Supreme Court Limits Class Actions in Wal-Mart Victory

Supreme Court’s unanimous decision in favor of Wal-Mart restricts the ability of plaintiffs to seek certification of a class for damages.

On June 20, 2011, the Supreme Court of the United States issued its highly-anticipated ruling in Wal-Mart Stores, Inc. v. Duke.  The Court unanimously held that the Ninth Circuit Court of Appeals erred in affirming the certification of the class under Rule(b)(2) of the Federal Rules of Civil Procedure.  A 5-4 majority further held that the plaintiffs failed to carry their burden of establishing commonality under Rule 23(a)(2). 

The majority held that Rule 23(a)(2) requires a party seeking certification of a class to demonstrate more than the mere existence of common questions; rather, the party seeking certification must demonstrate that class-wide proceedings will generate common answers to those questions.  The Court ruled that the plaintiffs failed to come forward with “significant proof” that Wal-Mart operated under a general policy of discrimination.  The Court concluded that evidence that Wal-Mart’s policy of discretion produced an overall sex-based disparity was insufficient.  Because there was “no convincing proof of a company wide discriminatory pay and promotion policy,” the plaintiffs failed to establish the existence of any common question.

The majority also held that the class was improperly certified under Rule 23(b)(2) because the monetary relief sought by the plaintiffs was not merely incidental to the injunctive or declaratory relief that they requested.  The Court concluded that Rule 23(b)(2) does not authorize class certification when each class member would be entitled to an individual award of monetary damages, which, in this case, was the request for backpay.

Justice Ginsburg, Justice Breyer, Justice Sotomayor and Justice Kagan concurred in the majority’s reversal of certification of the class under 23(b)(2), but found that the majority erred in its analysis under Rule 23(a)(2).  The concurring Justices stated that the case should have been remanded to the district court for analysis under Rule 23(b)(3).  They also criticized the majority for conducting a “dissimilarities” analysis under Rule 23(a)(2) which essentially grafted onto Rule 23(a)(2) the predominance analysis required under Rule 23(b)(3).

The Court’s ruling greatly restricts the ability of plaintiffs to seek certification of a class for damages without meeting all of the requirement of Rule 23(b)(3), including predominance and superiority, by seeking certification under Rule 23(b)(2).  Plaintiffs also will no longer be able to satisfy their burden under Rule 23(a)(2) simply by identifying the common issues in the case.  Rather, plaintiffs must now present significant proof that the common questions can be answered with common proof.

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Lying on an Application About Criminal Conduct Bars Defamation Claim

Employers normally require new hires to complete job applications and certify that the information contained in their applications is true and accurate before hiring them. Job applications serve many laudable purposes: you can evaluate education, ensure that the applicant has the required experience and know-how to do the job and retrieve contact information for former employers from whom you can learn about the applicant’s skills and abilities before he or she is brought into your workplace. You can compare respective applicants on an “apples-to-apples” basis. A recent case now adds another reason: an application can also provide employers with a defense to later litigation where the new hire was untruthful or omitted material facts on his or her application.

In Van Hoven v. Pre-Employee.com, Inc., 156 Wn. App. 879 (2010), the plaintiff applied for a position with a hospital and signed a background authorization under penalty of perjury in which he affirmed that he had not been charged with or committed any crime. The hospital contracted with a consumer reporting agency to conduct a background check, as it did for all applicants. The hospital hired the plaintiff “conditioned” on a positive background check. The agency reported that the plaintiff had been guilty of possession of marijuana and drug paraphernalia. The hospital confronted the plaintiff with the report, who admitted that he had been guilty of possession of marijuana and drug paraphernalia but that, as part of a plea bargain, one of the charges had been dismissed. He also claimed to have been confused by the question – “Have you ever been convicted of any crime?” – though he did not deny the results of the background check or provide any clarification. The hospital rescinded its conditional employment offer, for it would not have initially hired him with such charges, and, more importantly, because he had lied on his application. The consumer reporting agency later corrected the report to explain that the marijuana possession charge had been, in fact, dismissed in a plea bargain. The plaintiff sued the consumer reporting agency for defamation.

Consumer reporting agencies are highly regulated entities. Washington has its own statutes that regulate consumer reporting agencies. See RCW 19.182, et al.  These statutes provide that a consumer like the plaintiff cannot assert a claim for defamation, invasion of privacy or negligence with respect to the reporting of information unless false information is furnished with malice or willful intent to injure. That is an elevated standard. In Van Hoven, the plaintiff could produce no evidence that the consumer reporting agency had acted with actual malice or intent to injure. The agency thus had immunity from the plaintiff’s claims.

The Van Hoven court noted that the plaintiff could also not establish damages. To establish a defamation claim, a plaintiff must show (1) falsity, (2) an unprivileged communication, (3) fault and (4) damages. Because the plaintiff did not deny the results or provide any clarification of the background check, and the hospital stated that it would not have hired him if he had disclosed such charges, he had no damages from the consumer reporting agency’s alleged inaccurate background check. The Van Hovencourt noted that the plaintiff had lied on his application when he answered “no” to the question of whether he had been convicted of any criminal offense. Even discounting the misinformation about his marijuana possession charge, he was still convicted of the drug paraphernalia charge. Without damages, he had no defamation claim.

The takeaways from Van Hoven are that employers should always require new hires to fill out applications, which mandate a certification for truth and accuracy. Employers should not accept a resume in lieu of a job application because resumes do not normally have certifications for truth and accuracy nor do they specify that the applicant will not be hired or can be terminated for misrepresenting information. Applications reveal education and background experience and provide third-party contact information to learn about the new hire’s skills and abilities. Further, if the applicant lies or omits information, that conduct can serve as a basis for refusing to hire or terminating upon its discovery. And, in litigation, a plaintiff can have his or her damage award reduced or limited by application lies or omissions. This is known as the “after acquired evidence” doctrine. The Van Hoven court also emphasized that such information can serve as a defense to a claim of damages – if you lie, you cannot expect the employer to hire you.  The other takeaway is that the employer correctly shared the background check with the plaintiff, providing him an opportunity to respond or rebut the information before taking adverse action. Such a step is highly advisable to avoid future litigation.

New Jersey’s Appellate Division: Failure to Prove Emotional Distress Damages and Failure to Prove Intentional Infliction of Emotional Distress Does Not Necessarily Foreclose Punitive Damages under the New Jersey Law Against Discrimination

Employees bringing suit for discrimination under the New Jersey Law Against Discrimination (LAD) frequently bring a common law claim for intentional infliction of emotional distress. What happens to a plaintiff’s claim for punitive damages under the LAD when a jury (i) determines that defendants did not act with willful, wanton and reckless conduct to sustain the claim for intentional infliction and (ii) does not award the plaintiff any damages for emotional distress? In Rusak v. Ryan Automotive, L.L.C., 2011 N.J. Super. LEXIS 24 (App. Div. Feb. 8, 2011), New Jersey’s Appellate Division ruled that discrimination plaintiffs are not necessarily foreclosed from recovering punitive damages by such jury findings. The proofs for punitive damages under the LAD are not the same as those for recovery under an intentional infliction cause of action.

Rusak v. Ryan Automotive, L.L.C.

Judith Carrie Rusak was a salesperson for a car dealership that was acquired in 2003 by Ryan Automotive, L.L.C. (Ryan). In 2005, Ryan hired a general manager who, according to Rusak, subjected her to insults, crude comments, and graphic sexual stories. Rusak also claimed that when she told that general manager that a co-worker (and one of the general manager’s hires) showed her and another female employee pornographic material, the general manager cursed at her and told other employees that he was going to fire her. Rusak did not return to work and alleged that as a result of this conduct, she experienced anxiety attacks.

Rusak sued Ryan and the general manager, alleging that she was discriminated and harassed in violation of the LAD on the basis of gender, was retaliated against in violation of the LAD, and was the victim of intentional infliction of emotional distress. She sought compensatory damages for lost wages and emotional distress, punitive damages, and counsel fees.

The jury concluded that Ryan was subjected to a sexually hostile work environment and that her report about receiving a pornographic email was a substantial or motivating factor in the general manager’s decision to discharge her. The jury did not find that defendants’ acts constituted “willful, wanton or reckless” conduct for purposes of the intentional infliction count and further decided that Ryan should not be awarded emotional distress damages. It did award Ryan $80,108.80 to compensate her for lost wages and back pay. In light of the jury’s findings on the intentional infliction claim, the trial judge did not proceed to the punitive damages phase of the trial. Ryan appealed.

The Appellate Division concluded that the evidence supported submission of Ryan’s punitive damage claim to the jury. The Court found that Ryan’s proofs demonstrated a continuous pattern of hostility directed at her because of her gender and that the general manager was in an upper management position. The Court acknowledged that there was proof to the contrary, but further determined that such contrary proof did not warrant taking the punitive damage question from the jury. The Court buttressed its conclusion by reviewing other cases in which much less egregious conduct supported submission of punitive damages to the jury.

The Appellate Division then considered the effect, if any, on the jury’s answer to the interrogatory on the verdict sheet that defendants’ conduct was not willful, wanton and reckless. The Court concluded that the trial judge erred by interpreting the jury’s negative answer as the equivalent of a factual finding under the Punitive Damages Act with respect to defendants’ state of mind. First, the Court ruled that it was improper to read that question as incorporating within its terms the requisite state of mind necessary to support any award of punitive damages because the tort of intentional infliction did not require anything more than intentional or reckless conduct. Second, the Court determined that Ryan never consented to that question acting as a necessary predicate on which her punitive damage claim was based. The Court also found that the jury could have answered the question in the negative, because it concluded that Ryan did not suffer emotional distress as a result of defendants’ discrimination.

The Appellate Division remanded for a trial on punitive damages. Should that trial go forward, the Court offered guidance on what the jury should be told so that the jury’s attention would be focused only on those issues relevant to the punitive damage phase of the trial. First, the jury should be instructed that it had already been determined that defendants engaged in unlawful harassment and retaliation under the LAD and that Ryan was awarded compensatory damages for lost wages and back pay, along with the amount of that award. The Court also directed the jury be told that it had been determined that Ryan did not suffer emotional distress damages under the LAD and that the purpose of punitive damages was different from the purpose of compensatory damages.

Wisconsin Omnibus Tort Bill is Signed

On Thursday, January 27, 2011, Governor Walker signed into law Wisconsin’s Omnibus Tort Bill. The new laws will take effect no later than February 11, 2011 – 11 business days after January 27, 2011.

Strict Product Liability (Wis. Stat. § 895.047):

  • Sellers and distributors of defective products are not subject to liability unless: (a) they assume, through contract, a duty of the manufacturer; or (b) the manufacturer and its insurer are not subject to service of process in Wisconsin; or (c) a court concludes that a judgment against the product manufacturer or its insurer could not be enforced. Further, the principles of comparative negligence embodied in Wis. Stat. § 895.045 now apply to strict product liability claims.

Common-Law Risk Contribution Doctrine Limited (Wis. Stat. § 895.046):

  • With certain exceptions, when a claimant alleges claims of design defect or failure to warn, a product defendant may be held liable only if the claimant proves—in addition to other elements required—which specific product allegedly caused the injury. If the claimant cannot meet this proof requirement, a product defendant may be held liable only if: no other lawful process exists for the claimant to seek redress; the claimant’s injury could be caused only by a product that is chemically and physically identical to the allegedly offending product; the defendant manufactured, distributed, sold, or promoted a complete integrated product; and the claimant names as defendants the manufacturers that collectively manufactured 80% of the chemically and physically identical products sold in Wisconsin during the relevant production period.

Punitive Damage Caps (Wis. Stat. § 895.043(6)):

  • Punitive damages may not exceed twice the amount of compensatory damages recovered or $200,000, whichever is greater. However, the cap does not apply to drunk drivers. In addition, the cap does not apply to cases already pending at the time of the effective date.

Non-Economic Damage Caps for “Long-Term Care Providers” (Wis. Stat. § 893.555):

  • Non-economic damages for bodily injury arising from the care or treatment (or any omission) by a “long-term care provider”—which includes nursing homes, hospice centers, and assisted living centers—are capped at $750,000.

Move Toward Daubert Standard of Expert Testimony (Wis. Stat. § 907.02(1)):

  • Expert testimony is now limited to testimony that is: (a) based on sufficient facts or data; (b) the product of reliable principles and methods; and (c) based on the witness’ applying those principles and methods to the facts.

Mandatory Monetary Sanctions for Frivolous Claims or Filings (Wis. Stat. § 895.044):

  • Courts now must award as sanction actual costs, including reasonable attorney fees, when they find that a party or its attorney knew that an action it filed or continued was frivolous and does not correct the improper conduct within 21 days.

Wisconsin Tort Reform 2011: Governor signed the Omnibus Tort Reform Act

Governor Scott Walker signed the OmnibusTort Reform Act (the “Act”) today, January 27, 2011.  The Act addresses several areas of interest for Wisconsin companies.

Specifically, the Act:

 

Limits Punitive Damages.

  • Punitive damages are capped at to $200,000 or double the amount of compensatory damages, whichever is higher. The cap does not apply to lawsuits related to operating a motor vehicle while intoxicated.

Raises the Standards for Expert Testimony.

  •  This Act adopts the standard set forth in Federal Rule of Evidence 702, also known as the “Daubert standard.” The Daubert standard allows the admission of expert testimony only if it is based on sufficient factors or data and is the product of reliable principles and methods.

Limits the Application of the Risk Contribution Theory. 

  • This provision is a response to the Wisconsin Supreme Court’s 2005 decision in Thomas v. Mallett, 2005 WI 129, 285 Wis. 2d 236, 701 N.W.2d 523, where the Court permitted a case to proceed against seven paint manufacturers despite the fact that the plaintiff could not prove who made the lead-based paints that he claimed poisoned him as a child. The Act limits the holding in Thomas. If the claimant can not identify the specific product that allegedly caused the injury, a manufacturer, distributor, seller, or promoter of a product may be held liable only if all of the following apply: (1) the claimant proves: (a) no other lawful process exists for the claimant to seek any redress from any other person for the injury or harm; (b) that the claimant has suffered an injury or harm that can be caused only by a manufactured product chemically and physically identical to the specific product that allegedly caused the claimant’s injury or harm; and (c) that the manufacturer, distributor, seller, or promoter of a product manufactured, distributed, sold, or promoted a complete integrated product, in the form used by the claimant or to which the claimant was exposed, and that meets all of the following criteria: (i) is chemically and physically identical to the specific product that allegedly caused the claimant’s injury or harm; (ii) was manufactured, distributed, sold, or promoted in the geographic market where the injury or harm is alleged to have occurred during the time period in which the specific product that allegedly caused the claimant’s injury or harm was manufactured, distributed, sold, or promoted; and (iii) was distributed or sold without labeling or any distinctive characteristic that identified the manufacturer, distributor, seller, or promoter; and (2) the action names, as defendants, those manufacturers of a product who collectively manufactured at least 80 percent of all products sold in this state during the relevant production period by all manufacturers of the product in existence during the relevant production period that are chemically identical to the specific product that allegedly caused the claimant’s injury or harm.

Limits Strict Product Liability Claims. 

  • Under the Act, Wisconsin is now in line with the majority of other states that have adopted the “reasonable alternative design” test instead of the broader “consumer expectation” test. Accordingly, a manufacturer will be liable for damages caused by the manufacturer’s product based on a claim of strict liability only if the injured claimant proves that the product was defective, the defective condition made the product unreasonably dangerous, the defective condition existed at the time the product left the control of the manufacturer, the product reached the user or consumer without substantial change, and the defective condition caused the claimant’s injuries. If the injured party’s percentage of total causal responsibility for the injury is greater than the percentage resulting from the defective condition of the product, the injured party may not, based on the defect in the product, recover damages from the manufacturer, distributor, seller, or any other person responsible for placing the product in the stream of commerce. If the injured party’s percentage of total causal responsibility for the injury is equal to or less than the percentage resulting from the defective condition of the product, the injured party may recover but the damages recovered by the injured party shall be diminished by the percentage attributed to that injured party.

Toughens State Rules Relating to Damages for Frivolous Claims. 

  • In civil cases, a party or his or her attorney may be liable for costs and fees for actions that are done (1) in bad faith, solely for the purpose of harassing or maliciously injuring another; or (2) was without a reasonable basis in the law. If the offending party withdraws or corrects the improper conduct within 21 days of receiving the other party’s motion for fees, the court can decide whether to award actual costs taking into consideration the offending party’s mitigating conduct. If the offending party does not timely withdraw or correct the conduct, actual costs shall be awarded. If the decision is appealed and the appellate court affirms the award of fees, the offending party must also pay the attorney fees incurred in the appeal.    

In addition to the tort reform provisions outlined above, the Act includes several health care related provisions previously discussed in a client alert dated January 10, 2011, also available here.

Federal Circuit Breaks the 25 Percent Rule of Thumb

Last week, in Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055 (Fed. Cir. Jan. 4, 2010) (hereinafter, “Uniloc“), the Federal Circuit declared that the “25 percent rule of thumb,” which has been widely used for calculating damages in patent infringement cases, is “fundamentally flawed.” Accordingly, the Federal Circuit held that any evidence relying on the 25 percent rule is inadmissible as a matter of law. This holding represents a significant shift in Federal Circuit precedent. Indeed, the Federal Circuit upheld a jury verdict based on the use of the 25 percent rule as recently as March 10, 2010. Although the underlying technology that is the subject of Uniloc deals with a software registration system to deter copying of the software, the decision will be felt across all industries.

In calculating damages for patent infringement, a reasonable royalty rate should reflect the anticipated result of a hypothetical negotiation at the time of first infringement. The 25 percent rule suggested that a licensee would pay a royalty rate equivalent to 25 percent of the expected profits from products that incorporate the intellectual property at issue. Consequently, when the 25 percent rule was used, an alleged infringer’s profit margin (profits divided by net sales) was multiplied by 25 percent to arrive at a reasonable royalty rate. That royalty rate was then multiplied by the royalty base (revenue from the sale of infringing products) to arrive at an alleged reasonable royalty.

The criticism of the 25 percent rule did not begin with Uniloc. Indeed, the rule had previously received criticism as an arbitrary and crude tool. Specifically, scholars criticized the rule because it did “not take into account specific circumstances that will determine the actual value of the patent at issue[,]” and because “multiplying by an arbitrary fraction to derive the value of a patent is an exercise in arbitrary business analysis.” Nevertheless, the Federal Circuit had tolerated its use in calculating damages for patent infringement. For example, in i4i Ltd. Partnership v. Microsoft Corp., the Federal Circuit affirmed the district court’s admissibility of a damage expert’s opinion based on the 25 percent rule because it met the “minimum standards of relevance and reliability.” In support of his opinion’s admissibility, the damages expert “testified that the 25-percent rule was ‘well recognized’ and ‘widely used’ by people in his field.”

Notwithstanding the 25 percent rule’s prior use, in Uniloc, the Federal Circuit directly addressed the admissibility of the rule for the first time. The Federal Circuit started its analysis of the 25 percent rule by addressing the rule’s previous criticisms, placing them into three general categories: (1) it fails to account for the unique relationship between the patent and the accused product; (2) it fails to account for the unique relationship between the parties, such as the different levels of risk assumed by the licensor and licensee; and (3) it fails to fit within the model of the hypothetical negotiation within which it is based due to its arbitrary characteristics. With these criticisms in mind, this ruling of the Federal Circuit puts a definitive stop to the use of the 25 percent rule in calculating damages for patent infringement:

as a matter of Federal Circuit law[,] the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.

If this was not clear enough, the Federal Circuit further held that even when the 25 percent rule is “offered merely as a starting point[,]” any opinion derived therefrom is still inadmissible because “[b]eginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion.” In support of its holding, the Federal Circuit stated that “the 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy” the fundamental requirement that “there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case.” In other words, a damages calculation “must be tied to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time.”

The Federal Circuit did not leave litigants without a mode for calculating damages in patent infringement cases, however. Indeed, the Federal Circuit reaffirmed the use of the Georgia-Pacific factors for determining a reasonable royalty rate. Specifically, the Federal Circuit pointed to Georgia-Pacific factors one and two, “looking at royalties paid or received by in licenses for the patent in suit or in comparable licenses[,]” and factor twelve, “looking at the portion of profit that may be customarily allowed in the particular business for the use of the invention or similar inventions[,]” as still “valid and important factors for determining a reasonable royalty rate.” The Federal Circuit further stated that it requires “evidence purporting to apply to these, and any other factors,” to be “tied to the relevant facts and circumstances of the particular case at issue.”

The total impact of this decision on the “size” of future damage awards may be uncertain, but it is certain that the Federal Circuit is sending a clear message that abstract methodologies for calculating damages are not acceptable. By forcing damage calculations to be tied to the relevant facts and circumstances of the particular case, the Federal Circuit continues its efforts to require damage awards in patent cases to bear a direct relationship between the claims of the patent at issue and the accused products.