Analysis of Duran v. U.S. Bank National Association


It is a bit belated, but I'm getting some write-ups of the big cases up for your reading pleasure (or agony).  First up is Duran v. U.S. Bank National Association (May 29, 2014).  Loan officers for U.S. Bank National Association (USB) sued for unpaid overtime, claiming they had been misclassified as exempt employees under the outside salesperson exemption.  Plaintiffs moved to certify the case as a class action.  Plaintiffs provided declarations from 34 current and former putative class members, all stating that they worked overtime hours and spent less than half of their workday engaged in sales-related activities outside their branch office.  USB argued that plaintiffs could not establish a predominance of common issues or that the class action device was superior to other methods of adjudication.  USB filed declarations from 83 putative class members, 75 of whom said they usually spent more than 50 percent of their workday engaged in outside sales.  USB also submitted deposition testimony from the four former class representatives stating that they regularly worked more than half the day outside the office. The Court certified the class of 260 individuals.

The trial court then devised a plan to determine the extent of USB’s liability to all class members by extrapolating from a random sample. After considering competing proposals, the court expressed concern about the potential for biased survey results and proposed an alternative of its own devising.  The court opted to select a random sample of 20 class members to testify at trial. A decertification motion was denied. The court later ruled on a key motion in limine, denying USB the ability to introduce any testimony or declarations from class members or other loan officers not in the random sample group.

Phase one of the bench trial lasted 40 court days.  The two named plaintiffs and 19 of the 20 other RWG members testified.  USB called several corporate witnesses and the direct supervisors of some of the RWG witnesses.

In anticipation of phase two, plaintiffs moved to amend the declaration of their expert, Jon Krosnick, to permit trial testimony about the results of a telephone survey Krosnick had conducted of class members’ work hours.  The court allowed the amendment. USB moved to exclude the survey evidence.  In opposition, plaintiffs filed a declaration from their statistics expert, Richard Drogin, whon opined that phase one findings of liability and average weekly hours of unpaid overtime could be “reliably projected to the whole class” because they were based on a random sample.  Drogin calculated a weighted average of overtime for the RWG at 11.87 hours per week, with a margin of error of plus or minus 5.14 hours at a 95 percent confidence interval.  The relative margin of error for the overtime estimate was plus or minus 43.3 percent.  The Court then concluded USB did not carry its burden of proof on the outside salesperson exemption.  Based primarily on testimony from RWG witnesses, the court ruled that the entire class employed by USB was misclassified as exempt, and all class members were owed overtime in amounts to be determined in phase two of the trial.

During the damages phase, USB’s statistician testified that it was statistically possible that 13 percent of the class was properly classified as exempt.  He calculated that up to 14 percent of the class, or 36 members, could have been properly classified as exempt.

Nevertheless, the court calculated the total amount of overtime restitution owed to the class at $8,953,832.   With prejudgment interest, the total award as of May 15, 2009, came to $14,959,565.  The impact of a 14 percent error on the judgment total would have been approximately $2 million.  On appeal, the Court of appeal ordered the class decertified and reversed the judgment. A petition for review was then granted.

The Supreme Court began its discussion by reviewing the outside sales person exemption and how the exemption test interacts with class proof:

We have observed that some common questions about the exemption “are likely to prove susceptible of common proof” in a class action.  (Sav-On, supra, 34 Cal.4th at p. 337.)  Job requirements and employer expectations of how duties are to be performed may often be established by evidence relating to a group as a whole.  (Ramirez, supra, 20 Cal.4th at p. 802.)  But litigation of the outside salesperson exemption has the obvious potential to generate individual issues because the primary considerations are how and where the employee actually spends his or her workday.  (Sav-On, at pp. 336-337; Ramirez, at p. 802.)  Of course, the questions of actual performance and employer expectations can be intertwined.

Slip op., at 21.  The Court noted that, while predominance “requires a determination that group, rather than individual, issues predominate,” that does not “preclude the consideration of individual issues at trial when those issues legitimately touch upon relevant aspects of the case being litigated.” Slip op., at 22.  The Court then scrutinized the unique manageability issues inherent in the affirmative defenses likely to arise in misclassification cases:

In her concurring opinion in Brinker, Justice Werdegar drew an instructive distinction between the types of affirmative defenses that can undermine manageability:  “For purposes of class action manageability, a defense that hinges liability vel non on consideration of numerous intricately detailed factual questions, as is sometimes the case in misclassification suits, is different from a defense that raises only one or a few questions and that operates not to extinguish the defendant’s liability but only to diminish the amount of a given plaintiff’s recovery.”  (Brinker, supra, 53 Cal.4th at p. 1054 (conc. opn. of Werdegar, J.), fn. omitted.)  Defenses that raise individual questions about the calculation of damages generally do not defeat certification.  (Sav-On, supra, 34 Cal.4th at p. 334.)  However, a defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability.

Slip op., at 25. The Court then observed that many courts have been reluctant to certify misclassification cases unless uniform policies or practices violate wage and hour laws:

Unless an employer’s uniform policy or consistent practice violates wage and hour laws (see, e.g., Brinker, supra, 53 Cal.4th at p. 1033), California courts have been reluctant to certify class actions alleging misclassification.  (E.g., Arenas v. El Torito Restaurants, Inc. (2010) 183 Cal.App.4th 723, 734; Dunbar v. Albertson’s, Inc., supra, 141 Cal.App.4th 1422, 1431; see also Soderstedt v. CBIZ Southern California, LLC (2011) 197 Cal.App.4th 133, 153-154 [certification denied, despite employer’s uniform policies, due to variations in how the policies were implemented with different employees].)
However, individual issues will not necessarily overwhelm common issues when a case involves exemptions premised on how employees spend the workday.  In Sav-On, supra, 34 Cal.4th 319, for example, we upheld certification of an overtime class action based on a showing that all plaintiffs performed jobs that were highly standardized.  As a result, class members performed essentially the same tasks, most of which were nonexempt as a matter of law.  (Id. at pp. 327-328.)  Further, the defendant’s corporate policy required all class members to work overtime.  (Id. at p. 327.)  Where standardized job duties or other policies result in employees uniformly spending most of their time on nonexempt work, class treatment may be appropriate even if the case involves an exemption that typically entails fact-specific individual inquiries.

Slip op., at 25-26.  In this matter, the Court concluded that the trial court did not adequately manage individual issues when it essentially precluded litigation of individual issues:

The primary consideration in a misclassification case pertains to “the realistic requirements of the job.”  (Ramirez, supra, 20 Cal.4th at p. 802.)  The trial court ultimately made detailed findings to the effect that the BBO position was essentially a telemarketing job, most easily performed in the office.  However, at the certification stage, it should have been apparent that litigation of the outside salesperson defense would also involve significant inquiry into how each of the class’s 260 members “actually spen[t] his or her time.”  (Ibid.)

Slip op., at 28. Thus, it was the failure to manage individualized issues, rather than the predominance of common issues that the Court found to be a fatal flaw in the management of the case:

USB’s exemption defense raised a host of individual issues.  While common issues among class members may have been sufficient to satisfy the predominance prong for certification, the trial court also had to determine that these individual issues could be effectively managed in the ensuing litigation.  (See Brinker, supra, 53 Cal.4th at p. 1054 (conc. opn. of Werdegar, J.); Sav-On, supra, 34 Cal.4th at p. 334.)  Here, the certification order was necessarily provisional in that it was subject to development of a trial plan that would manage the individual issues surrounding the outside salesperson exemption.
In general, when a trial plan incorporates representative testimony and random sampling, a preliminary assessment should be done to determine the level of variability in the class.  (See post, at p. 40.)  If the variability is too great, individual issues are more likely to swamp common ones and render the class action unmanageable.  No such assessment was done here.

Slip op., at 28.  When considering the impact of Duran, it is imperative to emphasize that the Court did not overturn the predominance finding at the time of certification. Rather, the Court found that the subsequent trial plan was an inadequate method of managing individualized issues. Related to that finding, the Court held that the trial management inappropriately abridged the right to assert affirmative defenses:

While class action defendants may not have an unfettered right to present individualized evidence in support of a defense, our precedents make clear that a class action trial management plan may not foreclose the litigation of relevant affirmative defenses, even when these defenses turn on individual questions.

Slip op., at 30.  Here, too, plaintiffs must be alert to overreach in the characterization of Duran by defendants. Duran does not promise an unfettered right to force the trial of every affirmative defense as to every class member. The trial decision in Duran, however, simply cannot be supported with any conviction:

The court’s decision to extrapolate classwide liability from a small sample, and its refusal to permit any inquiries or evidence about the work habits of BBOs outside the sample group, deprived USB of the ability to litigate its exemption defense.  USB repeatedly submitted sworn declarations from 75 class members stating that they worked more than half their time outside the office.  This evidence suggested that work habits among BBOs were not uniform and that nearly one-third of the class may have been properly classified as exempt and lacking any valid claim against USB.

Slip op., at 31.  The Court rejected analogies to disparate treatment discrimination cases, where individual treatment is of little relevance and aggregate group treatment is the singular question.

The Court did not foreclose class proof in misclassification cases, saying only that it would be appropriate in instances where common proof of treatment or practices is compelling:

This is not to say that an employer’s liability for misclassification may never be decided on a classwide basis.  A class action trial may determine that an employer is liable to an entire class for misclassification if it is shown that the employer had a consistently applied policy or uniform job requirements and expectations contrary to a Labor Code exemption, or if it knowingly encouraged a uniform de facto practice inconsistent with the exemption.  (See, e.g., Bell, supra, 115 Cal.App.4th at p. 743.)  In such a case, the evidence for uniformity among class members would be strong, and common proof would be sufficient to call for the employer to defend its claimed exemption.

Slip op., at 34-35.  Next, the Court discussed statistical evidence. It began by noting, “Questions about the use of statistical evidence to prove classwide liability and damages are far from settled.” Slip op., at 35. The Court recognized the widely divergent opinions on the use of statistical evidence:

It is an open question, hotly contested among the parties and amici curiae, whether statistical sampling can legitimately be used to prove a defendant’s liability to absent class members.  The question has arisen in numerous contexts, ranging from mass torts (e.g., Cimino v. Raymark Industries, Inc. (5th Cir. 1998) 151 F.3d 297, 319-320) to employment discrimination (e.g., Wal-Mart Stores, Inc. v. Dukes, supra, 564 U.S. at p. __ [131 S.Ct. at pp. 2560-2561]).  In the wage and hour context, recent decisions from federal district courts have disagreed about whether statistical sampling may be used to prove liability.

Slip op., at 36-37. The Court then discussed Bell, noting that the “statistical evidence in Bell was heard only after classwide liability had been established.” Slip op. at 37.  The Court concluded its general assessment of statistical models for proof of liability by noting that no general rule is necessary:

We need not reach a sweeping conclusion as to whether or when sampling should be available as a tool for proving liability in a class action.  It suffices to note that any class action trial plan, including those involving statistical methods of proof, must allow the defendant to litigate its affirmative defenses.  If a defense depends upon questions individual to each class member, the statistical model must be designed to accommodate these case-specific deviations.

Slip op., at 38.  The Court expressly noted that the Mt. Clemens use of statistical evidence to calculate damages in overtime pay cases, while well accepted by courts, did not provide a sound rationale for accepting too much error in the liability phase of a misclassification case.

The Court then discussed errors in the Court’s statistical methodology, noting that (1) the sample size was too small, (2) the sample was not random, suffering from non-response bias and self-selection bias, (3) the 43 percent margin of error was far too large, (4) the response rate was poor, (5) measurement errors were likely, and (6) the methodology differed significantly from Bell, where two experts worked together to determine a reliable sampling methodology.

Concurring in the opinion, Justice Liu authored a concurrence that agreed with the conclusion that the trial court’s statistical approach was hopelessly flawed but questioned whether enough guidance had been provided for future misclassification class actions.  First, with respect to the outside sales exemption in California, Justice Liu said:

[I]n recognizing that California’s definition of an outside salesperson is quantitative in nature, Ramirez did not say that the test boils down to whether a particular employee actually spends more than 50 percent of his or her working hours on outside sales.  Instead, the ultimate question is:  what are “the realistic requirements of the job”?

Slip op. conc., at 4. Justice Liu then explained how both aggregate evidence and individualized evidence should be considered to address the misclassification question:

[N]either an aggregate method of proof (like sampling or representative witness testimony) nor individualized evidence (like a declaration) is necessarily dispositive when the ultimate issue at trial is to determine “the employer’s realistic expectations” or “the realistic requirements of the job.”  (Ramirez, supra, 20 Cal.4th at p. 802.)  The two types of evidence must be considered and weighed alongside each other, and more broadly, they must be considered and weighed together with the full range of evidence bearing on the ultimate issue, including the employer’s job description, company policies, industry customs, and testimony of supervisors or managers who monitored, evaluated, or otherwise set expectations for employees in the class.  We entrust our trial courts with the task of weighing such multidimensional evidence, and their judgments will be sustained if supported by substantial evidence.

Slip op. conc., at 10. Justice Liu concluded by observing that the trial court was correct as to how it framed the certification question:

Today’s opinion properly identifies the shortcomings of the representative witness group in this case and the trial court’s failure to give due consideration to the individualized evidence that U.S. Bank National Association (USB) sought to introduce in its defense.  But it is important to note that the trial court focused on the right question on the merits:  What were the realistic requirements of the BBO position?

Slip op. conc., at 11.  There is little doubt that Duran will be oversold as a bar on all forms of aggregate proof in class actions. The only remedy will be to present a thorough analysis of what Duran does and does not stand for in misclassification cases and the greater class certification context.

BREAKING NEWS: Opinion in Duran v. U.S. Bank National Association now available

Finally, the news drought comes to an end, and class action practitioners have been waiting for this one for some time.  Today, the California Supreme Court issued its opinion in Duran v. U.S. Bank National Association (May 29, 2014). A more extensive analysis will have to wait, but the introduction includes some very telling statements, namely that the Supreme Court is not holding that statistics cannot be used for both liability and damages in class actions:

We encounter here an exceedingly rare beast: a wage and hour class action that proceeded through trial to verdict. Loan officers for U.S. Bank National Association (USB) sued for unpaid overtime, claiming they had been misclassified as exempt employees under the outside salesperson exemption. (Lab. Code, § 1171.) This exemption applies to employees who spend more than 50 percent of the workday engaged in sales activities outside the office. (Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785 (Ramirez).)

After certifying a class of 260 plaintiffs, the trial court devised a plan to determine the extent of USB‘s liability to all class members by extrapolating from a random sample. In the first phase of trial, the court heard testimony about the work habits of 21 plaintiffs. USB was not permitted to introduce evidence about the work habits of any plaintiff outside this sample. Nevertheless, based on testimony from the small sample group, the trial court found that the entire class had been misclassified. After the second phase of trial, which focused on testimony from statisticians, the court extrapolated the average amount of overtime reported by the sample group to the class as a whole, resulting in a verdict of approximately $15 million and an average recovery of over $57,000 per person.

As even the plaintiffs recognize, this result cannot stand. The judgment must be reversed because the trial court‘s flawed implementation of sampling prevented USB from showing that some class members were exempt and entitled to no recovery. A trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced. Statistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions. However, as outlined below, the trial court‘s particular approach to sampling here was profoundly flawed.

Slip op., at 1-2.  Didn't expect that outcome, did you?