Corporations and Diversity Jurisdiction

Last month the U.S. Supreme Court granted certiorari in Friend v. Hertz Corporation, in which the Ninth Circuit had affirmed the remand of a class action case against Hertz for lack of diversity jurisdiction, applying the circuit's "place of operations" test. For a company like Hertz, what that means is that even though their executive offices and place of incorporation are elsewhere, they are still being deemed a citizen of California simply because they have more employees and operations in California than any other state. Hertz argues in its petition for certiorari first that the Supreme Court should resolve a split in the Circuits as to how to define a corporation's citizenship based on such potentially conflicting formulations as "nerve center" or "place of operations," and second that it is unfair not to take California's huge population into account in applying whatever test the Supreme Court approves. In other words, national corporations like Hertz are likely to have more employees and operations in California than any other state, merely because that is required to serve California's much larger population than any other state, not because their operations are actually directed from California.

Looking at the narrow issue of how to define a corporation's principal place of business, Hertz's argument does seem to have some appeal. But perhaps this case will prompt a re-examination of the broader question of the reasons for diversity jurisdiction in the first place. Diversity jurisdiction is justified to allow an out-of-state person (including corporations of course) to avoid the prejudice that might exist in the state court system by removing a case to federal court, which is supposedly above such parochial concerns. In practice diversity jurisdiction is rarely invoked for that reason. In fact, I can only recall one case in nearly 30 years of practice where I sought out a federal forum because I was seriously concerned about the prejudice that might have affected the result in state court. More often, the federal forum is preferred for other reasons, such as different procedural rules, supposedly greater attention to complex legal issues, or advantages that might accrue from a more suburban jury. In the Hertz case, the Ninth Circuit mentioned the policy considerations behind diversity jurisdiction, noting that because of its extensive California operations, "Hertz is not in jeopardy of being mistreated in California courts."

So while on the one hand it may seem unfair to make national corporations like Hertz citizens of California, when they can seek the perceived advantages of federal court in most other states, on the other hand it is not obvious that they are prejudiced by being required to defend cases by California citizens in California state courts. It will be interesting to see how the U.S. Supreme Court resolves this issue.

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Wage and Hour Class Actions

The California Supreme Court today clarified several issues under the unfair competition, or unfair business practices statute (Business and Professions Code Section 17200 et seq.), and under the Labor Code Private Attorneys General Act (Labor Code Section 2698 et seq.)("PAGA"), two commonly used statutes for pursuing alleged wage and hour violations. In the Arias v. Superior Court case, the Court held that purported representative actions brought under the unfair business practices statute must satisfy class action requirements, basing this holding on an analysis of the language and intent of Proposition 64, which tightened the standing requirements under this statute. (The concurring opinion points out some of the quirky features of Section 382 of the Code of Civil Procedure, which actually pre-dates modern class action practice, but concedes that viewing Proposition 64's reference to Section 382 more broadly than as a requirement that representative unfair business practices cases must satisfy class action rules may make little practical difference.)

In contrast to the voters' fairly clear tightening of the rules for unfair competition cases by means of Proposition 64, the court held that the PAGA contains no requirement that class action rules be satisfied. The Supreme Court was not troubled by employers' claims of due process violations when various individual plaintiffs attempt to obtain relief against an employer that will bind the employer in subsequent litigation but will not bind other plaintiffs pursuing similar relief. That is because, according to the Supreme Court, any plaintiff taking advantage of PAGA is proceeding as the "proxy or agent of the state's labor law enforcement agencies . . . ." (slip opin. at 16)

In a second case, Amalgamated Transit Union v. Superior Court, the California Supreme Court held that labor unions are not entitled to bring actions for alleged wage and hour violations under either the unfair competition statute or PAGA. A labor union has not suffered actual injury as a result of wage and hour violations, and is therefore disqualified under the Proposition 64 amendments to the unfair competition statute. A labor union is also not an "aggrieved employee" entitled to sue under PAGA for such violations.

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Mixed Motives in Age Discrimination Cases

Yesterday, the U.S. Supreme Court, in Gross v. FBL Financial Services, Inc., decided that age discrimination cases should not follow the same burden of proof analysis that the Court has applied in other kinds of discrimination cases. Specifically, in Price Waterhouse v. Hopkins, 490 U.S. 228 (1989), a case under Title VII of the Civil Rights Act of 1964, the Court had held that if an employee showed that discrimination was a motivating factor in the employer's challenged employment action, the burden of persuasion should shift to the employer to show that the employer would have taken the same action in the absence of the discriminatory motive. The Court has now held that courts should not follow this analysis in cases brought under the Age Discrimination in Employment Act, a different statute. Instead, an age discrimination plaintiff is simply required to prove that his or her age was a "but-for" cause of the challenged employment action.

Evidently the majority of the current court never cared much for the Price Waterhouse analysis, and specifically stated that it might not have adopted this analysis if the question were being considered for the first time today. (slip opin. at p. 10) Does this mean that the whole reason we now have to apply a different analysis in age discrimination cases as opposed to other discrimination cases is that Justice O'Connor has been replaced by Justice Alito? I think it does. If so, maybe we could call the appointment of Justice Alito a "but-for" cause of this latest decision.

In any case, the various burden-shifting tests developed by the Supreme Court in discrimination cases have always proved somewhat incompatible with the way cases are actually presented and understood by the trier of fact. Therefore it is probably too early to tell whether this latest explanation of the way the way burdens of persuasion are supposed to be allocated will make a large difference in practice. Further, judging from what I read in the Los Angeles Times this morning about this case, it appears likely that Congress will take action to reverse this latest Supreme Court ruling, similarly to what they did with the Lilly Ledbetter case, and clarify that age discrimination cases should be handled in a similar manner to other types of discrimination cases.

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Campaign Contributions and Due Process

The Supreme Court took a step toward recognizing the potentially corrupting influence of campaign contributions, by holding in Caperton v. A.T. Massey Coal Co. that due process required the recusal of an appellate judge who had benefited from approximately $3 million in expenditures by the chairman of Massey Coal Company, in aid of the judge's election campaign. Although there was no evidence that the judge had any direct or indirect stake in the outcome of the case, and although there was also no evidence that the judge's decision (he was the decisive vote in a 3-2 decision reversing a $50 million judgment against Massey), was influenced by this massive campaign assistance, the Court nevertheless held that the judge's decision not to recuse himself constituted a violation of due process.

So here is a case that seems to be crying out for redress: a guy spends $3 million to help elect a judge who then proceeds to overturn a $50 million judgment. Not only was the campaign expenditure shockingly enormous; but it actually seems to have been a small price to pay in view of the fabulous result he obtained on appeal. Even if he had no intention of obtaining such a result, and even if the judge had been completely uninfluenced by the campaign assistance, something still obviously smells wrong about this transaction. Yet the result may be very troublesome to apply, since the Court did not lay out a clear rule to tell judges when they must recuse themselves.

Instead the majority opinion (written by Justice Kennedy) merely took pains to emphasize that it was an extreme case. The opinion seems to suggest that the case should not have broad application. On the other hand, the Court has created an opening to view campaign contributions the same way that judges' direct financial interest in a case are viewed. The likely result is that any judge who has received substantial campaign assistance from one of the litigants in any case before that judge, must now seriously think about recusal.

Cartoon from American Constitution Society website

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Enforcing Releases of Mis-Classification Claims

California Labor Code Section 206.5 prohibits the enforcement of releases of claims for wages due, unless payment of those wages has been made. A simplistic way of thinking about this rule is to say that you can't settle wage claims, i.e., an employer is never off the hook for paying an employee less than the wages that the employee is owed. But this section has also been held to prohibit employers from withholding compensation that is concededly due to an employee in order to obtain a settlement of additional, disputed amounts. In Chindarah v. Pick Up Stix, Inc., No. G037190 (2/26/09), however, the Fourth District Court of Appeal upheld the validity of releases settling claims of alleged mis-classification, where there was presumably a dispute as to whether the employer owed any overtime wages at all.

The case involved a proposed class action to recover overtime wages on behalf of certain managers and lead cooks employed by Pick Up Stix, who had been classified, improperly according to the plaintiffs, as exempt employees. The settling employees signed a release acknowledging that they spent more than 50% of their time performing managerial duties, and agreed not to participate in any class action by the employees who did not settle. The appeal followed a summary adjudication in favor of the employer of its cross-complaint for breach of those releases, after a number of the settling employees went ahead and joined the proposed class action despite having signed these releases.

The Court of Appeal distinguished this situation from the settlement of claims in which the employer made payment of wages concededly due to the employee conditional on settlement of other claims. The court held that this rule did not bar enforceability of the settlements, since there was a bona fide dispute as to whether overtime wages were due at all.



Classification issues are often difficult. Whether an employer may legitimately rely on exceptions for administrative or executive employees to justify treating them as exempt turns on an analysis of such issues as the nature of the employee's job duties; the extent to which that employee participates in supervision, hiring and firing of other employees; and the percentage of time that such employees spend performing executive or administrative functions. In Chindarah, the Fourth District panel approved the settlement of good faith disputes over these complicated issues. Employee advocates would probably view the decision as an opportunity to exploit workers. Employers would probably view it as an opening for the possibility of negotiating settlements of legitimate disputes with employees, instead of forcing these issues to be resolved in an adversarial manner. Since I represent both employees and employers, I would say there is some validity to both perspectives.

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Constitutional Confusion in California

Yesterday's ruling by the California Supreme Court in Strauss v. Horton and related cases, was about as narrow a victory for the proponents of Proposition 8 that the Court could have rendered. Although the Court upheld the validity of Proposition 8, which amends the State Constitution to read that only marriage between a man and a woman is valid or recognized in California, the Court at the same time recognized the validity of the thousands of same sex marriages performed in California between the time of the Court's decision last year finding a constitutional right to marry regardless of sexual orientation, and the voters' amendment of the Constitution last November preventing the state from recognizing a marriage between same sex couples.

More importantly, the Court decided that Prop. 8 cannot affect anybody's substantive rights at all. Therefore, all Prop. 8 did was to deny the state the power to call a same sex union a marriage (except for the thousands of same sex couples who took advantage of the Supreme Court's ruling last year). For the future, the Court held that "same-sex couples continue to enjoy the same substantive core benefits afforded by those state constitutional rights as those enjoyed by opposite-sex couples--including the constitutional right to enter into an officially recognized and protected family relationship with the person of one's choice and to raise children in that family if the couple so chooses--with the sole, albeit significant, exception that the designation of 'marriage' is, by virtue of the new state constitutional provision, now reserved for opposite-sex couples." (slip opinion at p. 92)

It is ironic that in order to save Proposition 8, the Court had to render it almost meaningless. On the other hand, if the Court had held that Proposition 8 had the fundamental effects that its opponents claimed that it had, the Court might have had to overturn Proposition 8 as an invalid attempt to revise, as opposed to amend, the Constitution.

This result is certain to cause confusion, because the law will continue to recognize the marriages of gay couples who were married last year, while gay couples who obtain civil unions this year are entitled to all of the substantive rights of married couples, except that the state cannot say that they are married. Proposition 8 is still the law in California, but all it means is that only opposite-sex couples are entitled to the designation "marriage." Same-sex couples will have to search for another name to describe a relationship that they believe is just as sweet.

Photo from amgmedia.com

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Moving Further Away from Notice Pleading

On Monday, the US Supreme Court made clear in Ashcroft v. Iqbal (No. 07-1015) that its new formulation of pleading standards in the Twombley case, has broad application. Arguably, the Court raised the pleading bar even higher, as the Court's opinion could be read to encourage examination of the surface plausibility of the factual allegations of the complaint, and to allow courts to reject complaints if these factual allegations are deemed too "conclusory."



The case involved civil rights claims against the Attorney General, the FBI director, and others, on behalf of a Pakistani citizen who was arrested in the United States in the wake of the September 11 attacks. Plaintiff alleged that these high-ranking officials were the "principal architect" of and "instrumental" in carrying out a policy of harsh confinement of individuals based on their ethnicity, religion or national origin. These allegations were held too conclusory to meet Twombley's "plausibility" standard. Further, the Court held that the complaint failed sufficiently to allege that the defendants had adopted a policy of separately classifying persons of high interest based on their ethnicity or religion. The Court made clear that it was not rejecting the plaintiff's allegations as unrealistic or nonsensical, only that they were too conclusory. The court justified this result based on its supposition that a legitimate dragnet could have a disparate impact on Muslims or Arabs that would not necessarily have resulted from intentional discrimination.

Perhaps the heightened level of scrutiny given to Iqbal's complaint could be explained by judicial deference to the government's law enforcement efforts in the wake of the September 11 attacks. Perhaps it merely signals that the era of indulgence given to civil rights claims dating back to the 1950's and 1960's is over. Whatever the reason, the Court's striking down of this complaint will certainly inspire even more defendants to file even more motions to dismiss all kinds of complaints for failure to state a claim.

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Class Actions

Today the California Supreme Court made it easier to certify class actions in unfair business practices cases. In the so-called Tobacco II cases (S147345), the Court reversed a lower court order de-certifying a class action in the wake of Proposition 64, the law that modified California's unfair business practices statute (Business & Professions Code Section 17200 et seq.) to require that the persons bringing such claims have actually been injured themselves by the alleged unfair practices. The main issue before the Supreme Court was whether all class members must comply with Proposition 64's standing requirements, or only the class representatives. Specifically, the question was whether each smoker who is eligible to remain as a member of the class must demonstrate reliance on the tobacco companies' alleged unfair practices.

The case relied on interpretation of Proposition 64 itself, holding that the initiative was only intended to limit the persons who can bring an unfair business practices claim, not to change the nature or type of relief available. Therefore, the Court held the amended statute does not preclude a class action on behalf of other persons who might not themselves be able to demonstrate compliance with the new standing requirements. So if the class of smokers who had been exposed to defendants' advertising and marketing practices was validly certified in the first place, that certification did not become invalid merely by virtue of the passage of Proposition 64.

How this decision affects the definition and certifiability of class actions in other contexts, and even in other unfair business practices cases, will probably remain a subject of continued debate. The extent to which the members of a putative class must have similar interests to one another and to the interests of the class representatives, and the extent to which a class action is a manageable way of dealing with all of the different interests of class members, must still be addressed on a case-by-case basis.

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