New Data Reveals Immigrants’ Voting Potential at the Local Level

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Race Discrimination: U.S. Supreme Court Cases

Below is a list of U.S. Supreme Court cases involving race discrimination and the rights of members of racial groups, including links to the full text of the U.S. Supreme Court decisions.

  • Korematsu v. U.S. (1944)
    The Court in this case upheld the conviction of an American of Japanese descent, who had been prosecuted for remaining in California after a 1942 presidential order designating much of the west coast a “military area”, and requiring relocation of most Japanese-Americans from California (among other west coast states)
  • Shelley v. Kraemer (1948)
    This decision held that “racially restrictive covenants” in property deeds are unenforceable. In this case, the “covenants” were terms or obligations in property deeds that limited property rights to Caucasians, excluding members of other races.
  • Bailey v. Patterson (1962)
    The Court in this case prohibited racial segregation of interstate and intrastate transportation facilities.
  • Loving v. Virginia (1967)
    This decision holds that state laws prohibiting inter-racial marriage are unconstitutional.
  • Jones v. Mayer Co. (1968)
    The Court held in this case that federal law bars all racial discrimination (private or public), in sale or rental of property.
  • Lau v. Nichols (1973)
    The Court found that a city school system’s failure to provide English language instruction to students of Chinese ancestry amounted to unlawful discrimination.
  • Batson v. Kentucky (1986)
    This decision holds that a state denies an African-American defendant equal protection when it puts him on trial before a jury from which members of his race have been purposefully excluded.
  • Grutter v. Bollinger (2003)
    In this case, the Court finds that a law school’s limited “affirmative action” use of race in admissions is constitutional.

Prisoner Rights & Resources

Welcome to the “Prisoners Rights & Resources” section. This section contains links to a variety of national resources related to corrections and the rights of those incarcerated. To suggest a resource for this list, please contact us.

American Civil Liberties Union
The official Prison Rights website of the American Civil Liberties Union (ACLU), the only national litigation program on behalf of prisoners.
Rights of Inmates
A comprehensive overview of the constitutional rights of those incarcerated.
National Legal Aid and Defender Association
A non-profit organization dedicated to representing indigent defendants.
Prison Activist Resource Center
A source for progressive and radical information on prisons and the criminal prosecution system.
Legal Aid Society of New York
Advocating for constitutional and humane conditions of confinement for prisoners in the New York City and State correctional systems.
Prisoners and Prisoners’ Rights
An overview of inmates’ rights, and links to a menu of related resources.
Justice Denied
A magazine devoted to helping people who have been wrongly convicted in the U.S.
Partnership for Safety and Justice
The Partnership for Safety and Justice (formerly The Western Prison Project) publishes a prisoner support directory.
National Coalition to Abolish the Death Penalty
The official website of the only fully-staffed national organization exclusively devoted to abolishing capital punishment.
Stop Prisoner Rape
CLAIM
A Chicago-based organization providing legal and educational services, to help imprisoned mothers preserve their families.
Preventing Prison Rape
Addressing the epidemic in the country’s prison facilities.
Amnesty International
Human Rights Watch
Website of an organization seeking to end the abusive treatment of prisoners.
HIV & Hepatitis Education Prison Project
Concerned with educating and informing on infectious disease in corrections.
National Ass’n of the Deaf – Rights of Deaf Inmates
An overview of rights and remedies for deaf inmates.
The Eighth Amendment
A look at the source of a prisoner’s constitutional rights.
Death Penalty Information Center
A non-profit organization serving the media and the public, with analysis and information on issues concerning capital punishment.
Books Not Bars
Working to expose and end the over-incarceration of youth
Prisoner Action Coalition
Advocating to improve conditions in California prisons, and assist individual prisoners with legal matters.
Equal Justice, USA
Mobilizing and educating citizens around crime and punishment, including racial, economic, and political biases.
The Other Side of the Wall
A collection of news, articles, and resources related to prisons, prisoners, and the death penalty.
Prison Legal News
An independent publication that reports, reviews, and analyzes court rulings and news related to prisoner rights and prison issues.
Jewish Prisoner Services International
Providing direct spiritual, outreach, and advocacy services for Jewish prisoners and their loved ones.
The Sentencing Project
A national leader in the development of alternative sentencing programs and in research and advocacy on criminal justice policy.
Citizens United for Rehabilitation of Errants (C.U.R.E.)
Nation-wide grass roots organization dedicated to reducing crime through reform of the criminal justice system.
Native American Indian Spiritual Freedom in Prison
Discusses recent cases and provides links to related resources.
Prisoner Advocacy Network
Prisoners and advocates united for human rights.

Standing Under California § 17200 Only Requires Injury From Business Practice

Drawing upon recent California Supreme Court rulings, the U.S. Court of Appeals for the Federal Circuit reversed a California federal district court’s dismissal of claims under the state’s unfair competition law, finding the court had wrongly dismissed the claims for lack of standing. Allergan, Inc. et. al. v. Athena Cosmetics, Inc. et. al., Case No. 10-1394 (Fed. Cir., May 24, 2011) (Gajarsa, J.).

Allergan, a manufacturer of an FDA-approved treatment for inadequate eyelash growth, Latisse®, brought suit alleging the defendants had infringed or induced infringement of multiple patents. Allergan also claimed defendants violated California’s unfair competition law, U.C.L. §§17200 et seq. With respect to the latter claim, Allergan contended that defendants’ manufacture, sale or marketing of hair/eyelash growth products that had not been approved by the FDA or state health regulators constituted unfair competition under the California statute.

The defendants countered that Allergan lacked standing because the statute only protects persons who have suffered a loss that is eligible for restitution. Restitution is a remedy that seeks to restore the status quo; it requires the plaintiff to have had an ownership interest in the money or property it seeks to recover. The district court found Allergan had no such interest in lost profits or market share because defendants’ profits derived from third-party consumers. Allergan appealed; its patent claims were stayed pending appeal of the unfair competition claim.

The Federal Circuit rejected the district court’s narrow view of the California unfair competition statute. While acknowledging that California voters had approved Proposition 64 to restrict standing requirements and address abuses that had resulted in frivolous lawsuits, the Court noted that the California Supreme Court’s decisions in two cases that were decided while the Allergan appeal was pending (Kwikset Corp. v. Superior Court of Orange County and Clayworth v. Pfizer, Inc.,), demonstrated that Proposition 64 did not limit standing solely to injuries compensable by restitution. Instead, a plaintiff need only allege an injury in fact that was the result of the unfair business practice. Applying this reasoning, the Court held that Allergan had adequately pleaded a claim under U.C.L. §17200.

Importantly, the Court also rejected the defendants’ claims that standing under U.C.L. §17200 required a plaintiff to have direct business dealings with a defendant. The Court denied that Proposition 64 added any such “business dealings” requirement to U.C.L. §17200 claims.

Practice Note: The Allergan decision demonstrates that while standing to file suit under §17200 is more limited than it was in the past, §17200 remains a potent tool that litigants can use to challenge a competitor’s practices.

The Perils of Email: Navigating the Legal Risks

In 2011, the typical corporate user will send and receive more than 110 electronic messages a day (over 40,000 per year), according to the Radicati Group. The number of worldwide email accounts is projected to increase from over 3.1 billion in 2011 to over 3.8 billion by 2014, 25% of which will belong to corporate users. As technology continues to drive growth and expansion for businesses, greater volumes of communication will be handled via email.

Although electronic messaging makes communication easier, faster and less expensive, it also creates an extraordinary set of issues. Identifying these perils and developing procedures to avoid them is critical for every company.

Information Preservation and Hold Notices

Various federal, state and local laws, rules and regulations require corporations to retain electronic communications and other information. For example, Rule 17a-4 of the Securities and Exchange Act requires SEC-regulated companies to retain all communications sent and received for at least three years, the first two in an easily accessible place. NASD Rule 3110 requires members to preserve books, accounts, records, memoranda and correspondence, and under the Sarbanes-Oxley Act, emails can become part of the business records of a company that are to be retained.

But, even when it is not required by law, an email retention policy should be in place. For example, according to a 2008 study by Osterman Research, 66% of the organizations surveyed rely upon email, IM archives or backup tapes to support and defend the organization in litigation. This should come as no surprise. Under the Federal Rules of Civil Procedure, a party generally is entitled to any document – in “hard” or “soft” (i.e., electronic) copy – that “appears reasonably calculated to lead to the discovery of admissible evidence.” Knowing this, litigation battle lines are often drawn around electronically stored information (ESI) and allegations that evidence has been destroyed (or “spoilated”). Savvy lawyers know that ESI discovery costs can drive settlement negotiations, or at least, distract parties from the real issues in the case. It is important, therefore, to have a sound retention policy to help make retrieving data for both business and legal purposes less painful.

Information Retention Policies

The adoption and enforcement of a retention policy is the first step to managing ESI. To be worthwhile, retention policies should: 1) reduce the risk of loss of critical and/or confidential business data, 2) alleviate burdens during an investigation or a lawsuit, and 3) account for information that needs to be retained to advance the goals of the business units and is legally required to be retained by the administrative and regulatory entities to which the corporation reports. What this means is that information critical for business continuity should be backed-up, retained and stored in a sensible way for retrieval. In developing retention policies, management should consider the importance and usefulness of information that is not legally required to be retained against the potentially high costs of locating and producing the information if required to do so later.

Determining what information to retain should be a collaborative process that includes at least one member of the IT department, the legal department, the affected business unit or units and human resources. That team should appoint a leader, most likely a legal department member, who is charged with mastering all facets of the policy and assuming ultimate responsibility for implementing and supervising all of its requirements. In terms of litigation, one of the requirements should include the process for retrieval, taking into consideration the time, manpower and monetary expense needed to actually assimilate relevant information for review and production.

After the policy is implemented, an ESI task force should schedule periodic reviews to test the retention procedures in order to confirm that the scope of retention adequately meets the over-arching goals, and that record-purging and backup activities are occurring and are documented. Additionally, the task force should ensure that data on all servers, desktops, laptops, PDAs, etc. is accounted for in the regularly scheduled purging cycle. When financially feasible, periodic audits of the policy and the processes, with the assistance of a third party, can verify and enhance reliability and compliance.

A lot of effort goes into formulating an effective retention policy and adequately communicating its importance to all of the persons affected by it.  As one analyzes ways to improve and enforce the policy, one should be mindful to consider whether the policy includes certain characteristics as suggested by information management firm Iron Mountain’s Records Management Best Practices Guide. These include:

  • A sound and defensible record retention schedule that captures and reviews all records created by all business units.
  • Electronic records that are migrated into a digital archive equipped with efficient and effective tools for searching, discovery organization and retention management.
  • A retention program with components integrated into an internal audit process.
  • Appropriate disposal methods, based on the different record classes or media types employed by the end-users of the electronic media.

Managing the Litigation Hold

Information retention policies that are reasonable outside the litigation context may nevertheless result in the destruction of ESI that would be relevant in litigation and give rise to a claim of spoliation. A proactive approach to thwart such a claim should require strong lines of communication between management, IT and legal and a keen appreciation for determining the date at which the company may “reasonably anticipate litigation.” Indeed, courts have insisted upon the suspension of routine document retention and destruction policies at the moment a party reasonably anticipates litigation. At that instance, a litigation hold notice should be prepared and distributed to all key personnel.

Obviously, deciding what to retain for purposes of a litigation hold is as equally important as determining when to distribute the litigation hold notice. For this reason, it is recommended that the litigation hold notice be a joint effort between in-house and outside counsel, and include language broad enough to describe categories of information that may be relevant to both the defense and prosecution of any reasonably anticipated claim. The litigation hold notice should also clearly identify one or two people to whom all questions should be directed and describe which ESI storage devices are subject to the hold. In more significant litigation, counsel should also plan to meet and interview key custodians and summarize the efforts undertaken to preserve and collect documents and ESI. While the summary should be privileged, it is an important document that counsel may refer to in defending a claim challenging the integrity of the litigation hold. In short, a well thought out and executed litigation hold plan may save a bundle of money (both in legal fees and possible sanctions) in responding to allegations of spoliation or other nonsensical litigation gamesmanship.

Avoiding Sanctions

Spoliation is “the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” Courts have broad discretion to impose appropriate sanctions under Rule 37 of the Federal Rules of Civil Procedure when a party spoliates evidence in violation of a court order. However, in the absence of a court order, a party asserting a spoliation motion has the burden to prove spoliation occurred. As a general rule, that party should prove: 1) the party charged with destroying the evidence had an obligation to preserve it; 2) the records were destroyed with a “culpable state of mind”; and 3) the destroyed evidence was relevant to the moving party’s claim or defense.

While evidence of the third point may be under the control of the moving party, proving the first two points will usually require evidence within the possession, custody and control of the party against whom the motion is filed.

As with most prudent plans, the key is to be proactive. The first step to potentially avoid sanctions for spoliation is to initiate the litigation hold as soon as possible. Thereafter, one should immediately identify and modify retention policy features, systems and devices that, in routine operation, would destroy potentially relevant ESI. Then, one should send a notice to all personnel affected by the hold. Purging functions should be disengaged and protocols to overwrite backup media should be suspended. It is also important to be diligent and anticipate what employees will hide, destroy or alter ESI; one should guard against such tactics by interviewing key employees early and monitoring their use of company email and electronic document storage systems for signs of tampering, destruction or other troublesome behavior. An “Electronic Discovery Response Team” composed of management, IT personnel and legal counsel, should be assembled and should secure all storage media containing potentially discoverable data immediately upon receiving a request for production, and document all preservation efforts. In significant matters, consider retaining forensic experts to segregate, image and examine potentially discoverable electronic media both to meet early disclosure deadlines and to be in a better position to avoid abusive fishing expeditions.

Forensic Reviews

No discussion about ESI is complete nowadays without a reference to forensics. According to a November 2007 article in the American Bankruptcy Institute Journal entitled “Digital Forensics 101: Where to Find Critical Evidence,” authors Walt Manning and Michelle Campbell define digital forensics as a practice that “combines elements of law and computer science to collect and analyze electronic data in a way that could be admissible as evidence.” Forensic tools and techniques search every obvious and hidden space for stored data, and usually uncover evidence missed by even a diligent custodian’s review. Common places where stored data is overlooked in the data retrieval process can include computer hard drives, telephones, fax machine transaction records, USB “thumb” drives, optical media such as CD-ROM or DVD disks, backup media, online storage services, off-site archival services, shared network drives, external hard drives, cell phones or PDAs capable of containing email or text messages.

Through the use of forensic tools, techniques and experts, it is possible to: 1) recover deleted files or email messages; 2) recover fragments of data, even if a portion of the original has been permanently deleted; 3) identify and capture relevant data saved on external data storage devices; 4) capture and search data from cellular telephones and personal digital assistants; 5) capture and analyze instant messaging traffic; and 6) analyze internet history and recover images of websites visited. Given the particularly aggressive nature of some lawyers, and the evolving procedural guidelines for ESI discovery, effective internal policies should consider the ability to resurrect and unveil deleted and/or “hidden” ESI. The simple, but harsh, truth is that the days of total document destruction (i.e., shredding) are gone. The concept of “shredding electronic data” is a complex, often incomplete, process.

New Technology, New Threats

The internet and email have revolutionized the way individuals and businesses communicate with each other. As email and text-messaging increasingly become the primary forms of communication, the continued widespread use of email and texting in the corporate setting creates a whole host of interesting issues for companies and their lawyers. In litigation, for example, emails are an important component of discovery and often contain the proverbial “smoking gun.” The best defense is a good offense, which starts with a thoughtful analysis of the threats, backed by sound policies and practices that may ensure the proper use, retention and handling of emails and other ESI.

June Proves To Be A Busy Month For ARB And Its Proposed Cap-and-Trade Program

June was certainly an interesting month for those following the progression of California’s Global Warming Solutions Act (“AB 32”), which requires that California cut greenhouse gas (“GHG”) emissions to 1990 levels by 2020. The “linchpin” of AB 32 is a proposed cap-and-trade program, a market-based approach to reducing GHG emissions in which the California Air Resources Board (“ARB”) sets a collective cap on GHG emissions and then allows under- and over-polluters to buy and sell credits among themselves. However, recent judicial and agency developments have altered the cap-and-trade landscape. At the very least, the cap-and-trade program, if it survives judicial review, will not begin in earnest until 2013 (instead of the planned January 1, 2012 start date).

LITIGATION DEVELOPMENTS

(1) Association of Irritated Residents v. California Air Resources Board

In 2009, a citizen’s group, Association of Irritated Residents (“AIR”), challenged ARB’s adoption of the cap-and-trade program found in the AB 32 Scoping Plan (the Plan for compliance with AB 32), alleging that ARB failed to adequately analyze alternatives to the cap-and-trade program, thereby violating the California Environmental Quality Act (“CEQA”).

On March 18, 2011, Judge Ernest H. Goldsmith of the San Francisco County Superior Court agreed with AIR’s contention that ARB was in violation of CEQA. Judge Goldsmith found ARB had not adequately weighed or analyzed the alternatives to the cap-and-trade program when it adopted an implementation strategy for AB 32. Judge Goldsmith’s final order, including a writ issued on May 20, halted all rule-making activities related to the cap-and trade program until ARB complies with the requirements proscribed under CEQA. (For further discussion on this, please see prior article here.)

(2) District Court of Appeal Grants ARB’s Petition for a Writ of Supersedeas

On June 1, ARB appealed Judge Goldsmith’s final order to the First District Court of Appeal. ARB then filed a petition for a writ of supersedeas, which requested the Court confirm that Judge Goldsmith’s injunction on the implementation of the cap-and-trade program was automatically stayed pending the determination of the underlying appeal. On June 3, the Court of Appeal issued a temporary stay while it considered whether the lower court’s injunction was “mandatory” or “prohibitory.” (For further discussion on this, please see prior article here.)

AIR argued that Judge Goldsmith’s final order was both mandatory and prohibitory. The mandatory element, according to AIR, requires ARB to conduct an appropriate alternative analysis for the Scoping Plan. AIR argued that this part of the injunction may be automatically stayed pending the appeal. However, AIR argued the prohibitory element – the instruction in Judge Goldsmith’s order preventing ARB from continuing to implement and develop its cap-and-trade program – is not automatically stayed once an appeal is filed.

ARB argued that the lower court’s final order would force ARB to miss the first year deadline for completing the necessary rulemaking procedures as directed under the state’s Administrative Procedures Act, thereby eliminating its ability to timely implement AB 32 in accordance with statutory requirements. This injunction, according to ARB, results in improper interference. In the alterative, ARB argued, under a balancing of the harms test, the Court should grant a “discretionary” stay if an automatic stay is determined to be inappropriate.

On June 24, the First District Court of Appeal issued an order granting ARB’s petition for a writ of supersedeas. Pending the Appellate Court‘s consideration of ARB’s appeal, the San Francisco County Superior Court order requiring ARB to halt all development and implementation of the cap-and-trade program is stayed. This means ARB is permitted to continue to advance and finalize plans for the cap-and-trade program while the Appellate Court determines the merits of ARB’s appeal.

Ass’n of Irritated Residents v. CARB, Case No. A132165, in the California First District Court of Appeal can be found here.

AGENCY DEVELOPMENTS

(1) ARB Releases Supplemental Analysis of Scoping Plan Alternatives

While the Court of Appeal took into consideration the arguments regarding ARB’s petition for the stay, ARB pursued another course of action. On June 13, ARB released a revised and supplemental analysis of alternatives to the Scoping Plan (the “Supplement”). (The Supplement can be found here.)  The release began a forty-five (45) day public review and comment period. In addition, ARB has scheduled two public hearings for July 8 and July 15 to discuss the Scoping Plan.  ARB also formally noticed a hearing before the full Board for August 24, 2011.

The Supplement presents a revised analysis for five (5) proposed alternative measures to be potentially utilized in implementing AB 32’s Scoping Plan and is much more detailed than the original environmental analysis. The Supplement reassesses the following alternatives, which were included in the original analysis:

a.       A “no project” alternative (or taking no action at all);[1]
b.      A plan relying on a cap-and-trade program for sectors included in a cap;[2]
c.       A plan relying more on source-specific regulatory requirements with no cap-and-trade component;[3]
d.      A plan relying on a carbon fee or tax;[4] and
e.       A plan relying on a variety of proposed strategies and measures.[5]

This new analysis incorporates emissions projections that take into account current economic forecasts and already implemented reduction measures. All the alternatives discussed, excepting the no project alternative, would achieve 2020 target levels. According to the Supplement, ARB believes that the cap-and-trade program and the mixed strategy approach would have the best chance of success. Importantly, the Supplement not only includes a revised alternatives analysis, it also includes significant revisions to the amount of GHG emissions needed to reach 1990 levels by the target date.[6]

After the forty-five (45) day review period, ARB will consider and prepare written responses to the public comments received. This should discharge Judge Goldsmith’s determination that ARB violated CEQA by commencing the implementation of the Scoping Plan prior to adequately responding to comments.

At the August 24 hearing, which will be at the Cal/EPA headquarters in Sacramento at 9:00 a.m., the Board will then determine, in light of the comments, responses and revised environmental analysis, whether the selection of the cap-and-trade program was appropriate. Thus, the Supplement offers a shield to protect ARB regardless of the determination of the appeal. With the Supplement and the subsequent review process, ARB retains the ability to request Judge Goldsmith dissolve his final order and injunction as the agency would have remedied the violations noted in the final order and would now be in compliance with CEQA.

(2) ARB Delays Required Compliance with Cap-and-Trade Program Until 2013

On June 29, ARB Chairwoman Mary Nichols told lawmakers at the California Senate Select Committee on the Environment, the Economy and Climate Change that ARB is planning to “initiate” the cap-and-trade program on January 1, 2012 but not “start the requirements for compliance” until January 1, 2013. Nichols stated the decision came “in light of the importance of this regulation to the success of California’s climate change program and the need for all necessary elements to be in place and fully functional.” (Nichols’ full transcript can be read here.)  In conjunction with news of this delay, ARB will release a draft of regulations regarding offset protocols and allowance distribution within the next two (2) weeks.

In her testimony, Nichols stated that the postponement of the compliance date would not affect the stringency of the program or the total amount of GHG emissions that industries would be mandated to reduce by 2020. Specifically, Nichols believes, “It gives [ARB] 2012 to work our stress tests, go through any issues anyone might raise…and come up with answers.” In short, the delay will not extend the 2020 target date required by AB 32.

Under the delay, the quarterly auctions of emissions allowances that each large emitter in California must turn in would commence in the second half of 2012, and not in February 2012 as originally planned. Entities that emit more than 25,000 metric tons of carbon dioxide per year will begin trading credits at the end of 2012 to cover emission reduction obligations for 2013 and later.

The cap-and-trade program requires covered facilities to surrender allowances and offsets once every three (3) years. Under this newly announced delay, the original first three (3) year compliance period (2012-2014) will be shortened to two (2) years.

According to Nichols’ testimony, the decision to delay the compliance requirements came after Nichols conferred with the State Attorney General’s Office and experts on California’s disastrous attempt to participate in deregulated electricity sales, which lead to widespread fraud and rolling black-outs experienced by much of the State in 2000-2001. Despite Nichols assertion that the pending litigation was not a deciding factor, many commentators believe that a principal reason for the delay is to ensure compliance with CEQA.

In an emailed statement issued by ARB clarifying Nichols’ testimony, ARB spokesperson Stanley Young, stated: “ARB will be initiating all elements of the cap-and-trade program throughout 2012, including establishing a market infrastructure, developing market oversight mechanisms, conducting trainings, holding auctions and developing linkages with partners in the Western Climate Initiative. This will ensure that we have tested the program prior to moving into the first year of compliance. The only change is shifting the first compliance obligation to 2013.”

Josh Margolis, CEO of CantorCO2e, a Cantor Fitzgerald LP subsidiary that provides financial services to the environmental and energy markets, offers the following take-aways from Nichols’ statement, as determined through CantorCO2e’s interactions with ARB staff:

a.       The most significant change is excusing sources from the need to secure and retire allowances or offsets to account for 2012 emissions;
b.      There will be no 2012 allowances issued;
c.       There will be the same reduction obligation by 2014 as under the original schedule, but “[t]he reduction forced by the declining cap that was originally scheduled to occur over a three (3) year period will now occur over a two (2) year period;”
d.      An underdetermined number of auctions will happen in 2012;
e.       In the 2012 auctions, 2013 and future vintage allowances will be auctioned; and
f.       ARB will issue a statement this week that clarifies and answers many of the above items, and addresses other issues as well.

Some commentators see this delay as a potentially detrimental roadblock for the future of the cap-and-trade program.  Peter Asmus, a senior analyst at Pike Research, stated: “I think it’s a sign of a lack of faith in the whole cap-and-trade concept, which was also shot down at the federal level…[It] shows the push back on the environmental regulations is even occurring in California.”

However, not all are pessimistic. State Senator Fran Pavely (D), author of AB 32, had originally called this meeting to discuss the implications and consequences of Ass’n of Irritated Residents v. CARB. After the meeting, Pavely stated: “This modest delay in implementation is prudent. The one-year period will provide flexibility; allowing us to road-test market mechanisms to see how they will work, while ensuring that the greenhouse gas pollution reductions required by the program remain intact.”

Margolis is equally optimistic about the delay, as he believes it might have the effect of keeping more businesses in the California. According to Margolis, “Chairman Nichols has delivered an elegant solution that will keep the environment whole and have a minimal impact on sources.”

Again, only time will tell what the final determination of Ass’n of Irritated Residents v. CARB and the future of the cap-and-trade program as proposed by AB 32 will be. More updates to come…

[1] This alternative is based on “existing conditions.” In establishing this baseline, the Supplement reflects the current status of other Scoping Plan measures. This includes those already adopted by ARB under AB 32 or enacted independently by State Legislature. The Supplement estimates the no-project approach would fall 22 million metric tons of CO2-equivalent emissions short of the 2020 target reduction levels.

[2] This alternative looks at several examples of cap-and-trade programs enacted throughout the country and internationally. The Supplement identifies problems associated with these existing programs and offers ways California can avoid similar concerns. The Supplement also proposes an “adaptive management program” that would require ARB to monitor local air quality impacts and provide adjustments in order to deal with such impacts. This provision is probably included in response to AIR’s original challenge that the use of cap-and-trade could result in the concentration of emissions in low-income and minority neighborhoods.

[3] This alternative uses remediation measures that target specific sources of GHG emissions – including, but not limited to, oil and gas extraction plants, refineries, transportation sources, and cement plants. ARB states there is significant concern in implementing this alternative as it poses a substantial risk of emissions “leakage” or the relocation of these sources to other states.

[4] This alternative discusses examples of currently enacted fee programs and design considerations. ARB believes enacting a carbon fee or tax would be inefficient and potentially impossible. (In California, any tax must obtain a two-thirds (2/3) vote of the State Legislature and that any fee must be placed within the boundaries of California Supreme Court’s Sinclair decision and Proposition 26.) ARB has leakage concerns in regards to this alternative as well.

[5] This alternative proposes a mix of the three previous alternatives, not including the no project alternative.

[6] The original Scoping Plan estimated that the 2020 target level was 427 million metric tons of CO2-equivalent emissions (the 1990 level). Under a “business-as-usual” approach, which was assumed to result in 596 million metric tons of CO2-equivalent emissions, the Scoping Plan estimated a reduction of 169 million metric tons. However, with the economic recession and the reduction measures currently implemented, the Supplement states the current reduction needed to attain 2020 target level is now 80 million metric tons. The 2020 level under the same “business-as-usual” approach is estimated to be 507 million metric tons.

Ninth Circuit Finds Jurisdiction Over Foreign Corporation Based On Its Subsidiary’s Contacts in the United States

In the recent case of Bauman v. DaimlerChrysler Corp. (No. 07-15386 (9th Cir. May 18, 2011)), the Ninth Circuit expanded the use of agency theory” to impose personal jurisdiction over a foreign corporation doing business in the U.S. solely through its U.S. subsidiary. The court found jurisdiction based on the subsidiary’s contacts within California, even though the lawsuit was initiated by non-U.S. residents regarding acts allegedly committed in a foreign country that had nothing to do with the subsidiary’s contacts.

If this decision stands, it has the potential to affect any foreign company doing business in the U.S. through subsidiaries, even if those subsidiaries have nothing to do with the company’s alleged actions giving rise to the lawsuit.

In the decision, the Ninth Circuit held that personal jurisdiction existed over DaimlerChrysler AG (DCAG), a German company, based in part on its right to maintain control over Mercedes-Benz USA LLC (MBUSA), its wholly owned U.S. subsidiary. The court held that DCAG could be haled into court in California due to MBUSA’s contacts within California.

Background

The plaintiffs in Bauman are 22 Argentine nationals who allege that DCAG’s Argentine subsidiary, Mercedes-Benz Argentina (MBA), collaborated with the Argentine government during its “Dirty War” in order to break up the union at an MBA plant. The plaintiffs brought suit under the Alien Tort Statute and the Torture Victims Prosecution Act of 1991. 

Suit was brought against DCAG in the Northern District of California. Like many global companies doing business in the U.S., DCAG owns an American holding company, DaimlerChrysler North America Holding Corp., which in turn owns MBUSA. MBUSA is a Delaware company with its principal place of business in New Jersey, but it has a regional office in California, as well as other centers of operation located in California.

The relationship between DCAG and MBUSA is governed by a General Distributor Agreement which establishes requirements for MBUSA as the general distributor of Mercedes-Benz cars in the U.S. MBUSA is the single largest supplier of luxury vehicles to the California market, and MBUSA’s sales in California alone account for 2.4 percent of DCAG’s total world wide sales. DCAG did not dispute that MBUSA was subject to general personal jurisdiction in California.

However, DCAG did dispute that it was subject to personal jurisdiction in California. At the district court level, DCAG’s motion to dismiss for lack of jurisdiction was granted. Plaintiffs appealed to the Ninth Circuit, which reversed the district court’s holding.

Ninth Circuit’s Decision

The question before the Ninth Circuit was whether the district court has general personal jurisdiction (i.e. jurisdiction over any claims against DCAG, regardless where they arise) over DCAG through the contacts of MBUSA. The court recognized that the district court did not have specific personal jurisdiction over DCAG, since the plaintiffs’ claims did not arise from DCAG’s contacts with California. Instead, the court determined whether general jurisdiction was appropriate over DCAG.

First, the court considered whether DCAG had “the requisite contacts with the forum state to render it subject to the forum’s jurisdiction” by considering either “substantial” or “continuous and systematic” contact with the forum state. The real question was whether the court could impute MBUSA’s contacts in California to DCAG. To decide this, the Ninth Circuit said that courts can use the “alter ego” test or the “agency” test. Recognizing that the alter ego test was not met in this case, the court turned to the agency test.

The agency test is predicated upon showing the “special importance of the services performed by the subsidiary.” Specifically, the agency test is satisfied by a showing that the subsidiary functions as the parent corporation’s representative in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.

Further, the parent company must also exert, or have the right to exert, sufficient control over the subsidiary, though “not as much control as is required to meet the ‘alter ego’ test.”

The court held that MBUSA’s services were sufficiently important to justify personal jurisdiction over DCAG via the agency test. The court explained that “DCAG simply could not afford to be without a U.S. distribution system,” given the amount of cars sold in the U.S. and in California. Moreover, DCAG had the right to control MBUSA’s activities under the distributor agreement.

Second, the court analyzed whether the assertion of jurisdiction would be fair and reasonable under the circumstances of this case. Looking at several factors, the court concluded that it was reasonable to assert jurisdiction over DCAG.

Of importance, the court focused on DCAG’s purposeful interjection into the California market. The court looked at the importance of the California market to DCAG’s car sales and the fact that DCAG had initiated lawsuits in California to challenge clean air laws and to protect its patents. The court also found that DCAG was a large sophisticated company, therefore the burden to litigate the dispute in California was not enough to preclude jurisdiction.

The court also found Germany’s sovereignty concerns trumped by California’s interest in adjudicating important questions of human rights. Finally, the court expressed doubts that Argentina was an adequate alternative forum to address allegations involving the “Dirty War.”

Conclusion 

The importance of Bauman is that the Ninth Circuit’s use of the “agency” test makes it easier for foreign corporations to be sued in the U.S. based on the unrelated activities of an American subsidiary. Foreign corporations exercising control, or which have clauses in distribution or other agreements with their U.S. subsidiaries which allow them to control their subsidiary’s activities, should pay close attention to the court’s analysis in Bauman

However, Bauman’s importance may be limited depending on the Supreme Court’s approaching decision in Goodyear Dunlop Tires, S.A. v. Brown (No. 10-76), which raises similar issues regarding personal jurisdiction over a foreign company when the lawsuit does not arise from events in the U.S. It is possible that the Ninth Circuit views their “agency theory” as a way around any Supreme Court decision, but until Goodyear is decided, Bauman’s reach remains uncertain.

“Good Faith” In Prompt Payment Disputes

In California, the payment of contractors is governed by so-called “prompt payment statutes” which are sprinkled through various legislative codes, and which impose sanctions on the paying party for non-compliance. Progress payments by general contractors to their subcontractors on private and most public works of improvement are governed by section 7108.5 of the Business & Professions Code. Retention payments to subcontractors on public works of improvement are governed by section 7107 of the Public Contracts Code, and on private works of improvement by section 3260 of the Civil Code. In some cases the statutes permit withholding of payments only where there is a “good faith” dispute. But what constitutes “good faith”?

All of these statutes provide that monies must be released to subcontractors within a certain time except under special circumstances, i.e., where a dispute is involved or where the parties agree to an alternative payment scheme. Thus, where there is a “good faith dispute over all or any portion of the amount due on a progress payment,” the general may withhold up to 150 percent of the disputed amount. Bus. & Prof. Code § 7108.5(c) (emphasis supplied). On a public project, “if a bona fide dispute exists between the subcontractor and the original contractor” the latter may withhold from retention up to 150 percent of the estimated value of the disputed amount. Cal. Pub. Cont. Code § 7107(e) (emphasis supplied). And on a private project, if “a bona fide dispute exists between a subcontractor and the original contractor, the original contractor may withhold from that subcontractor with whom the dispute exists its portion of the retention proceeds . . . [not to] exceed 150 percent of the estimated value of the disputed amount.” Cal. Civ. Code § 3260(e) (emphasis supplied). Hence, a key factor as to when monies may be withheld from a subcontractor without exposing the general contractor to sanctions is whether there is a bona fide or good faith dispute between the parties.

The case of Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Casualty & Surety Company of America, 133 Cal. App. 4th 1319 (4th Dist. 2005) was the first to expressly examine what constitutes a “good faith dispute” on a private work of improvement under Bus. & Prof. Code § 7108.5 and Civ. Code 3260. In that case, the court observed that “the phrase ‘good faith’ does have a distinct meaning and purpose in the law” (id., at 1339) and “suggests a moral quality; its absence is equated with dishonesty, deceit or unfaithfulness to duty,” Guntert v. City of Stockton, 43 Cal. App. 3d. 203, 211 (1974) (citation omitted), or “that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being faithful to one’s duty or obligation.” People v. Nunn, 46 Cal. 2d 460, 468 (1956). The court noted the comments of another authority: “Good faith, or its absence, involves a factual inquiry into the plaintiff’s subjective state of mind. [Citations] Did he or she believe the action was valid? What was his or her intent or purpose in pursuing it?” Knight v. City of Capitola, 4 Cal. App. 4th 918, 932 (1992).

In Alpha Mechanical, the general contractor did not make final payment because it alleged that the subcontractor did not correct work deemed defective by the owner and damaged the work of other trades – necessitating repair work for which the general would have to pay if the subcontractor did not. The appellate court found no evidence in the record suggesting that the general contractor “lack[ed] good faith in its belief that the dispute over the damage caused by Alpha justified withholding the remaining sums due it.” Id., 133 Cal. App. 4th at 1340. Hence, the general contractor was not subject to penalties under either Bus. & Prof. Code § 7108.5 or Civ. Code 3260.

Alpha Mechanical involved a classic dispute over work performed under the contract. However, no such dispute was involved in the more recent case of Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc., 179 Cal. App. 4th 1401 (3d Dist. 2009), involving a public work of improvement. Martin Brothers involved a dispute over changed work, specifically over additional compensation that the subcontractor contended was owed over and above the agreed contract price for work that was allegedly outside the scope of the contract. The subcontractor sought to recover penalties under Public Contract Code section 7107 for the general’s failure to release retention. The appellate court in Martin Brothers held that the reference to “dispute” in section 7107 encompassed any dispute, so long as the dispute was bona fide. Hence, even though there was no dispute over the amount of retention owed under the contract, the court found the general was justified in withholding retention while the change order dispute was pending.[1] The court’s holding in Martin Brothers was surprising to many observers because it allowed the general contractor to withhold undisputed sums solely due to a dispute over whether additional sums were owed. Alpha Mechanical and Martin Brothers constitute a very broad reading of what can constitute a bona fide dispute and suggest that nearly any dispute, so long as it is genuinely believed to exist, can enable a general contractor to withhold undisputed amounts owing from a subcontractor.

That approach was flatly rejected this year in FEI Enterprises, Inc. v. Yoon, B209862 (2d Dist. 2011), certified for partial publication. In the published portion of this opinion, the appellate court addressed the good faith dispute exception to the prompt payment requirement set forth in section 7108.5 of the Business & Professions Code (which the court noted contains similar language to that found in sections 7107 and 10262.5 of the Public Contract Code and section 3260 of the Civil Code). The court rejected the subjective standard invoked by the Alpha Mechanical court, stating “that decision did not make a proper analysis of the meaning of the term “good faith dispute” as it is used in section 7108.5.” It explained that the court in Alpha Mechanical essentially converted the “good faith dispute” language into a “good faith belief” standard. This court found such a standard to be “unwarranted and unwise.” Instead, unless the factual circumstances dictate otherwise, an objective, “reasonable person” standard should be used to determine whether a payment from a contractor to a subcontractor is subject to a “good faith dispute” under the prompt payment statute.

Hence, there are now two cases, in the third and fourth districts respectively, which apply a subjective standard to the question of whether a good faith dispute exists to excuse prompt payment and one case in the second district which applies an objective standard to the question. PRACTICE TIP: If your client’s dispute arise in one of the aforementioned districts, you can expect the court will most likely follow the precedent set by its own district. If the dispute arose in another district, it will be difficult to predict how a court would rule; hence, it is prudent to be conservative in recommending strategy and predicting outcomes.


[1] Martin Brothers also sought to recover penalties under Bus. & Prof. Code § 7108.5 for Thompson’s failure to make timely progress payments. The court found that the parties had agreed to an alternative payment scheme by the terms of their subcontract in which payment was expressly “not due until Subcontractor has furnished . . . applicable [lien] releases pursuant to Civil Code section 3262.” Since section 7108.5 allows parties to “opt out” of its requirements via written agreement, and since Martin Brothers had not timely submitted the required lien releases, the court held that Thompson did not violate the prompt payment statute in failing to make a progress payment under the time constraints of the statute. Id., 179 Cal. App. 4th at 1415. PRACTICE TIP: Subcontractors should take steps to assure that lien waivers, if required by the subcontract, are timely submitted with each invoice for progress payment.

Rambus Encore: Duty to Preserve Documents for Litigation Clarified

Reconciling the opposite conclusions recited by two district courts on essentially identical facts, the U.S. Court of Appeals for the Federal Circuit has clarified when a litigant is under a duty to preserve documents at risk of committing spoliation.  Micron Technology v. Rambus, Inc., Case No. 09-1263 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part); Hynix Semiconductor, Inc. v. Rambus, Inc., Case No. 09-1299; -1347 (Fed. Cir., May 13, 2011) (Linn, J.) (Gajarsa, J., concurring-in-part, dissenting-in-part, joined by Newman, J.).  In these cases, the Federal Circuit concluded that Rambus improperly destroyed millions of pages of documents in advance of litigation, handing the technology licensing giant a major setback in its patent enforcement program.

Rambus licenses patents that relate to enhanced performance memory chips.  Most of Rambus cash flow is from patent licensing revenue.  Rambus initiated its first enforcement action in 2000, slightly before Micron and Hynix initiated declaratory judgment actions against it, seeking declarations of invalidity, non-infringement and unenforceability.  In advance of its enforcement actions against Micron or Hynix, Rambus, in 1999, conducted what has been termed “shred days” or a “shred party,” during which millions of pages of documents were destroyed.  In the Micron case, the district court (Delaware) concluded that Rambus had engaged in spoliation of documents that related to its patent licensing program and ordered dismissal of the action against Micron as a sanction.  The district court did so after concluding that litigation was reasonably foreseeable (to Rambus) by the end of 1998.

In the Hynix case, the district court (ND Ca) concluded that litigation was not foreseeable (to Rambus) at the time of the shredding and so found that there was no spoliation.  In the opinion of Hynix court, litigation must be “immediate” or “certain” to be foreseeable.

In the present appeal the Federal Circuit was called upon to resolve the issue of when litigation was foreseeable and so a duty to preserve documents arose.  Rambus urged the Court to adopt a standard whereby a party would be obligated to preserve documents only when litigation became “probable.”

In the Micron case, the Federal Circuit affirmed the district court ruling that spoliation had occurred but reversed the district court on the sanction of dismissal and remanded the case for reconsideration of that sanction.  The Federal Circuit left it to the district court to determine, based on the totality of the circumstances, the date the duty to preserve arose, but the Federal Circuit did conclude that the duty to preserve did arise prior to the August 1999 shred day and that spoliation had occurred.  In terms of the circumstances to be considered (under the totality of circumstances test), the Federal Circuit cited facts such as Rambus’ knowledge of the potentially infringing activity (of Micron), as well as the steps it had taken in furtherance of litigation such as selecting forums, prioritizing targets and creating claim charts.  The Court noted that for Rambus, litigation was “an essential element of its business model.”

As part of the remand, the Federal Circuit instructed the Delaware district court to make a determination on the issue of bad faith and to re-assess its finding of prejudice, i.e., in terms of whether, independent of the propriety of Rambus’ document destruction, the shredding had an impact on the ability of potential defendants to defend themselves.   In reversing the dismissal sanction, the Federal Circuit instructed the district court to reassess the sanction based on the degree of bad faith and prejudice it found and whether there was another, lesser sanction that would be sufficient.

In the Hynix appeal, the Federal Circuit reversed the district court, concluding that the standard of foreseeability used in that case (“imminent or probable, without significant contingencies”) was too narrow and that even if there are contingencies, so long as their resolution is “reasonably foreseeable,” the litigation is also reasonably foreseeable.   The district court was instructed, on remand, to determine (under the same totality of the circumstances test) when Rambus’ duty to preserve arose and whether Hynix was entitled to relief.

Attorney-Client Privilege and Crime-Fraud Exception

The Federal Circuit agreed with both district courts that even though the evidence used to advance the spoliation argument was subject to an attorney-client privilege, that privilege was “pierced” by the crime-fraud exception since the communications in issue were in furtherance of a violation of a destruction of evidence statute (notwithstanding Rambus’ argument that the California statute in question only applied where there was “immediacy of temporal closeness” between the time the destruction occurred and the time set for document production).  The Court rebuffed Rambus’ argument, noting that it would make “no sense” given Rambus’ control of the timing of events, to permit a party to intentionally destroy evidence and then just wait some “arbitrary period of time” before filing suit to avoid the consequences of the crime-fraud exception.

In Secret Rebate Case, If It Walks Like A Duck, Allegations That It Will Also Quack Are Plausible

On May 24, 2011, United States District Court, Central District of California, denied a motion to dismiss allegations of a “price squeeze” implemented through the granting of secret rebates to the plaintiff’s customers, finding that the complaint stated a plausible claim under California Business and Professions Code section 17045. Drawing on “judicial experience and common sense”, District Judge Dean D. Pregerson held that the allegations of the first amended complaint are sufficiently “plausible” on their face to withstand challenges under Bell Atl. Corp. v. Twombly, 550 U.S. 544, (2007). Western Pacific Kraft, Inc. v. Duro Bag Manufacturing Company, Case No. CV 10-06017 DDP (SSx), 5/24/11.

Plaintiff Western Pacific Kraft, Inc. (“WPK”) is a wholesaler of paper bag products to smaller wholesale distributors. Defendant Duro Bag Manufacturing Company (“Duro”) is the largest manufacturer of paper bags in the country, and the largest seller of paper bags in California. Duro was WPK’s supplier, and also its principal competitor. For twenty years or more, Duro would reduce its prices to WPK, where WPK informed Duro that it had to meet competition from competing sources.

On October 9, 2010, however, Duro informed WPK that it would no longer do so. Instead, it raised the prices it charged WPK, while at the same time lowering the prices it charged WPK’s customers. WPK only became aware of the discriminatory pricing when asked by its existing customers to meet the competition from Duro’s lower prices.

WPK filed a complaint in federal court, alleging violations of California Business and Professions Code section 17045. Section 17045 has been a feature of California law since 1913, and was added to the California Unfair Practices Act in 1941. It prohibits the “secret payment” of rebates and unearned discounts, or secretly extending to certain purchasers special services or privileges not extended to all purchasers buying on like terms and conditions. However, additional elements of a violation are that there also be (a) injury to a competitor, and (c) a showing that such payment tends to destroy competition. It has been held to be applicable to competition at either the seller or the purchaser level, or both. ABC International Traders, Inc. v. Matsushita Elec. Corp., 14 Cal. 4th 1247 (1997). In Diesel Elec. Sales & Serv., Inc. v. Marco Marine San Diego, Inc., 16 Cal. App. 4th 202 (1993), the Court of Appeal, Fourth District, held that Section 17045 must be “liberally construed”.

The first amended complaint alleged that as a result of the price discriminations, which were unknown to WPK, Duro’s course of conduct “effectively put it out of business”. It alleged that Duro had injured WPK and destroyed competition by providing secret rebates, refunds, or discounts to its customers.

As is much in vogue, Duro moved to dismiss, citing Twombly, and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). In discussing the applicable legal standards, the District Court recited the litany of quotes from Twombly that, while a complaint need not include “detailed factual allegations”, it must offer “more than an unadorned, the–defendant–unlawfully–harmed–me accusation.” Iqbal at 1949. While “conclusory allegations”, “labels and conclusions”, including “formulaic recitation of the elements,” or “naked assertions” are insufficient, the court will assume the veracity of “well-pleaded factual allegations”. Because this is somewhat of a subjective exercise, courts are to draw on their “judicial experience and common sense” in evaluating the two schools of thought. When is an allegation “well-pleaded” and “factual”, as opposed to being a “legal conclusion”? This may be difficult to parse prior to at least initial discovery.

Nevertheless, the court is to use its “common sense”. To paraphrase Lewis Carroll’s famous logical fallacy of officers marching, where at least one of the officers “waddles”, and has been heard to even utter the phrase, “quack”, a degree of common sense may tell us whether the allegation is, in context, “plausible on its face”. Is one of the officers really a duck?

The central attack by Duro was that the allegations of the first amended complaint do not plead sufficient factual allegations to show that Duro’s price discriminations were “secret”. Duro argues that this is so because it advised WPK that it would no longer grant “meeting competition” price reductions. However, as the court reasoned, WPK alleged a “price squeeze” in which Duro simultaneously raised its net prices to WPK, while at the same time lowering net prices charged to its former customers. The court held that on a motion to dismiss on Twombly grounds, the allegations were sufficient that the prices attributable to secret rebates were “secret”. This was on the basis of the allegations that the rebates were never disclosed to WPK. Here we have a “hint” of a possible concerted refusal to deal.

Duro also contended that the first amended complaint failed to establish that WPK could have been harmed by the secret rebates, assuming they were “secret” at all. The court disagreed, as a fair reading of the first amended complaint was that as a result of the price discriminations and rebates, “virtually all of the plaintiff WPK’s major customers began buying paper products directly from defendant Duro”. Thus, it alleged that as a result of the secret discriminatory pricing, it had been effectively run out of business. Perhaps not surprisingly, and as it would have been endorsed by Lewis Carroll, these allegations were sufficient to satisfy the three prongs of 17045. First, the price discriminations were “secret”. Second, by effectively putting WPK out of business, WPK was harmed as a competitor. Third, the elimination of WPK as a competitor would have reduced consumer search opportunities, and thus would have contracted the available consumer choices, and thereby allocatively inefficiently injuring the competitive process.

The motion to dismiss, interestingly, did not attack the first amended complaint on DuPont Cellophane grounds. It did not argue that paper bags, like cellophane, may have been substitutable with an array of packaging materials, and that “paper bags” or “paper bags in California”, were an insufficient allegation of a properly defined relevant market for an evaluation whether the allegations of antitrust injury were sufficiently “plausible”. See United States v. E.I. DuPont de Nemours & Co., 353 U.S. 586 (1957). Thus, the court has held that through an application of “common sense” as determined by the district court, there can be life after Twombly. While further developments could determine that we have but an impersonation of a duck, the allegations are sufficient to allow the connection between the waddles, the quacks, and a judicial determination that in fact, we are dealing with something like a duck.

U.S. Supreme Court Decision May Dramatically Affect California Employee Arbitration Agreements

On April 27, 2011, the Supreme Court of the United States handed down its opinion in AT&T Mobility LLC v. Concepcion. The High Court held that California’s Discover Bank rule, which required most consumer (and employee) contract arbitration agreements to allow for class arbitration, was preempted by the Federal Arbitration Act (FAA) and thus invalidated.

Standing alone, this ruling is good news for California employers, since it may allow them to avoid costly and burdensome class action lawsuits with their employees. InConcepcion, the plaintiffs filed a class action lawsuit in federal court against AT&T, alleging false advertising and fraud for charging sales tax on phones that AT&T advertised as free. The High Court held that arbitration agreements in standard form contracts that waive the right to pursue a class action are enforceable, and that the FAA preempts the Discover Bank rule. Specifically, the High Court held that theDiscover Bank rule interferes with arbitration in a manner inconsistent with the FAA’s purpose by allowing consumers/employees to insist upon class-wide arbitration. The High Court held that class-wide arbitration, unless consensual, sacrifices arbitration’s informality, slows down the process and makes it more costly. Moreover, the High Court found that there is also little incentive for defendants to arbitrate class-wide claims because (1) class actions impose significant risks and (2) arbitrations are poorly suited to resolve such high-stakes matters.

Navigating California Case Law

For employers considering adding a class action waiver to their arbitration agreements or those wanting to begin implementing arbitration agreements with their California employees, California case law has placed other restrictions on those agreements that were not explicitly addressed by the High Court in Concepcion. (Although, as we shall see, the holding does place some of those existing restrictions in doubt).

In 2000, the California Supreme Court ruled in Armendariz v. Foundation Health Psychcare Services, Inc., a decision that, like Discover Bank, relied on a mix of public policy and common law unconscionability in limiting how employers could structure mandatory arbitration agreements. In Armendariz, the California Supreme Court found that mandatory arbitration agreements for employees must meet the following requirements in order to be enforceable:

  1. The agreement must provide the employee all remedies available in a court action.
  2. The agreement must provide for enough discovery to allow employees to gather necessary evidence to prove their claims.
  3. The agreement must provide for a written decision that will allow meaningful review.
  4. The employee cannot be required to pay any additional costs beyond those routinely faced in court litigation.
  5. The employer cannot limit the types of claims subject to arbitration such that only claims typically brought by employees are subject to arbitration.

Since then, hundreds of decisions have come down that have further refined theArmendariz rules, usually by placing additional restrictions.

Even though the Concepcion court did not purport to ban states from imposing any limitations on arbitration agreements, the decision may have an impact on theArmendariz restrictions. While the Concepcion court opined that a state could legitimately enact a law “requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted” or other laws requiring adequate notice of arbitration agreements that do not “conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms,” some of the Armendariz limitations may violate this rule as laid out by the High Court inConcepcion.

The first three Armendariz limitations listed above do not appear to be invalidated by the Concepcion reasoning. In other words, requiring at least minimal discovery, precluding restrictions on remedies and requiring the arbitrator to furnish a written decision are all wholly consistent with the FAA and do not serve to chill employers from instituting mandatory arbitration.

The last two Armendariz provisions, however, may be successfully challenged in light of the Concepcion ruling. For example, under Armendariz, the employer is responsible for all forum costs (except for a trivial filing fee that cannot exceed the cost of filing an action in court), making arbitration significantly less appealing from an employer’s point of view. This follows because arbitration is rarely resolved by a pretrial motion since arbitrators have strong incentives (e.g., the desire to seem fair to employees and the fact that the majority of their pay is generated by conducting evidentiary hearings) to allow a full hearing before issuing a decision. As a result, employers can virtually always expect arbitration claims to either settle or involve a full evidentiary hearing, with an arbitrator charging them tens of thousands of dollars per case.

On the flip side, employees who know they could be held responsible for sizable arbitration costs if they do not prevail would likely be dissuaded from bringing even meritorious claims. Before Concepcion, a state was presumably free to weigh pro-arbitration public policy against public policy that protects employees. But Concepcionfound that the FAA preempts states’ rights to engage in such a balancing exercise. As a result, the Armendariz requirement that employers pay all the costs of arbitration cannot be defended on public policy grounds, but must instead be defended by trying to show that such a requirement does not burden arbitration—despite the arguments above that it does burden arbitration.

Likewise, the Armendariz requirement that all claims must be arbitrated, rather than just those typically filed by employees, appears to burden arbitration. The court inConcepcion noted that “parties may agree to limit the issues subject to arbitration.” If that is true, there is no reason to assume that parties could not rationally agree that only a particular type of claim (e.g., wrongful termination claims) would be subject to arbitration. Indeed, the rationale underlying Armendariz that no rational employee would agree to that restriction rests on a premise that arbitration is an inferior forum for the employee. Whether or not this is the case, that rationale is hostile to arbitration and is a clear burden.

The Road Ahead for Employers

Despite the High Court’s ruling in ConcepcionArmendariz is still technically the law in California and no employer wants to be the test case for an arbitration provision that conflicts with it. Thus, employers with mandatory arbitration programs in California fashioned under the Armendariz strictures should not immediately change their agreements (unless, of course, they are willing to become a test case). That being said, the continuing viability of Armendariz’s restrictions on employee arbitration agreements is bound to be raised eventually by employers. In light of Concepcion, some employers may decide to take the risk of running afoul of Armendariz in return for more favorable arbitration agreements that will potentially reduce costs. Alternatively, Armendariz may be tested by an employer after the denial of a motion to compel arbitration where the employer failed to follow all the Armendariz factors. The true power of Concepcion is that trial and appellate courts evaluating agreements cannot overturn those agreements solely because they run afoul of state public policy.

U.S. Supreme Court Rules Arbitration Clauses May Waive Class Action Rights

The Supreme Court of the United States ruled on April 27, 2011, that state laws and court decisions that prohibit arbitration clauses from containing class action waivers are preempted by the Federal Arbitration Act, and that such clauses are not necessarily unconscionable.

The Supreme Court of the United States recently handed down a decision in AT&T Mobility LLC v. Concepcion, 562 U.S. ___ (2011), which will have a major impact on the enforceability of class action waivers in arbitration clauses.  The court held that the Federal Arbitration Act (FAA) preempts state statutory and decisional authority that treats arbitral class action waivers as unconscionable, as a matter of law.  The Supreme Court also specifically disapproved of a California Supreme Court decision that had held that class action waivers in consumer contracts were unconscionable, and thus unenforceable.  The AT&T decision could provide a road map for companies desiring to avoid consumer class action claims.

Section 2 of the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. §2.  The California decision had held that class action waivers are, as a matter of law, unconscionable in consumer contracts of adhesion involving small amounts at issue.  Based on its finding that unconscionability may provide grounds to revoke any contract, the California court found the FAA did not prohibit it from refusing to enforce an arbitral class action waiver.

In AT&T, the Supreme Court held that this rule interferes with the clear intent of the FAA to promote arbitration, noting “[t]he ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’”  AT&T slip op., at 9–10 (quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989)).  The court found that the California rule would disallow enforcement of any arbitration agreement that included a class action waiver in a consumer contract.  While the California court reasoned that its rule should only apply to adhesion contracts, the Supreme Court noted that “the times in which consumer contracts were anything other than adhesive are long past.”  AT&T slip op., at 12.  The Supreme Court also noted that the other requirements for the California rule to be applied—that the case involve small dollar amounts and involve schemes to cheat consumers—were too flexible and would only require basic allegations to be made to defeat the terms of an arbitration agreement.  The Supreme Court held that when a state law would impair the purpose of the FAA to the extent that the California rule would, the FAA must preempt the conflicting state law.

Importantly, the Supreme Court did not rule that all arbitral class action waivers are enforceable.  Rather, the Supreme Court held only that arbitral class action waivers are not, in and of themselves, unconscionable.  Courts still must evaluate the particular arbitration agreement at issue on a case-by-case basis to determine whether the terms are fair.  The arbitration agreement at issue in the AT&T decision, however, provides an example of an arbitration agreement that courts have held to be fair and enforceable.  The highlights of that arbitration agreement include the following:

  • Venue in the county where the consumer resides
  • Consumer election to have the arbitration be in-person, telephonic or decided based on written submissions
  • AT&T agreed to pay all costs for nonfrivolous claims
  • Arbitrators had the power to award any form of individual relief, including issuing injunctions and presumably awarding punitive damages
  • AT&T waived any right to seek reimbursement of its fees and costs
  • In the event that a consumer received an award greater than AT&T’s last written settlement offer, AT&T was to pay a $7,500 minimum recovery and double the amount of the consumer’s attorney’s fees

In finding AT&T’s terms fair, the Supreme Court relied on the District Court’s finding that consumers “were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which ‘could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.’”

Businesses at risk for consumer class actions should consider whether the cost of a generous arbitration provision like AT&T’s may outweigh the risk of consumer class actions.  The key to this analysis is the difference between the number of consumers who are likely to pursue individual claims to their conclusion and the likelihood that a plaintiff’s attorney will assert claims on behalf of a large number of consumers without their active participation.

The California Court of Appeal Again Chips Away at In re Tobacco II

Knapp v. AT&T Wireless Services, Inc. (Case No. G043744, May 20, 2011) __Cal.App.4th__, is the latest in a line of recent class action cases limiting the scope of In re Tobacco II Cases (2009) 46 Cal.4th 298. In Tobacco II, the California Supreme Court held that a named plaintiff in a putative class action must have suffered injury-in-fact to bring a claim for violation under the fraud prong of California’s Unfair Competition Law (the “UCL”), but that the named plaintiff need not show actual injury to unnamed class members. The court in Knapp held that Tobacco II applies only to standing, and not commonality, which requires a separate analysis. For this reason, the Fourth Appellate District upheld the trial court’s order denying plaintiff’s motion for class certification, finding that because AT&T Wireless did not make uniform representations to proposed class members, common issues of law did not predominate over individual issues and a class should not be certified under the UCL.

Julia Knapp subscribed to AT&T Wireless’ cell phone service. She claimed that AT&T Wireless fraudulently misrepresented and failed to disclose that it rounded up a customer’s partial airtime minutes to full minutes when calculating customers’ monthly minute totals. She claimed she suffered actual injury from this practice and, in a putative class action, sued for violations of the UCL and California’s Consumers Legal Remedies Act (CLRA), as well as common-law fraud. She then moved to certify a class, in part on the basis that her claims were common among the proposed class.

AT&T Wireless opposed the motion, arguing that the alleged misrepresentations were not uniformly made to proposed class members — some representations were oral with sales representatives either over the telephone or in person, while AT&T made many other relevant representations about the cell phone service in various advertisements, including radio, television, print and direct mailings.

Plaintiff argued that Tobacco II prohibited such individual inquiries. The Court of Appeal in Knapp, however, disagreed. “We see no language in Tobacco II that suggests to us that the Supreme Court intended our state’s trial courts to dispatch with an examination of commonality when addressing a motion for class certification.” The Knapp court found that Tobacco II was “irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.'” For these reasons, the Court of Appeal affirmed the decision of the trial court finding a lack of commonality and denying the motion to certify the class.
This decision is the latest in a growing line of Court of Appeal decisions to circumscribe Tobacco II’s apparent prohibition on inquiring into the standing of individual members of a putative class under the fraud prong of the UCL. Several courts have now drawn sharp distinctions between analyzing the standing of absent class members–rejected by the Tobacco II court–and analyzing the circumstances of absent class members cases for the purposes of analyzing common issues for class certification. Drawing on recent decisions in Cohen v. DIRECTV, Inc. (2009) 178 Cal.App.4th 966, Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, 843 and Pfizer v. Superior Court (2010) 182 Cal.App.4th 622, the Knapp court concluded that Tobacco II “does not affect our analysis as to commonality.”