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Wage-and-hour lawsuit ruling may curb class action lawsuits

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Wage-and-hour lawsuit ruling may curb class action lawsuits

SAN FRANCISCO—A state appellate court ruling last week in California that dismisses a class action wage-and-hour lawsuit by bank employees is expected to lead to a dramatic reduction in the number of class actions filed in the state and be highly influential nationally as well.

Last week's decision in Sam Duran et al. vs. U.S. Bank National Assn. relies in part on the June 2011 U.S. Supreme Court decision in Wal-Mart Stores Inc. vs. Betty Dukes. In Wal-Mart, the high court held that statistical evidence presented by plaintiffs was “insufficient to establish that respondents' theory can be proved on a classwide basis.” It also said anecdotal evidence of 120 affidavits, which it said represented one of every 12,500 class members, was “too weak to raise an inference” of discriminatory personnel decisions.

The plaintiffs in the Duran litigation are 260 current and former business banking officers who allege they were misclassified by U.S. Bank as outside sales personnel exempt from California's overtime laws.

The case, originally filed in 2001, has a convoluted procedural history. It includes a trial court granting plaintiffs' motion for class certification in 2005. In 2006, the trial court said it planned to use a random sample of 20 class members to testify as representatives for the class. In May 2009, the trial court awarded the class $15 million.

The three-judge panel of the 1st District Court of Appeals of California criticized the lower court's approach in its ruling last week. “We agree with USB that the trial plan employed here was seriously flawed,” the appellate court ruled. There was “no statistical foundation for the trial court's initial assumption that 20 out of 260 is a sufficient size for a representative sample by which to extrapolate either liability or damages.”

“The court appears to have arrived at this procedure on its own, without reliance on legal precedent or the advice of expert witnesses,” the appellate court ruled in reversing the lower court's judgment certifying the class. Referring to Wal-Mart, the California court said the U.S. Supreme Court found that “representative sampling studies did not justify certification.”

The ruling also says the trial court prevented U.S. Bank from introducing evidence pertaining to nonclass members in its defense. This “effectively prevented USB from establishing its affirmative defense as to classwide liability. The record on appeal supports the inference that a large percentage of the absent class member plaintiffs were properly classified and that USB did not owe them any overtime.”

“Thus, there is evidence that in the absence of the error, USB would have received a more favorable result.”

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The court said, “In sum, the court erred when, in the interest of expediency, it constructed a set of ground rules that unfairly prevented USB from defending itself.”

A spokesman for Minneapolis-based U.S. Bank said it was pleased the court agreed with its position.

Plaintiffs attorney Ellen Lake, who worked with the Greenbrae, Calif.-based Wynne Law Firm on the case, said she was disappointed with the decision and plans to appeal the ruling to the California Supreme Court. Observers note it is unknown whether the court will agree to hear the case.

“This is a huge decision,” said Marc E. Bernstein, a partner with law firm Paul Hastings Janofsky & Walker L.L.P. in New York. It is a “well-reasoned decision that explains employers have rights, too.”

Mr. Bernstein said, “The reality is, most defendants up until now” have settled class actions. “They're afraid to try them, and I think a decision like this could well encourage employers to try more of these cases” because it will now be very difficult for plaintiffs to try cases like these “where you can't use a sampling,” Mr. Bernstein said.

Thomas R. Kaufman, a partner with Sheppard Mullin Richter & Hampton L.L.P. in Century City, Calif., said the court's “very thorough analysis” of the issue of class certification is consistent with the U.S. Supreme Court's logic in Wal-Mart.

The decision is the “logical extension of the Wal-Mart decision,” which said “you can't prove a class action based on the so-called trial by formula,” said Anthony J. Oncidi, a partner with Proskauer Rose L.L.P. in Los Angeles.

Douglas A. Plazak, a senior attorney with Reid & Hellyer A.P.C. in Riverside, Calif., said he was “thrilled” the “court finally corrected what I believe was the trial court's violation of the due process rights of the defendant, USB, and certainly has cast grave doubt on the ability of plaintiffs to use statistical sampling to demonstrate liability which is, from a constitutional perspective, a very questionable way to prove liability against a defendant.”

“It's a fantastic ruling,” said Marlene S. Muraco, a shareholder with law firm Littler Mendelson P.C. in San Jose. The “court of appeals gets” the arguments “that the defense bar has been making about the trial of class actions and the manageability of class actions for a long time.”

“The problem is, the judge just kind of made up a sampling plan. He said, "10% is just about right' without any input from statistics experts and wound up with a large margin of error on liability and on the damages,” she said.

Mr. Kaufman said the ruling would “knock out 90 to 95% of the class actions that currently would get certified in California.”

And, while not binding elsewhere, Duran will be a “very persuasive authority” in other states, most of which have laws that, like California's, are modeled on the federal statute. In addition, “big California decisions tend to be very influential,” Mr. Kaufman said.

Mr. Bernstein said the decision also will have a national impact because it is based on the U.S. Constitution's concept of due process. For that reason, he also says it is unlikely it will be overturned on appeal. “You'll see it cited everywhere,” he said.

Mr. Plazak said the ruling could be influential elsewhere “because it could show other courts from a practical standpoint how they should apply Dukes vs. Wal-Mart in their states as well.”

“We're class-happy here” in California, which means the fact that this decision came from California court will make it particularly influential, said William L. Stern, a partner with Morrison & Foerster L.L.P. in San Francisco.

However, Wyston M. Ackerman, a partner with law firm Robinson & Cole L.L.P. in Hartford, Conn., disagreed.

“I'm not sure it will have a broad impact outside California,” he said. “There are some state courts that have not adopted Wal-Mart, so we may see some different approaches in different states.”