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Blanchette v. Superior Court (2017)

Brennan J. Mitch, Esq.

In Blanchette v. Superior Court (2017), the California Court of Appeal addressed a novel question: when must defects in a homeowner’s claim be raised by the builder?  The Court held as a matter of first impression that a builder’s failure to acknowledge receipt of a homeowner’s notice pursuant to the Right to Repair Act within 14 days released the homeowner from all further requirements under the Act even if the initial notice failed to satisfy the specificity requirements under the Act.

The Court of Appeal observed that the goal of the Right to Repair Act, Civil Code Section 895 et seq., is to resolve construction defects without resort to litigation.  The Court reasoned that this goal “cannot be achieved by permitting homebuilders to serve tardy responses to claims or to ignore them entirely.”  Further, Section 930 provides that all time periods under the Act are to be strictly construed.

Under the Act, the builder had 14 days to acknowledge receipt of the homeowner’s notice.  In Blanchette, the builder responded on the 21st day by asserting that the alleged construction defects were not described with sufficient detail but nonetheless offered to inspect the homes.  The Blanchette Court strictly construed the deadlines and found the acknowledgement to be untimely, thus releasing the homeowner from further obligations under the Act.

The Court’s opinion summarized Blanchette’s lesson for builders: “a developer who unilaterally concludes the level of specificity in a notice is insufficient, and therefore concludes it need not respond within the 14-day period prescribed by statute, acts at its peril if later, it wishes to employ the inspection and settlement process otherwise mandated by the statute.”

By: Brennan J. Mitch, Esq.

Cochran, Davis & Associates, P.C.


Popescu v. Apple

Christopher C. Schwarz, Esq.

A California appellate court recently ruled that an expert terminated for resisting Apple, Inc.’s illegal anti-competitive behavior could maintain two separate tort claims against Apple for interference with contractual relations (contract interference) and intentional interference with prospective economic advantage (business interference). Popescu was an “exceptional” aluminum engineering manager who developed cutting-edge alloys for high-tech customers. He was employed by Constellium, a company Apple was working with while considering changes to the aluminum design of its MacBook, iPad, and iPhone. Popescu, in overseeing the project, had to reveal to Apple trade secrets regarding aluminum alloy manufacturing formulas and processing. As such, Apple presented Constellium with a “Development Agreement” containing what Popescu felt were overly restrictive terms. Popescu refused to sign. He again refused at a subsequent meeting with Apple, during which the voice recorder on his smart-pen—which had inadvertently been turned on—recorded the meeting’s conversation.

An Apple attorney confiscated the pen and insisted that Constellium launch an investigation into the incident, and request Popescu’s termination. When Popescu’s supervisors resisted, Apple appealed to the management of the private equity firm that owned Constellium. Popescu was then terminated for cause and was unable to obtain other employment in the aluminum alloy industry. Popescu sued Apple alleging violations of the Sherman Antitrust Act, the Cartwright Act, and the Uniform Trade Secrets Act.

The trial court dismissed the suit reasoning that Popescu was an at-will employee and that Popescu did not allege Apple committed an independently unlawful act when it encouraged Constellium to launch an investigation into the recording incident. The appellate court reversed, reasoning that an employee whose at-will employment contract is terminated as a result of a third party’s interference need not allege that the defendant’s conduct was independently wrongful to state a contract interference claim. The court also held that Popescu did not need to allege that Apple specifically intended to directly harm Popescu. He only needed to claim that Apple’s wrongful act interfered with his economic relationship with his employer, which he did. The appellate court remanded the case back to the trial court to determine the extent of liability as to both torts.


By: Christopher C. Schwarz, Esq.

Cochran, Davis & Associates, P.C.

Aghaji v. Bank of America N.A.

Corinne L. Cortes, Esq.

Plaintiff Homeowners Bringing A Class Action Were Unsuccessful in Challenging Denial of Leave to Amend Where They Fail to Show Proposed Additional Facts Sufficient to State Unfair Competition Claims Which Did Not Arise Out of the Same Transaction or Occurrence

In the recent case Aghaji v. Bank of America N.A., the California Court of Appeal affirmed the trial court’s decision to deny plaintiffs leave to amend their UCL claim against Bank of America and its subsidiaries.  Plaintiffs were all homeowners from all over the United States whose home loans originated with or were serviced by Bank of America and its subsidiaries.  The Court held that the claims of the two-hundred-twenty-two plaintiffs could not be presented in a joint action.

The Court of Appeal first noted that plaintiffs had failed to provide sufficient facts to state a UCL claim.  The Court of Appeal also expressed strong disapproval of plaintiffs’ counsel’s declaration which in reality served to emphasize the diverse fact patterns presented.  The declaration enumerated allegations of other charges to one of the plaintiff’s principal balance, additional and unneeded insurance charged to another plaintiff, mortgage statements provided to a plaintiff that underreported amounts toward his mortgage, and an improper loan modification agreement provided to another plaintiff.   Furthermore, the facts alleged failed to show that the alleged UCL violations all occurred in California.  California’s unfair competition law does not apply exterritorialy.

The Court of Appeal also observed that even if plaintiffs had stated sufficient facts for each of the 222 plaintiffs, the claims did “arise out of the same transaction, occurrence, or series of transactions or occurrences.”  Under Code of Civil Procedure section 378(a)(1), plaintiffs may join in one action if “[t]hey assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action.”


By: Corinne L. Cortes, Esq.

Cochran, Davis & Associates, P.C.

Castro-Ramirez v. Dependable Highway Express (2016)

Ryan J. Jones, Esq.

A recent case addressed the interplay between discrimination based on an employee’s association with another who has a disability and whether the employer must provide the employee with a reasonable accommodation.  Castro-Ramirez v. Dependable Highway Express (2016) 2 Cal.App.5th 1028, review denied (Nov. 30, 2016).  Castro-Ramirez sued Dependable High Express (“DHE”) for disability discrimination, failure to prevent discrimination, and retaliation under FEHA, as well as wrongful termination in violation of public policy.

Plaintiff alleged that, when DHE hired him to work as a truck driver in 2010, he told DHE he had a disabled son who required dialysis on a daily basis and plaintiff was responsible for administering the dialysis.  He requested work schedule accommodations that his supervisor initially granted, permitting him to attend to his son in the evening.  In 2013, a new supervisor changed his work schedule.  Plaintiff complained to the new supervisor about the change in schedule.  On April 23, 2013, the supervisor gave plaintiff the 12:00 p.m. shift.  Plaintiff objected and explained that the shift would not allow him to be home early enough in the evening to tend to his disabled son.  The supervisor spoke to a manager and then terminated plaintiff’s employment.  The supervisor told plaintiff he “had quit by choosing not to take the assigned shift.”

DHE moved for summary judgment, and the trial court granted DHE’s motion.  In April 2016, the Court of Appeal initially held that “no published California case has determined whether employers have a duty under FEHA to provide reasonable accommodation to an applicant or employee who is associated with a disabled person.  We hold that FEHA creates such a duty according to the plain language of the Act.” Previously published at: 246 Cal.App.4th 180.  On rehearing, the court significantly backed away from this new statement of the law.  In the second opinion, the court stated that they were not deciding whether FEHA imposes a separate duty to reasonably accommodate employees associated with a disabled person.  Nevertheless, the court still found there was evidence that Castro-Ramirez’s association with his disabled son was a substantial motivating factor for terminating him, and DHE’s stated reason for terminating him was pretext.


By: Ryan J. Jones, Esq.

Cochran, Davis & Associates, P.C.

California Fair Pay Act goes into effect on January 1, 2016, Strengthening the State’s Ban on Gender-Based Pay Discrimination

Margaret A. Sedy, Esq.

On October 6, 2015, Governor Brown signed the California Fair Pay Act (“the Act”), which amends Labor Code Section 1197.5. The Act is designed to address the gender wage gap in California and to increase requirements for wage equality and transparency. When the Act goes into effect on January 1, 2016, employers in California will be subject to one of the strictest and most aggressive equal pay laws in the country. The Act expands employer liability for sex-based wage disparities and makes defending equal pay claims more difficult.

According to the author of the amended law (Senate Bill 358), its purpose is to allow open discussion and inquiries by employees regarding their own pay and the pay of their co-workers, and to enable employees to discover and challenge any wage differential and rectify the disparity. The amended law also prohibits employers from discriminating or retaliating against employees who seek to enforce their rights under the amended statute. Employees may also directly file suit without having to first exhaust administrative remedies.

I. The New, Broader Standard for Fair Pay: “Substantially Similar Work”

Under existing California and federal law, employers are prohibited from paying employees of one sex less than employees of the opposite sex for performing “equal work” at the “same establishment.” The Act, however, eliminates the “same establishment” and “equal work” requirements, creating a much broader standard for employers to comply with. The amended law will prohibit an employer from paying its employees,

at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.”

Consequently, this means that that employees can bring equal pay claims based solely on disparities between individuals performing substantially similar work, irrespective of their work locations or job titles. For example, as the Act’s author explained, a female housekeeper who cleans hotel rooms could challenge the wages paid to a male janitor who cleans the lobby and banquet halls. A claim for unequal pay no longer requires that the pay at issue be within the same job, department or same work location to be actionable.

Under the amended law, so long as the work performed is “substantially similar,” an employee only needs to demonstrate that he or she is not being paid at the same rate as an employee of the opposite sex (“comparator-employee”) in any of the employer’s locations and in any other job category. This means that employees in different roles and locations may now be used as “comparators” for purposes of establishing a violation under the amended law.

II. Shifting the Burden of Proof: Significantly Relaxed for Employee, Heightened for Employer

Once an employee is able to show a pay differential as described above, the burden of proof shifts to the employer, who must affirmatively demonstrate that the entire pay differential is based on the reasonable application of one or more of the following four factors:

  1. A seniority system;
  2. A merit system;
  3. A system that measures earnings by quality or quantity of production, or
  4. A bona fide factor other than sex, such as education, training, or experience.

While these four factors are included under existing law, the Act now makes an employer’s ability to rely on the fourth factor as a defense significantly harder. The new law states that a bona fide factor other than sex, such as education, training or experience

shall only apply if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity.”

Furthermore, “business necessity” under the Act is defined as “an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.

Assuming the employer is able to demonstrate that a pay difference is not sex-based, is related to the position in question, and that a business necessity exists, an employee may still rebut the employer’s defense “if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.” Essentially, this means that an employer relying on the fourth factor to defend a difference in pay must demonstrate that it is closely tied to an absolute business necessity. This is indeed a significantly greater burden and higher standard to meet than under existing law, including the federal Equal Pay Act of 1963.

Damages under the amended law have not changed: an employee that successfully proves his or her claim may recover the amount of wages the employee was not paid due to the wage differential, plus interest, an additional equal amount as liquidated damages, and attorneys’ fees.

III. Wage Transparency: Prohibiting Employees’ from Discussing their Wages is, well…Prohibited

As mentioned in the introduction to this article, the Act also seeks to decrease pay secrecy by further prohibiting employers from enacting rules, policies or otherwise engaging in conduct that prohibits employees from disclosing their own wages, discussing the wages of others, asking about other employees’ wages, or aiding and encouraging employees to exercise their rights under the Act. However, the Act explicitly makes clear that it does not obligate any person (employer or employee) to disclose wages. It should also be noted that under California Labor Code Section 232, employers are already prohibited from requiring an employee to refrain from disclosing the amount of his or her wages or to waive his or her rights to do so. The National Labor Relations Act (“NLRA”) includes a similar legal counterpart that protects employees that act together, or in “concert,” in an effort to improve the terms or conditions of their employment, such as wages. The difference in the Act is that now employees specifically have a private right of action directly against their employer for violating this provision. Under Labor Code Section 232 and the NLRA, an employee’s remedy against an employer for prohibiting such conduct was only actionable by the state or federal regulatory authority (i.e., the California Labor Commission; the National Labor Relations Board). Now, it is actionable by the employee directly and in civil court.

IV. Additional Remedies and Causes of Action: Anti-Discrimination and Anti-Retaliation Provisions

The Act also prohibits employers from discriminating or retaliating against employees who seek to enforce their rights under the Act, or for assisting others to invoke their rights. Employees who can prove they were discharged, discriminated against, or retaliated against in violation of the Act are entitled to seek reinstatement of employment, recover lost wages and benefits, and obtain equitable relief against their employer.

V. Increased Record Keeping Requirement

The Act also extends the two-year time period for keeping records related to employees’ terms and conditions of employment, including but not limited to, wages, rates, job descriptions and job classifications, to three years.

VI. Considerations for California Employers: Recommendations to Minimize the Risk of Noncompliance

Employers should begin reviewing their compensation-related policies and procedures now, before the law goes into effect on January 1, 2016. Here are some steps California employers may wish to consider to help minimize the risk of noncompliance with the California Fair Pay Act:

1) Evaluate all compensation-related policies and procedures with counsel to ensure all additional requirements are met.

2) Review employees’ job descriptions and current salaries to ensure any pay differentials are completely accounted for by any or all of the above-numerated factors and that the factor has been reasonably

3) Evaluate and update handbooks, polices, and procedures prohibiting retaliation and discrimination to include a specific reference to the Act.

4) Train any employees that make compensation-based decisions on the Act’s new statutory requirements and specifically, on the factors that such decisions can legally be based.

5) Evaluate your company’s internal complaint procedures and ensure there are adequate methods and means to bring to light and address any wage differential issues or complaints.

6) Evaluate any references to compensation in employee handbooks, employment contracts and/or confidentiality agreements to ensure provisions are consistent with the Act; revise any prohibitions on disclosure of compensation accordingly.

7) Consider how your company will address employee inquiries about other employees’ salary information; while the amended statute does not preclude an employee from making an inquiry (for the purpose of ascertaining their rights under the Act), the employer is not legally obligated to disclose the salary of any of its employees; after adopting a policy to address this, ensure supervisors, managers and/or human resource professionals carry it out consistently and evenly.

8) Update your company’s internal record retention policies and procedures to reflect the new three-year retention period for employment records, including: employee wages and rates, job classifications and descriptions, and all other terms and conditions of employment.

By: Margaret A. Sedy, Esq.

Cochran, Davis & Associates, P.C


Corinne L. Cortes, Esq.

The U.S. District Court for the Ninth Circuit recently held that an Abercrombie & Fitch employee had proven her prima facie case of a Title VII religious accommodation claim against her former employer based on her employer’s objection to her wearing a hijab on the job.  Because the employee and the EEOC established a prima facie case of employment discrimination both under federal Title VII and California FEHA, the burden of proof shifted to the employer.  The Court rejected all three of the employer’s defenses – failure to conciliate, undue hardship, and infringement of commercial free speech.

Defendant Abercrombie & Fitch (“Abercrombie”) operates retail clothing stores across the country. Abercrombie maintains a “Look Policy,” to which all store employees must conform. The policy is designed to communicate “the spirit of each brand.” Plaintiff Khan, a Muslim who believes that Islam dictates her choice of apparel, wore a hijab, a head scarf Islam requires Muslim women to wear in public, during her initial interview. She acknowledged Abercrombie’s Look Policy and agreed to abide by it, but wore the hijab during her period of employment of approximately fourteen (14) months. During that time, Abercrombie failed to inform her of the Look Policy violation, but on a random visit to the store where Khan worked unpacking shipments and stocking the floor, an upper level manager saw her wearing the hijab. Management made two formal requests to Khan to stop wearing the hijab.  Khan responded that she could not remove the hijab because of her religious beliefs. Abercrombie terminated Khan for failure to comply with the Look Policy. Ten (10) days later, Abercrombie offered Khan reinstatement with permission to wear the hijab, which Khan refused.

Khan filed a Charge of Discrimination against Abercrombie with the EEOC. Two similar charges related to hijabs and the Abercrombie Look Policy were pending with the EEOC. In a consolidated conciliation, the EEOC recommended to Abercrombie that all employees should be allowed to wear headscarves in the future without consideration on a case-by-case basis. Abercrombie refused the recommendation, and the EEOC filed the present action.

On cross-motions for partial summary judgment, the Court granted plaintiffs’ motion and denied defendant’s. The EEOC and Khan established a prima facie case of Title VII religious accommodation, successfully showing all three required elements: (1) employee’s bona fide religious belief conflicted with an employment duty; (2) employee informed employer of the belief and conflict; and (3) employer subjected employee to discriminatory treatment because of employee inability to fulfill the job requirement.  Here, plaintiffs proved that Khan held a bona fide belief that Islam required her to wear a hijab in public, that she informed Abercrombie of the belief, and that Abercrombie requested she desist from wearing the hijab at work, and when she didn’t, terminated her for failure to comply with the Look Policy. After plaintiffs’ showing of the prima facie elements, the burden of proof shifted to Abercrombie to prove its affirmative defenses.

The Ninth Circuit held that the EEOC had properly completed conciliation with Abercrombie.  Prior to filing a suit, the EEOC must attempt to eliminate any alleged employment practice by informal methods of conference, conciliation, and persuasion.  EEOC v.Pierce Packing Co. (1982) 669 F.2d 605, 607. The Court disagreed with Abercrombie’s contentions that the EEOC had taken an “all-or- nothing approach” and had “abruptly ended” the conciliation.

The Court further rejected Abercrombie’s defense of undue hardship.  To establish undue hardship requires proof that the requested accommodation would result in “more than a de minimus cost.” Transworld Airlines, Inc. v. Hardison (1977) 432 U.S. 63, 84.  Here, the Court opined that Abercrombie failed to show that any deviation from its Look Policy threatened the company’s success.  The Court also declared without foundation Abercrombie’s claims that an accommodation for Khan would have threatened the core of its business model and overall success.  The evidence provided by Abercrombie was characterized by the Court as nothing more than generalized subjective beliefs and assumptions with no documentation to establish any negative impact on sales or any disruption or imposition.

The Ninth Circuit also rejected Abercrombie’s defense of infringement upon its right to commercial free speech. Commercial speech, entitled to a lesser degree of Constitutional protection, must, as set forth in Bolger v. Youngs Drug Products Corp. (1983) 463 U.S. 60: (1) be an advertisement; (2) refer to a particular product; and (3) the speaker must have an economic motivation for the speech.  Here, the Ninth Circuit reasoned that Abercrombie’s argument that employees are “living advertisements” did not equate to “representing the brand” because employees were not necessarily wearing the products being sold. Thus, their appearance was considered not to promote a particular product nor propose a commercial transaction.

Finally, the Court held that genuine issues of material fact precluded summary judgment on the EEOC’s claim for a permanent injunction and Abercrombie’s liability for punitive damages.

By: Corinne L. Cortes, Esq.

Cochran, Davis & Associates, P.C.

Bad Faith and Speculation About Unpled Claims

Steven R. Inouye, Esq.

The California Court of Appeal recently reached a decision affirming an insurer’s right to deny a claim where third party allegations against an insured cosmetics manufacturer did not support coverage even though extrinsic facts revealed that the underlying complaint could have been amended to allege covered claims.

In Ulta Salon, Cosmetics & Fragrance, Inc. v. Travelers Property Casualty Co. of America, 197 Cal.App.4th 424 (June 10, 2011) (Second District), the Court of Appeal upheld an insurer’s demurrer to a bad faith lawsuit without leave to amend.  The underlying action involved a consumer suit which alleged a single cause of action against a cosmetics manufacturer under the California Safe Drinking Water and Toxic Enforcement Act of 1986 for the failure to warn of toxins in its products.   However, the plaintiff customer never alleged that she used the cosmetics or that she suffered bodily injuries as a result of any contact with the products.  Furthermore, the only remedies sought under the consumer protection statute were for civil penalties and injunctive relief.   Since no bodily injuries were alleged, the insurer Travelers denied coverage under the insured’s CGL policy.  Thus, the manufacturer was forced to defend the lawsuit at its own expense.   After several years of litigation, the insured settled with the consumer and brought a bad faith lawsuit against Travelers.

In response to the bad faith action, Travelers filed a demurrer to the complaint arguing that it had no duty to defend.  Travelers asserted that no coverage was triggered under the CGL policy because the consumer never alleged she suffered “bodily injuries” from using the cosmetics as required by the insuring language.  The trial court agreed, sustaining Travelers’ demurer without leave to amend and effectively dismissing the case.   The manufacturer appealed.

On appeal, the manufacturer argued that the “face of the complaint” included general allegations that the customer had been exposed to toxins in the cosmetics.  The manufacturer asserted that since the consumer could have amended her complaint to allege bodily injuries, a potential for coverage existed.   The insured also asserted that expert discovery conducted during the litigation revealed that the consumer could have been injured by her contact with the toxins.

The Court of Appeal upheld Travelers’ demurrer without leave to amend.   The Court of Appeal agreed with the trial court that there was no coverage because the consumer had not made any bodily injury claims in her complaint.  The Court of Appeal also dismissed the insured’s argument that bodily injury damages were “contemplated” by the consumer because her complaint emphasized the toxic nature of the cosmetics.   The Court of Appeal rejected this argument by stating that “the insured may not speculate about unpled third party claims to manufacture coverage.’” [citing Hurley Construction Co. v. State Farm Fire & Casualty Co. (1992] 10 Cal. App.4th 533, 538.]

The Court of Appeal also held that there was no abuse of discretion in upholding the demurrer without leave to amend.  The appellate court dismissed the insured’s arguments that discovery revealed a potential for coverage such that her bad faith complaint could be amended.   Even though extrinsic facts discovered during the lawsuit showed that the insured may have been exposed to the cosmetics, the Court of Appeal held that extrinsic facts may only create a duty to defend if they are “known to by the insurer at the inception of the third party lawsuit.”  [citing Gunderson v. Fire Ins. Exchange (1995) 37 Cal.App.4th 1106, 1113-1114.]  Further, the court found that there was no potential for coverage noting the difference between being exposed to a toxic product and claiming to be injured as a result.

In light of the Ulta Salon ruling, insurers may be more confident in denying claims under CGL policies which require “bodily injuries” to be alleged, so long as, no facts known at the time of the lawsuit’s inception would indicate that bodily injuries were suffered by a third party plaintiff.  This ruling may be especially useful in analyzing coverage for claims which involve the violation of consumer protection statutes or other regulatory measures.

By: Steven R. Inouye, Esq.

Cochran, Davis & Associates, P.C.


Elizabeth D. Diaz, Esq.

Employers have a strong interest in enforcing arbitration provisions of employment agreements.  However, California has a strong public policy of protecting the rights of employees in a class action so that employees may have their day in court.  The recent case of Brown v. Ralphs Grocery Store reaffirms this strong public policy, even in light of the recent U. S. Supreme Court ruling.

In Brown, the Appellate District went to great lengths to distinguish the specific facts of Brown and avoid enforcing the U.S. Supreme Court ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (“AT&T”).  AT&T rejects the well-established California rule that use of class action waivers in consumer arbitration agreements is prohibited.  The Supreme Court held that the Federal Arbitration Act (“FAA”) preempts the California rule.  The FAA confirms that agreements to arbitrate are valid, irrevocable, and enforceable.  According to the court, the FAA reflects both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract.  Brown is the first California case to apply the holding in AT&T.

In Brown, Plaintiff Terri Brown began working for Ralphs Grocery as a security guard in 2005. Plaintiff filed a class action against her employer asserting four Labor Code violations and a violation of Business and Professions Code section 17200, et seq. based on the alleged Labor Code violations.  Plaintiff also alleged that she satisfied the administrative prerequisites to pursue a representative action under the state Private Attorney General Act of 2004 (PAGA) and sought civil penalties pursuant to PAGA.

Defendants petitioned to compel arbitration based upon the Mediation and Binding Arbitration Policy (“arbitration policy”) in Plaintiff’s employment application.  The arbitration policy included both a class action waiver and a PAGA waiver.  The trial court denied defendants’ petition.  The trial court found that the class action waiver and the PAGA waiver were unconscionable and therefore unenforceable.  Plaintiff filed a notice of appeal.

The Court of Appeal for the Second District reversed the trial court’s order denying defendants’ petition to compel arbitration.  However, the court did not directly address the issue of whether the AT&T holding applied in the employment-related context.  Instead, the court relied on the fact that Plaintiff failed to meet her evidentiary burden in the trial court to invalidate the class action waiver.  The appellate court ruled that Plaintiff failed to make a factual showing under a four factor test to invalidate the class action waiver provision.  Thus, the court said “we do not have to determine whether, under AT&T … the invalidity of class action waivers in employee-employer contract arbitration clauses is preempted by the FAA.”

As to the PAGA waiver in the arbitration policy, the court of appeal declined to extend AT&T to waivers of PAGA representative actions.  The Brown court circumvented AT&T by distinguishing waivers of PAGA representative actions.  The court indicated that AT&T dealt with the private individual right of a consumer to pursue class action remedies whereas PAGA actions protect the public.  The appellate court held that the FAA did not preempt state law regarding the unenforceability of a PAGA waiver in an employment contract.  Thus, the court found the PAGA waiver unenforceable.  The court noted, “Until the United States Supreme Court rules otherwise, we continue to follow what we believe to be California law.”

The appellate court remanded the case to determine whether to sever the PAGA waiver from the agreement or to refuse to enforce the entire agreement or portions thereof.  Currently, the severance issue has not yet been decided by the trial court.  A status conference is scheduled for January 31, 2012.

It is still too early to tell how the AT&T case will affect class action waivers in an employee-employer contract arbitration clause.  For the time being, there may be a surge of PAGA actions that will rely on Brown to circumvent arbitration.  Therefore, employers should routinely evaluate whether its labor and employment practices conform to the California Labor Code to avoid PAGA actions.

By: Elizabeth D. Diaz, Esq.

Cochran, Davis & Associates, P.C.

A Named Insured and An Additional Insured May Not Contractually Alter The Horizontal Exhaustion Rule Under California Law

I.Justine Grubb, Esq.

Applying California law, the Eastern District rejected an attempt to contract around the application of primary and excess policies in Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co. In that case, the insurer for the named insured paid the entire settlement for its named and additional insured in a wrongful death action due to a forklift accident.  The settlement of $3.5M was reached by exhausting the primary layer of insurance and $2.5M from the excess layer.  After the primary insurer for the additional insured refused to contribute, the insurer for the named insured brought an action for contribution.  On summary judgment, the Eastern District of California held a named insured and an additional insured could not contractually alter the horizontal exhaustion rule.

Tasq Technology, Inc. (“Tasq”) owned a warehouse in Roseville, California.  Tasq contracted with West Coast Conveyor and Equipment (“West Coast”) for the installation of shelving at its warehouse.  Tasq also leased a forklift from manufacturer, Crown Equipment Corporation (“Crown”) to accomplish the installation.  The lease agreement between Crown and Tasq required Tasq to name Crown as an additional insured for any bodily injury arising out of the possession, use or operation of the forklift.  Tasq procured a policy per the lease agreement through Continental Casualty Company (“Continental”).  In accordance with the lease, Tasq named Crown as an additional insured.  Crown also maintained its own primary liability-only policy of insurance through St. Paul Surplus Lines Insurance Company (“St. Paul”).  The St. Paul policy had a self-insured retention of $250,000.

While operating the forklift in the Tasq warehouse, an employee of West Coast was killed.  The employee’s family brought a wrongful death action against Tasq and Crown.  On behalf of Tasq and Crown, Continental settled the wrongful death action.  In settlement, Continental paid its primary policy limits of $1,000,000.  In addition, Continental paid the excess limits of $2,500,000 for a total settlement of $3,500,000.  Continental then brought an action for declaratory relief against St. Paul, seeking contribution.

On cross-motions for summary judgment, the Court held that the Continental excess policy was not triggered until and unless the primary policies (including the St. Paul primary policy issued to Crown) were exhausted.  The Court also was not persuaded by St. Paul’s argument that its insured could contract to apply a primary policy as an excess policy.  In declining to interpret the policy to be excess, the Court advised that such a provision would amount to an escape clause, unenforceable under California law.

Emphasizing the different risks that primary and excess insurers agree to underwrite, the Court held the contractual indemnity provisions between an insured (Tasq) and an additional insured (Crown) could not modify the priority of how insurance policies must be applied.  Accordingly, the excess coverage provided by Continental was not triggered until and unless the St. Paul primary policy was exhausted.

Continental Cas. Co. v. St. Paul Surplus Lines Ins. Co. (E.D.C.A. March 22, 2011) 2011 WL 1103345

By: I. Justine Grubb, Esq.

Cochran, Davis & Associates, P.C.

The Ninth Circuit Rejects Form Over Substance Claim Of Independent Contractor

I.Justine Grubb, Esq.

With the Ninth Circuit’s decision in Narayan v. EGL, Inc. on July 13, 2010, California Courts have held employers’ attempts to contract around the California Labor Code invalid. In Narayan, the Court rejected the employer’s argument that it contractually hired truck drivers as independent contractors who were, therefore, not within the ambit of the California Labor Code for purposes of overtime, wages and business expenses.

The case involved a suit by aggrieved drivers regarding the scope of their employment with EGL, Inc., a global transportation service. The drivers admittedly signed a contract with EGL, Inc. stating that the intention of the contract was to create an independent contracting relationship between EGL, Inc. and the individual drivers. The drivers later sued for money damages, contending they were due unpaid overtime wages, business expenses, meal compensation, unlawful deductions from wages and statutory penalties under the California Labor Code. The district court initially held that the law of Texas applied, based on a choice-of-law provision in the Independent Contractors’ contract. However, the Ninth Circuit held that the choice-of-law provision only applied to the “interpretation and enforcement of the contract.” Since the claimants were seeking an evaluation of benefits under the California Labor Code, it would be improper to apply Texas law to a California regulatory scheme. The Court also noted that the drivers were all residents of California and performed work in California.

In their summary judgment motion, the employer pointed to the independent contractors’ contract as evidence that the drivers were not entitled to the protections and benefits provided under the California Labor Code. In rejecting the employer’s attempt to contract around the California Labor Code, the Ninth Circuit did not place any significance on the parties’ attempt to define the relationship in the independent contractor contract. Instead, the Court looked to a multitude of factors in evaluating whether the relationship was that of employee-employer or vendee-vendor.

The Court reiterated it would look to the following factors in evaluating the type of employment relationship created between the parties:

* Whether the party performing services is engaged in a distinct occupation or business;
* The kind of occupation and whether the work is usually done by a specialist;
* The skill required;
* Whether the principal supplies the tools and instrumentalities;
* Length of time for the service contract;
* Method of payment: by time or by job;
* Whether the work is part of the regular business of the principal;
* Whether the parties believe they are creating an employer-employee relationship;
* The individual’s opportunity for profit or loss;
* The investment in equipment or materials required for task, or employment of helpers; and The degree of permanence of the working relationship.

The Court also cited to the provisions of the California Labor Code § 2750.50 with approval. Under that code section, the Courts look to: the control and discretion of the individual; whether the business is customarily an independent business; and whether the independent contractor status is bona fide.

The Court expressed the need to balance the factors, listed above. The Court then determined that the drivers’ transporting was within the scope of the services performed by ECL, Inc.; the services did not require special skill or certification; the contracts were not for a finite period of time, but instead automatically renewed, thus essentially creating an at-will employment; and that the details of the drivers’ actions were governed by substantial ECL, Inc. policies and procedures. Although the Court noted the drivers owned their own trucks, and were, in theory, able to perform independent contracting for other companies, the trucks were required to be new, painted white, and to bear the ECL, Inc. logo. These restrictions essentially made it impossible for the drivers to work for any other companies at the same time as for ECL, Inc. These factors involved questions of fact, namely: whether the drivers were independent contractors or employees. This question of fact required the Court to reverse the granting of ECL, Inc.’s motion for summary judgment.

The Ninth Circuit suggested, under the proper circumstances, to look at the classifications given to the individuals by the Internal Revenue Service or the Employment Development Department of California.

By: I. Justine Grubb, Esq.

Cochran, Davis & Associates, P.C.