Calif. SC calls decision 'profoundly flawed' in 'rare beast' of a class action

By Kyla Asbury | Jun 2, 2014

OAKLAND, Calif. (Legal Newsline) - The California Supreme Court has issued a decision on a class action lawsuit against U.S. Bank National Association in Alameda County Superior Court.

"We encounter here an exceedingly rare beast: a wage and hour class action that proceeded through trial to verdict," the decision states. "Loan officers for U.S. Bank National Association sued for unpaid overtime, claiming they had been misclassified as exempt employees under the outside salesperson exemption."

This exemption applies to employees who spend more than 50 percent of the workday engaged in sales activities outside the office, according to the decision, which was issued May 29 and written by Justice Carol Corrigan.

After certifying a class of 260 plaintiffs, the trial court devised a plan to determine the extent of USB's liability to all class members by extrapolating from a random sample.

"In the first phase of trial, the court heard testimony about the work habits of 21 plaintiffs," the decision states. "USB was not permitted to introduce evidence about the work habits of any plaintiff outside this sample."

Nevertheless, based on testimony from the small sample group, the trial court found that the entire class had been misclassified.

After the second phase of trial, which focused on testimony from statisticians, the court extrapolated the average amount of overtime reported by the sample group to the class as a whole, resulting in a verdict of approximately $15 million and an average recovery of over $57,000 per person.

"As even the plaintiffs recognize, this result cannot stand," the decision states. "The judgment must be reversed because the trial court's flawed implementation of sampling prevented USB from showing that some class members were exempt and entitled to no recovery."

A trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced, according to the decision.

"Statistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions," the decision states. "However...the trial court's particular approach to sampling here was profoundly flawed."

While class certification can be a useful tool for deciding common questions, the California Supreme Court claims it has repeatedly explained that remaining individual issues must be fairly managed.

"In some cases, statistical methods may offer a reasonable and appropriate way to do so," the decision states. "However, reliance on statistical proof cannot be used to bar the presentation of valid defenses to either liability or damages, even if the alternative would require adjudication of a defense on an individual level."

When liability is to be established on a class-wide basis, the defendant must have an opportunity to present proof of affirmative defenses within whatever method the court and parties fashion to try these issues, according to the decision.

"If the trial proceeds with a statistical model of proof, a defendant accused of misclassification must be given a chance to impeach that model or otherwise show that its liability is reduced because some plaintiffs were properly classified as exempt," the decision states.

"We review class action trial management decisions for abuse of discretion. The trial court's exclusion of all evidence about the work habits of BBOs outside the sample group and its implementation of a biased sampling plan were manifestly an abuse of the court's discretion."

The errors require reversal if it is reasonably probable that they affected the verdict, according to the decision.

"Here, there can be little question that the trial court's findings on liability and damages would have been different absent its erroneous exclusion of evidence and reliance on faulty statistical methodology," the decision states. "Accordingly, both aspects of the class judgment must be reversed."

On remand, a new trial will be required for both liability and restitution, and the trial court may entertain a new class certification motion.

Justices Tani Cantil-Sakauye, Marvin R. Baxter, Kathryn Werdegar, Ming Chin and Goodwin Liu; and retired Justice Joyce L. Kennard all concurred.

USB is a nationwide financial services provider and during the class action period, it operated more than 130 branches in California.

The class action was brought by USB employees who worked as business banking officers. Their primary job is to cultivate new business.

After a BBO acquires a new client, a client manager handles the portfolio and maintains the relationship.

A BBO can be assigned to work with up to four bank branches. Although they typically use one branch office as a home base, some BBOs work from multiple branches or their homes, according to the suit.

On Dec. 26, 2001, the class action complaint was filed alleging USB had improperly classified BBOs as exempt, denying them overtime pay in violation of Labor Code section 1194.3.

Class counsel later replaced the original named plaintiff with three new class representatives.

In March 2005, when dueling certification motions were pending, counsel replaced these representatives with the two currently named plaintiffs, Samuel Duran and Matt Fitzsimmons.

All replaced representatives had testified in depositions that they spent more than 50 percent of their workday engaged in sales activities outside USB offices, which would have brought them within the exemption.

On Jan. 6, 2005, the plaintiffs moved to certify the case as a class action.

"At that time, USB employed approximately 40 BBOs in California," the decision states. "There were over 200 current and former BBOs in the putative class."

Plaintiffs provided declarations from 34 current and former BBOs, all averring that they worked overtime hours and spent less than half of their workday engaged in sales-related activities outside their branch office.

USB opposed certification and argued that plaintiffs could not establish a predominance of common issues or that the class action device was superior to other methods of adjudication.

USB filed declarations from 83 putative class members, 75 of whom said they typically spent more than 50 percent of their workday engaged in outside sales.

USB also submitted deposition testimony from the four former class representatives stating that they regularly worked more than half the day outside the office.

The trial court certified the class.

Approximately one year after certification, the parties presented competing trial management plans.

"USB strenuously objected to the use of representative sampling," the decision states. "If the court rejected its proposal for focused trials of all class members, USB proposed that the parties each select an equal number of class members for the trial sample."

USB argued that a survey would not yield a truly representative sample because class members who were properly classified as exempt would have no interest in participating in trial or returning the survey. Thus, any survey-based sample would be skewed in plaintiffs' favor.

At a case management conference, the court also expressed concern about the potential for biased survey results and proposed an alternative of its own devising.

The court suggested that it could select a random sample of 20 class members to testify at trial.

Any findings on liability and damages for this sample would then be extrapolated to the remainder of the class.

"USB again objected that an attempt to extrapolate liability from representative testimony would violate due process," the decision states. "There was no precedent for using random sampling to establish liability in a class action involving the outside sales exemption. Indeed, neither side was aware of any such case even proceeding to a liability phase trial."

Notwithstanding these objections, the court decided to proceed with its own plan, taking testimony from 20 randomly selected class members in addition to the two named plaintiffs.

The court directed its clerk to draw names "from the proverbial hat" to select 20 class members plus five alternates.

"The record does not reflect how the court determined that this number or method of selection was appropriate," the decision states. "The court contemplated trying the case in two phases: Phase one would include testimony from those in the RWG. Phase two would consider evidence, including expert testimony, 'seeking to extrapolate the results of Phase I evidence to the class.'"

In November 2006, around the same time the trial court finalized the trial management plan and selected the RWG, the plaintiffs moved to dismiss their claims under the Labor Code and proceed solely on a claim for equitable relief under the unfair competition law.

The court allowed the amendment, but also ordered that class members be notified and given a second opportunity to opt out.

USB objected that the randomness of the sample would be compromised if members of the RWG withdrew.

In total, nine people opted out, four were members of the RWG and five were among the remaining 250 people in the class.

USB then asked the court to readmit the four RWG members.

"It produced declarations from two RWG members stating they had opted out at class counsel's urging," the decision states. "These declarants believed they had been properly classified as exempt and felt the lawsuit was frivolous."

In addition, a declaration from USB's expert, Phillip Gorman, explained that the much higher opt-out rate for RWG members--20 percent, as compared with 2 percent for the rest of the class--was statistically 'very unlikely to be attributable to random chance.'"

In Gorman's opinion, removal of the four RWG members created a biased sample that, if extrapolated, could result in large overestimates of the percentage of misclassified class members and of any overtime pay owed to the class.

The court denied the motion, observing that questions about the admissibility of testimony from non-RWG witnesses would be more appropriately addressed at trial. The final class was composed of 260 individuals.

In March 2007, USB moved to decertify the class action, citing new case law and deposition testimony from RWG members and it argued that individual issues predominated.

"USB also submitted a declaration from statistician Andrew Hildreth opining that the RWG sample size was too small to produce a reasonably accurate estimate of class-wide liability or damages," the decision states. "Hildreth explained that a high margin of error was inherent in such a small sample size."

As a result, it was very likely that a class-wide judgment would encompass some employees who were properly classified, and the damages estimate extrapolated from the small sample would be highly inaccurate. The motion was denied.

The trial court issued a phase one statement of decision on Sept. 22, 2008, approximately one year after the close of evidence.

It found that, during all relevant times, USB did not have a policy requiring BBOs to spend more than half their time away from bank locations.

Although some defense witnesses testified the bank expected BBOs to spend most of their time away from the office, the court discredited this testimony based on its assessment of the evidence and the lack of documentary support.

The court found that BBOs were never told they were expected to spend time outside the bank.

The court concluded USB did not carry its burden of proof on the outside salesperson exemption.

"Based primarily on testimony from RWG witnesses, the court ruled that the entire class of BBOs employed by USB between December 26, 1997, and September 26, 2005, was misclassified as exempt, and all class members were owed overtime in amounts to be determined in phase two of the trial," the decision states.

The court provisionally accepted Drogin's assertion that RWG members worked an average of 11.87 hours of overtime per week but deferred consideration of the number's significance to phase two.

Alameda County Superior Court case number: 2001-035537

From Legal Newsline: Kyla Asbury can be reached at classactions@legalnewsline.com.

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