobility v. Concepcion preempted application of the Broughton-Cruz rule, which established that agreements to arbitrate claims for public injunctive relief under these or any other statutes, was unenforceable.

McGill petitioned the California Supreme Court claiming that there was no preemption of the Broughton-Cruz rule and that any arbitration agreement requiring submission of claims for public injunctive relief was unenforceable. McGill also raised an argument that had been ignored by the Court of Appeal but which had traction in the Supreme Court, which is that the clause was unenforceable as it sought to waive McGill’s right to seek public injunctive relief in any forum based upon language in the clause that claims under the consumer statutes could not be pursued “in any litigation in any court.” At the hearing, Citibank agreed with McGill that this clause would prevent McGill from seeking public injunctive relief in any forum 

 In a nutshell, the Court held that it need not decide whether FAA preemption applied because Citibank agreed that public injunctive relief was excluded from the obligation to arbitrate, and the Broughton-Cruz rule “which applies only when the parties have agreed to arbitrate requests for such relief” was not at issue; thus, the continued validity of that rule after Concepcion need not be decided.  The only question before the court was “whether the arbitration provision is valid and enforceable insofar as it purports to waive McGill’s right to seek public injunctive relief in any forum.

By focusing only on the specific language of an arbitration clause that prevented the plaintiff from seeking public injunctive relief in either arbitration or court, the California Supreme Court attempted to thread the needle to avoid taking on the obvious question of FAA preemption under Concepcion and later decisions that have upheld precluding class procedures in consumer arbitrations.  The narrowness of this decision leaves open the question in California courts of the continued validity of the Broughton-Cruz rule and its prohibition against  waiving claims for public injunctive relief by agreeing to individual arbitration

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.

A California Litigation Blog