State Appellate Court Vacates Class Action Settlement Due to Court’s Failure to Independently Analyze Fairness of Settlement.

Case: Kullar v. Foot Locker Retail Inc., Case No. A119697 (Cal. Ct. App. 11/7/08)

The One Sentence Summary: Approval of a $2 million settlement in a wage-and-hour class action against a retailer was vacated because the trial court failed to independently analyze the evidence and circumstances surrounding the settlement.


What They Were Fighting About: Defendant Foot Locker agreed to settle this class action, which alleged various failures to properly compensate employees for their labor and expenses, for a total of $2 million. A member of the class filed a written objection to the settlement and requested discovery, arguing that the settlement was not fair and class counsel had not completed sufficient discovery to determine the extent of the class loss. At the hearing for final approval, the settling parties argued that information supporting the settlement had been exchanged at the mediation that resulted in the settlement, but that none of the information could be provided to the trial court due to the privilege accorded mediation discussions. The trial court concluded that it could not compel the parties to turn over documents exchanged at the mediation, and approved the settlement on the basis that “circumstantial evidence” indicated it was fair.


Upon the objector’s appeal, the appellate court vacated and remanded for further proceedings. The court held the trial court was required to independently analyze the evidence and circumstances to determine whether the settlement was in the best interests of the class. Although the trial court was not required to attempt to decide the merits of the case, it must at least satisfy itself that the class settlement is within “the ‘ballpark’ of reasonableness.” Accordingly, the trial court was required to examine the relevant data. If certain data were privileged, the parties could be required to provide the trial court with other data that would enable the court to make an independent assessment of the adequacy of the settlement terms. The appellate court further held that the objector should be permitted to renew its discovery requests, within limits.

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Even Reasonable and Narrow Non-Compete Agreements Are Barred by California Statute

Employment contracts with non-competition clauses are common outside of California, but a California statute, section 16600 of the California Business and Professions Code, prohibits non-compete contracts outside of a few statutory exceptions. In a decision issued on August 7, 2008, Edwards v. Arthur Anderson, No. S147190, the California Supreme Court held that section 16600 prohibits non-competition contracts even if the non-compete clause is reasonable or imposes only a “narrow restraint.” The Court further held that the employer had engaged in a wrongful act by requiring the employee to sign a release of claims under the non-competition contract.

Background:

Section 16600 provides that

“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Statutory exceptions to section 16600 allow non-compete contracts in certain circumstances, including in connection with the sale of goodwill of a business (§ 16601) and the dissolution of a partnership (§ 16602) or limited liability corporation (§ 16602.5).

In Edwards, the plaintiff Edwards had signed a non-competition agreement as an employee of Arthur Anderson. The agreement barred Edwards from serving within 18 months any Anderson clients with whom Edwards had worked, and barred solicitation of clients of Anderson’s Los Angeles office. After Anderson became embroiled in the Enron scandal, HSBC sought to hire a group of employees including Edwards. HSBC and Anderson required the moving employees to sign a “Termination of Non-Compete Agreement” which released “any and all” claims against Anderson. Edwards refused to sign the termination agreement because he did not want to release indemnity claims against Anderson, and was therefore not hired by HSBC. Edwards then sued Anderson and HSBC for claims including interference with prospective economic advantage. Edwards lost in the trial court against Anderson but won at the California Court of Appeal (click here for a discussion of the lower court decision). The California Supreme Court then took the case.

California Supreme Court Holdings:

• The first question before the California Supreme Court was whether Anderson’s enforcement of the non-competition agreement (by forcing Edwards to sign an agreement terminating it) was a wrongful act. The Court held that enforcing the non-competition agreement was illegal under section 16600 and enforcing it was a wrongful act that could lead to liability for interference with prospective economic advantage. The Court noted that

  section 16600 reflects “a settled legislative policy in favor of open competition and employee mobility, . . . [it] ensures that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice [and it] protects the important legal right of persons to engage in businesses and occupations of their choosing.”



• In light of the broad statutory language of section 16600 and the limited statutory exceptions, the Court rejected decisions of federal courts which had ruled that section 16600 allowed “reasonable” non-compete contracts that imposed only a “narrow restraint” on competition. The Court stated “Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect.”


• In a second part of the decision unrelated to the non-competition agreement issue, the Court also held that the release sought by Anderson as the employer for “any and all” claims was not unlawful because it could not be interpreted to release non-waivable employee indemnity rights under California Labor Code section 2802(a).
  

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Brinker Restaurant v. Superior Court of San Diego County, et al.

Case: Brinker Restaurant v. Superior Court of San Diego County, Case No.D049331 (Cal. Sup. Ct. 7/22/08)

The One Sentence Summary: On July 22, 2008, the California Court of Appeal issued a ruling on meal breaks and rest periods that may make it easier for California employers to comply with meal and rest break requirements. Because it is likely that the case will be appealed, however, employers should be cautious in relying on the opinion until all appeals are finally concluded, which may take several years.

What They Were Fighting About:

In Brinker Restaurant v. Superior Court of San Diego County, et al., plaintiffs brought a class action complaint against Brinker Restaurants (operator of 137 restaurants in California including Chili's, Romano's Macaroni Grill, and Maggiano's Little Italy) for various alleged violations of California meal and rest break requirements. In vacating the Superior Court's order granting class certification, the Court of Appeal made several significant rulings concerning employers' responsibility for meal periods and rest breaks:

(1) Providing Meal and Rest Breaks: The Court held that while employers cannot "impede, discourage or dissuade employees from taking" meal periods or rest breaks, employers need only provide employees the opportunity to take meal periods and rest breaks, not ensure that employees actually take them.

(2) Scheduling Meal Breaks: The Court overturned the trial court's conclusion that the employer was required to provide meal breaks on a "rolling" five hour schedule-that is, providing a thirty minute break for each five hours worked. Because Brinker allowed its food servers to take meal breaks in the first hour of an eight hour shift (so they could work and earn tips during the busiest part of the shift), plaintiffs had argued that Brinker was required to provide a second meal period within five hours of the first meal break. The Court held that employers need provide only one meal break for employees who work between five and ten hours during a shift, regardless of when the meal period is taken. A second meal break is only required if an employee works more than ten hours.

(3) Scheduling Rest Breaks: The Court also rejected the argument that employees need to take their rest breaks in the middle of each four hour period. The Court found that Brinker did not violate the rest break requirement by allowing employees to take their meal period in the first hour of an eight hour shift and then to take their two rest breaks later in the shift.

What Brinker May Mean to You:

If this case is not overturned on appeal (which we may not know for months or even years), then employers will have more flexibility in scheduling meal periods and will not have the burden of ensuring (and proving) that employees actually take the full meal periods provided. In addition, employers will not have to pay the one hour of premium pay to employees who take an "early lunch," a break at the wrong time, or a break of less than 30 minutes, as long as the employer provided a meal period and the employee did not work more than ten hours total.

In light of the likelihood that this case will be appealed, we recommend that employers do not make changes to meal and rest break policies without consulting legal counsel.

If you have any questions about the Brinker case, and how it may apply to any particular situation effecting your company, please contact one of us in the Labor and Employment Practice Group.

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No Irreparable Harm Justifying Writ Relief From Trial Court's Order to Disclose Redacted Version of Letter Prepared By Outside Counsel

Case: Costco Wholesale Corporation v. Superior Court (Cal. Ct. App. 3/27/08)

The One Sentence Summary: Where a redacted version of a letter prepared by Costco's outside counsel detailing a comprehensive factual investigation and legal analysis of the classification of managers within Costco warehouses disclosed only job descriptions of certain managers readily available from other sources, Costco was unable to establish that irreparable harm would result from disclosure of the redacted letter and therefore was not entitled to writ relief from the trial court's order requiring production of the redacted letter.

What They Were Fighting About: In 2000, Costco engaged outside counsel to conduct a comprehensive factual investigation and legal analysis of the classification of managers within Costco warehouses. Outside counsel interviewed two warehouse managers and relied on other information provided to her by Costco, her legal research and experience in preparing a 22 page letter addressing the exempt status of certain Costco warehouse managers in California. In 2001, Costco decided to reclassify ancillary managers (i.e., managers of departments within each warehouse, such as meat, bakery, pharmacy, etc.) from exempt employees not entitled to overtime payments to salaried, non-exempt employees who were entitled to overtime. Plaintiffs then filed a class action against Costco in 2003 alleging it had misclassified ancillary managers as exempt employees and thus unlawfully failed to pay overtime. Plaintiffs sought production of the outside counsel's letter, and Costco objected on attorney-client privilege and work product grounds. The trial court ordered that a referee inspect the letter in camera to determine whether and what information in the document constituted privileged legal advice. The referee issued a recommendation upholding Costco's privileges as to parts of the letter, which he redacted, but found that other factual information about various employees' job responsibilities was not protected and should be produced. The referee found that the factual information was obtained in outside counsel's role as fact-finder rather than attorney and should be disclosed because it amounted to recorded statements of prospective witnesses and/or reflections on a non-legal matter. The trial court adopted the referee's recommendation and ordered the redacted form of the letter produced. Costco filed a petition for writ of mandate, which the appellate court denied, and then filed a petition for review in the California Supreme Court. The Supreme Court granted the petition and transferred the case back to the appellate court. The appellate court requested supplemental briefs, specifically on the issue of whether irreparable harm would result from release of the redacted letter, thus justifying extraordinary relief by writ of mandate. Following a hearing, the court again denied the petition for writ of mandate, thereby upholding the trial court's order requiring production of the redacted letter.

Court Holdings:

• The court's opinion focused primarily on whether disclosure would result in irreparable harm to Costco. Upon examining the redacted letter, the court held that Costco could not establish irreparable harm because the only parts of the letter that were unredacted were "inconsequential and [did] not infringe on the attorney-client relationship." The factual statements describing certain employees' job descriptions did not communicate any legal opinion, analysis or strategy, but merely provided information readily available from other sources that could easily be obtained through interviews, depositions or a document production request.



• Although the general rule in Evidence Code section 915(a) is that a trial court may not require even in camera disclosure of a communication in order to determine whether the communication is privileged, the rule is not absolute and in camera hearings may be held under certain circumstances. For example, in camera review is allowed to evaluate whether waiver exists and when application of a privilege depends on the communication's content (e.g., common interest privilege); or when there is a claim that the attorney was acting in some capacity other than as legal counsel and the dominant purpose of the communication and the attorney's work were not in furtherance of an attorney-client relationship (e.g., communications by insurance company's in-house claims adjuster who was also an attorney). Without in camera hearings, control over the determination of whether a privilege exists would be based solely on the representations of the party asserting the privilege.



• The court upheld the referee's conclusion that the unredacted portions of the letter, which contained factual information about various employees' job descriptions based on non-privileged documents and interviews with two managers, were not privileged. While recognizing that the attorney-client and work product privileges apply to corporations, the court cited the "landmark" California case on corporate attorney-client privilege, D.I. Chadbourne, Inc. v. Superior Court, 60 Cal.2d 723 (1964) for the proposition that not all statements furnished to corporate attorneys are privileged. The court noted that the referee applied the principles set forth by the Supreme Court in Chadbourne in analyzing which portions of the letter were privileged.

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Step-By-Step Guide to the San Francisco Health Care Security Ordinance

The San Francisco Health Care Security Ordinance (HCSO) became effective on January 9, 2008. The HCSO requires most San Francisco employers to make minimum health care expenditures for their employees, to track such expenditures, and to confirm compliance. Folger Levin & Kahn LLP has prepared a summary of the HCSO intended to be a step-by-step guide to help businesses understand the basic requirements of the ordinance. If you have any questions about the application of the HCSO to your business, please contact any of us in the Labor and Employment Practice Group.

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New Legal Developments for California Employers

This posting provides a summary of many new developments in California Employment Law for 2008, including summaries of new statutes, case law, and regulations that will impact California employers. If you have any questions about the application of any of these laws to any particular situation effecting your company, please contact one of us in the Labor and Employment Practice Group.

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California Supreme Court Finds That Class Arbitration Waivers in Employment Arbitration Agreements May Be Contrary to Public Policy

Case: Gentry v. Superior Court of Los Angeles Co. (Circuit City Stores, Inc.), No. S141502 (Cal. Aug. 30, 2007)

The One Sentence Summary: The California Supreme Court held that class arbitration waivers should not be enforced if a trial court determines that class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.

What They Were Fighting About: Plaintiff filed a class action lawsuit in superior court against Circuit City Stores, Inc. (“Defendant”), seeking damages for violations of the Labor Code. Plaintiff argued that Defendant had illegally misclassified salaried customer service managers as exempt managerial/executive employees not entitled to overtime pay, when in fact, they were non-exempt non-managerial employees entitled to be compensated for hours worked in excess of eight hours per day and 40 hours per week. When he was hired, however, Plaintiff executed an arbitration agreement with Defendant that precluded class actions. As such, Defendant moved to compel individual arbitration.

Court Holdings:

• The Court held that class arbitration waivers in overtime cases may be contrary to public policy. Specifically, the Court found that “the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable,” “overtime wages are another example of a public policy fostering society’s interest in a stable job market,” and “overtime laws also serve the important public policy goal of protecting employees in a relatively weak bargaining position against ‘the evil of overwork.’”


• Accordingly, the Court set forth certain factors a trial court must consider when employees allege that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver.


• First, the trial court considers the modest size of the potential individual recovery. Second, the potential for retaliation against members of the class. Third, the fact that absent members of the class may be ill informed about their rights. And lastly, other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.


• “If [the trial] court concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver....”
  
  

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