Sunday, July 13, 2014

FYI: Cal Sup Ct Reverses Trial Court Judgment in LO Wage and Hour Class Action, Criticizes Statistical Sampling Used to Determine Liability

The Supreme Court of California recently held that a class action trial management plan must permit the litigation of relevant affirmative defenses, even when those defenses turn on individual questions.  In so ruling, the Supreme Court criticized using a sampling of class members to determine liability.

A copy of this opinion is available at:

A group of business banking officers (BBOs) sued their bank employer (Employer) for alleged failure to pay overtime compensation, claiming they had been misclassified as exempt employees under the outside salesperson exemption. 

The BBOs were employed to sell bank products, including loans and lines of credit, to small business customers.  The Employer had classified the BBOs as exempt employees pursuant to the “outside salesperson” exemption.

As you may recall, in California, persons entitled to overtime pay include those “employed in any occupation, trade, or industry, whether compensation is measured by time, piece, or otherwise, but [do] not include any individual employed as an outside salesman …” Calif. Labor Code section 1171.  An “[o]utside salesperson” is one “who customarily and regularly works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities.”  Calif. Industrial Wage Commission, Wage Order No. 4-2001 (Jan. 1, 2001), subd. 2(M).

Unlike the corresponding federal provision, the California’s wage order definition of an outside salesman “takes a purely quantitative approach” and focuses exclusively on whether the employee spends more than 50% of the workday engaged in sales activities outside the office.  Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 797.

The trial court certified a class of 260 plaintiffs, and the parties later proceeded to trial.  The trial court devised a plan to determine the extent of Employer’s liability to all class members by extrapolating from a random sample.

Without input from either side’s statistical experts, the trial court “randomly” selected 20 of the BBOs, plus the two named plaintiffs, as a representative witness group (RWG).  The trial court instructed its clerk to randomly choose the twenty BBOs.  When several BBOs opted out of the class or failed to respond to the trial court’s order, the trial court simply replaced those RWG members with other BBOs.  At trial, the Employer was not allowed to introduce declarations or live testimony concerning the work habits of class members outside of the RWG.  The Employer was not allowed to argue that many of the class members outside of the RWG had been properly classified as “exempt” from overtime compensation requirements.

Based upon testimony from the RWG members, the trial court found that the Employer had misclassified the entire class of BBOs and was required to pay overtime compensation.  The trial court relied upon the Plaintiff’s statistics expert in determining damages.  It calculated the average number of unpaid overtime hours worked by the RWG members and then extrapolated that figure to cover the entire class of BBOs.  According to Plaintiff’s statistics expert, the margin of error was 43.3%.

This resulted in a verdict of approximately $15 million, and an average recovery of over $57,000 per person.  The Court of Appeal reversed, and the California Supreme Court granted review.

The California Supreme Court noted that “as a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.”  Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021-1022.  However, “class treatment” is not appropriate “if every member of the alleged class would be required to litigate numerous and substantial questions determining his individual right to recover following the ‘class judgment’” on common issues.  (City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 459.)

The Supreme Court also noted that in considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class.  The Court explained, “[A] defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability … Only in an extraordinary situation would a class action be justified where, subsequent to the class judgment, the members would be required to individually prove not only damages but also liability.”

The Court rejected the trial court’s practice of barring testimony from class members outside of the RWG:  “if liability is to be established on a classwide basis, defendants must have an opportunity to present proof of their affirmative defenses within whatever method the court and the parties fashion to try these issues. If trial proceeds with a statistical model of proof, a defendant accused of misclassification must be given a chance to impeach that model or otherwise show that its liability is reduced because some plaintiffs were properly classified as exempt.”

The California Supreme Court also criticized the trial court’s sampling technique.  The Court found that the RWG was too small and that the trial court should have considered input from the parties’ statistical experts prior to selecting the RWG. 

The Supreme Court determined that the RWG was not randomly selected. “[E]ven when selection procedures appear to be random, errors may arise that undermine randomness. For instance, nonresponse bias can occur if a sample is chosen randomly from a group containing only survey respondents.”  The Court recounted that several of the RWG members who had given favorable deposition testimony for the Employer later opted out of the lawsuit.  These former class members submitted declarations stating that Plaintiff’s counsel strongly encouraged them to opt out after they were selected for the RWG.  Finally, the Court found that the margin of error of 43.3% was so large that the resulting damages award violated due process.

Accordingly, the California Supreme Court reversed the trial court’s judgment, holding that the “trial court’s exclusion of all evidence about the work habits of BBOs outside the sample group and its implementation of a biased sampling plan were manifestly an abuse of the court’s discretion.”  The Court instructed that, “[o]n remand, the trial court must start anew by assessing whether there is a trial plan that can properly address both common and individual issues if the case were to proceed as a class action.”

In so ruling, the Court noted that its “opinion properly identifies the shortcomings of the representative witness group in this case and the trial court‘s failure to give due consideration to the individualized evidence that [Employer] sought to introduce in its defense,” and “we cannot have confidence in [the trial court’s] findings because the trial court did not use a valid representative witness group or consider individualized evidence that might have presented a more complete picture of the class.” 

Eric Tsai
McGinnis Wutscher Beiramee LLP
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