September 20, 2016

KEEPING CURRENT: A Mixed Bag: 2015 Supreme Court Term Produces Wins and Losses for Business in “Pocketbook” Cases

Jon Bible

From a business perspective, the past Supreme Court term produced a mixed bag of decisions, with wins, losses, and a lot of uncertainty. The latter is a function of the fact that in some instances a majority of justices, which is needed for a case to be precedent, seems to have been cobbled together via compromise opinions that are narrow in scope or that stated principles but then remanded the case to the lower court for final resolution. This is likely attributable, at least in part, to the death of Justice Scalia in February, when many cases were pending, as it has been speculated that the justices had to scramble at times to avoid a 4–4 split that would affirm the ruling below but deprive it of precedential value. In some cases there was a split anyway. In Friedrichs v. California Teachers Assn., for example, a 4–4 court affirmed a Ninth Circuit decision that public employees who do not join a union may be forced to pay dues to support its bargaining activities.

Given the nature of some issues involved, class action law seemed especially ripe for a landmark ruling. In Spokeo, Inc. v. Robins (see below), for example, Spokeo sought to gut federal laws allowing statutory damages based on a violation of their provisions; when aggregated in a class action, such damages can sum to ruinous amounts even for a technical violation that causes little or no concrete harm. That the court didn’t oblige and there was no “wow” decision in any other business field does not, however, mean that the significance of the term should be downplayed, for seeds were planted in some opinions that could take root and produce major changes in the law.

This article briefly reviews some of these cases. Given space constraints, it deals with the ones most likely to affect the liability of business litigants for damages and litigation expenses—their pocketbooks, in other words.

Spokeo may have the greatest impact. Compiling data from different sources, Spokeo produces profiles of people for use in various contexts, including employment. Robins claimed that his profile inaccurately stated that he is married, has children, is in his fifties, has a job, is affluent, and has a graduate degree. He filed a class action arguing that Spokeo is a credit reporting agency required by the Fair Credit Reporting Act to take steps to ensure the accuracy of its reports and that it willfully failed to so. This exposed Spokeo to liability for actual damages or statutory damages of $100–$1,000 per violation.

The central issue was whether Robins had standing to sue under Article III of the Constitution, which empowers federal courts to act only in live cases. For standing, one must prove a particularized (personal), concrete injury in fact traceable to the defendant and likely to be redressed by judicial decision. Robins alleged that the misinformation cost him job prospects, but the district court deemed this too speculative. The Ninth Circuit reversed, finding that the violation of a statutory right is an injury in fact and that Robins alleged a violation of his, not just others’, FCRA rights. Thus, he had shown a violation of a protected interest that was both particularized and concrete.

The Supreme Court agreed that Robins had shown a particularized injury, adding that plaintiffs who represent a class must show that they, not other, unidentified class members, have been injured, but faulted the analysis for not separately focusing on the “concreteness” issue. For the most part, its reasoning was straightforward. To be concrete an injury must be real, not abstract, and both tangible and intangible injuries may qualify. Congress may identify intangible harms which meet Article III requirements, and in the FCRA it sought to curb the dissemination of false information via procedures designed to decrease that risk. But the court then made seemingly contradictory statements. On the one hand it said that Robins could not get standing by alleging a bare procedural violation divorced from any concrete harm; for example, how the dissemination of an incorrect zip code could be harmful is difficult to see. On the other hand it said there may be cases in which the violation of a statutory procedural right is an injury in fact without the plaintiff having to allege any additional harm. As well, the risk of real harm may satisfy Article III requirements.

What all of this adds up to is unclear; indeed, the ruling is sufficiently murky that, as commentators have noted, both sides claimed victory. In the almost two months (as of August 10, 2016, the time of this writing) since Spokeo was announced, there have been 327 Westlaw citing references, and a cursory review shows that courts are all over the map in terms of what language is important and how to construe it. Some have said that it is still possible for proof of a statutory violation to confer standing, while others have said there must be proof that a violation caused concrete harm or a sufficient risk of it.

The bottom line is that plaintiffs must now be ready to talk in terms of the impact, not just existence, of violations. This could have huge implications for the plaintiffs’ bar, for laws such as the Fair Debt Collection Practices Act, Cable Communications Privacy Act, Truth in Lending Act, Video Privacy Act, and Telephone Consumer Protection Act rely on enforcement schemes similar to that of the FCRA and are targets for plaintiffs’ lawyers because of the lucrative statutory damages they offer. Under the TCPA, for example, each text message, phone call, or fax can lead to statutory damages of $500 to $1,500, and exposure in such cases can reach such staggering levels that companies doing their best to comply with the law nonetheless face enormous pressure to settle cases whether meritorious or not.

As for what Robins must prove on remand, the Ninth Circuit and Justice Ginsburg (dissenting) noted that he did not rest his case on Spokeo’s violations; instead, he claimed that his job prospects were harmed and he experienced anxiety due to the misinformation in his profile. Although this established concreteness for Ginsburg it was not enough for the majority, which didn’t even mention this. Keeping in mind the zip code analogy, it seems that Robins must cite specific ways in which the violations alleged caused him harm or a sufficient risk of it. How he can do this and what risk is enough are open questions, as is the question of whether all laws allowing statutory damages are now in jeopardy because of Spokeo. Spokeo cited 17 such laws in its brief.

Tyson Foods, Inc. v. Bouaphakeo was also a disappointment for business, which had hoped for bright-line, negative answers to two questions: (1) Whether a class action may be certified if the class contains hundreds of uninjured members, and (2) whether differences among class members may be ignored where liability and damages will be determined via statistical techniques that presume all class members are identical to the average in a sample. In the end, the court said the first issue was not before it because the damage award had not been disbursed, nor did the record indicate how it will be. The court also noted that Tyson rejected the plaintiffs’ suggestion to bifurcate the liability and damages phases of the trial, which was made because of the difficulty of removing uninjured class members after the award was rendered; thus, the court said, Tyson itself was responsible for the no-injury issue being out of the case. So the court focused solely on the second issue.

The case involved over 3,000 hourly employees in a pork processing plant. Their work required them to wear protective gear, but its composition depended on the tasks a worker performs; thus, the amount of time it took to don and doff this gear varied as well. Tyson paid some, but not all, employees for donning and doffing; also, it did not record the time each employee spent doing so. The employees sued, alleging that under existing standards, donning and doffing must be included in calculating whether they were entitled to overtime pay under the Fair Labor Standards Act because it was pre- and post-work activity integral and indispensable to their work. Tyson countered that given the variance in protective gear each employee wore, the employees’ claims were not sufficiently similar to be resolved as a class.

Because Tyson had no records of donning and doffing time, the employees relied on a study (whose validity Tyson did not contest) performed by an expert who conducted videotaped observations analyzing how long this took in different parts of the plant and averaged that time to produce estimates. These estimates were then added to employee timesheets to determine which class members worked more than 40 hours a week and the value of class-wide recovery. Tyson argued that the varying amounts of time it took employees to don and doff made reliance on the sample improper and that its use would lead to recovery for people who had not worked 40 hours. The jury awarded the class $2.9 million in unpaid wages, about half of what the expert had proposed.

For a class to be certified, questions of law or fact common to class members must predominate over questions affecting only individual class members. The parties agreed that whether the class met this standard hinged on whether the study could be used to prove donning and doffing time. Tyson argued that these were person-specific inquiries, while the plaintiffs asserted that, based on the study, it could be assumed that each worker donned and doffed for the same average time observed in the study. Whether this inference is permissible was the central issue.

The court rejected Tyson’s request for a categorical exclusion of statistical evidence in class actions. The use of such evidence to establish class-wide liability, it reasoned, will depend on the purpose for which the evidence is being introduced and on the elements of the underlying claim. A key question was whether each class member could rely on this evidence to establish liability in an individual action; if so, the evidence is a permissible way to establish the employees’ hours worked in a class action. This test was met here, due to a legal rule applicable to FLSA claims: when an employer has not complied with its obligation to keep records, an employee may produce evidence to show the amount of uncompensated work as a matter of reasonable inference; if she does this, the employer must produce evidence that negates the inference. Under this rule, the expert study would be a valid method of proof in individual claims; thus, it was valid in the class action.

As for the possibility that uninjured class members might receive damages, the court said it was unclear how the jury had calculated the lump sum and the trial court had not yet decided how to allocate it. An unspoken premise of the court’s approach had to be that the court would, on remand, avoid that outcome. A separate opinion expressed skepticism that this could be done and concluded that it remained to be seen whether the jury verdict could stand.

Tyson Foods does not approve the use of statistical evidence in all class actions; in fact, the court reiterated at the end of its analysis that this is a case-specific inquiry. Two key factors making the case unique are that Tyson had not kept needed records and that the FLSA has a rule regarding the effects of this failure. As for the abandoned question—whether a class may be certified if it includes uninjured members—if one reads the decision and Spokeo together, the court seems to have indirectly answered it in the negative. In light of these cases, moreover, there is now an issue of whether plaintiffs who try to establish standing under a risk-of-harm theory must prove that their claims are typical of those of the class, an essential feature of a class-certification analysis. If a violation is procedural and the impact on class members is uncertain, even a plaintiff who can establish his standing under Spokeo may not be able to show that he is typical of the class and that the standing of other class members can be established without resort to individualized proof. And if an individual cannot establish standing without that proof, Tyson Foods confirms that it cannot be established for a class.

DirectTV, Inc. v. Imburglia is another in a line of court cases strongly endorsing arbitration as a litigation alternative. In 2008, DirectTV consumers filed a class action seeking damages for early termination fees that they thought violated California law. They had signed a service contract that required arbitration of disputes and waived the right of consumers to join in a class action unless the “law of your state” made this waiver unenforceable, in which case the arbitration agreement was void. In 2005, California courts had invalidated the waiver under state law, so DirectTV proceeded in state court. But in 2011 the Supreme Court held that the Federal Arbitration Act (FAA) preempted this law, so DirectTV moved to have California courts compel arbitration.

Not so fast, said the California Court of Appeal. It said the issue now is whether the “law of your state” means the law to the extent it had not been preempted or the law absent that preemptive effect. Noting that this was a take-it-or-leave-it contract drafted by DirectTV and applying the rule that ambiguous contract language should be construed against the drafter, it adopted the second interpretation and refused to order arbitration.

The Supreme Court disagreed. In theory, it said, the contract parties could have invoked the law of Tibet, pre-revolutionary Russia, or California pre-2011, but the court of appeals’s interpretation undermines FAA goals. As well, its effect is that the “law of your state” includes invalid laws and the court found that the court of appeals would not have permitted this result in a non-arbitration setting; to put all contracts on the same footing it was necessary to hold that the phrase embraces only valid state laws. Notably, by grounding its ruling on the FAA, the court avoided federalizing the interpretation of contracts, while serving notice that it will diligently police efforts to avoid its arbitration-favorable jurisprudence.

May defendants moot a class action by merely offering complete relief to the class representative? In Campbell-Ewald Co. v. Gomez the court said no, thus rejecting a defense commonly thought to be available to companies facing massive litigation costs in cases in which theoretical statutory damages may be astronomical. The U.S. Navy hired Campbell-Ewald to target 18–24-year-olds in a multimedia recruiting campaign. It sent texts to people outside of this class, however, including 40-year-old Gomez, who had not consented to receive them as required by the Telephone Consumer Protection Act. Gomez filed a class action for damages. Defendant offered to settle, but Gomez rejected this; defendant then sought to have the case dismissed because its offer gave Gomez complete relief. Applying basic contract law, the Supreme Court held that no matter how attractive a settlement offer is, it does not moot a lawsuit if the plaintiff does not accept it, and if it has no effect and the status quo ante prevails, the lower court is free to certify the class.

In a side note, echoed in a dissent, the court stressed that it was not deciding whether a defendant could achieve the same result by depositing funds sufficient to cover the named plaintiff’s claim into an account payable to plaintiff and then seeking entry of judgment in that amount. Another option was for the defendants to deposit a certified check with the trial court for the full amount due. It remains to be seen whether either option will be enough to get around the court’s contract law, offer-acceptance rationale.

In CRST v. EEOC, the EEOC took the sexual harassment claim of a female driver of a trucking company and tried to expand it into a giant “pattern or practice” lawsuit on behalf of hundreds of parties it identified in discovery. Along the way it became clear that the EEOC had not, as Title VII of the 1964 Civil Rights Act requires, investigated and tried to conciliate many of these claims; the lower court thus dismissed all but two. It then granted CRST attorneys’ fees for the dismissed claims under the standard which allows fees if a claim is frivolous, unreasonable, or groundless. The EEOC argued that a fee order requires a decision on the merits, but the court held that a defendant is a prevailing party under Title VII, to whom attorneys’ fees may be awarded, if it rebuffs a plaintiff’s attempt to alter its legal relationship with the defendant, irrespective of how it does so.

From the standpoint of their exposure to liability for damages and litigation-related expenses, these cases contain good, not so good, and bad news for business people. Several cases involved remands to the lower court, however, so a lot could change. As well, there will be a great deal of judicial interpretation of what the court wrote, and when hundreds of judges get involved in this, conflicting outcomes are inevitable. The earlier mention of the 327 Spokeo citing references illustrates this. In due course things may settle down and there may be some clarity in the areas that these opinions touch on, but it is going to take time for this to happen.

Jon Bible

Jon Bible is a professor of business at Texas State University–San Marcos who specializes in employment law. He has previously contributed several “Keeping Current” articles to Business Law Today.