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

Seyfarth Synopsis: The increasingly common practice of third-party funding of class actions, which provides tax incentives to plaintiffs’ attorneys and third-party funders alike, may no longer be protected under confidentiality agreements.  Finding a class action funding agreement to be relevant in determining the adequacy of class counsel, a court in California granted a defendant’s motion to compel the plaintiff to produce the litigation funding agreement and reveal the identity of the third-party funder. This ruling is key for all employers facing class action litigation.

A recent trend has emerged in the class action landscape whereby a third-party funder pays the owner of a civil claim an up-front monetary payment in return for the claim owner’s promise to convey a portion of the potential recovery.  Class action plaintiffs’ attorneys and third-party funders are incentivized under this approach through tax advantages, whereby the attorneys can defer tax liability on the monetary advancement until the claim pays off while the funders can deduct their expenses and pay tax on any profit at the lower capital-gains rate.  Predictably, many of the third-party funders enter into such agreements with plaintiffs’ attorneys confidentially for varying business or personal reasons.

In a novel decision that will profoundly impact the practice of third-party funding of class actions, Judge Illston of the U.S. District Court for the Northern District of California recently granted defendant’s (“Chevron”) motion to compel plaintiff to reveal the identity of who was funding its proposed class action regarding a gas explosion off the coast of Nigeria in Gbarabe v. Chevron Corp., No. 14-CV-173 (N.D. Cal. Aug. 5, 2016).  This ruling provides businesses facing class actions, including employers facing workplace class actions, a blueprint as to how to compel plaintiffs to identify stakeholders in class action lawsuits against their companies.

Case Background

Plaintiff, a Nigerian fisherman near the coastal waters of Bayelsa, Nigeria, brought a class action suit on January 13, 2014 for alleged losses to the classes’ livelihood and health problems.  Id. at 2.  After several rounds of motion practice and extensions, plaintiff moved for class certification on April 8, 2016.

To determine whether plaintiff’s counsel could adequately represent the proposed class of Nigerian fisherman and residents, Chevron requested that plaintiff be ordered to produce “documents reflecting or relating to the actual or potential financing or funding of the prosecution of this litigation” and to comply with Civil Local Rule 3-15.  Id.  Chevron argued that when the Court ruled on the upcoming class certification motion, it must examine the resources that plaintiff’s counsel will commit to representing the class, which was especially important in a case like this involving claims that are likely to be expensive to investigate, prepare for trial, and prosecute to verdict.  Further, Chevron noted that plaintiff did not dispute that his counsel, a group of solo practitioners, were dependent on outside funding to prosecute the case.

After initially refusing to produce the requested documents, plaintiff produced a heavily redacted copy of a litigation funding agreement.  Id. at 3.  Chevron argued the redactions made it impossible for it to assess whether counsel could commit adequate resources to the class.  While plaintiff conceded the relevance of the funding agreement to the class certification adequacy determination, and further did not assert that the agreement was privileged, plaintiff argued that he and “his counsel are under a contractual obligation to preserve the confidentiality of the funder’s identity, as well as the terms of the agreement, absent a Court order or a determination that it would be prudent to do so.”  Id.  Plaintiff thereafter proposed submitting an unredacted copy of the litigation funding agreement to the Court for in camera review, along with an executed declaration by the funder’s Chief Investment Officer which addresses each item identified by defendant in their motion.  Id.

The Court’s Decision

The Court rejected plaintiff’s proposed approach and granted Chevron’s motion to compel production of the litigation funding agreement.

The Court noted that under the circumstances of the case, the litigation funding agreement was relevant to the adequacy determination and thus should be produced to defendant.  Further, the Court noted that the confidentiality provision of the funding agreement did not prohibit plaintiff from producing the agreement.  Id.  Plaintiff’s proposal for in camera review of the agreement by the Court was found to be inadequate because it would deprive Chevron of the ability to make its own assessment and arguments regarding the funding agreement and its impact, if any, on plaintiff’s ability to adequately represent the class.  Accordingly, the Court ordered plaintiff to produce the litigation funding agreement to Chevron along with any other documents that were responsive to Chevron’s document request.  Id. at 4.

Implications For Employers

A business confronted with class action litigation absolutely would want to know if someone other than the plaintiffs themselves have a financial interest in a “bet-the-company” case.  The ruling in Gbarabe arms employers with a potential strategy to unmask third-party funders that may have an interest in seeing their financial demise as a class action defendant.  Given that this ruling stemmed from internationally-based class action litigation involving solo practitioners, businesses should be cautioned that courts may not always find litigation funding agreements to be relevant in determining the adequacy of plaintiffs’ counsel.  Nonetheless, the arguments presented by Chevron are instructive in showing class action defendants how they can attempt to figure out who is bankrolling litigation battles against them.  Finally, this ruling should serve as a cautionary tale to those third-party funders who desire anonymity, and ideally result in a chilling effect of this practice that amounts to tax-incentivized gambling on class action litigation.  Workplace class actions can expect to see similar challenges to the adequacy of class counsel with motions to compel the production of litigation funding agreements in the very near future.

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

In EEOC v. DolGenCorp, LLC d/b/a Dollar General, No. 13-CV-4307 (N.D. Ill.), a case we blogged about previously here, Judge Andrea Wood of the U.S. District Court for the Northern District of Illinois recently decided several discovery issues that have become increasingly common in large-scale, EEOC-initiated disparate impact litigation.

Judge Wood’s ruling is a mixed bag. On the one hand, Judge Wood allowed the EEOC to take discovery on certain background checks performed by Dollar General even though the EEOC did not claim that those background checks had a disparate impact. She also ruled that the EEOC could exceed the presumptive 25 interrogatory limit because the case was nationwide in scope.  She further held that pre-suit statistical analyses performed by the EEOC were protected by the deliberative process privilege. On the other hand, she ruled that EEOC documents subject to the deliberative process privilege may nonetheless be discoverable if an employer can demonstrate a particularized need for the materials that outweighs the EEOC’s need for confidentiality.

Case Background

The EEOC filed suit against Dollar General, alleging that Dollar General’s use of criminal background checks for applicants is discriminatory because it has a disparate impact on African-American job applicants. During the course of discovery, the EEOC sought information regarding other background checks performed by Dollar General. Dollar General refused to turn them over, arguing that the other background checks were not relevant to the EEOC’s claims.

Also during discovery, the EEOC served more than 25 interrogatories on Dollar General. In turn, Dollar General refused to answer four of the interrogatories that exceeded the presumptive 25 interrogatory limit under the applicable local rules.

Finally, Dollar General sought any statistical analyses the EEOC had regarding the purported disparate impact of Dollar General’s background check policy. The EEOC refused to turn its pre-suit analyses over, claiming that they were protected by the deliberative process privilege.

Both parties moved to compel discovery. Magistrate Judge Sheila Finnegan granted the EEOC’s motions to compel and denied Dollar General’s motion to compel. Dollar General subsequently filed Rule 72 objections to Magistrate Judge Finnegan’s report and recommendation.

The Court’s Decision

The Court began by considering whether Dollar General should be compelled to turn over documents regarding other, non-challenged background screening used by Dollar General.  Judge Wood held that the documents were relevant to Dollar General’s business necessity defense.  Id. at 4. Specifically, Judge Wood held that the EEOC was entitled to respond to Dollar General’s business necessity defense by showing that alternative, equally effective background checks were available to Dollar General. The Court found that the non-challenged background screening performed by Dollar General might represent such alternative background checks. Id. at 4-5.

The Court then rejected Dollar General’s argument that the EEOC was required to investigate any background checks it claimed were relevant before filing suit. Id. at 5. The Court held that such investigation would only be necessary if the EEOC was claiming the background checks had a disparate impact. Id. Because the EEOC was not challenging these other background screenings, the Court compelled Dollar General to turn over documents about its other background checks. Id.

The Court then addressed the excess interrogatories. The Court held that the EEOC was allowed to exceed 25 interrogatories because its claim was “nationwide in scope, raise[d] complicated data issues, and involve[d] many different legal and factual areas.” Id. at 7-8.

The Court next considered whether Dollar General could discover the EEOC’s pre-suit statistical analyses of Dollar General’s background check policies. After noting that “[t]he deliberative process privilege protects communications that are part of the decision-making process of a governmental agency,” the Court found that these analyses were protected by the deliberative process privilege because they were performed as the EEOC was determining whether to sue Dollar General. Id. at 8-9.

Nevertheless, the Court held that the EEOC might nonetheless be required to turn the analyses over if Dollar General could demonstrate a “particularized need for the documents that exceeds the EEOC’s need for confidentiality.” Id. at 11. The Court then remanded the issue to the Magistrate Judge so that she could decide whether Dollar General could make such a showing.

Implications For Employers

Employers involved in litigation with the EEOC should be aware of this decision because the EEOC will undoubtedly rely upon it when it seeks discovery regarding non-challenged employment policies and when it seeks to serve excess interrogatories in complex, nationwide cases. The EEOC will also try to use the ruling to shield any pre-suit statistical analyses it performed from discovery. However, employers also can use decision to support discovery gambits vis-à-vis the Commission; even if the EEOC’s pre-suit statistical analyses are protected by the deliberative process privilege, they are nonetheless subject to discovery because of some particularized need.

Readers can also find this post on our EEOC Countdown blog here.

By Gerald L. Maatman Jr. and Howard M. Wexler

In the closely watched case of EEOC v. BMW Manufacturing Co., LLC, 13-CV-1583 (D.S.C.), which concerns the EEOC’s “Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Under Title VII (most recently discussed here, the parties have waged a discovery battle over whether the EEOC should be forced to respond to discovery concerning its own use of criminal background checks and credit histories during the hiring practices.  Although the EEOC won the initial battle when a Magistrate Judge held that the it did not have to produce this evidence, the dust has settled and BMW has won the war. In a ruling of December 8, 2014, U.S. District Court Judge Henry M. Herlong Jr. ordered the EEOC to produce “all documents that constitute, contain, describe, reflect, mention, or refer or relate to any policy, guideline, standard, or practice utilized by the EEOC in accessing the criminal conviction record of applicants for employment with the EEOC.” EEOC v. BMW Manufacturing Co., LLC, 13-CV-1583, 2014 U.S. Dist. LEXIS 169849, at *4 (D.S.C. Dec. 2, 2014).

This decision represents a big win for BMW as well as all employers staring down the barrel of the EEOC’s “do as we say, not as we do” enforcement policies.

Case Background

The EEOC filed suit against BMW alleging that “its criminal conviction background check policy constitutes an unlawful employment practice in violation of…Title VII…because BMW’s policy had, and continues to have, a significant disparate impact on black employees and applicants and is not job-related and consistent with business necessity.” Id. at *1. This case is one of a handful of systemic cases that the EEOC has filed in recent years over employers use of background check policies.  The EEOC has suffered several resounding defeats in their pursuit of this initiative, including the landmark case against Kaplan Higher Education Corp. (most recently discussed here) where the Sixth Circuit upbraided the EEOC for the “homemade” methodology that the agency used to determine race in that case – namely, by asking “race raters” to assign race based on drivers’ license photographs – concluding that it was “crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself.”

The Court’s Decision

Upon the Magistrate Judge’s denial of its motion to compel, BMW filed Rule 72 objections with Judge Herlong requesting that he overrule the Magistrate Judge’s decision given the relevance of the requested information. Id. at *1. The Magistrate Judge denied BMW’s request because “considering the burdens of proof in a disparate impact case and in light of BMW’s motion to compel, BMW has failed to explain how production of the EEOC’s convictions policy contributes to its ability to prove that BMW’s criminal conviction policy at issue is job-related and/or is consistent with a stated business necessity.” Id. at *2-3.

Judge Herlong disagreed with the Magistrate Judge’s reasoning, instead finding that the EEOC had the burden of establishing “why its objections are proper given the broad and liberal construction of the federal rules” and that it failed to meet this burden. Id. at *3. Although Judge Herlong noted that the EEOC based its argument on the fact that its own policies are not relevant because “the positions for which the EEOC utilized its policy were not similar to the positions at issue in this litigation,” he held that BMW is not simply required to sit back and “accept the EEOC’s position” without discovery as to its policies or information concerning the positions for which they are used. Id. Accordingly, Judge Herlong ordered the EEOC to produce the requested information since “this production should not be burdensome to the EEOC, and the Court can perceive no harm to the EEOC in producing its internal policies.” Id.

Implications For Employers

This decision represents a big win for employers given the EEOC’s general reluctance to allow a “look behind the curtain.” This is not a surprise since in affirming dismissal of the EEOC’s case against Kaplan, the Sixth Circuit honed in on the fact that the EEOC had initiated a pattern or practice lawsuit against an employer for using “the same type of background check that the EEOC itself uses.” This is yet another decision that highlights the fact that simply because the EEOC says certain information is not relevant does not make it so. Employers should be able to put this ruling to good use for current and future discovery battles with the EEOC.

Readers can also find this post on our EEOC Countdown blog here.

tug-of-war.jpgBy Gerald L. Maatman, Jr. and Rebecca Bjork

In EEOC v. Freeman, 2012 U.S. Dist. LEXIS 179183, at *6 (D. Md. Dec. 19, 2012), Magistrate Judge Day of the U.S. District Court for the District of Maryland noted that “there simply is no more aggravating action than a lawyer improperly instructing a deponent not to answer a question.” Nevertheless, in the most recent deposition in EEOC v. Freeman, the EEOC continuously instructed its representative in a Rule 30(b)(6) deposition not to provide defense counsel with an answer to their questions. Defendant left the deposition with numerous unanswered questions, lost time, and lost money. Insistent that the EEOC did not follow the applicable Federal Rules of Civil Procedure that govern depositions, Defendant filed a motion to compel the EEOC to provide a Rule 30(b)(6) designee for a second deposition on the unanswered questions, with the costs and sanctions to be paid by the EEOC. The EEOC, adamant to conceal its information, vehemently opposed the Defendant’s motion.  

Facts Of The Case – Round One

The EEOC has a mixed track record of success in EEOC v. Freeman. The lawsuit arose out of a charge of discrimination filed by an African-American woman in January 2008, who claimed that the Defendant discriminated against her on the basis of her race when it rejected her employment application based on her credit history (discussed here in our previous posts on this lawsuit). After the EEOC began investigating the charge, it expanded its investigation to include Defendant’s use of criminal history information for all applicants. The EEOC filed suit alleging a nationwide pattern or practice of discrimination based on the Defendant’s use of criminal background checks. In August 2012, the Defendant brought a motion for partial summary judgment, which the Court granted – and about which we previously blogged here. Defendant contended that, for claims that were not part of the original charge, the 300-day statute of limitations in Section 706 of Title VII should run – not from the date of the original charge – but from the date that the EEOC notified the company that it was expanding its investigation to encompass new clams. The Court granted partial summary judgment and held that the relevant date for purposes of the 300-day time bar was the date of notice of the new charges. The Court’s grant of partial summary judgment was a victory for the Defendant.

Round Two

The story does not end there, however. In March 2012, Defendant served the EEOC with its Notice of Rule 30(b)(6) Deposition requiring the EEOC to produce a representative to discuss a number of topics – about which we previously blogged here. The EEOC argued that Defendant’s requested deposition would not reveal relevant information relevant to its claims and defenses, and the EEOC asked the Court for a protective order. The Court denied the EEOC’s motion and found that the Defendant’s deposition could produce information relevant to its argument that considering applicants’ criminal backgrounds and credit histories is a business necessity. Similarly, the Court was not persuaded by the EEOC’s argument that the Court should prohibit deposition questioning regarding the Commission’s own hiring procedures. The Court relied on facts that showed that the EEOC is involved in the hiring process. Thus, the Court reasoned that Defendant’s depositions would provide relevant information. Finally, the Court denied the EEOC’s third contention that a protective order was appropriate because the EEOC was already deposed on similar issues in another case – EEOC v. Kaplan Higher Educ. Corp., No. 10-CV-2882 (N.D. Ohio May 26, 2011). In a resounding defeat for the EEOC, Judge Day held that the EEOC’s claim was without merit because Defendant did not participate in the EEOC v. Kaplan deposition and that case involved different issues. Thus, the Court denied the EEOC’s motion for a protective order. This marked the Defendant’s first discovery triumph in EEOC v. Freeman.

Round Three

Most recently, Defendant deposed one of the EEOC’s witnesses, Carol Miaskoff, regarding the matters discussed above. At the deposition, Defendant asked pointed questions regarding the EEOC’s policy guidance and regulations pertaining to the legal standard applicable to a Title VII disparate impact challenge to an employer’s use of arrest or conviction records in making hiring and other selection decisions. Id. at *2. The Defendant also attempted to question Miaskoff regarding the EEOC’s policies relating to the applicable legal standard to challenge an employer’s use of credit history or other financial records in making hiring and other selection decisions. Id. at *3. During the deposition, on five occasions the EEOC’s counsel instructed Miaskoff not to answer questions posed by Defendant’s counsel. The EEOC’s challenges left the Defendant without answers to critical questions. Accordingly, Defendant moved to compel the EEOC to provide a designee for a second deposition to answer the challenged questions. Defendant argued that the EEOC’s counsel improperly instructed Miaskoff not to answer its questions. The EEOC responded that the requested information should not be compelled because it was outside the scope of the Rule 30(b)(6) deposition, not relevant, and privileged. Id. at *8.

The Court’s Ruling

At first, Magistrate Judge Day’s ruling appeared deferential to the Defendant. Magistrate Judge Day began his ruling by noting that Federal Rules of Civil Procedure provide that “[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense” and “the witness must answer the question subject to the objection which is thereby preserved for trial.” Id. at *6. In a turn for the EEOC’s benefit, however, Magistrate Judge Day held that “[n]onetheless, a court is not required to grant a motion to compel merely because an attorney gave an improper instruction not to answer.” Id. at *7. Magistrate Judge Day relied on the fact that courts enjoy substantial discretion in the management of discovery and reasoned that three of the Defendant’s question were plainly outside the scope of the Rule 30(b)(6) notice of the deposition. Id. at *10. As for the fourth question that the EEOC challenged, Magistrate Judge Day held that it was proper for the EEOC to instruct Miaskoff not to answer because “privilege is an appropriate ground for instructing a deponent not to answer a question.” Id. at *12. Magistrate Judge Day held that the fifth and final question that the EEOC challenged was reasonably calculated to lead to the discovery of admissible evidence and therefore the EEOC was not justified in instructing Miaskoff not to answer on relevancy grounds. Id. at *11. Nevertheless, Magistrate Judge Day held that it was unnecessary to compel an additional deposition because “further questioning would be redundant…” Id. at *26. Additionally, the Magistrate Judge Day denied the Defendant’s request for sanctions. 

Implications For Employers

Discovery disputes are often hotly contested matters. Motions to compel can be particularly vital to a party’s case because one answer has the ability to un-hinge a massive trunk of pertinent information. In other words, “knowledge is power.” Thus, Magistrate Judge Day’s ruling limits Defendant’s available arguments against the EEOC in this case. 

 Readers can also find this post on our EEOC Countdown blog here.