Labor and Employment Law Newsletter

September 13, 2010



Arbitration Corner

Privacy Corner

Other Key Cases


Clarification And Expansion Of FMLA Requirements

            On June 22, 2010, the United States Department of Labor (the “DOL”) issued Administrator’s Interpretation No. 2010-3 to clarify which employees stand in loco parentis for purposes of eligibility for certain types of leave under the Family and Medical Leave Act (the “FMLA”).  The DOL’s position is that an employee who either has “day-to-day responsibilities to care for” or provides financial support for a child stands in loco parentis and, thus, is eligible to take FMLA-protected leave “for the birth or placement of a child, to care for a newborn or newly placed child, or to care for a child with a serious health condition.”  The DOL guidance reaffirms that the FMLA does not require a biological or legal relationship between employee and child.  Click here to read the full text of the interpretation document.

            In addition, last year President Obama authorized changes to the family military leave provisions of the FMLA when he signed the National Defense Authorization Act of 2010.  Of note, the law expands two types of leave:  first, it extends caregiver leave to eligible employees who are the spouse, child, parent or next of kin of veterans; second, it extends exigency leave to family members of an individual serving in the regular Armed Services (not just the reserves).  The new law also alters the definition of “serious injury or illness” to include pre-existing injuries “aggravated by service in the line of duty.”

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FLSA Includes Nursing Time

            President Obama signed the Patient Protection and Affordable Care Act into law in March of this year.  The new law amended Section 7 of the Fair Labor Standards Act to include a requirement that employers provide unpaid “reasonable break time” to nursing mothers.  Employers must allow employees to take a “reasonable break” every time they need to express milk for one year after the birth of a child.  Employers also must provide a “shielded” place for lactation; a bathroom is not a permissible location under the law.  The DOL released a Frequently Asked Questions to help employers understand their obligations under the federal law.  (Click here to view.)  Note that California employers are already subject to similar requirements pursuant to Labor Code §§ 1030-1033.

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DLSE Clarifies Role Of Unpaid Interns

            In an April 7, 2010 Opinion Letter, the California Division of Labor Standards Enforcement (the “DLSE”) clarified its test for evaluating whether interns, students or trainees deemed to be in “training” are exempt from California’s minimum-wage requirements.  Going forward, the DLSE will apply a six-factor test to determine whether interns, students or trainees are “employees” and, therefore, not exempt from California’s minimum-wage requirements. 

            Under the six-factor test, the DLSE will consider whether: 

    • the job training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school;
    • the training is for the benefit of the interns, trainees or students;
    • the interns, trainees or students do not displace regular employees, but work under their close observation;
    • the employer derives no immediate advantage from the activities of interns, trainees or students, and, on occasion, the employer’s operations actually may be impeded;
    • the interns, trainees or students are not necessarily entitled to a job at the conclusion of the training period; and
    • the employer and the interns, trainees or students understand that the interns, trainees or students are not entitled to wages for the time spent in training.

            The six-factor test requires consideration of the totality of the circumstances on a case-by-case basis.  In adopting the six-factor test, the DLSE abandoned its previously used 11-factor test, which incorporated five requirements not set forth in case law.     

            Importantly, the third prong of the test – that interns, trainees or students not displace regular employees – requires more than an employer’s representation that no displacement of regular workers has occurred.  Rather, the “nature of the activities to be performed by the intern must be examined to determine whether the training activities bear a direct relationship with the educational or vocational objectives and do not unreasonably intrude into activities which could be performed by regular workers who would be subject to compensation for such work.” 

            One factor evidencing that an intern has not displaced regular workers is the level of supervision over the intern.  Where interns “require and rely upon supervisors directly and other regular workers indirectly to acquire and learn the skills necessary for the described activities,” displacement of regular workers is unlikely.  Similarly, occasional work will not establish an employment relationship if it does not “unreasonably replace or impede the educational objections for the intern and effectively displace regular workers.”  The presence of a full staff immediately prior to and following the internship period also suggests that the contribution of the intern to the business is sufficiently limited, thus satisfying the third criterion.  

            While the Opinion Letter does provides some clarity about the standards for maintaining an exemption from California’s minimum-wage laws, courts are not bound by the DLSE’s criteria.  Moreover, an intern’s, student’s or trainee’s willingness or agreement to work for free does not itself establish that the intern and employer have not entered into an employment relationship or that the intern is exempt from California’s minimum-wage requirement.

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California Supreme Court Allows Review Of Some Arbitrator Decisions

            In Pearson Dental Supplies, Inc. v. Superior Court, ___ Cal. 4th ___ (2010), the California Supreme Court affirmed the propriety of vacating an arbitration award when “a clear error of law by an arbitrator means that an employee subject to a mandatory arbitration agreement will be deprived of a hearing on the merits of an unwaivable statutory employment claim.”  Historically, California courts declined to vacate arbitration awards based on legal error.  This decision arguably opens the door to greater judicial review of arbitrator errors, potentially undercutting the finality of arbitrator decisions. 

            Plaintiff Luis Turcios (“Turcios”) filed a complaint with California’s Department of Fair Employment and Housing (the “DFEH”), alleging age discrimination.  The DFEH issued a right-to-sue letter, and Turcios sued Pearson Dental Supplies, Inc. (“Pearson”) in state court.  A few months later, Pearson filed a motion to compel arbitration based on a dispute resolution agreement signed by Turcios during his employment.  The trial court granted Pearson’s motion and sent the parties to arbitration.  The arbitrator then granted summary judgment for Pearson in a “brief letter,” holding that Turcios had failed to submit his claims to arbitration within the time frame allowed by Code of Civil Procedure § 1281.12. 

            On review, the trial court vacated the arbitration award, finding that the arbitrator committed an error of law by misinterpreting the tolling provision in Section 1281.12 (and, thereby, wrongly determined that Turcios’s claims were time-barred).  The court also held that it was obligated to review the decision sufficiently to protect a plaintiff’s “unwaivable statutory rights arising from his [Fair Employment and Housing Act (“FEHA”)] claims.”  The appellate court agreed that the arbitrator improperly applied tolling, but held that his “erroneous decision is ‘insulated from judicial review.’”  The California Supreme Court accepted Turcios’s petition for review.

            The Supreme Court first concluded that the arbitrator had committed a “clear error of law” by misapplying the Section 1281.12 tolling provision to hold that Turcios’s claims were time-barred and, thus, had inappropriately granted summary judgment for Pearson.  The Court then evaluated whether this clear error of law could “serve as a proper basis for vacating the arbitration award.”  The Court looked to its past decisions for guidance. 

            In Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992), the Court made clear that arbitration awards are reviewable only in circumstances enumerated by statute or if the parties’ arbitration agreement provided for broader review.  In addition, the Moncharsh Court held that, for purposes of the statute, “[it] is well settled that ‘arbitrators do not exceed their powers merely because they assign an erroneous reason for their decision.’”  The Court noted, however, that the Moncharsh decision left open the possibility that a court may review an arbitrator’s decision when, for example, “granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights.”  The Court also looked to Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), finding that it left open “the proper standard of judicial review of arbitration awards arising from mandatory-arbitration employment agreements that arbitrate claims asserting the employee’s unwaivable statutory rights.”

            The Supreme Court ultimately held that, in light of legislative intent to allow employees to enforce their FEHA anti-discrimination rights, “an arbitrator whose legal error has barred an employee subject to a mandatory arbitration agreement from obtaining a hearing on the merits of a claim based on such right has exceeded his or her powers . . . and the arbitrator’s award may properly be vacated.”  To reach that conclusion, the Court found that the arbitrator’s mistake of law was a “paradigmatic” example of a decision that, without judicial review, would fail to protect Turcios’s statutory rights because he would not receive a hearing on the merits of his FEHA claims “through no fault of the employee or his attorney.”  Moreover, Turcios had “no opportunity for bargaining over the arbitration agreement” at issue, so he could not be said to have received “the justice he bargained for.”  Accordingly, the trial court appropriately vacated the award.

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Certain Disputes Regarding CBA Evaluated By Court, Not Arbitrator

            In Granite Rock Co. v. Int’l Brotherhood of Teamsters, 130 S. Ct. 2847 (2010), the United States Supreme Court held that disputes regarding the formation or ratification of a collective bargaining agreement (a “CBA”) are to be resolved by the courts, not an arbitrator.

            In April 2004, the CBA between employees represented by the International Brotherhood of Teamsters, Local 287 (the “Local”), and Granite Rock expired.  The parties reached an impasse during negotiations, and the Local initiated a strike against Granite Rock.  On July 2, 2004, the parties agreed to a new CBA, which contained a no-strike provision and an agreement to arbitrate disputes under the CBA.  Soon thereafter, Granite Rock refused to enter into a second agreement that would hold harmless the striking employees; consequently, the Local continued the strike.  Granite Rock then brought an action against the Local and the International Brotherhood of Teamsters (“IBT”) for strike-related damages under Section 301(a) of the Labor Management Relations Act, alleging a violation of the new CBA’s no-strike provision.  The IBT and the Local countered that the new CBA was not ratified on July 2, and that, therefore, Granite Rock could not rely upon the no-strike provision in the contract to bring the action. 

            The procedural question for the district court was whether it or an arbitrator had the authority to decide when contract ratification occurred.  The district court held that the ratification date should not be arbitrated.  Rather, the court held that a jury must first determine whether the new CBA was effectively ratified on July 2 and that, second, an arbitrator should evaluate Granite Rock’s claim for damages because the no-strike provision fell under the CBA’s arbitration agreement.  On appeal, however, the Ninth Circuit Court disagreed, holding that the date of the CBA’s ratification also should be deferred to an arbitrator.    

            The Supreme Court reversed.  It held that a dispute may be submitted to arbitration only where the “court is satisfied that the parties agreed to arbitrate that dispute.”  The Court emphasized that, at all times, arbitration is a matter of consent and may only be used to resolve those disputes that the parties have agreed to submit to it.  Accordingly, courts should only order arbitration “where the court is satisfied that neither the formation of the parties’ arbitration agreement nor its enforceability or applicability to the dispute is in issue.”  Conversely, if the formation of the arbitration agreement or its enforceability or applicability is at issue, the court must resolve the matter, and thus arbitration of those issues is not appropriate. 

            Applying this framework, the Court held that when a CBA is formed is just as critical as whether the contract was formed and whether its provisions are enforceable.  Here, the parties’ dispute centered on when the CBA was ratified or formed and, accordingly, whether the CBA’s no-strike provision and arbitration clause were in place when Granite Rock incurred its purported damages.  The Court held that, despite the federal presumption favoring arbitration, an arbitrator’s assessment of the claims and defenses could not be reached without the court first determining the ratification date of the CBA (which impacted the enforceability of the arbitration agreement) and whether the parties effectively agreed to arbitrate these issues under the CBA.

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U.S. Supreme Court Revisits Arbitrability Of Arbitration Clauses

            In Jackson v. Rent-A-Center West, Inc., 130 S. Ct. 2772 (2010), the United States Supreme Court upheld the validity of a “delegation provision” in an arbitration agreement, which assigned to an arbitrator the “exclusive authority to resolve any dispute” regarding the arbitration agreement’s enforcement.  In so doing, the Court rejected the Ninth Circuit Court’s view that only a court should determine the enforceability of an arbitration agreement.

            Plaintiff Antonio Jackson (“Jackson”), one of defendant’s employees, signed an Agreement to Arbitrate (the “Agreement”) when he was initially hired.  He later instituted an action in the United States District Court against Rent-A-Center West, Inc. for alleged race discrimination and retaliation under 42 U.S.C. § 1981.  The Agreement “provided for arbitration of all ‘past, present or future’ disputes arising out of Jackson’s employment,” and delegated to the arbitrator “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of” the Agreement.

            The Court described two different types of challenges to validity under the Federal Arbitration Act:  (1) a challenge to the validity of an agreement to arbitrate; and (2) a challenge to the contract as a whole.  Because an arbitration provision is severable from the rest of the contract in which it appears, a challenge to the contract as a whole (or to a provision other than the arbitration provision) will not prevent a court from enforcing the agreement to arbitrate.  If a party specifically challenges the provision requiring arbitration, then a court may evaluate the validity of that agreement.

            In this case, the Court determined that Jackson challenged the validity of the whole contract.  Because Jackson did not specifically challenge the agreement to arbitrate, the Supreme Court concluded that it was obligated to find the arbitration provision valid under the Federal Arbitration Act and to enforce it.  Accordingly, the Supreme Court held that Jackson’s challenge to the validity of the entire contract was for the arbitrator to decide, and not the court.

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United States Supreme Court Allows Employer Inspection Of Employee Text Messages

            In City of Ontario v. Quon, 130 S. Ct. 2619 (2010), the United States Supreme Court held that a government employer’s review of employee text messages sent and received via an employer-issued pager did not violate the employee’s Fourth Amendment rights.  Instead, the Court held that a government employer is not required to use the least intrusive means possible when searching electronic devices to achieve a legitimate work-related purpose.  The search, however, must be narrow in scope and designed to achieve a legitimate work-related purpose. 

            The City of Ontario (the “City”) issued Plaintiff Jeff Quon (“Quon”) and other members of the Ontario Police Department’s SWAT team city-owned pagers to assist officers in responding to emergency situations.  Each pager carried a maximum number of characters that could be sent and received each month.  On several occasions, Quon exceeded the monthly character limit and was permitted to reimburse the City for the overage charges.  Several months after receiving the pager, Quon was notified orally and in writing that messages sent and received via the pager were considered e-mail messages under the City’s Computer Usage, Internet and E-Mail Policy (the “Policy”) and, therefore, subject to City review.  The Policy, signed by Quon two years earlier, specified that the City reserved “the right to monitor and log all network activity including e-mail and Internet use, with or without notice,” and that “[u]sers should have no expectation of privacy or confidentiality when using these resources.”   

            After learning of repeated texting overages, the Police Chief decided to audit pager usage to evaluate whether the character limit was too low, and whether officers were paying overage fees for work-related or personal messages.  Accordingly, the City reviewed transcripts of messages sent and received from Quon’s pager over a two-month period, excluding messages sent during non-working hours.  The audit revealed that the vast majority of Quon’s messages were not work-related and some were sexually explicit.  Quon was subsequently disciplined for sending and receiving personal messages while on duty. 

            Prior to determining whether the City’s audit of Quon’s text messages violated his Fourth Amendment rights, the Court stated that the case would be disposed of on narrow grounds and with the following assumptions:  (1) Quon in fact had a reasonable expectation of privacy in the messages he sent and received on the City-issued pager; (2) the City’s review of the message transcripts did constitute a search under the Fourth Amendment; and (3) the principles applicable to a government employer’s search of an employee’s physical office apply to a search of messages or information transmitted via employer-issued electronic equipment. 

            With this analytic framework in mind, the Court applied the principles articulated in its plurality opinion in O’Connor v. Ortega, 480 U.S. 709 (1987), which evaluated an employee’s rights under the Fourth Amendment when a government employer searches and seizes personal items from an employee’s office.  Relying on O’Connor, the Court held that special needs of the workplace justify an exception to the Fourth Amendment’s prohibition against a warrantless search.  Under O’Connor, a search conducted by a government employer for a non-investigatory work-related purpose, or to investigate work-related misconduct, is reasonable if the “measures adopted are reasonably related to the objectives of the search and not excessively intrusive in light of” the circumstances surrounding the search.  The Court emphasized that the City’s narrow examination of transcripts for a two-month period with redactions of messages sent and received during Quon’s off-duty hours – combined with Quon’s knowledge that the pagers were to be used for work-related purposes and that the messages could be subject to auditing – rendered the search permissible in scope and reasonable under the test outlined in O’Connor.     

            The Court also held that the Ninth Circuit Court erred in finding that an employer must use the least intrusive search practicable for it to be deemed reasonable under the Fourth Amendment.  According to the Court, the least intrusive search test is inappropriate because, with hindsight, parties or judges can always find a less intrusive method of conducting a search.  Therefore, even if a less intrusive search did exist (e.g., searching Quon’s messages for a one-month period instead of a two-month period), the type of search conducted by the employer may still be reasonable in light of the circumstances.   

            The Court cautioned that it aimed to avoid broad implications for future cases regarding employees’ privacy expectations in their use of employer-related technology; accordingly, the Court operated under the assumption that Quon did have a reasonable expectation of privacy.  The decision, therefore, does not directly speak to whether an employee has an expectation of privacy when sending messages on employer-issued equipment, even when notified in writing that the employee should hold no such expectation. 

            Quon signals that investigations conducted for work-related purposes or workplace misconduct must be narrow in scope and directly related to the purpose of the search so as to not be excessively intrusive.  Although the Court did not seize on this point, it is helpful for employers to have a policy in place notifying employees that they do not have an expectation of privacy when transmitting or receiving messages with employer-issued electronic equipment.  Finally, employers should note that Quon may not define the rubric for assessing invasion of privacy claims under the California Constitution because it affords broader privacy protection than the Fourth Amendment.

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California Supreme Court Evaluates Employee Privacy

            In Hernandez v. Hillsides, Inc., 47 Cal. 4th 272 (2009), the California Supreme Court weighed issues of employee privacy in the workplace.  Defendant Hillsides operates a private nonprofit residential facility for neglected and abused children.  Plaintiffs were two Hillsides employees who shared an enclosed office.  The facility director learned that, late at night after plaintiffs had left, someone had repeatedly used a computer in their office to view pornographic web sites.  Such use conflicted with company policy and with Hillsides’ goals.  Concerned that the culprit might be a staff member who worked with the children, Hillsides’ director set up a hidden camera in plaintiffs’ office without informing them.  The camera operated during non-business hours.  The director did not expect or intend to catch plaintiffs on tape.

            After discovering the hidden camera, the plaintiffs sued, alleging that defendants violated their right to privacy under the common law and the California Constitution.  The trial court granted defendants’ motion for summary judgment and dismissed the case.  The court of appeal reversed, finding triable the issues of fact:  (1) whether plaintiffs had suffered an intrusion into a protected zone of privacy; and (2) if so, whether the intrusion was so unjustified and offensive as to constitute a privacy violation.

            The Supreme Court reversed the court of appeal’s judgment insofar as it allowed the privacy claim to proceed to trial, holding that summary judgment was appropriate.  The Court concluded that the lower court did not err in determining that a jury could find the requisite intrusion.  While plaintiffs’ privacy interests in a shared office at work were far from absolute, they had a reasonable expectation under widely held social norms that their employer would not install video equipment capable of monitoring and recording their activities – personal and work-related – behind closed doors without their knowledge or consent.

            On the other hand, the Court held that the court of appeal had erroneously found a triable issue as to whether that intrusion was highly offensive and sufficiently serious to constitute a privacy violation.  Any actual surveillance was drastically limited in nature and scope, exempting plaintiffs from its reach.  Moreover, defendants were motivated by strong countervailing concerns, which included providing a wholesome environment for the abused children in their care and avoiding legal liability.  The Court noted that defendants did not suspect plaintiffs of using their computers improperly, and actually tried to ensure that plaintiffs were not present when any monitoring or recording occurred.

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California Supreme Court Defines Evidentiary Standard And Discrimination Rule

            In Reid v. Google, Inc., --- Cal. Rptr. 3d ----, 2010 WL 3034803 (Aug. 5, 2010), the California Supreme Court decided two important issues, one procedural and one evidentiary.  First, the Court held that a party does not waive its evidentiary objections for appeal on summary judgment if that party properly raised the objections but the trial court did not rule on them.  Second, the Court appears largely to have rejected the “stray remarks” doctrine in discrimination cases.

            Plaintiff Brian Reid (“Reid”) worked at Google for nearly two years.  He was hired at age 52 to work as Google’s director of operations and director of engineering.  Reid alleged that some of his co-workers made offensive age-related comments to him while he worked for Google.  For example, one of Reid’s occasional supervisors allegedly made age-based comments to him “every few weeks,” including telling Reid “that his opinions were ‘obsolete’ and ‘too old to matter,’ [and] that he was ‘slow,’ ‘fuzzy,’ ‘sluggish,’ and ‘lethargic.’ . . .”  Other co-workers also made age-related comments.  Reid was demoted, moved around in the company and ultimately left Google with a severance package.

            Reid sued Google asserting several claims, including age discrimination.  Google filed a motion for summary judgment on, among others, the age discrimination claim, and filed 31 pages of written objections to Reid’s evidence proffered in response to the motion.  The trial court granted the motion but did not rule specifically on the objections, noting instead that “it was relying only on ‘competent and admissible evidence pursuant to Biljac Associates v. First Interstate Bank [citation omitted].’”  The court of appeal reversed.  The California Supreme Court then granted review to decide the issues of:  (1) waiver of evidentiary objections made in connection with summary judgment motions; and (2) adoption of the stray remarks doctrine.

            The Supreme Court held that the trial court’s failure to rule specifically on Google’s evidentiary objections did not waive those objections for appeal.  In so doing, the Court rejected an approach adopted by some lower courts, which resulted in a waiver of all objections if that party did not procure a specific trial court ruling on them.  The Supreme Court’s view was that, because Google made its objections “in proper form in writing and orally” at the hearing, Google’s objections were preserved for appeal.  The Court also approved the appellate court’s adoption of the “presumed overruled approach” (which, in the absence of a specific trial court ruling, deems all objections as overruled by the trial court and all evidence as admitted). 

            The Court then turned to the application of the stray remarks doctrine in discrimination cases.  That doctrine has its roots in a concurring opinion issued by United States Supreme Court Justice O’Connor in Price Waterhouse v. Hopkins.  Justice O’Connor described “stray remarks” as “statements by nondecisionmakers, or statements by decisionmakers unrelated to the decisional process itself,” that “standing alone” will not shift the burden of persuasion to the employer, although they may “be probative of discrimination.”  Building on Justice O’Connor’s statements, federal courts have applied and expanded the doctrine to exclude so-called “stray remarks,” but California courts have never explicitly adopted that exclusionary or burden-shifting paradigm. 

            The Supreme Court rejected application of the stray remarks doctrine in California.  The Court agreed with the court of appeal that judgments about the admissibility and probative value of stray discriminatory comments should be made on a case-by-case basis, taking into account the whole record, for several reasons.  First, if applied as an exceptionless exclusionary rule, the doctrine “would result in a court’s categorical exclusion of evidence even if the evidence was relevant,” which is inappropriate when “[a]n age-based remark not made directly in the context of an employment decision or uttered by a non-decision-maker may be relevant, circumstantial evidence of discrimination.”  Excluding such evidence would impermissibly deny the jury its role in determining the weight of the evidence.  Second, if applied strictly, the doctrine would conflict with statutory- and case-law-based procedural rules in California.  California statute and case law require courts to consider all evidence presented in the parties’ papers and all reasonable inferences drawn from that evidence.  Third, while “[a] stray remark alone may not create a triable issue of age discrimination,” in combination with other evidence it may be enough to prevent summary judgment.  Fourth, because the terms “decision maker” and “outside of the decisional process” are left undefined, the doctrine has been applied inconsistently by courts.  In addition, the doctrine completely ignores the fact that “discriminatory remarks by a non-decisionmaking employee can influence a decision maker.”  Finally, identical remarks have been treated in different ways by different courts, so application of the rule has lead to inconsistent results. 

            Consistent with these views, the Supreme Court affirmed the court of appeal’s decision.  It found that Google’s objections to Reid’s evidence had been presumptively overruled but had been preserved on appeal.  Notwithstanding that ruling, the Court determined that the lower court “properly considered evidence of alleged discriminatory comments made by decision makers and coworkers along with all other evidence in the record.”  It therefore affirmed the court of appeal’s reversal of summary judgment for Google.

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Prevailing Party Status Not Required To Recover Attorneys’ Fees Under ERISA’s General Fee Shifting Statute

            In Hardt v. Reliance Standard Life Insurance Co., 130 S. Ct. 2149 (2010), the United States Supreme Court determined that a litigant need not be a “prevailing party” to recover attorneys’ fees and costs under Section 1132(g)(1) of the Employee Retirement Income Security Act (“ERISA”).  Circuit Courts were divided on this question.  The Supreme Court’s decision addressed that decisional conflict, and held that, to recover attorneys’ fees under ERISA’s general fee shifting statute, a party need show only “some degree of success on the merits.”

            Bridget Hardt (“Hardt”) filed a claim for long-term disability benefits from her employer’s Group Long-Term Disability Insurance Plan (the “Plan”).  Reliance Standard Life Insurance Company (“Reliance”) served as the underwriter for the Plan, and provisionally approved Hardt’s claim.  Reliance later notified Hardt that her benefits under the Plan would expire after 24 months, and that she was ineligible for ongoing benefits because she was not “‘totally disabled from all occupations.’”  After exhausting her administrative remedies, Hardt brought an ERISA claim against Reliance for denying her benefits.   

            The district court denied Hardt’s motion for summary judgment but held that the record showed compelling evidence that Hardt was in fact totally disabled.  The district court then instructed Reliance to consider all evidence pertaining to Hardt’s application within 30 days (including evidence previously excluded from Reliance’s review), and warned that failure to do so would result in judgment in favor of Hardt.  Reliance complied with the district court’s order, granted Hardt’s application, and paid her $55,250 in accrued benefits. 

            The district court next granted Hardt’s motion for attorneys’ fees and costs under Section 1132(g)(1) of ERISA based on the court’s ruling essentially in her favor.  The Fourth Circuit Court reversed, holding that the district court’s order that Reliance consider additional evidence of Hardt’s disability within 30 days did not amount to an “‘enforceable judgmen[t] on the merits’” or a “‘court-ordered consent decree[e]’” and, therefore, that Hardt could not be considered a prevailing party.  336 Fed. Appx. 332 (4th Cir. 2009). 

            The Supreme Court granted certiorari and held that, under the plain reading of the statute, an award for attorneys’ fees and costs are not limited to prevailing parties.  The Court noted that the words “prevailing party” do not appear in the provision.  Instead, Section 1132(g)(1) states that, in an action by a participant, beneficiary or fiduciary, “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party.”  Moreover, the Court emphasized that Section 1132(g)(2) states that only plaintiffs who obtain “a judgment in favor of the plan” may seek attorneys’ fees.  Considering the differences in the plain language of the two provisions, the Court concluded that Congress did not intend Section 1132(g)(1) to contain an express “prevailing party” limitation on the trial court’s discretion when awarding attorneys’ fees.       

            The Supreme Court next considered whether the district court appropriately granted Hardt’s motion for attorneys’ fees. Although Section 1132(g)(1) grants trial courts discretion to award attorneys’ fees in ERISA actions, that discretion is not unlimited.  Relying on the framework established in Ruckelshaus v. Sierra Club, 463 U.S. 680 (1983) (reviewing judicial discretion to award attorneys’ fees under the Clean Air Act), the Court held that an award of attorneys’ fees is appropriate under Section 1132(g)(1) if a party has achieved some success on the merits, rather than trivial success on the merits or success on purely procedural grounds. 

            Applying this standard, the Supreme Court concluded that Hardt did achieve some success on the merits.  Even though the district court did not grant her motion for summary judgment, it had concluded that Reliance did not properly review her claim; found that there was compelling evidence that Hardt was completely disabled; ordered Reliance to consider additional evidence of Hardt’s disability within 30 days; and made clear that if Reliance failed to do so, judgment would be entered in Hardt’s favor.  Accordingly, the district court’s ruling favored Hardt sufficiently to show some success on the merits under the Ruckelshaus test.  Thus, Hardt’s award of attorneys’ fees under Section 1132(g)(1) was deemed appropriate.

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Two-Member NLRB Decisions Invalidated

            In New Process Steel v. National Labor Relations Board, 130 S. Ct. 2635 (2010), the United States Supreme Court held that the two-member National Labor Relations Board (the “NLRB”) did not have authority to issue decisions on behalf of the NLRB.  The Court’s decision resolved a circuit split, with five circuit courts holding that the two-member NLRB was legitimate and one concluding the opposite.

            Pursuant to the Taft-Hartley Act, the NLRB should have five members, with at least three members required to form a quorum.  The members may delegate full authority to sub-groups of at least three members.  In late 2007, the NLRB was short one member and expected two more vacancies.  Faced with the prospect of having too few members for a quorum, the four sitting NLRB members took action.  Among other things, they delegated the NLRB’s authority to a three-person group, two of whom would remain after the anticipated vacancies.  In so doing, the NLRB expressed the opinion that the two members would be acting appropriately as a quorum of the three-person delegated group.  That two-member group issued decisions in nearly 600 cases over a 27-month period. 

            The Supreme Court rejected the NLRB’s theory, holding that the two-person group did not have authority to act.  Once the membership of the group and the NLRB fell to two, the group lost its power to issue decisions for three reasons.  First, the statute’s plain language required that the NLRB’s delegated authority must always vest in a group of three members, not two.  Second, Congress easily could have allowed the NLRB to delegate its authority to a group of two by clearly stating that intention, but chose to not do so.  Finally, the Court believed its interpretation was “consistent with the longstanding practice of the NLRB.” 

            The majority acknowledged that the NLRB had an “understandable desire to keep its doors open despite vacancies,” and also recognized “the costs that delay imposes on the litigants.”  Despite these concerns, the Court explained that until Congress acted to allow delegation of NLRB powers to two people, the statute “must be given practical effect rather than swept aside in the face of admittedly difficult circumstances.”  In light of the decision, the NLRB is expected to reconsider two-member cases that were challenged by the parties.

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Appellate Court Upholds Decertification Of Class Of Managers From Multiple Stores

           In Keller v. Tuesday Morning, Inc., 179 Cal. App. 4th 1389 (2009) (review denied Mar. 10, 2010), the court of appeal affirmed the decertification of a class of managers employed at multiple Tuesday Morning, Inc. (“Tuesday Morning”) locations. Plaintiffs filed a class action alleging that they were improperly classified as exempt and, as a result, failed to collect overtime wages due them. The trial court certified a class. After the parties conducted extensive discovery, Tuesday Morning moved to decertify the class, and the trial court granted that motion.

            On appeal, Tuesday Morning argued that certification was inappropriate because determining the amount of time each store manager spent performing managerial duties varied from store to store and required a highly individualized inquiry.  The court acknowledged that some questions regarding general management policies were similar among the plaintiffs, but ultimately held that certification was inappropriate.  The court based its decision on the individualized differences in Tuesday Morning store size, layout, socio-economic makeup, the number of employees at each location and, in particular, the manner in which the managers conducted their supervisory activities.  The court concluded that such discrepancies among individual plaintiffs could not be adequately presented in one collective action.

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California Supreme Court Illuminates Application Of Attorney-Client Privilege

            In Costco Wholesale Corp. v. Superior Court, 47 Cal. 4th 725 (2009), the California Supreme Court reversed a lower court decision, holding that the attorney-client privilege applied to preclude discovery of an opinion letter on wage-and-hour issues prepared for Costco Wholesale Corporation (“Costco”) by its attorneys.

            In June 2000, Costco retained a law firm to provide legal advice regarding the exempt or nonexempt classification of certain Costco warehouse managers.  Based on the information gathered in a firm attorney’s interviews of two managers, an attorney provided Costco with a 22‑page opinion letter (the “Opinion Letter”).  Several years later, Plaintiffs sued Costco, claiming that managers had been misclassified as exempt employees.  Plaintiffs moved to compel discovery of the Opinion Letter.  Over Costco’s objection, the trial court ordered a discovery referee to conduct an in camera review of the Opinion Letter.  The referee produced a heavily redacted version of the Opinion Letter, finding that, although most of the letter contained attorney-client communications, the company’s attorney acted as a “fact finder” instead of as an attorney while conducting interviews; thus, that factual information, at least, was discoverable. 

            The Supreme Court reversed, holding that production of the Opinion Letter violated the attorney-client privilege.  Under the California Evidence Code, the party claiming attorney-client privilege has the initial burden of establishing that a communication was made in the course of an attorney-client relationship.  Once the party establishes facts necessary to support a prima facie privilege claim, the communication is presumed to be made in confidence.  The party opposing the claim must then prove that communication was not confidential or that the privilege does not apply for a different reason.  Cal. Evid. Code § 917. 

            The Court concluded that the attorney-client privilege attached to the Opinion Letter, irrespective of its contents.  Because Costco engaged the firm to supply legal advice regarding the classification of its managers, the Opinion Letter was confidential in nature under the Evidence Code, and the privilege protected the transmission of information. 

            This decision will give California employers some comfort that attorney-driven investigation of wage-and-hour issues will remain privileged, at least so long as the attorney was acting as an legal advisor and not solely as a “fact-finder.”  However, the fact that the trial court ordered production of this attorney-prepared and advice-filled legal memorandum, and the case then progressed all the way to the Supreme Court, suggests that defining the attorney’s role and the scope of the exercise from the outset may be essential to preserving privilege.

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