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By Gerald L. Maatman, Jr. and Alex W. Karasik

Seyfarth Synopsis: In a lawsuit brought by a plaintiff class action firm alleging that objectors to class action settlements violated both RICO and Illinois state law by filing frivolous objections in order to seek payouts, an Illinois federal court denied in part the Defendant objectors’ motion to dismiss, holding it had subject-matter jurisdiction to hear the dispute and that a claim seeking injunctive relief for the objectors’ unauthorized practice of law could proceed.

In the class action landscape, where serial objectors frequently frustrate the settlement process by requesting payouts in order to withdraw objections, this case is a must-read for employers and class action defense attorneys.

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Case Background

In Edelson PC v. The Bandas Law Firm PC, No. 16-CV-11057, 2018 U.S. Dist. LEXIS 119305 (N.D. Ill. July 20, 2018), Plaintiff – a well-known class action plaintiffs’ law firm – alleged that Defendants regularly filed frivolous objections to class action settlements in order to leverage lucrative payoffs, and that as class action attorneys, they were forced to agree to the payoffs or else encounter significant delays in securing relief for class members. Plaintiff sued Defendants (who also included non-attorneys that allegedly aided the objector law firms by serving as class objectors) for violations of RICO and Illinois state law claims for abuse of process and the unauthorized practice of law, and further sought a permanent injunction under the All Writs Act. Id. at 2.

To say the least, Plaintiffs’ lawsuit is novel and a broadside attack on objectors.

Previously, on February 6, 2018, the Court granted Defendants’ motion to dismiss in part, and dismissed Plaintiff’s federal RICO claims for failing to allege predicate acts of racketeering. Id. The Court reserved judgment on Plaintiff’s state law claims, however, pending further briefing on whether it had subject-matter jurisdiction to hear them. In response to the Court’s order to show cause, Plaintiff argued that its state law claims were properly before the Court under either supplemental jurisdiction, 28 U.S.C. § 1367, or traditional diversity jurisdiction, 28 U.S.C. § 1332(a). In response, Defendant argued that supplemental jurisdiction was improper because Illinois courts remained open to Plaintiff and the putative class, and, further, that Plaintiff could not meet the $75,000 amount in controversy threshold required to bring the suit in diversity.

The Court’s Decision

The Court held that it had subject-matter jurisdiction to hear Plaintiff’s state-law claims, and granted in part and denied in part Plaintiff’s state law claims. First, the Court addressed Plaintiff’s argument that Illinois state courts were closed to many putative class members, and the Court therefore should retain supplemental jurisdiction to avoid unfair prejudice to the putative class as a whole. Id. at 10. The Court rejected this argument, noting that the Illinois Code of Civil Procedure provides that any plaintiff whose case is dismissed by a federal district court for lack of jurisdiction may refile his case in state court within one year, “whether or not the time limitation for bringing such action expires during the pendency of [the federal case].” Id. at 11. Accordingly, the Court held that the supplemental jurisdiction statute did not support continuing jurisdiction over Plaintiff’s remaining state-law claims.

Next, the Court addressed Plaintiff’s argument that the Court could hear its state-law claims under traditional rules of diversity jurisdiction, which require complete diversity of citizenship and an amount in controversy of more than $75,000. After dismissing several individual Defendants as dispensable parties, Defendants argued that in order for the Court to establish complete diversity, it must dismiss also dismiss any putative class members who are citizens of California or Texas — the states in which remaining the Defendants reside. The Court rejected this argument, noting it was “poorly founded” and that it “is black-letter law that the citizenship of putative class members is irrelevant for diversity purposes.” Id. at 13. After further finding that “there is no serious case to be made that Plaintiff has not put more than $75,000 in dispute,” the Court held that it had subject-matter jurisdiction to hear the merits of Plaintiff’s state law claims.

Turning to the merits of the state law claims, Plaintiff alleged that Defendants committed the common law tort of abuse of process by manipulating the class-action objection process to serve their own ends. Id. Noting that the tort abuse of process is narrow and disfavored by Illinois law, the Court explained that Plaintiff’s alleged injury — having to pay off Defendants to avoid litigating their objection — was insufficient to establish such a claim. As such, the Court dismissed Plaintiff’s abuse of process claim.

Plaintiff’s final claim sought an injunction against two of the Defendant attorneys for the unauthorized practice of law pursuant to the Illinois Attorney Act, alleging that the attorneys were ghostwriting the objections and coordinating sham mediation sessions despite not moving for pro hac vice admission or filing appearances in the case involving Plaintiff’s counsel where Defendants had objected. The Court explained that under the Illinois Attorney Act, other attorneys and law firms have standing to sue for such an injunction “[b]ecause the practice of law by an entity not licensed constitutes an infringement upon the rights of those who are properly licensed.” Id. at 18 (citation omitted). Defendants argued that this claim should have been brought in state court, and additionally argued that Plaintiff’s complaint technically did not argue that one Defendant was an unlicensed attorney. Id. at 18-20. The Court rejected these arguments, holding that federal courts could hear such claims, and that Defendants’ “clumsy attempt at linguistic gymnastics ignores the text of the . . . Illinois Attorney Act.” Id. at 21. Accordingly, the Court held that Plaintiff sufficiently stated a plausible claim for the unauthorized practice of law, and denied Defendants’ motion to dismiss this claim.

The Court concluded its opinion by opining it was “troubled by the fact that until now its decisions appear to leave Plaintiff and those similarly affected without an adequate remedy — and may fail to deter the Defendants from further rent-seeking [, and] that class counsel facing similar demands may be best served by calling the professional objector’s bluff and seeing the objector’s appeal through to its conclusion.” Id. at 22. But leaving a ray of optimism, the Court noted that the U.S. Supreme Court has recently transmitted an amendment of Rule 23 to Congress that, if effectuated, would require district court approval before any objector can withdraw an objection or appeal in exchange for money or other consideration.

Implications For Employers

Serial objectors to class action settlements have long frustrated employers and class action litigators by delaying the settlement certification process, and have especially enraged plaintiff-side class action attorneys who must decide whether to pay off the objectors or incur additional time and costs in fighting the objection. While Plaintiff’s RICO and abuse of process claims have now been dismissed in this case, the survival of the unauthorized practice of law clam is significant in that it could result in the Defendant serial objectors from being enjoined to engage in this practice in Illinois. It may also serve as a deterrent to other “professional objectors.”

As such, employers and class action attorneys should pay close attention to developments in this context, as this case and the U.S. Supreme Court’s potential amendment of Rule 23 will undoubtedly have an impact on the class action settlement objection practice that routinely impacts the cost of litigation.  

By Gerald L. Maatman, Jr. and Michael L. DeMarino

Seyfarth Synopsis:  In the midst of a legal landscape that is seemingly pro-arbitration, employers should recognize that employees still have a few strategies to oppose arbitration or invalidate an arbitration agreement. The recent ruling of the U.S. District Court for the Northern District of California in Buchanan, et. al. v. Tata Consultancy Services, Ltd., 15-CV-01696 (N.D. Cal. Jul. 23, 2018), is a good reminder for employers that arbitration agreements are still susceptible to challenges like waiver and unconscionability. Employers faced with class actions involving a mix of class members who signed and did not sign arbitration agreements should be careful to preserve their right to enforce the agreements. 

At the same time, this decision in Buchanan is important because it held that a private, individual plaintiff is not entitled to rely on the pattern and practice burden shifting framework articulated in Teams Int’l Bhd. of Teamsters v. U.S., 431 U.S. 324, 360 (1977) – an issue that the Ninth Circuit has not yet addressed.

Background:

In Buchanan, et. al. v. Tata Consultancy Services, Ltd., No. 15-CV-01696 (N.D. Cal. Jul. 23, 2018), four plaintiffs sued Tata Consultancy Services, Ltd. (“TCS”), alleging disparate treatment under Title VII of the Civil Rights Act of 1964. Specifically, plaintiffs claimed that TCS, which is headquartered in India, maintained a pattern and practice of intentional discrimination in its United States workforce by favoring persons who are South Asian or of Indian National Origin. TCS provides consulting and outsourcing services, and plaintiffs claimed that TCS favored individuals who are predominately South Asian when assigning individuals to open client projects. After class certification briefing, the district court certified a class consisting of all individuals “who are not of South Asian race or Indian  nation origin who were employed by [CTS]  . . . and were terminated . . . .” Id. at 6.

After the class was certified, TCS brought a motion to bifurcate the claims of Plaintiff Buchanan from those of other plaintiffs and a motion to compel arbitration. The district court granted both motions.

The Decision

As a threshold matter, the district court held that Plaintiff Buchanan was not entitled to rely on the pattern and practice framework for proving employment discrimination under Int’l Bhd. of Teamsters v. U.S., 431 U.S. 324, 360 (1977). Buchanan was not a member of the class because, unlike the class, he was never employed by TCS. Under the Teamsters framework, the burden shifts to the employer to defeat a prima facie showing of a pattern or practice by demonstrating that the plaintiffs’ proof is either inaccurate or insignificant.

Although the Ninth Circuit has not addressed whether an individual private plaintiff may use the Teamsters framework, the district court held that pattern and practice method of proof is not available to private plaintiffs. “To allow this expansion of Teamsters,” the district court reasoned, “would ‘conflict with the Supreme Court’s oft-repeated holding . . . that ultimate burden of persuading the trier of fact that the defendant intentionally discriminated against plaintiffs remains at all times with the plaintiff.” Buchanan, et. al. v. Tata Consultancy Services, Ltd., at 8. Because Plaintiff Buchanan, as an individual private plaintiff, was subject to a different burden shifting framework than will govern the claims of the class, the district court concluded that bifurcating his claims from those of the class would avoid confusion at trial and support judicial economy.

As to TCS’s motion to compel arbitration, plaintiffs argued that TCS waived its right to demand arbitration and that the arbitration agreement contained impermissible waiver and unconscionable provisions. Addressing plaintiffs’ waiver argument, the district court concluded that although TCS waited until the fourth amended complaint to assert its right to arbitrate, TCS had notified plaintiffs of its intent enforce the agreement as soon as plaintiffs implicated a potential plaintiff to whom the agreement applied. Hence, the district court concluded that plaintiffs were on notice and granting TCS’s motion would not prejudice plaintiffs.

The district court similarly rejected plaintiffs’ contention that the arbitration agreement contained an impermissible prospective waiver of an employee’s federal anti-discrimination rights. The district court ultimately disagreed that Teamsters pattern and practice burden-shifting framework is a substantive right. The district court likewise rejected plaintiffs’ argument that the arbitration agreement was unconscionable because of a “selective[] overlay [of] a pro-Defendant subset of the Federal Rules of Civil Procedure. ” Id. at 14. Plaintiffs challenged the arbitration agreement because it did not provide employees the opportunity to file motions to strike or motions for judgment on the pleadings. The district court, however, concluded that these limitations did not rise to the level of unconscionability. It reasoned that “[m]otions to strike are disfavored . . . . and Motions for judgment on the pleadings are easily recast” into motions for summary judgment. Id.

Implication For Employers:

This case is a valuable reminder for employers with arbitration agreements that it is still best practice to avoid acting inconsistent with the right to arbitration, lest you supply plaintiffs with a waiver argument. Employers facing a class mixed with employees who signed and did not sign arbitration agreements should be careful preserve their right to enforce arbitration agreements. This may include notifying plaintiffs of the existence of the arbitrations agreement and your intent to enforce the agreement as soon as a plaintiff enters the case to whom the agreement is applicable.

 

Dear Readers,

Happy 4th of July from the Workplace Class Action Blog. We will be on break this week for the holiday and will resume posting our insights on breaking workplace class action news and issues next week.

Best wishes to all for a safe and happy Fourth of July holiday. We hope you have a restful day enjoying family, friends, and loved ones. We will be back soon with all new significant workplace class action observations. Thank you and Happy 4th.

Sincerely,

The Workplace Class Action Blog Writers & Editors

 

On June 21, 2018, XpertHR featured Gerald (Jerry) L. Maatman, Jr. of Seyfarth Shaw LLP as a special guest commentator on its popular podcast series for human resources professionals. In this episode, Jerry provides a comprehensive overview of the Supreme Court’s landmark ruling in Lewis v. Epic Systems Corp., and the decision’s implications for employers.

In a closely contested 5-4 decision authored by Justice Neil Gorsuch, the Supreme Court held that employers may require employees to sign class action waivers as a condition of employment, and such contacts are unenforceable under the Federal Arbitration Act. In practice, this means that employees who have signed such agreements are obligated to arbitrate workplace disputes individually, rather than as a class or collective action. It is believed that this ruling may affect an estimated 25 million employment contracts, a number that will only continue to rise.

On XpertHR’s podcast, which is hosted by Legal Editor David Weisenfeld, Jerry answers a myriad of key questions about the impact of this decision for employers. David and Jerry touch on important aspects of the ruling such as Justice Ginsburg’s harsh dissent, potential workarounds by the Plaintiff’s bar, the practicality of arbitration agreements for employers, and more. To listen to the full episode, click HERE.

Implications For Employers

The Epic Systems ruling has the potential to immediately influence workplace relations. In fact, the impact of this case is already being seen in courtrooms around the country, with employers incorporating this stance into their arguments against putative employment class actions. Furthermore, as Jerry states in the podcast, the Supreme Court has issued a “mosaic of arbitration decisions” over the past few years that may expand the scope of this ruling beyond just wage & hour cases.

However, though the reading of this decision is pro-business, it may present new complications for employers. For example, the Plaintiff’s bar may adopt the strategy of filing hundreds of individual arbitration claims, a tactic Jerry describes as “death by 1,000 cuts.” Justice Ginsburg’s vociferous dissent can also be interpreted as a plea for Congressional action, though it is difficult to determine the likelihood and proximity of legislative action.

For a full explanation of this case’s impact on employers and HR personnel, make sure to listen to XpertHR’s podcast!

By Christopher M. Cascino and Gerald L. Maatman, Jr.

Seyfarth Synopsis: At the start of this week, the U.S. Supreme Court issued its long-awaited decision in China Agritech, Inc. v. Resh, No. 17-432 (U.S. June 11, 2018), which has important implications for employers because it will limit their exposure to successive class actions.  Specifically, the Supreme Court held that, while the individual claims of putative class members are tolled during pending class actions, their class claims are not. 

Case Background

The China Agritech case was the third putative shareholder class action brought against China Agritech alleging fraud and misleading business practices.  The first such action was brought by Theodore Dean on February 11, 2011. On May 3, 2012, the court in Dean denied class certification, and Theodore Dean then settled his individual claim.

On October 4, 2012, a new set of plaintiffs brought the second putative class action, the Smyth action, against China Agritech. The district court again denied class certification, after which the Smyth plaintiffs settled with China Agritech.

On June 30, 2014, Michael Resh filed a third putative class action against China Agritech. China Agritech argued that Resh’s class claims expired on February 3, 2013 under the applicable two-year statute of limitations.  Resh argued that his class claims were tolled during the Dean and Smyth actions under the principles of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held that the filing of a class action tolls the applicable statute of limitations for all putative class members.

The district court found that American Pipe tolling did not apply to class claims, and thus dismissed Resh’s class claims as untimely.  The Ninth Circuit reversed.  To resolve a circuit split, the Supreme Court granted certiorari.

The Supreme Court’s Decision

In an opinion by Justice Ginsburg, the Supreme Court began by considering the rationale behind its decision in American Pipe.  Specifically, the Supreme Court observed that the purpose of American Pipe tolling is to avoid putative class members filing motions to intervene or separate, individual suits to protect their claims in the event class certification was denied.  China Agritech, No. 14-432 at *5-6.  The Supreme Court further noted that the efficiency and economy purposes of Rule 23 would be undermined if putative class members needed to file motions to intervene and individual actions to preserve their individual claims while putative class actions were pending.  Id. at *6-*7.

The Supreme Court observed that Rule 23 favors early resolution of class certification questions, in that it Rule 23 states that class certification should be decided at “‘an early practicable time.’” Id. at *7 (quoting Fed. R. Civ. P. 23(c)).

The Supreme Court also considered the basis for allowing equitable tolling. Specifically, the Supreme Court pointed out that, to receive equitable tolling, plaintiffs must demonstrate that they have “been diligent in the pursuit of their claims.” China Agritech, No. 14-432 at *9. The Supreme Court found that “[a] would-be class representative who commences suit after expiration of the limitation period . . . can hardly qualify as diligent in asserting claims and pursuing relief.” Id.

Finally, the Supreme Court found that the problem with allowing American Pipe tolling to apply to class claims is that “the time for filing successive class suits . . . could be limitless.” Id. at *10. It held that “[e]ndless tolling of a statute of limitations is not a result envisioned by American Pipe.” Id. at *11. Accordingly, the Supreme Court held that “[t]ime to file a class action falls outside the bounds of American Pipe.” Id. at *15.

Implications For Employers

While China Agritech is not an employment case, it nonetheless represents an important win for employers because it limits the ability of employees to bring successive class actions on the same claims. If the Supreme Court had ruled that American Pipe tolling applied to class claims, employers who won on class certification in one case could then face successive putative class actions asserting the same claims for an indefinite period of time. Since the Supreme Court ruled that American Pipe tolling does not apply to class claims, employers can now have the certainty of knowing the date on which particular class claims expire.

By Gerald L. Maatman, Jr.

Seyfarth Synopsis: On April 30, 2018, the U.S. Supreme Court granted a writ of certiorari in Lamps Plus Inc. v. Varela, No. 17-988. This matter, which involves the interpretation of workplace arbitration agreements, has the potential to significantly impact class action litigation. In today’s video, Partner Jerry Maatman of Seyfarth Shaw explains the legal framework of this case, as well as its importance for employers.

Lamps Plus Inc. v. Varela began as a putative class action filed in 2016 after a phishing incident at Lamps Plus. Specifically, Plaintiff Frank Varela’s tax information was compromised when an unknown individual posed as a company executive and gained access to confidential employee data. However, Lamps Plus argued that the company’s arbitration agreement signed by Varela mandated that his claims be handled through arbitration on an individual basis, thereby precluding his class action. Both the U.S. District Court for the Central District of California and the U.S. Court of Appeals for the 9th Circuit agreed with Varela’s argument that the arbitration agreement allowed for class arbitration.

The major question in this case regards the circumstances in which class arbitration can be compelled under the Federal Arbitration Act (“FAA”). Though the Supreme Court agreed to review this question in the near future, it answered nearly the same question in 2010 in a case entitled Stolt-Nielsen S.A. v. AnimalFeeds International Corp., in which it held that class arbitration is authorized only when all parties specifically agree to it. Within the next 6-12 months, we can expect the Supreme Court to again a decision on this important class action topic.

Implications For Employers

Employers and human resources personnel who handle employment contracts should keep a close eye on this case. The decision in Lamps Plus Inc. v. Varela may very well impact an employer’s process in drafting arbitration clauses.

Furthermore, the Supreme Court’s decision to review this matter, while also considering Epic Systems Corp. v. Lewis, No. 16-285, indicates a significant interest in class action issues. Both of these matters have the potential to greatly impact employment class action litigation. Make sure to watch the video above for a detailed explanation of the Varela debate, and stay tuned to our blog for the latest updates!

By Gerald L. Maatman, Jr.

Seyfarth Synopsis: In its recent review of Seyfarth’s 2018 Annual Workplace Class Action Litigation Report, EPLiC called it the “bible” for class action legal practitioners, corporate counsel, employment practices liability insurers, and anyone who works in related areas.

We are humbled and honored by the recent review of our 2018 Annual Workplace Class Action Litigation Report by Employment Practices Liability Consultant Magazine (“EPLiC”) – the review is here.

EPLiC said: “The Report is a must-have resource for legal research and in-depth analysis of employment-related class action litigation. Anyone who practices in this area, whether as a corporate counsel, a private attorney, a business execu­tive, a risk manager, an underwriter, a consul­tant, or a broker, cannot afford to be without it. Importantly, the Report is the only publica­tion of its kind in the United States. It is the sole compendium that analyzes workplace class actions from ‘A to Z.’”

We are often asked – “How does it happen – how do you produce your Annual Workplace Class Action Litigation Report”?

The answer is pretty simple – we live, eat, and breathe workplace class action law 24/7.

Each and every morning we check the previous day’s filings of EEOC lawsuits and workplace class actions relative to employment discrimination, ERISA, and wage & hour claims. We do so on a national basis, both in federal courts and all 50 states. Then we check, log, and analyze every ruling on Rule 23 certification motions and subsidiary issues throughout federal and state trial and appellate courts. This is also done on a national basis.  We put this information in our customized database; we analyze and compare the rulings on class action issues and Rule 23 topics, and then we prepare an analysis of each and every decision.

Our class action practitioners – a group of over 175 Seyfarth lawyers – contribute to the process of building the database and analyzing decisional law on a daily basis.

We have been doing this on a 24/7 basis for over 14 years, and publishing the Annual Workplace Class Action Litigation Report in the first week of January of each calendar year.

The result is a compendium of workplace class action law that is unique in its analysis, scope, and comprehensiveness.

We are particularly proud that EPLiC recognized our Report as the “state-of-the-art report” on workplace class action litigation.

Thanks EPLiC. We sincerely appreciate the kudos.

Now, even less than half way through the year, we have tracked and analyzed more class action decisions to this point in 2018 than at the halfway point in past years. On this pace, our 2019 Report will cover more decisions than ever before.

By: Gerald L. Maatman, Jr. & Michael L. DeMarino

Seyfarth Synopsis:  In September 2017, our blog posted a video highlighting an emerging class action litigation risk for employers – the Illinois Biometric Information Privacy, commonly known as “BIPA.”  Since this time, class action filings under BIPA have exploded, including a potentially-landmark case against social media giant Facebook.  Today, Seyfarth Shaw Associate Mike DeMarino discusses the Facebook case, as well as its potential impact on employers, with Partner Jerry Maatman.

The BIPA statute was enacted by the Illinois legislature in 2008 in an effort to keep up with various industries’ use of employees’ biometric data.  In this context, biometric data refers to a number of measurements of individual biological patterns that can be used to identify individuals.  Examples we have seen cited in BIPA litigation include retina/iris scans, fingerprints, voiceprints, and scans of hand/face geometry.

Though the BIPA statute was enacted in Illinois ten years ago, employers and litigators are still waiting to see how certain aspects of the law will be interpreted.  A recent class action, entitled In Re Facebook Biometric Information Privacy Litigation, Case No. 15-CV-3747 (N.D. Cal.), may provide some important answers.  This matter, filed by three Facebook users in Illinois, involves allegations that Facebook violated users’ rights to privacy under BIPA through its automatic face-tagging feature.  On April 16, 2018, a federal judge in California certified (see order here) the class as all “Facebook users located in Illinois for whom Facebook created and stored a face template after June 7, 2011.”  The case is set for trial in June 2018.

As Jerry explains in the video, employers should keep a close eye on the outcome of this class action.  The key debate, centered around the concept of “standing” under Spokeo, Inc. v. Robins 136 S. Ct. 1540 (2016), has the potential to significantly impact future BIPA litigation.  For a full explanation of this case and employer class action litigation risk under BIPA, make sure to watch the video above!

By Gerald L. Maatman, Timothy F. Haley, and Ashley K. Laken

Seyfarth Synopsis: There are currently pending at least four class actions claiming that provisions contained in franchise agreements prohibiting the hiring of employees of other intrabrand franchisees without the consent of their employer violate the antitrust laws.  That being said, in 1993 the Ninth Circuit affirmed summary judgment in favor of a franchisor in a similar “no-hire” case.  It reasoned that due to the control the franchisor exercised over its franchisees, the franchisor and its franchisees were incapable of conspiring in violation of Section 1 of the Sherman Act. While the so-called “single enterprise” defense is potentially available, franchisors should be cognizant that in developing that defense, they may create evidence or admissions that would support a subsequent claim that the franchisors are joint employers of their franchisees’ employees.  In light of the availability of other defenses, franchisor employers should assess whether the joint employer risk is worth accepting in order to pursue the single enterprise defense. 

Introduction

“No-hire” (sometimes referred to as “no-switching”) agreements are contracts between or among employers not to hire each other’s employees.  A “no-poaching” agreement is different but similar.  It prevents the solicitation of another employers’ employees, but does not prevent their hire, so long as there was no solicitation.  The franchise no-hire agreements typically are limited in duration.  For example, in pending litigation against Pizza Hut,  it is alleged that the challenged agreement only prohibits hiring anyone who was in a managerial position at another Pizza Hut restaurant at any time during the previous six months.  Ion v. Pizza Hut, LLC, Case No. 4:17-cv-00788, Complaint at ¶ 4, available at https://www.classaction.org/media/ion-v-pizza-hut-llc.pdf (last visited on 4/10/2018).

In 2017, at least three class action cases were brought against separate franchisors alleging that the organizations’ “no-hire” agreements suppress wages and violate antitrust laws.  And a fourth was filed in January 2018.  There may be more to come.  In a letter to Attorney General Jeff Sessions dated November 21, 2017, Senators Elizabeth Warren and Cory Booker inquired as to whether DOJ was “currently investigating the use of no-poach agreements in the franchise industry.”  In that correspondence, Senators Warren and Booker cited to a study by Princeton economists that found that “fully 58% of the 156 largest franchisors operating around 340,000 franchise units used some form of anti-competitive ‘no-poach’ agreements.”  See https://www.warren.senate.gov./files/documents/2017_11_21_No_Poach.pdf (last visited on 4/10/2018).

To prove a violation of Section 1 of the Sherman Act, the plaintiff must show an agreement between or among two or more persons or entities.  Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984).  In 1993, a Jack-in-the-Box franchisor successfully defended a challenge to its no-switching agreement on the grounds that the franchisor and its franchisees were a single enterprise and incapable of conspiring in violation of Section 1.  Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447-48 (9th Cir. 1993) (per curiam).

That defense is premised upon the control that a franchisor has over the operations of its franchisees.  And the question then is whether developing that defense creates an unacceptable risk of creating evidence or admissions supporting joint employer status.

The Single Enterprise Defense

In the franchise no-hire context, usually there is little dispute that an agreement exists.  It is typically contained in the franchise agreements between the franchisor and each of its franchisees.  But the parties to the alleged unlawful agreement must also be legally capable of conspiring.  In Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984), the U.S. Supreme Court held that a parent and its wholly owned subsidiary were incapable of conspiring in violation of Section 1 because their conduct must be viewed as that of a single enterprise.  The Supreme Court reasoned that “[a] parent and its wholly owned subsidiary have a complete unity of interest.  The objectives are common, not disparate; the general corporate actions are guided or determined not by two separate corporate consciousnesses, but one.”  Id.  It therefore reversed the decision of the Seventh Circuit which had affirmed a jury verdict in favor of the plaintiff.

In 1993, without mentioning Copperweld, the Ninth Circuit extended this single enterprise concept to the franchise environment in a no-hire case.  Williams, 999 F.2d at 447-48.  Other courts have also found that franchisors were incapable of conspiring with their franchisees within the meaning of the Sherman Act.  See Danforth & Associates, Inc.,  v. Coldwell Banker Real Estate, LLC, Case No. C10-1621, 2011 U.S. Dist. LEXIS 10882, *6-7 (W.D. Wash. Feb. 2, 2011) (franchisor and franchisee cannot conspire within the meaning of the Sherman Act); Search International, Inc. v. Snelling and Snelling, Inc., 168 F. Supp. 2d 621, 626-27 (N.D. Tex. 2001) (unity of interest between franchisor and its franchisees made them incapable of conspiring in violation of the Sherman Act); Hall v. Burger King Corporation, 912 F. Supp. 1509, 1548 (S.D. Fla. 1995) (franchisor and franchisee were incapable of conspiring under the Sherman Act).

But the authorities cited above do not stand for the broad proposition that franchisors, in general, cannot unlawfully conspire with their franchisees.  The district court in Williams itself acknowledged that the issue required an examination of the particular facts.  Williams v. I.B. Fischer Nevada, 794 F. Supp. 1026, 1030 (D. Nev. 1992).  Likewise, some have opined that the Supreme Court’s subsequent decision in American Needle v. National Football League, 560 U.S. 183 (2010), makes it more difficult for franchisors to argue that the franchise system is a single economic enterprise.  See B. Block & M. Ridings, Antitrust Conspiracies in Franchise Systems After American Needle, Franchise L.J., Vol. 30, No. 4 (Spring 2011).  In American Needle, the Supreme Court held that the National Football League was not a single enterprise for antitrust purposes regarding certain licensing activities.  Id. at 186.

Thus, while certainly authority exists to support the argument that franchisors cannot conspire with their franchisees in violation of Section 1, the defense may not be successful in every case.  And as noted, developing that defense may create evidence or admissions that could be used to support a joint employer argument that could create legal risks for franchisors in other contexts.

Potential Joint Employer Liability

There are numerous laws that recognize that an employee can be simultaneously employed by more than one employer.  This is referred to as joint or co-employment.  If a franchisor is found to be the joint employer of the employees of its franchisee, it could be exposed to liability for, among other things: benefits under the franchisor’s benefit plans; Occupational Safety and Health Act (“OSHA”) violations; violations of the National Labor Relations Act (“NLRA”); violations of the Fair Labor Standards Act (“FLSA”); violations of state and federal employment practices statutes; and violations of numerous state laws, depending upon the state.

Franchisors have had notable success in defeating claims that they are a joint employer of their franchisees’ employees.  For example, in Pope v. Espeseth, Inc., 228 F. Supp. 3d 884, 889‑91 (W.D. Wis. 2017), the court held that the franchisor was not a joint employer of the franchisees’ employees under the FLSA.  The court found, among other things, that the franchisor did not exercise control over the franchisees’ employees’ working conditions.  See also Ochoa v. McDonald’s Corp., 133 F. Supp. 3d 1228, 1235-38 (N.D. Cal. 2015) (franchisor was not joint employer of franchisees’ employees because, among other things, it did not exercise requisite control of their wages, hours or working conditions).

But it is difficult to predict whether a joint employer relationship exists.  First, the tests vary depending upon the law or statute at issue.  Compare Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156, slip op. at 6 (Dec. 14, 2017), vacated on other grounds by Hy-Brand Industrial Contractors, Ltd., 366 NLRB No. 26 (Feb. 26, 2018) (applying common law agency principles) with Barfield v. New York City Health and Hospitals, 537 F.3d 132, 141‑43 (2d Cir. 2008) (applying an economic realities test under the FLSA).  And even under the same law, the courts sometimes apply different tests depending upon the jurisdiction.  See Hall v. DirecTV, LLC, 846 F.3d 757, 766 (4th Cir. 2017) (noting that “courts in various jurisdictions within this Circuit and throughout the country [apply] numerous, distinct, multifactor joint employment tests” under the FLSA).  Likewise, even under the NLRA, the law has fluctuated between a direct and indirect control test.  See Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156, slip op. at 1-8 (Feb. 26, 2018).

The joint employer tests are also ambiguous.  Most of the tests require consideration of multiple factors, no one of which is controlling, and require the decision-maker to consider the “totality of circumstances.”  See, e.g., Barfield, 537 F.3d at 141-42 (noting that the FLSA multifactor test considers the totality of the circumstances).  The courts recognize that this is an inherently ambiguous test that at times leads to arbitrary results.  See Salinas v. Commercial Interiors, Inc., 848 F.3d at 137 ( “[L]ike other open-ended balancing tests,” this universe of nebulous factors test has “yield[ed] unpredictable and at times arbitrary results”) (internal citations and quotations omitted).

But in all of these multifactor tests, one of the factors considered is whether the potential joint employer has the right to, or exercises, “control.”  See, e.g., Hy-Brand Industrial Contractors, Ltd., 365 NLRB 156, slip op. at 35  (“requires proof that the alleged joint-employer entities have actually exercised joint control over essential employment terms”) (emphasis in original); Zheng v Liberty Apparel Co., 355 F.3d 61, 72 (2d Cir. 2003) (listing factors to consider to ascertain whether alleged joint employer has “functional control over workers” for purposes of the FLSA).

Certainly, the case can be made that the control necessary to establish the single enterprise defense is not the type of control necessary to support a joint employer finding.  For example, a parent-subsidiary relationship is sufficient to establish the single enterprise defense, see, e.g., Copperweld, 467 U.S. at 777, but insufficient to show a joint employer relationship, see Anwar v. Dow Chemical Co., 876 F.3d 841, 852-53 (6th Cir. 2017) (parent company not joint employer of subsidiary’s employees).  To establish the single enterprise defense in the franchise context, the franchisor will have to show that it has substantial control over the franchisees’ operations.  For example, in Williams, the court found that the franchisor exercised “almost complete control” over all decisions affecting the operation of the restaurants.  794 F. Supp. at 1032.  Whether a franchisor can make a similar showing without creating evidence of joint employment is not risk free.

Other Defenses To The Antitrust No-Hire Claims May Be Strong

Normally, an agreement will violate Section 1 of the Sherman Act only if it has an unreasonably adverse effect on competition.  The so-called “rule of reason” standard requires courts, in most cases, to analyze the effect of the agreement on competition in a relevant market and determine whether its anticompetitive effects outweigh its procompetitive benefits in that market.  See generally Atlantic Richfield Co. v. U.S.A. Petroleum Co., 495 U.S. 328, 342 (1990).  Judicial experience with certain types of agreements, however, has demonstrated that such agreements are so plainly or manifestly anticompetitive that no elaborate study is necessary.  Such agreements are conclusively presumed to be unreasonable and are deemed unlawful per se.  See, e.g., Business Electronics Corp. v. Sharp Electronics, Corp., 485 U.S. 717, 723-24 (1988).

Rule Of Reason Analysis Should Apply

The rule of reason should apply in determining the antitrust legality of no-hire agreements in the franchise setting.  First, the restraint is not naked but rather ancillary to the franchise agreement.  In Williams. the agreement’s purpose was to prevent raiding after time and expense had been invested in training.  794 F. Supp. at 1092.  Ancillary restraints are judged under the rule of reason.  See generally Eichorn v. AT&T Corp., 248 F.3d 131, 142-46 (3d Cir. 2001) (ancillary agreements are judged under the rule of reason).

Second, since the agreements are limited to a single brand, they should be viewed as an intrabrand restraint imposed vertically by the franchisor to encourage training by franchisees to assist in competing against other franchise brands.  Interbrand, as opposed to intrabrand, competition is “the primary concern of antitrust law.”  Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36, 52 n.19 (1977).  And nonprice vertical restraints that impose limitations on intrabrand competition are normally judged under the rule of reason.  See generally ABA Section of Antitrust Law, Antitrust Law Developments, 152-57 (8th ed. 2017) (“Developments”); see also Bogan v. Hodgkins, 166 F.3d 509, 515 (2d Cir. 1999) (refusing to apply per se rule to antitrust challenge to no-switching agreement).

Individual Franchisors Do Not Have the Power To Suppress
Wages In The Market For Restaurant Manager Jobs

Under the rule of reason, courts usually require “proof of a defendant’s market power as a prerequisite for a plaintiff seeking to satisfy its burden of proving likely anticompetitive effect.”  Developments at 71.  Market power is defined as the ability to raise prices above those that would be charged in a competitive market.  Id. at 70-71.  In the wage suppression context, that translates into the capability of a defendant to lower wages below those that would be paid in a competitive market.  Courts rarely find that market power exists if a defendant’s market share is under 30 percent.  Id. at 71.

To prove that a defendant has market power, the plaintiff must normally establish a relevant market, both in terms of the product involved and the geographic scope.  The product market must include all products that are reasonably interchangeable.  See generally id. at 583‑88.  Significantly, “relevant markets generally cannot be limited to a single manufacturer’s products.”  Id. at 591.  In the franchise no-hire cases, that means that the product market must include jobs provided by all employers who offer positions that are reasonable substitutes for one another.

The plaintiffs in the pending franchise no-hire cases claim that specialized training renders jobs at other franchises unreasonable substitutes.  E.g., Ion v. Pizza Hut, LLC, Case No. 4:17‑cv‑00788, Complaint at ¶¶ 80-81, available at https://www.classaction.org/media/ion-v-pizza-hut-llc.pdf (last visited on 4/10/2018).  Thus, the plaintiffs are necessarily contending that the relevant product market is limited only to jobs at the defendant franchisor’s franchisees.  But to accept this argument the court would have to adopt the disfavored single brand market, and plaintiffs have failed to prevail on similar arguments in at least three other no-hire cases.  See Eichorn, 248 F.3d at 148 (rejecting argument that relevant market was limited to jobs at AT&T and its affiliates); Bogan, 166 F.3d at 516 (affirming summary judgment in a no-switching agreement case because plaintiffs were unable to show that the “specialized training and expertise” was sufficient to create an antitrust submarket consisting of agent positions provided by a single insurance company); CMT, 2008 U.S. Dist. LEXIS 63633 at *29‑31 (granting summary judgment to defendants because plaintiffs had not shown that the relevant market was limited to jobs in the oil and petrochemical industry).

It is also highly unlikely that a plaintiff can show that any single franchisor possesses market power (i.e., the ability to suppress wages) in the market for supervisor jobs, or even for manager or supervisor positions limited to such establishments..  Certainly, no franchisor possesses 30 percent or more of either of those markets.

Plaintiffs may try to avoid this outcome by arguing that they can demonstrate actual anticompetitive effects resulting from the no-hire agreements with direct evidence, making a showing of market power unnecessary.  See generally Developments at 68-70 (noting that some cases have acknowledged that proof of actual competitive harm can obviate the need to show market power even when restraints are not naked restrictions on price or output).  But such a showing is difficult to make and has been rejected in at least one wage suppression case involving the exchange of wage information because the plaintiffs were unable to show that the relevant market was limited to jobs in the oil and petrochemical industry.  See CMT, 2008 U.S. Dist. LEXIS 63633 at *23‑26; see also Developments at 68‑70 (“attempts to prove substantial, actual anticompetitive effects have often been unsuccessful,” citing cases).

For these reasons, franchisors have very strong arguments that no-hire agreements limited to their own franchisees that are limited in duration and designed to create incentives for franchisees to provide training do not violate the antitrust laws.  Thus, franchisor defendants in these cases should carefully consider whether it is necessary to pursue the single enterprise defense and risk creating evidence that could support a joint employer argument in other contexts.

Conclusion

While each case will turn on its own facts, franchisors may have strong defenses available to them to resist antitrust challenges to their no-hire agreements.  One of those defenses is the single enterprise defense, but pursuing that defense may create evidence that could be used against the franchisor in a subsequent joint employer claim.  And, it is difficult to predict the potential adverse effects of creating that evidence given the current ambiguity and evolving nature of the joint employer doctrine.  Thus, before raising the single enterprise defense, franchisors should carefully analyze the strength of that and other available defenses to the no-hire claim and weigh that against the risk of a joint employer claim.

 

By Gerald L. Maatman, Jr.

Seyfarth Synopsis: On Monday, March 26, the U.S. Supreme Court focused on two notable class action issues, each with the potential to significantly impact workplace litigation.  In today’s video vlog, Partner Jerry Maatman of Seyfarth Shaw breaks down the importance of class action tolling issues and the concept of “cy pres” settlements for employers.

The first Supreme Court case discussed in the video is China Agritech v. Resh, et al. No. 17-432.  This case involves allegations of securities fraud by a class of shareholders against a Chinese fertilizer company.  Plaintiffs failed to gain class certification in two successive class actions, and while these lawsuits were pending, the two-year statute of limitations for securities fraud claims expired.  Nevertheless, the 9th Circuit allowed a third class action to move forward on the basis of American Pipe tolling, and Defendant China Agritech appealed to the Supreme Court. The Supreme Court’s consideration of the boundaries of American Pipe tolling in the China Agritech case may well have profound implications for workplace class action litigation.

Next, we analyze the legal concept of “cy pres” distributions in class action settlement.  “Cy pres” is a French doctrine translated to mean “as close as possible.”  This notion was originally intended to apply to trust-law and the division of excess charitable funds.  However, it has been adapted by the Plaintiffs’ bar to apply in situations involving class action settlements without a clear beneficiary.  On March 26, the Supreme Court denied certiorari in two matters addressing this topic, including Tavares et al. v. Gene Whitehouse et al., No. 17-429, and the combined cases Tingle v. Perdue, No. 17-807 and Mandan v. Perdue, No. 17-897.  The Perdue cases considered the distribution from a $380 million settlement of a landmark 2010 Native American discrimination case known as the Keepseagle.

As Jerry discusses in the video, the outcomes of both debates have the potential to shift important facets of class action litigation.  Notably, for the China Agritech case, the Supreme Court might re-shape the landmark 1974 decision in American Pipe & Construction v. Utah, 414 U.S. 538 (1974).  Regarding “cy pres” settlement distributions, though the Supreme Court denied review in this instance, the debate is too pressing in respect to class action litigation to be avoided for long.  Make sure to watch the video above for Jerry’s complete analysis on both topics!