Simple Steps Employers Can Take to Minimize the Risk of Preventable Lawsuits

Employers today are facing a barrage of wage and hour lawsuits on an unprecedented scale.  Indeed, it is not uncommon to see plaintiffs’ attorneys target a particular industry for “special” attention, especially when there appears to be a significant number of employers unclear about or unconcerned with the obligations imposed by the Fair Labor Standards Act (FLSA) and state wage and hour laws.  The hospitality industry has come under just such scrutiny, with single plaintiff and class action lawsuits filed against national chains as well as local “mom and pop” establishments.  With no employer immune, there are several areas where a proactive employer should pay particular attention.

Minimum Wage, Overtime and Off-The-Clock Claims

One issue that turns up time and again, particularly with less sophisticated employers, involves incorrect minimum wage payments.  Under federal and state law, employers are required to pay nonexempt employees the minimum wage.  In many cases, employers do not realize the federal or state minimum wage has changed and that, as a result, hourly employees are not being paid the appropriate minimum wage until a lawsuit has been filed.  Employers often mistakenly rely on HR consulting firms or payroll companies to notify them of any changes in the minimum wage.  However, the wage and hour laws place the onus of compliance on the employer. Unless the employer has an indemnification agreement with its payroll provider, the employer is on the hook for the unpaid wages plus any fees or other penalties that may be imposed.  Employers should periodically verify whether a minimum wage hike has occurred or is planned.

Another easily correctible mistake involves the incorrect payment of overtime to hourly workers.  Instead of paying employees time-and-one-half (1.5x) the hourly rate for hours worked in excess of 40, some hospitality and service industry employers continue to pay employees the straight time rate for overtime hours.  For example, an employee is paid $10 per hour for all hours worked, including overtime hours, even though the federal and state laws require the employee to be paid $15 per hour for all hours over 40.  Some employers erroneously believe that an employee may agree, or even offer (in exchange for more hours) to accept a lesser overtime wage than is required by the law.  The law is very clear, however, that employees may not waive their right to be paid the minimum or overtime wage.

Off-the-clock claims are another headache plaguing hospitality employers.  These lawsuits stem from the nonpayment of wages for time spent working by employees before clocking in and after clocking out (i.e., off-the-clock work), and they are often filed in conjunction with minimum wage and overtime claims.  To succeed on these claims, the employees must prove that the employer knew they were engaging in off-the-clock work activities without compensation.  The success of these claims often hinges on whether the employer has implemented timekeeping rules, notified employees of the rules and disciplined employees who violated them.  Credibility of the supervisors and witnesses is also a major factor.

Employers would be well-served to require employees to clock in and out using a time clock and to have supervisors review the time cards on a weekly basis.  Under federal and state law, employers are required to keep accurate records.  Failure to do so can result in the courts giving more credence than they otherwise would to the employees’ estimate of the hours they worked.  Employers should also make clear to employees that they are not permitted to work overtime without prior authorization and that they will be disciplined up to and including termination if they work unauthorized overtime.  Employers also may want to consider implementing workplace rules requiring employees to start working as soon as they clock in and to leave the premises after they clock out, and depending on the industry and job, prohibiting employees from working at home.

Lest employers think these lawsuits are not a cause of concern, under federal law, employees may be awarded liquidated damages in an amount that is equal to the amount of the unpaid minimum wage or overtime amounts plus their attorneys’ fees.  Thus, lawsuits, often stemming from innocent mistakes, may end up costing employers hundreds of thousands of dollars, not including attorneys’ fees.  Moreover, state or federal departments of labor may decide to audit all of the company’s wage and hour practices.

Be Careful with Tip Credit Arrangements

Treatment of “tipped” employees is another hospitality industry practice that is frequently challenged by plaintiff’s attorneys.  Under federal and most states’ laws, employers may pay tipped employees a reduced hourly rate if the employer follows certain rules.  For example, Illinois law permits employers to pay tipped employees an hourly rate of $4.95 per hour, rather than the statutory $8.25 per hour.  To qualify for this credit under federal law, the employer must satisfy the following requirements:

  • Inform each tipped employee of the “tip credit” arrangement by, for example, posting the federal DOL notices regarding tipped employees and having employees sign a written acknowledgement of understanding.
  • Tipped employees must receive at least $30 in tips per month.  Compulsory service charges determined by the employers are not tips.
  • Tipped employees must be paid at least the minimum wage when the decreased hourly rate and tips are added together.
  •  Employees must be permitted to keep ALL tips, provided that a valid tip-sharing arrangement (or “tip pool”) may be utilized.  Employees may not be required to contribute more to the tip pool than what is “customary and reasonable.”

If the employer fails to satisfy any of the above conditions, the tip credit arrangement is invalid and the employer may be liable for the amount saved by using the tip credit, any additional overtime amounts and liquidated damages.

Most lawsuits challenging the tip credit take issue with the last element.  The general rule is that tip-sharing arrangements typically may not include dishwashers, cooks, managers, maintenance employees, janitorial staff and any other individuals not typically involved in serving customers.  Managers generally may not participate because their primary responsibility is to supervise, not service customers.  Starbucks has been fighting lawsuits all over the country, which claim that various supervisory employees should not be included in the tip pool.  The safest course is to limit the tip pool to employees whose primary responsibility is directly servicing customers.

Another type of lawsuit that could have wide-ranging ramifications for the service and hospitality industries challenges the amount of time that tipped employees spend on non-tip producing activities.  In Fast v. Applebee’s International, the Eighth Circuit Court of Appeals affirmed a Missouri federal district court decision adopting the U.S. Department of Labor’s position that non-tip producing activities, when routine and in excess of 20 percent of the employee’s shift, should be compensated at the minimum wage with no tip credit allotted.  With this decision, employers are confronted with the onerous task of implementing monitoring and record keeping practices aimed at tracking whether minuscule activities, such as cutting lemons, need to be detailed during the employee’s shift.  This case may well prompt the plaintiffs’ bar to pay even more attention to how service and hospitality employers pay their employees.

There is some good news for hospitality employers.  The United States Department of Labor recently reversed a long-standing enforcement rule specifying that, for purposes of how much an employee may contribute to a tip pool, the term “customary and reasonable” meant 15 percent.  In other words, the DOL previously took the position that requiring employees to contribute more than 15 percent of tips into a tip pool would jeopardize the employer’s tip credit arrangement.  The DOL pronounced in its new regulations that there is no maximum contribution percentage that applies to valid mandatory tip pools.  Employers should nevertheless be mindful to establish “tip pool” contribution rates that are consistent with industry standards.

Court Considers Whether Non-Competitor Can Bring Unfair Competition Claim

In Famous Horse Inc v 5th Ave Photo Inc (Case 08-4523-cv, October 21 2010), the US Court of Appeals for the Second Circuit has held that Lanham Act unfair competition claims need only meet the ‘reasonable interest’ test for the plaintiff to have standing.

The case revolved around wholesale clothiers’ sale of counterfeit ROCAWEAR-branded jeans. The wholesalers, the defendants-appellees, sold some of the jeans to plaintiff-appellant Famous Horse Inc, which operates a chain of discount clothing stores in the New York area. Once Famous Horse discovered the jeans were counterfeit, it stopped purchasing them, but the appellees continued to sell the counterfeit jeans to other discount stores and, while doing so, falsely advertised that Famous Horse was a “satisfied customer”.

In response, Famous Horse brought trademark infringement and unfair competition claims under the Lanham Act, as well as a variety of related state claims, against the appellees.

Famous Horse first claimed trademark infringement under both §43(a) and 32 of the Lanham Act based on the appellees’ claim that it was a “satisfied customer”. The district court dismissed both claims, because “plaintiff must allege facts establishing, inter alia, that a defendant’s use of plaintiff’s registered mark is likely to cause confusion as to the source of a product”. Since Famous Horse had never claimed that the use of its marks was connected to the source of the products, it had failed to state a case.

On appeal, the Second Circuit held that the district court was in error, as “consumer confusion triggering the Lanham Act… need not be solely as to the origin of the product”. Instead, a party has a §43(a) claim if it was falsely accused of being a satisfied customer, since §43(a) “specifically defines misrepresentation causing confusion as to affiliation, association or sponsorship as infringing activity”. Moreover, a party has a §32 claim if use “of a registered mark… is likely to cause confusion, or to cause mistake or to deceive”. Because the false claim of being a satisfied customer was likely to deceive and confuse as to association, the court vacated the district court’s dismissal of Famous Horse’s §32 and §43(a) claims.

Famous Horse also claimed unfair competition as a result of the appellees’ sale of counterfeit ROCAWEAR branded jeans. The question on appeal was whether Famous Horse had standing to bring an unfair competition claim despite not being in direct competition with the appellees nor owning the ROCAWEAR mark.

The Second Circuit noted that, while the Lanham Act’s language is “extremely broad” (allowing actions by “any person” who believes they are damaged by “any false designation of origin”), courts have narrowed the standard to apply only to commercial plaintiffs. However, while courts agree that only commercial plaintiffs can bring an action, there is a circuit split over whether an action can be brought by a non-competitor. Three circuits (the Seventh, Ninth and Tenth) require any plaintiff to be in actual competition with the defendant (the alleged user of the false mark). Three other circuits (the Third, Fifth, and Eleventh) use a “more flexible standard”, where actual competition is merely taken into account, not a requirement.

The Second Circuit has been somewhat in-between the two sides. It held that competition was a requirement in the case of Telecom Int’l Am Inc v AT&T Corp (280 F3d 175 (2001)), but in other cases held it was not a requirement – although where the parties were not in competition, the court “tended to require a more substantial showing” of injury and causation. Despite highlighting the circuit split, the court held that an ultimate resolution of the question was not necessary as the parties were competitors:

“Although Famous Horse sells at retail, and appellees primarily sell at wholesale, the goods they sell are in direct competition in the marketplace, and appellees’ products are supplied to retailers in direct competition with Famous Horse.”

To determine whether a plaintiff has standing, the Second Circuit uses the “reasonable interest” test:

“[I]n order to establish standing under the Lanham Act, a plaintiff must demonstrate (1) a reasonable interest to be protected against the alleged false advertising, and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”

Using this two prong test, the court first found that Famous Horse had a reasonable interest to be protected because:

  • its reputation for selling goods at low prices was harmed when customers saw similar jeans for less in other stores; and
  • customers who learned about counterfeit Rocawear jeans would assume that Famous Horse also sells counterfeit jeans.

Second, because Famous Horse alleged lost sales and future harm to its business as a result of those two injuries, the court held that it also had a reasonable basis that it was likely to be harmed by the false advertising. Therefore, although the court noted that the claims of damages would be difficult to prove at trial, the claims were “sufficiently plausible” to survive a motion to dismiss.

Judge Livingston concurred with the majority’s opinion in all but its analysis of the ‘reasonable interest’ test. He stated that he thought the two-prong Second Circuit framework should be abandoned for the Third Circuit’s five-factor Conte Brothers test, because the test gave “greater structure”, and would allow the court to “define the term ‘reasonable interest’ with greater precision”. The factors are:

  •  the nature of the plaintiff’s alleged injury, and whether it is the type of injury that Congress sought to redress;
  •  the directness or indirectness of the asserted injury;
  •  the proximity or remoteness of the party to the alleged injurious conduct;
  •  the speculativeness of the damages claims; and
  •  the risk of duplicative damages or complexity in apportioning damages.

Using the five factors, Judge Livingston stated that he would not have found that Famous Horse had standing to bring its unfair competition claim, primarily because:

  •  the injury was indirect; and
  •  there was a party (the owners of the ROCAWEAR mark) much more proximate to the appellees’ conduct.

This article first appeared on WTR Daily, part of World Trademark Review, in November 2010.

U.S. Supreme Court Resolves Circuit Split: FCA Relators Cannot Base Claims on Information Received Through FOIA Request

The U.S. Supreme Court resolved a split among federal circuits in its May 16 ruling that the public disclosure bar of the federal False Claims Act (FCA) precludes plaintiffs from bringing claims under the FCA based on information obtained through Freedom of Information Act (FOIA) requests for public documents. Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-188, 563 U.S. ___ (May 16, 2011).[1] The FCA’s public disclosure bar generally forecloses qui tam suits that are “based upon the public disclosure of allegations or transactions . . . in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation.” Id. The Court found that a federal agency’s written response to a FOIA request for records constitutes a “report” within the meaning of the FCA’s public disclosure bar and, as such, cannot form an independent basis for an FCA claim. See 31 U.S.C. § 3730(e)(4)(A).


Relator Daniel Kirk worked for petitioner Schindler Elevator Corporation (Schindler) for 25 years before resigning in 2003. In 2005, Kirk filed the instant action against Schindler under the FCA, alleging that Schindler had submitted hundreds of false claims for payments under its government contracts. Specifically, he alleged that the company’s claims for payments were accompanied by false certifications that it was in compliance with the Vietnam Era Veterans’ Readjustment Assistance Act of 1972 (VEVRAA), which requires contractors like Schindler to report certain information to the Department of Labor (DOL), such as how many of their employees are “qualified covered veterans” under the statute. He further alleged that Schindler violated VEVRAA’s reporting requirements by failing to file certain required VETS-100 reports, or including false information in the VETS-100 reports it did file. Although Kirk did not specify the amount of damages he sought on behalf of the United States for these false claims, he did estimate that the value of the VEVRAA contracts exceeded $100 million.

To support his allegations, Kirk relied on information he received by way of three FOIA requests to the DOL submitted by his wife, Linda. She requested of the DOL all VETS-100 reports filed by Schindler for the years 1998 through 2006. The DOL responded by email or letter to each of Mrs. Kirk’s requests; she received copies of 99 VETS-100 reports filed by Schindler, and was informed by the DOL that it could not locate Schindler’s VETS-100 reports for 1998, 1999, 2000, 2002, or 2003.

At the district court level, Schindler moved to dismiss the amended complaint on several grounds, including that the FCA’s public disclosure bar deprived the court of jurisdiction. 606 F. Supp. 2d 448 (S.D.N.Y. 2009). The district court granted the motion, finding that some allegations failed to state a claim, and the rest were based on the DOL’s FOIA responses, which the court found constituted public disclosure of transactions or allegations in an administrative “report” or “investigation.” See 31 U.S.C. § 3730(e)(4)(A). The Second Circuit vacated and remanded. 601 F.3d 94 (2010). Disagreeing with the district court, the appellate court held that an agency’s response to a FOIA request is neither a “report” nor an “investigation” within the meaning of the FCA’s public disclosure bar. Id. at 103-11.

The Decision

The Supreme Court granted certiorari on the question of whether a federal agency’s written response to a FOIA request is a “report” for the purpose of the public disclosure bar. In a 5-3 opinion delivered by Justice Thomas, the Court held that it is, finding that the ordinary meaning of the term “report” in the public disclosure bar subsumes FOIA responses and any attachments to them.

Using the dictionary definition of the word “report,” the Court found that the “broad ordinary meaning of ‘report’ is consistent with the generally broad scope of the FCA’s public disclosure bar.” Schindler, slip op. at 5. Reading the entire text of the public disclosure bar as an integrated whole, the Court found that the public disclosure bar provides a “‘broa[d] sweep.'”Id. at 6 (citing Graham County Soil and Water Conservation Dist. v. United States ex el. Wilson, 559 U.S. ___, ___ (slip op. at 8)).

Given its ordinary meaning in the context and purpose of the public disclosure bar, the Court held the term “report” includes a written agency response to a FOIA request. The Court noted that “[s]uch an agency response plainly is ‘something that gives information,’ a ‘notification,’ and ‘an official or formal statement of facts.'” Id. (quoting dictionary definitions of “report.”). Attachments to those agency responses, too, fall under the FCA’s public disclosure bar. “Any records the agency produces along with its written FOIA response are part of that response. . . . Nothing in the public disclosure bar suggests that a document and its attachments must be disaggregated and evaluated individually.” Id. at 9. The Court concluded that the DOL’s three written FOIA responses to Mrs. Kirk’s requests, along with the attached records, were “reports” within the meaning of the public disclosure bar, and remanded on the issue of whether Kirk’s suit is “based upon . . . allegations or transactions” disclosed in the FOIA responses.


In holding that FOIA responses are qualified disclosures under the FCA public disclosure bar, the Supreme Court simply affirmed that if the information on which a claim is based is publicly available through a report, then private citizen action should be subject to jurisdictional challenge. The qualified disclosure may not defeat jurisdiction if the relator is an original source of the information, a statutory check on the dismissal of qui tams where the relator has personal knowledge of the alleged fraud.

Despite its limited holding, the ruling is significant. There are qui tam actions that are derived from legitimate knowledge of the relator and but for personal knowledge of the relator the alleged fraudulent schemes would not be discovered and pursued. It has long been recognized, however, that the qui tam provisions provide only limited jurisdiction for private citizen actions to protect against potential abuse and manipulation by opportunistic suits. Indeed, this concern was at the fore of the Court’s consideration. “The sort of case that Kirk has brought seems to us a classic example of the ‘opportunistic’ litigation that the public disclosure bar is designed to discourage” the majority wrote. “[A]nyone could have filed the same FOIA requests and then filed the same suit.” Id. at 10-11. Prohibiting the use of publicly available information via FOIA to sustain private citizen bounty suits under the FCA qui tam actions avoids a potentially major abuse of the qui tam provisions and preserves the FCA’s statutory equipoise of balancing the rights of all parties in advancing the public interest of this important statute.

A dissent authored by Justice Ginsburg disagreed with the statutory analysis and invited congressional attention to the decision. Such a suggestion may be taken seriously by Congress, which has attempted to overrule many FCA judicial rulings through amendments to the statute in 2009 and 2010.

There remain a host of open issues with respect to the public disclosure bar. Congress made a number of amendments to the public disclosure bar in the Patient Protection and Affordable Care Act (PPACA) of 2010. These amendments include the limiting of the word “report’ to “federal” reports and the new provision that the public disclosure bar does not require dismissal if the government opposes it. The Court made clear that its interpretation of the public disclosure bar did not address the amendments made by PPACA. The Court also noted that there are other open and undecided issues related to the public disclosure bar, including circuit splits on how “based upon” is defined and whether a relator must voluntarily disclose the information to the government prior to it being publicly disclosed.

FCA qui tam actions where the government has declined to intervene, as here, present substantial opportunities to assess the relator’s jurisdiction to proceed and such challenges should be a threshold issue assessed under Fed. R. Civ. P. 12(b)(1), which also permits discovery in aid of jurisdiction in appropriate circumstances.

AT&T Mobility LLC v. Concepcion – What Does It Mean For Class Arbitration And Class Actions In Federal Antitrust Cases?

On Wednesday, April 27, 2011, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Apr. 27, 2011), holding that the Federal Arbitration Act, 9 U.S.C. sec. 2 (“FAA”) preempts the California Supreme Court’s Discover Bank” rule, which held that class action waivers in arbitration agreements were unconscionable and unenforceable. The Supreme Court held that California’s Discover Bank rule directly conflicted with the central purpose of the FAA, which is to ensure that private arbitration agreements are enforced according to their terms.

The AT&T Mobility decision rests on preemption grounds and does not necessarily resolve the question of whether class action waivers can be enforced against plaintiffs pursuing federal antitrust claims. However, the Second Circuit addressed that precise issue only weeks earlier in In re American Express Merchants’ Litig., 634 F.3d 187 (2d Cir. 2011), in which it held that class action waivers contained in an arbitration agreement were not enforceable against a class of plaintiffs pursuing tying claims against American Express under Section One of the Sherman Act. Thus, the stage may now be set for the Supreme Court to decide this issue. Although the Supreme Court expressed great hostility to class arbitration in AT&T Mobility, it is not a foregone conclusion that it will similarly hold class action waivers unenforceable in the context of federal antitrust claims. On the other hand, if it does so hold, the entire landscape of antitrust consumer class actions could drastically change.

1. The AT&T Mobility Decision

The FAA, 9 U.S.C. sec. 2, provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In AT&T Mobility, the Supreme Court held that under the FAA, states may not condition the enforceability of arbitration agreements on the availability of class procedures.

At the district court level, plaintiffs alleged that defendant AT&T unlawfully charged them sales tax on free cell phones. The agreements between AT&T and its cell phone customers included mandatory arbitration provisions coupled with class action waivers. The district court denied AT&T’s motion to compel arbitration, holding that the class action waivers rendered the mandatory arbitration agreements unconscionable and unenforceable under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). The Ninth Circuit affirmed, holding that the FAA did not preempt California law

The Supreme Court reversed the Ninth Circuit and held that the FAA preempted California’s “Discover Bank” rule. As the Court explained: “Although sec. 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” (Slip Op. at 9). The principal purpose of the FAA is to enforce arbitration agreements according to their terms. (Id.). Thus, states may not apply generally applicable contract defenses in a way that “disfavors arbitration.” (Slip Op. at 7). The Court found that the California Supreme Court’s use of the generally applicable unconscionability doctrine to render arbitration agreements with class action waivers unenforceable “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (Slip Op. at 9). The Court noted that, otherwise, states could rely on the doctrine of unconscionability or other general contract principles to strike down arbitration agreements based on other fundamental differences between arbitration and litigation: “The same argument might apply to a rule classifying as unconscionable arbitration agreements that fail to abide by the Federal Rules of Evidence, or that disallow an ultimate disposition by a jury.” (Slip Op. at 8).

The Supreme Court went on to express strong views against class arbitration, holding: “Arbitration is poorly suited to the higher stakes of class litigation.” (Slip Op. at 16). The decision discusses numerous problems with class arbitration, including: (1) lack of incentives for lawyers to arbitrate individual claims; (2) lack of incentives for companies to resolve individual claims; (3) arbitrators’ general lack of experience with class issues; (4) added difficulties with respect to confidentiality; (5) increased delay and procedural complexity; (6) required use of formal procedures sufficient to bind absent class members; (7) increased risk that errors will go uncorrected due to difficulty in obtaining review from arbitration decisions; and (8) increased settlement pressure on defendants. (Slip Op. at 13-17).

2. The Second Circuit’s decision in In re American Express Merchants’ Litig.

Only weeks before the Supreme Court decided AT&T Mobility, the Second Circuit held in In re American Express Merchants’ Litig., 634 F.3d 187 (2d Cir. 2011) that a mandatory arbitration agreement containing a class action waiver was unenforceable in a case involving federal antitrust claims brought by merchants against American Express. There, plaintiffs brought a tying claim against American Express under Section One of the Sherman Act, alleging that defendant American Express unlawfully forced them to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards. The contracts between the merchants and American Express included mandatory arbitration clauses that prohibited class actions. In 2006, the district court granted American Express’s motion to compel arbitration. In 2009, the Second Circuit reversed, holding that the class action waivers were unenforceable because they would grant American Express “de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.” 634 F.3d at 192. The Supreme Court granted American Express’s petition for writ of certiorari and remanded in light of its decision in Stolt-Nielsen S.A. v. Animalfeeds Intr., 130 S. Ct. 1758 (2010), which holds that class arbitration may not be imposed on a party that has not agreed to it.

On March 8, 2011, on remand, the Second Circuit reaffirmed its earlier 2009 decision. According to the Second Circuit, Stolt-Nielsen was inapposite: “Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable.” 634 F.3d at 193. The Second Circuit repeated much of its earlier 2009 decision and relied heavily on expert testimony explaining that individual arbitration of antitrust claims was cost prohibitive: “We find the record evidence before us establishes, as a matter of law, that the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.” Id. at 197-98. According to the Second Circuit, the class action waivers amounted to waivers of plaintiffs’ federal antitrust claims, and could not be enforced for public policy reasons based on Supreme Court precedent prohibiting waivers of antitrust liability.

3. Will the Supreme Court uphold the enforceability of class action waivers in federal antitrust cases?

The Second Circuit recently stayed the proceedings in In re American Express, and it appears that the Second Circuit will likely reconsider its decision in light of AT&T Mobility. Once that occurs, the stage may be set for the Supreme Court to review the Second Circuit’s decision in In re American Express and decide whether agreements that waive plaintiffs’ rights to pursue classwide relief in federal antitrust cases are enforceable. Unlike the AT&T Mobility decision, which involved a conflict between the FAA and California state law, this question pits the FAA against the federal antitrust laws. Indeed, the Supreme Court has already indicated its interest in resolving conflicts between the FAA and other federal laws, as just days ago, the Supreme Court granted certiorari in Compucredit Corp. v. Greenwood, No. 10-948, (cert. granted May 2, 2011) and will address a similar conflict between the FAA and statutory rights under the federal Credit Repair Organization Act (“CROA“) (the Ninth Circuit in Compucredit held that an arbitration agreement could not be enforced because plaintiffs’ right to sue in court cannot be waived under the CROA).

To resolve the conflict between the FAA and federal antitrust laws, the Supreme Court must give consideration “to the total corpus of pertinent law and the policies that inspired ostensibly inconsistent provisions.” Boys Markets v. Clerks Union, 398 U.S. 235, 250 (1970). On the one hand, the purpose of the FAA is to enforce the terms of arbitration agreements, but on the other hand, federal antitrust laws are designed to promote competition. This battle has several possible outcomes:

  1. The Court could agree with the Second Circuit and hold that class action waivers are unenforceable in the context of federal antitrust claims because it is cost prohibitive to arbitrate antitrust claims on an individual basis, and, as the Second Circuit observed, it is “a firm principle of antitrust law that an agreement which in practice acts as a waiver of future liability under the federal antitrust statutes is void as a matter of public policy.” In re American Express, 634 F.3d at 197.
  2. The Court could disagree with the Second Circuit and and hold that class action waivers are enforceable in the context of federal antitrust claims because it is not cost prohibitive to arbitrate antitrust claims on an individual basis, and, as the Supreme Court has observed, the central purpose of the FAA is to enforce arbitration agreements according to their terms. AT&T Mobility, Slip Op. at 9.
  3. The Court could agree with the Second Circuit that it is cost prohibitive to arbitrate antitrust claims on an individual basis, but nevertheless hold that class action waivers are enforceable in the context of federal antitrust claims. To do so, the Court would need to find that the policy reasons supporting the FAA and its goal of enforcing arbitration agreements strongly outweigh any antitrust policy concerns. The Court could diminish the purportedly “firm principle of antitrust law” against waivers of future antitrust liability. The Court could also hold that the risk of immunizing federal antitrust violations through class action waivers is low because violators would still be subject to government enforcement and private suits by competitors.
  4. The Court could disagree with the Second Circuit and hold that it is not cost prohibitive to arbitrate antitrust claims on an individual basis, but nevertheless hold that class action waivers are unenforceable in the context of federal antitrust claims. To do so, the Court would need to find that antitrust policy concerns strongly outweigh any FAA policy concerns. The Court could find that any disincentive to private enforcement of federal antitrust laws gives violators too much protection and is intolerable, noting that it is precisely because antitrust violations are difficult to detect and prove that Congress provides for treble damages in antitrust cases.
  5. The Court could partially agree with the Second Circuit and hold that while the class action waivers are unenforceable under the specific facts of In re American Express, their enforceability must be determined on a case-by-case basis, and might be held enforceable in a case where individual claims are large enough.
  6. The Court could partially disagree with the Second Circuit and hold that while the class action and class arbitration waivers are enforceable under the specific facts of In re American Express, their enforceability must be determined on a case-by-case basis, and might be held unenforceable if the individual claims are small enough.
  7. The Court could also disagree with the Second Circuit and hold that its decision is barred by Stolt-Nielsen. There, the Supreme Court reversed a Second Circuit decision upholding a class arbitration award, holding that class arbitration procedures were inappropriate because the arbitration agreement was silent with respect to class arbitration. In In re American Express, the Second Circuit distinguished Stolt-Nielsen, holding: “Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable.” 634 F.3d at 193.

These are just some of the possible outcomes if the Supreme Court decides to review the Second Circuit’s In re American Express decision and decide the issue. Should the Supreme Court hold that class arbitration waivers coupled with mandatory arbitration provisions are indeed enforceable, this decision has the potential to drastically change the landscape of consumer antitrust class actions in federal court. One would expect sellers to start adding these provisions to every contract, if they have not already done so. If this practice becomes widespread, antitrust class actions brought by direct purchasers should decrease and potentially stop altogether. On the other hand, indirect purchasers would not be subject to the terms of arbitration agreements between direct purchasers and upstream sellers, and could still pursue classwide relief to the extent permitted by state law.

With the 2005 enactment of The Class Action Fairness Act, 28 U.S.C. sec. 1332(d) (“CAFA”), defendants now routinely remove indirect purchaser class actions from state to federal court. Thus, a Supreme Court decision enforcing class arbitration waivers coupled with mandatory arbitration provisions may indirectly transform federal courts from venues that previously only entertained antitrust overcharge cases brought by direct purchasers between 1977 and 2005, to venues that decide only antitrust overcharge cases brought by indirect purchasers. This result surely was not envisioned by the Supreme Court when it decided Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) and held that indirect purchasers lack standing to seek antitrust relief in federal courts specifically because of the difficulties inherent in proving overcharge damages passed on to indirect purchasers.

Haitian TPS Extended

Secretary of Homeland Security Janet Napolitano announced on today that the Department of Homeland Security would extend Temporary Protected Status (“TPS”) for Haitians currently residing in the United States.  The extension of TPS will allow the approximately 48,000 Haitian nationals with TPS residing in the US to remain in the country an additional 18 months through January 22, 2013.  This is a very relieving development for all current Haitian US citizens who reside here legally under TPS.

DHS’s compassionate and humane response to the victims of the earthquakes in Haiti is evidence of the ability of the Executive branch to fix our broken immigration system.  Immigration reform, though necessary, can be implemented in a responsible manner.

Ignorance Is Not Bliss: Knowing When to Issue a Litigation Hold

Has your company adopted a records management and document retention program that will pass legal muster?  Does your company have a protocol in place to ensure that a litigation hold is issued at the right time and to track compliance after the hold is issued?  If not, a recent federal court decision  serves as a stark reminder that employers must issue litigation holds on a timely basis and track compliance with the directives found in the hold.  In Green v. Blitz U.S.A., Inc. (E.D. Tex. 2011), the court sanctioned the defendant in a products liability case when it learned, more than two years after the case had closed, that the defendant declined to issue a litigation hold and destroyed potentially relevant documents.

In Green, the jury returned a verdict in favor of the defendant, but discovery in a related case later revealed that the defendant had failed to produce a number of relevant documents.  Further inquiry revealed that the defendant had never issued a litigation hold, had placed a self-confessed “computer illiterate” in charge of its document retention efforts, had declined to conduct an electronic word search for relevant e-mails and had failed to suspend its standard document destruction policy.  In addition to imposing a $250,000 sanction, the court also required the defendant to provide a copy of the court’s order and opinion to every plaintiff in every lawsuit pending against it in the past two years, and to file a copy with its first responsive pleading in every new lawsuit for the next five years.

Although employers and attorneys have become increasingly familiar with the duty to preserve relevant evidence, Green demonstrates that some companies continue to get it wrong.  It is increasingly important to understand what events will likely trigger the duty to preserve in the context of an employment-related dispute, and what types of documents must be protected.

Triggering Events

An employer has a duty to preserve documents when it knows or should know that evidence is relevant to a current or future legal action.  This duty arises automatically when an employer reasonably anticipates litigation.  An employer can reasonably anticipate litigation when it receives notice that it is party to a legal or administrative proceeding.  See, e.g., Jones v. Bremen High Sch. Dist. 228, No. 08-CV-3548, 2010 WL 2106640, at *6 (N.D. Ill. May 25, 2010) (“Defendant clearly had a duty to preserve documents relevant to plaintiff’s claims when it received notice of plaintiff’s EEOC charges.”); Mosaid Tech. Inc. v. Samsung Electronics Co., 348 F. Supp. 2d 332, 336 (D.N.J. 2004) (“[T]he duty to preserve exists as of the time the party knows or reasonably should know litigation is foreseeable.  At the latest, in this case, that time was . . . when [the plaintiff] filed and served the complaint.”).

An employer may also have a duty to preserve evidence before any formal proceeding has begun.  For example, some courts hold that an employer can reasonably anticipate litigation when it receives a letter threatening potential legal action and requesting the preservation of relevant information.  See, e.g., D’Onofrio v. SFZ Sports Group, Inc., No. 06-687, 2010 WL 3324964, at *7–8 (D.D.C. Aug. 24, 2010) (holding that the employer had a duty to preserve relevant evidence when it received a letter from the plaintiff stating that she intended to initiate litigation, and requesting that electronically stored information be preserved); Sampson v. City of Cambridge, 251 F.R.D. 172, 181 (D. Md. 2008) (stating that “[i]t is clear that the defendant had a duty to preserve relevant evidence . . . when plaintiff’s counsel sent the letter to defendant requesting the preservation of relevant evidence, including electronic documents.  At that time, although litigation had not yet begun, defendant reasonably should have known that the evidence described in the letter ‘may be relevant to anticipated litigation.’”)

An employer may even have a duty to preserve relevant evidence, based simply on the totality of the circumstances.  In one case, a federal court in Connecticut upheld a $2.6 million jury verdict and held that it was proper to instruct the jury to draw an adverse inference against the employer for failing to suspend its standard document destruction policy three months before the plaintiff filed the complaint.  The court reasoned that several factors demonstrated that the employer could have reasonably anticipated litigation well before the complaint was filed, including:  the nature and severity of the plaintiff’s injury, the employer’s pre-litigation retention of a medical expert and claims manager to evaluate the scope of the plaintiff’s injury, and the use of video surveillance to monitor the plaintiff’s activities.  While the court declined to cite a single triggering event, it concluded that the totality of the circumstances indicated the employer had a duty to preserve documents at the time it destroyed certain reports.

These cases make clear that employers should routinely evaluate what events trigger the duty to preserve.  Moreover, simply issuing a litigation hold or asking employees to preserve documents, without actively monitoring compliance, is insufficient to avoid legal liability.  Employers should develop a standardized process to identify triggering events and ensure that key players understand their preservation obligations.  Many employers, for example, issue a legal hold and require recipients to certify in writing that they have identified all relevant information.  Other employers periodically circulate legal holds to notify new employees and remind existing employees of the ongoing duty to preserve.  In light of the potential sanctions that can be imposed on noncompliant companies, it is essential that employers implement a standardized process for issuing legal holds and ensuring compliance.

Types of Documents to Preserve

As a general rule, an employer need not preserve “every shred of paper, every e-mail or electronic document, and every backup tape.”   Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217 (S.D.N.Y. 2003).  Rather, an employer need only preserve “unique, relevant evidence that might be useful to an adversary.”  Id.  The scope of this duty will vary depending on the nature of the claim, but information must be preserved that an employer knows or should know is relevant to the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, or is the subject of a pending discovery request.  This includes electronic and hard copy documents that are in existence at the time the duty attaches, and all relevant documents created thereafter.

Typically, in an employment discrimination case, an employer must preserve the claimant’s personnel file, e-mail account for the time in question, and correspondence to and from supervisors and other key players, including human resources professionals involved in the adverse employment action.  The employer should also preserve information related to potential comparators.  This may include employees who worked in the same position as the claimant, reported to the same supervisor or were subject to the same type of treatment or adverse action.  Information related to the nature, timing and resolution of any other recent discrimination claims filed against the employer should also be preserved.

There is no one-size-fits-all approach to issuing legal holds, and applying the duty to preserve to real-world situations often presents a challenge.