FYI: 8th Cir Reverses Data Breach Class Settlement, Holds Appellate Bond Not to Include Delay-Based Administrative Costs

In a data breach putative class action, the U.S. Court of Appeals for the Eighth Circuit recently held that trial court had not conducted the required "rigorous analysis" of Federal Rule of Civil Procedure 23(a)'s class certification prerequisites when certifying the settlement class or when evaluating arguments raised by class objectors. 

 

Additionally, the Eighth Circuit also reversed the trial court's ruling on the amount of the appeal bond, holding that an appellate bond should not include costs associated with delays in administering a class action settlement while the matter was on appeal.

 

A copy of the opinion is available at: Link to Opinion

 

As you may recall, Target announced a security breach in 2013 that compromised the payment card data and personal information of approximately 110 million customers.  Consumers brought a class action against Target and eventually agreed to settle on behalf of a class that included all persons in the U.S. whose information was compromised as a result of the data breach. 

 

The trial court preliminarily approved the class and the settlement which created a $10 million settlement fund and an additional $6.75 million to the class counsel, and required Target to make specific data security improvements.  The settlement fund was to be distributed first to class members with documented losses, with the balance distributed equally among the class members with undocumented losses. Class members with no loss would receive nothing even if they incurred a future loss.

 

Two class members objected asserting inadequate compensation to the settlement class members, and excessive attorney' fees.  Another class member additionally asserted that the class failed to meet Rule 23(a) prerequisites.

 

The objectors argued that the class representatives were inadequate because they had alleged documented losses and would receive compensation, while the objectors and many others had no documented losses yet, such that they would receive no compensation, even if they incurred future losses. The objectors requested that the court certify and appoint separate counsel for a separate sub-class for those without documented losses who were set to receive zero compensation. 

 

The trial court overruled the objections, issued a final certification of the class and approved the settlement.

 

As you may recall, a district court may not certify a class unless it performs a "rigorous analysis" and is satisfied that the class meets Rule 23(a)'s certification prerequisites.  Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 351 (2011).  "Actual, not presumed, conformance with Rule 23(a)" is required.  Gen Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982). The trial court must continue to assure that the class is certifiable through the litigation, not just through the initial grant of certification.  Petrovic v. Amoco Oil Co., 200 F.3d 1140, 1145 (8th Cir. 1999).  In addition, the court must provide "close scrutiny" to guard the due process rights of absent class members.  Rattray v. Woodbury Cnty., 614 F.3d 831, 835 (8th Cir. 2010).

 

The Eighth Circuit analyzed what it means to provide a "rigorous analysis" of Rule 23 class certification prerequisites, and found that it must be more than simply repeating the language of Rule 23(a), but must include an adequate statement of the basic facts to show that each Rule 23 requirement is satisfied.  In addition, the Eighth Circuit held, the trial court must provide its reasoning for certification specifically enough so that the appellate court can provide meaningful review.

 

The Eighth Circuit held that the trial court had failed to meet that standard because, in its preliminary class certification, it had merely recited the Rule 23 prerequisites and stated that certification was proper. That, the Appellate Court explained, amounted to conclusions and not reasons, demonstrating that rigorous analysis had not taken place.

 

The Appellate Court further held that the trial court failed to continuously analyze the class certification ruling after the objectors raised issues that warranted inquiry into the propriety of certification and the possibility for an independent sub-class. The Eight Circuit found that to be an abuse of discretion and remanded the matter for the trial court to conduct and articulate a rigorous analysis of Rule 23(a) s certification prerequisites.

 

The Eighth Circuit enumerated the factors it expected to be included in the rigorous analysis.

 

The factors included whether the named representatives have common interests with the members of the class and will vigorously prosecute the interests of the class through qualified counsel, and whether there were any conflicts of interests between the named parties and the class they represent.

 

The Eighth Circuit further noted the important concerns raised by the objectors concerning whether an intra-class conflict existed between those who would recover funds and those who would not, whether that conflict prevents adequate representation, and if the conflict is fundamental, required a subclass, or separate attorney representation.  The Appellate Court took no position on those issues but demanded a satisfactory analysis from the trial court on those points.

 

Finally, the Appellate Court ruled on an issue of first impression for the Eighth Circuit:  whether costs associated with delays in administering a class action settlement while these issues were appealed may be included in an appeal bond under Federal Rule of Appellate Procedure 7. 

 

The Rule allows a trial court to "require an appellant to file a bond or provide other security in any form and amount necessary to ensure payment of costs on appeal." Fed. R. App. P. 7.  The Eighth Circuit noted that "[a]ppeal bonds are a type of guarantee for an appellee that an unsuccessful appellant can pay the costs the appellee incurs as a result of the appeal."

 

The Eighth Circuit held that Rule 7 costs on appeal included only those costs that the prevailing appellant could recover under a specific rule or statute to avoid creating "an impermissible barrier to appeal."  Adsani v. Miller, 139 F.3d 67, 76 (2nd Cir. 1998).  Applying this rule here, the Court held that the bond set by the trial court was excessive because it included a delay-based administrative costs, and ordered the trial court to reduce the bond consistent with the standard articulated.

 

Accordingly, the trial court's class certification orders and bond order were remanded for revisions consistent with the Eighth Circuit's opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Holds Section 8 Income Recipients Stated ECOA Claim Against Mortgage Lender, But Not Its Investor

The U.S. Court of Appeals for the Fifth Circuit recently held that a group of plaintiffs plausibly alleged claims for violations of the federal Equal Credit Opportunity Act (ECOA) by asserting that a mortgage lender refused to consider their Section 8 income in assessing their creditworthiness as mortgage applicants, and that they received mortgage loans on less favorable terms and in lesser amounts than they would have had their Section 8 income been considered.

 

Additionally, the Fifth Circuit held that ECOA does not encompass mortgage purchasers and investors who do not participate in the extension of mortgage loans, even when they have a policy of refusing to purchase mortgage loans that rely on Section 8 income.

 

A copy of the opinion is available at: Link to Opinion

 

Twelve individuals who received Section 8 housing assistance inquired about or applied for mortgage loans. Each sought to use their Section 8 income to make payments toward their desired new home mortgage loans.  All twelve of the individuals were allegedly denied a loan, or were extended a mortgage loan on allegedly less favorable terms, due to their Section 8 income.

 

The twelve individuals consisted of three groups: (1) individuals who applied directly to the mortgage lender ("originator applicants") (2) individuals who applied directly to the mortgage loan investor in its capacity as an originator ("investor applicants") and; (3) individuals who merely inquired about obtaining a mortgage loan ("inquirers")

 

The twelve individuals filed suit against the mortgage originator and the mortgage investor alleging discrimination in violation of ECOA on the basis of their receipt of public assistance income.  The defendants moved to dismiss for failure to state a claim, which the trial granted. The plaintiffs appealed.

 

As you may recall, the ECOA makes it illegal "for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . because all or part of the applicant s income derives from any public assistance program." 15 U.S.C. § 1691(a)(2).

 

To state a claim for relief under the ECOA, the plaintiffs must plausibly show that they were discriminated against in violation of the statute. More specifically, the complaint must plausibly allege that (1) each plaintiff was an "applicant"; (2) the defendant was a "creditor"; and (3) the defendant discriminated against the plaintiff with respect to any aspect of a credit transaction on the basis of the plaintiff's membership in a protected class. See 15 U.S.C. §§ 1691(a), 1691a(b), 1691a(e), 1691e(a).

 

First, the Fifth Circuit addressed the investor applicants. The investor applicants were those that applied for a mortgage loan directly with the mortgage investor defendant in its capacity as a mortgage originator. The investor applicants alleged only that the investor refused to consider their Section 8 income based on their guide. The guide stated that it would not purchase mortgage loans originated by other lenders when based on Section 8 income. The investor applicants alleged this was a violation of the ECOA.

 

However, the Fifth Circuit noted that the ECOA does not prohibit discrimination with respect to mortgages purchased on the secondary market. 

 

The Court noted that the other allegations asserted by the investor applicants were merely improper formulaic recitations of the elements of a cause of action. Thus, the Fifth Circuit affirmed the trial court's dismissal as to the investor applicants' allegations.

 

The Fifth Circuit then addressed the inquirers. The inquirers sought information from the originator but never applied for a loan.

 

Under the ECOA, and "applicant"  is defined as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit." 15 U.S.C. § 1691a(b).  The Court noted that the common meaning of the word "apply" means "to make an appeal or request especially formally and often in writing and usually for something of benefit to oneself." 

 

Thus, the Fifth Circuit held, the plain language of the ECOA unmistakably provides that a person is an applicant only if he or she requests credit.  Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937, 941 (8th Cir. 2014) (citing Webster s Third New International Dictionary 105 (2002)) (alterations omitted), aff'd by an equally divided Court, 136 S. Ct. 1072 (2016).

 

The Court noted that the inquirers did not allege that they applied for a loan or otherwise requested credit. They only alleged that they contacted the originator as to financing a home. The Fifth Circuit found these allegations insufficient to plausibly show that the inquirers applied for credit.

 

The inquirers cited case law where the Fifth Circuit reversed a holding that an applicant did not have standing because he failed to complete his application. However, the Court noted that in the instant case, the inquirers never alleged they submitted any sort of application or requested any credit.

 

The inquirers also argued that they failed to apply because the originator discouraged them from applying. The Court rejected this argument because the ECOA allows only an "aggrieved applicant" to bring a private cause of action, 15 U.S.C. § 1691e, and discouraging a prospective applicant cannot be brought as a violation of the ECOA.

 

Because the inquirers failed to allege they were applicants under the ECOA, the Fifth Circuit affirmed the trial court's dismissal as to the inquirers.

 

Third, the Fifth Circuit addressed the originator applicants. Each of the originator applicants filled out a loan application and submitted it to the originator for evaluation.

 

The applicants allege that they were denied credit and financing because the originator asserted it did not have an investor that would purchase a loan allowed for their Section 8 income to be utilized in calculating the debt to income ration and for qualifying purposes.  In addition, one of the originator applicants alleged she was specifically told Section 8 income would not qualify her.

 

The Fifth Circuit found that these allegations were sufficient to state a claim under ECOA for Section 8 income not properly being considered. Accordingly, the Court reversed the trial court's dismissal as to the originator applicants' claims against the originator.

 

The originator applicants also alleged ECOA violations against the investor. They allege that the investor's secondary market policy of refusing to purchase mortgages that rely on Section 8 income determined the originator's policy of discriminating against applicants with Section 8 income.

 

The Fifth Circuit noted that the ECOA defines a "creditor" as "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e).

 

The Court noted that the originator applicants did not allege that they applied directly or indirectly to the investor. Thus, the Court held that the investor could only be held liable as a creditor to the applicants if it was an "assignee of an original creditor who participates in the decision to extend, renew, or continue credit." 15 U.S.C. § 1691a(e).

 

The Fifth Circuit found that the originator applicants failed to state a claim against the investor because they did not allege that it participated in the decision to extend credit. The applicants merely alleged that the originator was a seller in the secondary market and the investor was a purchaser. There were no allegations of participation by the investor.

 

Of note, the Consumer Financial Protection Bureau (CFPB) filed an amicus brief arguing that the definition of creditor includes the conduct of the investor in the secondary market. However, the Fifth Circuit rejected the CFPB's attempted broad expansion of ECOA liability.

 

In sum, Fifth Circuit held that the investor applicants and inquirers did not state a claim for relief against the originator and/or investor under ECOA, and thus the trial court's dismissal as to those allegations was affirmed. Similarly, the Fifth Circuit held that the originator applicants failed to state a claim for relief against the investor under ECOA, and thus the trial court's dismissal was affirmed as to those allegations as well.

 

However, the Fifth Circuit held that the originator applicants did state a claim for relief against the originator and the trial court's was reversed as to those allegations.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Fla App Ct (3rd DCA) Holds Non-English Speakers Could Not Avoid English Language Contract Terms

The Third District Court of Appeal of the State of Florida recently reversed a trial court's denial of a car dealership's motion to compel arbitration, holding that because there was no evidence that the buyers, who did not read or speak English, attempted to learn or have explained to them what they were signing, or that the dealer's representatives prevented them from doing so or misrepresented the terms, the trial court erred by finding there was no valid agreement to arbitrate.

 

A copy of the opinion is available at:  Link to Opinion

 

A car dealership sold cars to three individuals who did not read of speak English. The buyers signed two documents at the time of purchase, a purchase order and a financing agreement, both of which contained arbitration clauses that were not identical.

 

The buyers filed a putative class action against the dealership and its finance director, alleging that they violated the Florida Deceptive and Unfair Trade Practices Act ("FDUPTA"), the Florida Motor Vehicle Retail Sales Finance Act, and were unjustly enriched, because blank spaces in the purchase documents were allegedly filled in after the buyers' execution, adding extra fees and products without the buyers' consent.

 

The dealership moved to compel arbitration and, after an evidentiary hearing, the trial court denied the motion, finding that because the dealership's sales staff never tried to explain the arbitration clause to the buyers.  Moreover, the trial court held that because the arbitration clauses in the two documents conflicted, there was no meeting of the minds to arbitrate. The dealership appealed this non-final order.

 

On appeal, the Third District recited that "[t]he trial court's entry of an order denying a motion to compel arbitration 'presents a mixed question of law and fact. … We review the trial court's legal determination and interpretations of contract de novo … and presume that the trial court's findings of fact are correct unless they are clearly erroneous. … '[T]here are three elements for courts to consider in ruling on a motion to compel arbitration of a given dispute: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.'"

 

The Court then addressed the first element, whether a valid written agreement to arbitrate existed. First, it rejected the trial court's reliance on the Florida Supreme Court's 2014 decision in Basulto v. Hialeah Auto. because that case involved buyers who were rushed into signing without being given an opportunity to ask questions or get help interpreting the documents and the dealership's staff allegedly made misrepresentations to the buyers regarding what they were signing.  The Appellate Court noted that these allegations were not present here.

 

Having concluded that Basulto was inapposite, the Third District applied "the general and longstanding legal principles regarding contract formation." First, it pointed out "the well-established principle that one who signs a contract is generally bound by the contract[,]" citing Florida Supreme Court precedent for the proposition that "[n]o party to a written contract in this state can defend against its enforcement on the sole ground that he signed it without reading it."

 

The Appellate Court cited two Florida Courts of Appeal rulings holding that "[i]f a person cannot read the instrument, it is as much his duty to procure some reliable person to read and explain it to him, before he signs it, as it would be to read it before he signed it if he were able to do so."

 

The Third District concluded that because the buyers had the burden of seeking clarification of the terms of the purchase documents and failed to do, and there was no evidence that the dealer's staff mispresented the terms or prevented them from reading the documents, "the trial court erred as a matter of law by invalidating the arbitration agreement on this basis."

 

The Appellate Court then turned to whether the alleged conflict between the arbitration clauses in the purchase order and financing agreement rendered it impossible for the buyers to understand them.

 

First, the Third District explained that "it is well-settled law that a single term in an arbitration clause cannot be interpreted in isolation, but must be read together with the rest of the contract." In addition, "'[a] primary rule of contract construction is that where provisions in an agreement appear to conflict, they should be construed so as to be reconciled, if possible.'"

 

After examining the text of each arbitration clause, the Appellate Court found that no actual conflict between the two existed. First, the Third District reasoned that the fact that the purchase order waived the right to a jury trial, while the financing agreement "could be read to allow for a jury trial if the dispute is not submitted for binding arbitration[,]" was irrelevant because the dealership had already demanded arbitration and both documents required the parties to "resolve their claims by binding arbitration, which obviously precludes any consideration of a jury trial."

 

The Third District also noted that there was no irreconcilable conflict between the purchase order's requirement that the parties submit to non-binding mediation before submitting their claims to binding arbitration because they didn't asked the trial court to compel it.

 

The Appellate Court then turned to examine the choice of law provisions, which the trial court found were in irreconcilable conflict. The purchase order required that arbitration be "in accordance with the Florida Arbitration Code" (FAC), while the financing agreement gave the buyers, subject to the dealer's approval, the option to choose from several arbitration organizations and provided that arbitration would be governed by the Federal Arbitration Act (FAA).

 

The Court again found that had the trial court engaged in the required attempt to reconcile, it would have discovered that no irreconcilable conflict existed because the Florida Supreme Court had already ruled twice that "an arbitration clause in a contract involving interstate commerce is subject to the FAC, to the extent that the FAC does is not in conflict with the FAA."

 

The Court found that there was no need to determine whether a conflict actually existed between the two laws and the federal preempted the state because the relevant provisions either did not apply or were "virtually identical" and thus no irreconcilable conflict existed.

 

The purchase order required all mediation and arbitration proceeding to take place in Miami-Dade County, while the financing agreement provided that arbitration hearings would take place "in the federal district in which the Buyers reside unless [the dealer] "is a party to the claim or dispute, in which case, the hearing will be held in the federal district where the contract was executed." The Court found that these two provisions did not conflict and "are easily harmonized" because "the contracts in question were executed in Miami-Dade County, which is the federal Southern District of Florida, and is where the Buyers filed their lawsuit against [the dealer]."

 

The Court also found there was no conflict between the financing agreement's delegation to the arbitrator of the power to decide the threshold question of arbitrability and scope of the arbitration clause, and the purchase order's silence on the issue. "More importantly, because there is no dispute in this case that the Buyers' claims fell within the scope of the broad arbitration provisions, there is certainly no 'irreconcilable conflict.'"

 

The financing agreement barred class actions, while the purchase order was silent on the issue. The Court found that this did not create an irreconcilable conflict because "under the FAA 'a party may not be compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." The Court concluded that "[b]ecause the financing agreement expressly bars class action proceedings and, in the purchase order, the parties did not expressly agree to permit class actions, then under both documents, class actions are not permitted."

 

Regarding the cost of arbitration, the purchase order required the cost of mediation and arbitration be shared equally by the parties, while the financing agreement required the dealer to advance the costs, up to $2,500, and gave the arbitrator discretion to order reimbursement. The Court agreed with the dealer that these provisions could easily be reconciled "by requiring the Dealer to advance the fees of arbitration up to a maximum of $2500 before requiring that the Dealer and the Purchaser bear the remaining costs of arbitration equally."

 

As to the right to appeal the arbitrator's award, the financing agreement provided that "in the event the arbitrator's award is $0 or in excess of $100,000, or it includes an award granting injunctive relief, then a party may request a new arbitration by a three-arbitrator panel." The purchase order was silent on this issue. Accordingly, the Court concluded that "because the purchase order was silent as to this issue, and the parties agreed to this procedure in the financing agreement, then the parties agreed to the procedure. As such there is no 'irreconcilable conflict.'"

 

Regarding attorney's fees, the purchase order provided that the prevailing party was entitled to recover its reasonable attorney's fees, while the financing agreement provided that "each party shall be responsible for its own attorney's fees 'unless awarded by the arbitrator under applicable law,' and 'the arbitrator shall apply governing substantive law in making an award.'" The Appellate Court found there was no conflict, much less an irreconcilable one, because the "FDUTPA entitles the prevailing party to recover its fees."

 

Finally, the Third District addressed the trial court's finding that the terms of the arbitration clauses were unconscionable. First, it explained that "the party seeking to avoid arbitration has the burden to prove both procedural and substantive unconscionability. … '[W]hile both elements must be present, they need not be present to the same degree.' … Procedural unconscionability deals with whether, given the totality of the circumstances, the parties had a meaningful choice to refuse the contract terms. … Substantive unconscionability deals with the reasonableness of those terms."

 

The Appellate Court reasoned that even though the contracts at issue could be characterized as "adhesion contracts," "[i]t is important to inquire into additional surrounding circumstances, such as whether a party could obtain the desired product or services elsewhere, whether one party pressured or rushed the other into signing a contract, or whether the party was otherwise precluded from inquiring into the terms of the agreement."

 

Because the arbitration clauses were not in irreconcilable conflict, and because the dealer had no obligation to explain the clauses to the buyers in Spanish, and because the buyers had "a full and fair opportunity to inquire into the terms of the documents, and they declined to do so," the Third District refused to allow the buyers "to escape the binding effect of their unequivocal assent to the arbitration clauses by claiming that [the dealer] did not explain the terms."

 

Given these facts, the Third District held that the fact that the arbitration clauses were "offered on a "take-it-or-leave-it" basis" was not enough to prove that the buyers' assent to arbitration was "procedurally unconscionable."

 

Because the buyers "failed to prove any degree of procedural unconscionability," the Third District concluded that "the arbitration agreements contained in the purchase order and financing agreement are not unconscionable."

 

The Appellate Court found that as a matter of law the trial court's reasons for denying the dealer's motion to compel arbitration were "flawed".  Accordingly, the Appellate Court reversed and remanded the case for further proceedings consistent with its opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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FYI: 2nd Cir Reverses Judgment in Favor of Bank Employer on "Remote Work" Pregnancy Discrimination Claims

In a case involving allegations that a bank employer violated state and federal laws by not allowing an employee to work remotely from home when she became pregnant, the U.S. Court of Appeals for the Second Circuit recently vacated in part the trial court's judgment adopting the jury's verdict in the bank's favor and the trial court's disqualification order in the bank's favor, and dismissed the appeal in part as to the employee's claim under the New York Human Rights Law (NYSHRL), remanding for further proceedings.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff employee began working at a bank in Buffalo, New York in the bank's information technology department. She worked with a team which did "system testing of computer programs for bank applications."

 

The plaintiff employee resigned and moved to Los Angeles because her husband obtained a new job there. Her supervisor suggested that she continue to work remotely through the bank's "Alternative Work Arrangement (AWA)" policy, which provided in relevant part that "[a]n employee's failure to resume [a] traditional work schedule or location upon revocation of an AWA will be considered a voluntary resignation of employment."  The plaintiff employee accepted and began working remotely from Los Angeles.

 

As part of an overhaul of the bank's online banking system, the bank's management reorganized the team with which the plaintiff employee worked and gave notice that all AWAs would be reviewed. The next day, the plaintiff employee notified her new supervisor that she was pregnant.

 

Shortly thereafter, management decided that team leads must be physically present at least two days per week in Buffalo and so notified the plaintiff employee.  The plaintiff employee asked that her commute be delayed until after she gave birth, but her request was denied.

 

The plaintiff employee sent her supervisor a doctor's letter recommending that the plaintiff employee refrain from travel during her pregnancy for health reasons, but management concluded there was not enough work that did not require her presence in Buffalo on a special project to keep her occupied.

 

The bank gave the plaintiff employee notice that she must "either permanently relocate to Buffalo within 30 days or apply for and, if eligible, take early short-term disability leave, allowing her to remain in California through the end of her pregnancy. If she chose neither of these options, she would be terminated and given eleven weeks of severance pay."

 

The plaintiff employee rejected the offer and hired an attorney, who sent a demand letter to the bank. The bank held a telephone conference with the plaintiff employee's counsel, which both agreed at the onset was subject to Federal Rule of Evidence 408, which provides that offers of settlement are inadmissible in later proceedings under certain conditions.

 

During the phone call, the bank agreed to reinstate the plaintiff employee and allow her to work remotely from Los Angeles for the remainder of her pregnancy, but an "explicit statement was made that the reinstatement offer was conditioned upon the execution of a release of [the plaintiff employee's] claims for monetary damages."

 

The plaintiff employee filed both a proceeding charging discrimination before the Equal Employment Opportunity Commission (EEOC) and a lawsuit in federal court. Her amended complaint alleged that the bank "(i) engaged in unlawful interference under the Family Medical Leave Act (FMLA), 29 U.S.C. § 2601 et seq., the California Family Rights Act, Cal. Gov't Code § 12945.2, and the California Pregnancy Disability Leave Law, Cal. Gov't Code § 12945(a); (ii) unlawfully retaliated under the FMLA, Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., the [Americans with Disabilities Act] ADA, 42 U.S.C. § 12101 et seq., and the NYSHRL, N.Y. Exec. Law § 290 et seq.; (iii) unlawfully discriminated under Title II, the ADA and the NYSHRL; and (iv) failed to provide reasonable accommodation under the ADA, the NYSHRL, and the California Fair Employment and Housing Act (FEHA), Cal. Gov't Code § 12940."

 

Prior to trial, the plaintiff employee filed a motion in limine pursuant to Federal Rule of Civil Procedure 408 seeking to exclude the bank from offering in evidence any settlement offer it made to reinstate the plaintiff employee in return to settling the case. In opposition, the bank "argued, first, that the reinstatement offer was admissible to show that appellant failed to mitigate damages and, second, should not be excluded under Rule 408 because the offer was unconditional, i.e., not contingent on [the plaintiff employee] releasing [the bank] from liability."

 

The trial court denied the motion after an evidentiary hearing, concluding "that there was 'no evidence to suggest that the offer of reinstatement was conditioned upon the compromise of the plaintiff's claims,' and, therefore the evidence of the reinstatement offer was admissible to show that [the plaintiff employee] had not attempted to mitigate damages." In addition, the trial court disqualified both of the plaintiff employee's attorneys from continuing as trial counsel based on the "advocate-witness rule because they were the only witnesses who could testify before the jury as to whether [the bank] extended an unconditional offer and whether appellant unreasonably rejected that offer."

 

The case went to jury trial, and at the close of the evidence, the trial court granted the bank's motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(a) "on a number of appellant's claims, including the failure to accommodate under the NYSHRL. The court also declined to instruct the jury that the ADA imposes an affirmative duty on employers to engage in an interactive process with all employees who have requested accommodations."

 

The jury returned a verdict in the bank's favor on the four remaining claims of "interference under the FMLA, retaliation under the FMLA, failure to accommodate under the ADA, and failure to accommodate under the California FEHA." The plaintiff employee appealed the verdict.

 

On appeal, the Second Circuit first addressed the admissibility of the reinstatement offer and attendant attorney disqualification, concluding that the trial court committed an error that was not harmless by admitting evidence of the reinstatement offer and, because the plaintiff employee's counsel's disqualification was based on the improper admission of the evidence, they could resume their role as trial counsel.

 

The Appellate Court reasoned that Federal Rule of Civil Procedure 408 "prohibits, inter alia, the admission of 'evidence … to prove or disprove the validity or amount of a disputed claim …: (1) … offering valuable consideration in … attempting to compromise the claim.'"

 

The Second Circuit pointed out that during the telephone conference in question, counsel started the call "by agreeing that Rule 408 would govern the conversation. Of course, such an agreement by itself does not preclude a party from making an unconditional offer, but it does suggest that parties here were hoping to take advantage of Rule 408's protection—protection available only for conditional offers." In addition, the Court reasoned that the bank's testimony before the EEOC was an admission that "the reinstatement offer was conditioned upon dropping the lawsuit and its monetary demand, eliminating, as a matter of law, any factual issue as to whether the offer was conditional."

 

Accordingly, the Court vacated the judgment "insofar as it adopted the jury's verdict" and "insofar as it adopted the [trial] court's order … disqualifying [counsel], because that order rested on the erroneous admission of evidence relating to [the bank's] reinstatement offer."

 

The Second Circuit then rejected the plaintiff employee's argument that the trial court erred by failing to instruct the jury that "a defendant's failure to engage in an interactive process is alone sufficient to support a failure-to-accommodate claim under ADA [, holding,] however that the district courts may admit an employer's failure to engage in an interactive process as evidence of discrimination under the ADA."

 

The Second Circuit agreed with its sister courts that "failure to engage in an interactive process does not form the basis of an ADA claim in the absence of evidence that accommodation was possible."

 

The Court then addressed the plaintiff employee's final argument that the trial court erred in granting the bank's motion for judgment as a matter of law on her failure to accommodate claims under the NYSHRL.  The Second Circuit reasoned that the plaintiff employee appealed "from the jury verdict entered in this action …, not from the district court's prior judgment as a matter of law," and therefore the plaintiff employee did not properly preserve the issue for appeal.

 

Accordingly, the trial court's judgment was vacated "in part, insofar as it adopted the jury's verdict and the district court's disqualification order." The Second Circuit also dismissed "the appeal in part, insofar as it pertains to claims under the NYSHRL", and remanded for further proceedings.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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