Saturday, September 14, 2019

FYI: Cal App Ct (2nd Dist) Upholds Denial of Class Cert Based on Survey and Statistical Sampling

The Court of Appeal for the Second District of California affirmed an order denying class certification in a wage and hour litigation, holding that plaintiffs' proposed anonymous, double-blind survey and statistical sampling failed to address individualized issues for liability and damages.

 

In so ruling, the Appellate Court held that the plaintiffs' trial plan was unmanageable and unfair because, among other things, the proposed survey deprived the defendants of the ability to cross-examine the witnesses and to assert defenses. 

 

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

 

In this putative class action, property inspectors (Plaintiffs) alleged that they were engaged by three service providers to perform property inspections for two insurance companies. 

 

Plaintiffs alleged they were employees of the insurers and service companies (Defendants) jointly, and Defendants failed to pay minimum wages and overtime (Cal. Lab. Code § 1194), furnish timely or accurate wage statements (Cal. Lab. Code § 226(e)), establish a policy for meal or rest breaks, or reimburse them for employment expenses (Cal. Lab. Code § 2802), and in so doing violated California's Unfair Competition Law (Bus. & Prof. Code § 17200, et seq.).

 

The Plaintiffs moved for class certification, supported by their expert's declaration that liability could be determined and damages calculated classwide by using "established survey methods and statistical analyses"  of a random sample of class members.

 

The trial court denied certification on the ground that Plaintiffs failed to show their status as employees could be established on predominantly common proof.

 

Plaintiffs appealed and the Appellate Court reversed the order, remanding with instructions for the trial court to evaluate the Plaintiffs' trial plan. 

 

On remand, the Plaintiffs' expert elaborated on the trial plan, proposing an anonymous, double-blind survey of all class members.  Specifically, the plan provided that all potential class members would be invited to participate in the survey and a telephone survey firm would conduct interviews and ask questions concerning:

 

(1) the amount of overtime worked, (2) the numbers of meal and rest breaks to which inspectors were entitled to take under California law but did not take (assume the law applied to these individuals), (3) the amount of time inspectors spent performing specific tasks of relevance to the claimed minimum wage violations, (4) the number of miles that inspectors drove to do their work, [and] (5) the amount of money that inspectors spent for other business expenses incurred in connection with their work.

 

The respondents would receive a small financial incentive to participate in the survey, and would be told their answers and participation were confidential.

 

The respondents would asked to recall, among other things, the time they spent doing inspection, the number of days per week worked beginning in 2005, the number of hours worked, when they took breaks and the duration of each break, whether they incurred expense, and which of the three service companies and only one of the insurers they worked for and for how long.

 

The survey did not include questions about the second insurer for unknown reasons.  When asked why, Plaintiffs' expert answered "I wasn't asked to do that." 

 

Using the sampling data from the survey, Plaintiffs' expert would generate estimated totals for each subclass, apportioned separately for inspections done for each of the Defendants, and provide a margin of error and confidence levels.

 

In opposition to Plaintiffs' trial plan, Defendants' expert identified several flaws in the proposed survey. 

 

First, the survey asked no questions related to the employee/independent contractor distinction, and in fact avoided questions about the degree of independence inspectors enjoyed. 

 

Specifically, the survey did not ask questions about the Defendants' knowledge or control of any facet of an inspector's workday, e.g., how many hours the inspector worked, what breaks were or could have been taken, or what meets were attended or expense incurred.  Defendants argued that this deficit left the independent contractor question unanswered and potentially skewed the survey results by artificially narrowing variances.

 

The expert also argued that the very precise recall required by the survey questions about events stretching back 10 years invited significant error.  Further, if the data showed that the respondents' experiences varied widely, the average may not be representative of the actual experiences of many members of class, and the anonymous nature of the survey led to inaccurate and unverifiable results.

 

The trial court again denied certification, finding Plaintiffs' statistical sampling unworkable because it did not specify which insurer's inspections were performed, or explain whether the inspectors' failure to take meal or rest  breaks was due to preference or to the exigencies of the job.  Also, the survey's anonymity deprived the Defendants from cross-examining witnesses to verify responses or test them for accuracy or bias.

 

This appeal followed.

 

As you may recall, " in wage and hour cases where a party seeks class certification based on allegations that the employer consistently imposed a uniform policy or de facto practice on class members, the party must still demonstrate that the illegal effects of this conduct can be proven efficiently and manageably within a class setting."   Duran v. U.S. Bank National Assn. (Cal. 2014) 59 Cal. 4th 1, 28-29.  " Class certification is appropriate only if 'individual questions can be managed with an appropriate trial plan.'" Id., at 27.

 

The Plaintiffs argued that their expert's survey was "methodologically correct and scientifically valid, captured all pertinent variation in hours worked among inspector, eschewed irrelevant questions, and produced reliable and accurate results."

 

The Appellate Court explained that the problem with the survey was not the scientific measurement procedure, rather it failed as a trial plan because it did not fairly establish Defendants' liability on a classwide basis as to any claim.

 

With respect to overtime and meal and rest breaks, the Appellate Court noted that "simply having the status of an employee [did] not make the employer liable for a claim for overtime compensation or denial of breaks."   Instead, "[a]n individual employee establishe[d] liability by proving actual overtime hours worked without overtime pay, or by providing that he or she was denied rest or meal breaks."

 

The Appellate Court found that Plaintiffs' expert asked no questions about the second insurer, and thus, it was unclear how Plaintiffs could establish the liability of the second insurer without considering whether any inspector worked for this insurer more than eight hours in a day or 40 in a week (Lab. Code § 510).

 

The Appellate Court explained that Plaintiffs' plan also failed with respect to their minimum wage claim (Lab. Code § 1194), because the inspectors were paid a piece rate for each inspection performed and Plaintiffs offered no explanation how they could establish the number of inspections performed for the second insurer, how long they took, or what the second insurer paid for them.

 

Regarding the meal and rest period claims, the Appellate Court explained that the inspectors performed inspections for a number of insurance companies, including non-parties, often in the same day, but the survey failed to ask if anyone ever worked long enough in a day for either of the insurance companies in this case to be entitled to a meal or rest period from that insurer or any of its three co-employers.

 

Further, the Appellate Court noted that "plaintiffs made no effort to explain how they could establish through common proof what expenses, if any, inspectors incurred for any particular insurer, or how they were deprived of wage statements."

 

The Appellate Court determined that the anonymous survey deprived the Defendants of any meaningful examination of any witnesses, as Plaintiffs expert did not know who the survey respondents were and why any class member had chosen not to participate.

 

After the Appellate Court issued an opinion affirming the trial court's ruling, Plaintiffs petitioned for rehearing, arguing that Defendants' liability could be established independent of the survey by examining the various policies and contracts demonstrating all the Defendants were co-employers that had the right to control Plaintiffs' work.

 

Plaintiffs argued that liability may be established classwide by the failure of one employer to pay overtime or provide a rest break on even a single occasion.

 

This approach, in the Appellate Court's view, was similar to that rejected in Duran, where the plaintiffs alleged their employer had misclassified them as outside sales persons, rendering them exempt from overtime laws.  In Duran, the plaintiffs proposed to proceed classwide with an initial liability phase and a second phase to address the extent of damages, but the California Supreme Court held that whether a given employee is properly classified depends in large part on the employee's individual circumstance.  Duran, 15 Cal.4th at 36. 

 

The Appellate Court also observed that in Brinker, the California Supreme Court analyzed the elements of the off-the-clock claim before it, holding that "liability is contingent on proof [the employer] knew or should have known off-the-clock work was occurring."  Brinker, 53 Cal.4th at 1024. 

 

As the Appellate Court explained, "an employer's liability for failure to provide overtime or rest breaks will depend on the employees' individual circumstance.  Liability to one employee by one employer does not establish even that employer's liability to other employees, much less the liability of a joint employer to any employee."

 

The Court continued, explaining that "[e]ven if a class action trial could determine that an employer is liable to an entire class for a consistently applied policy or uniform job requirements and expectations contrary to Labor Code requirements, or if it knowingly encouraged a uniform de factor practice inconsistent with the requires, any procedure to determine the defendant's liability to the class must still permit the defendant to introduce its own evidence, both to challenge the plaintiffs showing and to reduce overall damages."

 

Plaintiffs proposed that once the subclasses were certified and liability established in the first phase, class members could submit claims by answering a questionnaire, and any dispute could be resolved in "streamlined trials" where Defendants could cross-examine claimants and present their own witnesses. 

 

The Appellate Court explained that this approach would render any prior liability phase either duplicative or superfluous, as Defendants would likely raise several objections, and consequently the second phase could easily occupy the trial court for several months.

 

Finding that Plaintiffs' survey afforded "no fair, manageable way" to establish liability on common proof, the Appellate Court affirmed the trial court's order denying class certification.

 

 

 

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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Tuesday, September 10, 2019

FYI: 7th Cir Holds LLC Act Did Not Shield Owner From Liability for Fraudulent Loan Closings

The U.S. Court of Appeals for the Seventh Circuit recently ruled in favor of a bank suing to recover for a fraudulent loan scheme, finding that the Illinois LLC Act did not shield the closing agent company's owner from liability in a fraud scheme because he was substantially involved in the fraud and the scheme would have failed without his individual participation.

 

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

 

Straw buyers submitted fraudulent loan applications to a bank. The participants in the scheme used an attorney to represent the sellers at the closing.  The attorney owned the closing agent company, an Illinois LLC, which the participants used for the majority of the closings  (Title Company).  The closings took place at the attorney's office.

 

The bank gave closing instructions to the Title Company "to notify the bank immediately of any misrepresentations that would influence the bank's decision to make the loan" and to suspend the transaction when "the loan is owner occupied and the closing agent has knowledge that the borrower does not intend to occupy the property."

 

The attorney failed to comply with either requirement.  Instead, the attorney concealed the buyer's misrepresentations from the bank and instructed "closing agents to complete closings even when buyers were purchasing multiple properties."

 

The bank filed suit against the attorney in his individual capacity alleging multiple fraud claims.  In particular, the bank alleged the attorney knew that the buyers were straw buyers in a fraud scheme that made false representations to the bank in their loan applications. 

 

After conducting a bench trial, the trial court found that the attorney knew of the fraudulent scheme as the Title Company's owner and as the attorney for the sellers in the transactions.  The trial court also found that the attorney substantially assisted in the fraud scheme. 

 

Accordingly, the trial court entered judgment in favor of the bank and against the attorney.  This appeal followed.

 

The Seventh Circuit first noted that to prevail on an Illinois fraud claim, the plaintiff must prove: "(1) a false statement of material fact; (2) known or believed to be false by the person making it; (3) an intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from such reliance."  In addition, an Illinois aiding and abetting claim requires that "(1) the party whom the defendant aids performed a wrongful act causing an injury, (2) the defendant is aware of his role when he provides the assistance, and (3) the defendant knowingly and substantially assisted the violation."

 

The Seventh Circuit examined the attorney's argument that the trial court erred because the Illinois Limited Liability Company Act shielded him from liability. Under the Illinois LLC Act "the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager." 805 ILCS 180/1010(a).

 

The attorney individually participated in each closing as the seller's counsel and personally directed the Title Company's employees to conceal the fraud from the bank.  Thus, the Seventh Circuit held that section 10-10 of the Illinois LLC Act does not shield the attorney from liability for participating in the fraud scheme because the judgment was based on his individual conduct, not his membership in the LLC. 

 

The Seventh Circuit also rejected the attorney's argument that as the seller's attorney he cannot be personally liable for aiding and abetting the fraud because it is not possible for an agent and their principal to conspire under Illinois law.  The argument failed because the attorney waived it and because it is contrary to Illinois law.  In Illinois, there is no "per se bar that prevents imposing liability upon attorneys who knowingly and substantially assist their clients in causing another party╩╣s injury.  See, e.g., Thornwood, Inc. v. Jenner & Block, 799 N.E.2d 756, 768 (Ill. App. Ct. 2003). 

 

Here, the attorney reviewed fraudulent closing statements, held the closings at his law office, and attended the closings. He knew about and was substantially involved in the fraud scheme.  Thus, acting as the seller's attorney in the transactions did not protect the attorney from liability for participating in the fraud.

 

Therefore, the Seventh Circuit affirmed the trial court's order in favor of the bank and against the attorney.

 

 

 

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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Sunday, September 8, 2019

FYI: 3rd Cir Holds QR Code on Envelope Violates FDCPA

The U.S. Court of Appeals for the Third Circuit recently held that a debt collector violated the federal Fair Debt Collection Practices Act ("FDCPA") when the envelope it sent to a debtor displayed an unencrypted code that revealed the debtor's account number when scanned.

 

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

 

A consumer defaulted on her credit card and the bank that issued it assigned the account to a debt collection agency. The debt collector sent the consumer "a collection letter as a pressure-sealed envelope that had a QR [or quick response] code printed on its face. QR codes … can be scanned by a reader downloadable as an application (better known as an 'app') on a smartphone."

 

Upon being scanned, the QR code reader revealed a sequence of letters, symbols and numbers, part of which was the internal reference number associated with the consumer's account at the debt collection agency."

 

The consumer filed a putative class action lawsuit against the debt collection agency, alleging that it violated subsection 1692f(8) of the FDCPA, which prohibits debt collectors from "[u]sing any language or symbol other than the debt collector's address, on any envelope when communicating with a consumer by use of the mails."

 

Both sides moved for summary judgment. The trial court granted plaintiff's motion as to liability based on the Third Circuit's ruling five years ago in Douglass, which "held that a debt collector violates § 1692f(8) by placing on an envelope the consumer's account number with the debt collector." The trial court reasoned that "there was no meaningful difference between displaying the account number itself and displaying a QR code — scannable 'by any teenager with a smartphone app'— with the number embedded."

 

The trial court also rejected both the debt collector's argument that the plaintiff "had not 'suffered a concrete injury,' explaining that [plaintiff] was injured by "'the disclosure of confidential information[,]'" and the "argument that it was protected by the FDCPA's 'bona fide error defense.'"

 

The trial court entered judgment for the plaintiff and the certified class.  The debt collector appealed.

 

On appeal, the Third Circuit first addressed whether plaintiff had standing to sue, the first step in determining whether it had subject matter jurisdiction over the case. The Court explained that in order to satisfy the "case or controversy" required for a federal court to hear a case under Article III of the Constitution, the plaintiff must "have standing to sue. … Standing has three elements: '[t]he plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.' … An 'injury in fact' is one that is 'concrete and particularized.' … To be concrete, the injury 'must actually exist.' … It must be 'real,' not 'abstract.'"

 

After reviewing the Supreme Court's ruling in Spokeo to determine whether the plaintiff's intangible injury was sufficiently concrete, the Court concluded that plaintiff "suffered a concrete injury when her debt collector sent her a letter in an envelope displaying a QR code that, when scanned, revealed her account number with the debt collection agency."

 

The Court reasoned that it had already applied the principles set forth in Spokeo in its 2018 decision in St. Pierre v. Retrieval-Masters Creditors Bureau, which "held that a debtor suffered a concrete injury when a debt collector … sent him a collection letter in an envelope displaying his account number with the debt collector."

 

The third Circuit went on to explain that "[i]n Douglass, we had held that displaying a consumer's account number on an envelope was no 'benign,' explaining that such conduct 'implicates a core concern animating the FDCPA—the invasion of privacy.' … Thus, in St. Pierre, we concluded that the harm inflicted by exposing the debtor's account number was 'a legally cognizable injury.' … We explained that, because the harm involves the invasion of privacy, it 'is closely related to harm that has traditionally been regarded as providing a basis for a lawsuit in English and American courts.' … And therefore, per Spokeo, the plaintiff in St. Pierre had standing."

 

Here, the Court concluded that even though it did not expressly address the QR-code issue in Douglass and St. Pierre, "the reasoning of those two cases inevitably dictates that [the plaintiff] has suffered a concrete injury. … Whether disclosed directly on the envelope or less directly through a QR code, the protected information has been made accessible to the public…."

 

Because according to the Court the disclosure was itself a concrete harm, the plaintiff did not have to show "that someone had actually intercepted her mail, scanned the barcode, read the unlabeled string of numbers and determined the contents related to debt collection—or it was imminent someone might do so."

 

Having held that plaintiff had standing to sue, the Court considered whether the trial court correctly held that "she had a successful claim under the FDCPA."

 

First, it analyzed the text of § 1692f(8), finding "[t]here is no dispute that that provision plainly prohibits the QR code."

 

Next, the Court rejected the debt collector's argument "to read a benign language exception into § 1692f(8)" because a literal reading "would seemingly prohibit including 'a debtor's address and an envelope's pre-printed postage,' as well as 'any innocuous mark related to the post, such as 'overnight mail' and 'forwarding and address correction requested.'"

 

The Third Circuit reasoned that the disclosure of the account number itself was an invasion of privacy. "As explained above with respect to standing, the harm here is still the same — the unauthorized disclosure of confidential information. And if such disclosure was not benign, disclosure via an easily readable QR code is not either. Protected information has still been compromised."

 

Thus, the Court affirmed the trial court's holding that the debt collector violated the FDCPA by sending "an envelope displaying an unencrypted QR code that, when scanned, reveals the debtor's account number."

 

The Third Circuit also rejected the debt collector's bona fide error defense because "the bona fide error defense in § 1692k(c) does not apply to a violation of the FDCPA resulting from a debt collector's incorrect interpretation of the requirements of that statute.' … Put differently, 'FDCPA violations forgivable under § 1692k(c) must result from 'clerical or factual mistakes,' not mistakes of law.'" The debt collector did not make a mistake of fact, but instead "just misunderstood its obligations under the FDCPA." By arguing "that it 'mistakenly believed that its conduct could not conceivably violate the FDCPA[,]" the debt collector essentially admitted that it made a mistake of law, not one of fact.

 

Accordingly, the trial court's judgment was affirmed.   

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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