Litigating on the Fault Line: Class Action Law in California

By Jocelyn D. Larkin The Impact, FundMark Chavez Chavez & Gertler, LLP, Fred W. Alvarez Wilson Sonsini Goodrich & Rosati

As with so many other issues, California is on the cutting edge of the class action boom. Class action filings in the Golden State have significantly increased in the past decade, particularly in the areas of employment and business torts. In recent years, the California Supreme Court has issued a number of important rulings that have altered the state’s class action landscape. This Court, like its predecessors, has shown no hesitation in developing its own class action jurisprudence, incorporating principles of federal class action law in some cases and departing markedly from federal practice in other respects.

We begin with a brief overview of the statutory and common law foundations of California class action law, a body of law that can be a bit puzzling to those accustomed to practicing within the comprehensive framework of Federal Rule of Civil Procedure 23. We next highlight ten key differences between California and federal class action law, which illustrate the independent nature of California law. Then, we hone in on three areas of California class action law that have been particularly interesting of late: class action waivers in arbitration, class member discovery and communication, and class action settlements.

The Not-So-Simple Basics of California Class Action Law

The primary statutory authority for class actions in California is Code of Civil Procedure § 382.  It provides that:

When the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.

While that’s not quite the entire text of Section 382, it is all that actually matters. And, no, the words “class action” do not appear anywhere in the statute.

Practitioners accustomed to the detailed procedural structure of Federal Rule of Civil Procedure 23 may understandably be searching for a bit of scaffolding. Fortunately, some elements of that procedural blueprint are found in California Rules of Court, Rules 3.760–3.771, which govern motion practice, class notice, the settlement approval process and discovery against class members, among other topics. Notably, these rules do not address one critical piece – the prerequisites for class certification.

In California, class certification requirements are found in the case law. Sav-On Drug Stores v. Superior Court, 34 Cal. 4th 319, 326 (2004). The plaintiff must establish the existence of “an ascertainable class” and a “well-defined community of interest among class members.” Id. The “community of interest” criteria is comprised of three factors, mirroring some Rule 23 requirements: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class. Id.

California law has not expressly adopted the federal law requirement that a class action satisfy one of three types of class actions defined in Fed. R. Civ. P. 23(b). However, plaintiffs are required to show that class treatment would “provide substantial benefits” to both the courts and the litigants, a showing that California courts have recognized is akin to the ‘superiority’ prong of Rule 23(b)(3). Bell v. Farmers Ins. Exchange, 15 Cal.App.4th 715, 741 (2004). In addition, trial courts are permitted to look to federal class action law in the absence of relevant state law precedent; Rule 23(b) has often been used as that guide. See e.g. Capitol People First v. Dept. of Developmental Services, 155 Cal. App. 4th 676, 692 n.12 (2007); Bell v. American Title Ins. Co., 226 Cal. App. 3d 1589, 1603 (1991).

Not done yet. Consumer class actions in California are governed by their own statute, the Consumer Legal Remedies Act, Cal. Civil Code § 1781. The CLRA includes specific certification requirements (similar but not identical to Fed. R. Civ. P. 23(a)) as well as detailed provisions about the method and content of class notice. Like federal class action law, Civil Code § 1781 serves as guidance to trial courts in addressing open class action questions. Reyes v. Board of Supervisors, 196 Cal. App. 3d 1263, 1271 (1987).

Ten Key Differences Between California and Federal Class Action Law

California class action law, despite its idiosyncratic statutory framework, has many similarities with its federal counterpart. Before exhaling however, practitioners need to be aware that there are several areas where California law differs from federal law, in some instances based upon a deliberate choice by California courts to reject the federal approach. While an exhaustive analysis of these differences is beyond the scope of this article, we highlight some of the most significant. These differences suggest that California is a somewhat more hospitable forum for class actions than federal court.

1. Public Policy Favoring Class Actions – California has “a public policy which encourages the use of the class action device.” Sav-On Drug Stores v. Superior Court, 34 Cal. 4th 319, 340 (2004). To effectuate that public policy, trial courts have “an obligation to consider the use of. . . innovative procedural tools proposed by a party to certify a manageable class” and are urged to be “procedurally innovative.” Id. at 339. Federal law carries no similar imprimatur for the class action.
2. No Dispositive Motions Prior to Class Certification – California courts have long held that trial courts should not consider dispositive motions prior to certification, absent a compelling justification for doing so. Fireside Bank v. Superior Court, 40 Cal. 4th 1069, 1083 (2007); Home Sav. & Loan Assn. v. Superior Court, 42 Cal. App. 3d 1006, 1010 (1974). Pre-certification merits determinations present the risk of one-way intervention, e.g. class members taking advantage of a favorable ruling but avoiding an adverse judgment. Fireside Bank, 40 Cal. 4th at 1078. See also Tarkington v. Cal. Unemployment Ins. Appeals Bd., 172 Cal. App. 4th 1494 (2009) (suitability of class allegations in wage and hour litigation not properly reviewed at the demurrer stage). In contrast, federal courts are far more tolerant of dispositive motions pre-certification. See Manual for Complex Litigation, Fourth § 21.11 (West 2009) (initial case management order should include schedule for threshold dispositive motions if the judge chooses to hear them).
3. No Merits Review As Part of Certification - California courts “view the question of certification as essentially a procedural one that does not ask whether an action is legally or factually meritorious.” Linder v. Thrifty Oil Co., 23 Cal. 4th 429 (2000). While the federal courts long held a similar view, several circuits have recently 5 endorsed a review of merits issues where necessary to determine Rule 23 compliance. In re Hydrogen Peroxide Antitrust Litig, 552 F.3d 305 (3rd Cir. 2008); In re IPO Securities Litg., 471 F.3d 24, 41-42 (2d Cir. 2006).
4. Opt-In Procedure Prohibited - Several federal statutes, such as the Fair Labor Standards Act (FLSA), mandate that class members join a lawsuit by affirmatively “opting in”; such cases are known as collective actions. In Hypertouch v. Superior Court, 128 Cal. App. 4th 1527 (2005), the California Court of Appeal held that an “optin” procedure is not authorized by -- and is impermissible under -- California law. “The overwhelming weight of authority teaches that the ‘opt-in’ approach does not enhance but undermines the salutary effect of proper class actions.” Id. at 1550. Recently, a California Court of Appeal dismissed an FLSA action filed in state court because its optin procedure is incompatible with California law, citing Hypertouch. Haro v. City of Rosemead, 174 Cal. App. 4th 1067, 1075-76 (2009).
5. Interlocutory Appeals from Class Certification Orders – Under Fed. R. Civ. P. 23(f), either party may seek an interlocutory appeal of a class certification order but the decision to hear the appeal is at the discretion of the appellate court. Chamberlan v. Ford Motor Co., 402 F.3d 952 (9th Cir. 2005). In contrast, California allows an immediate appeal of an order denying class certification under the “death-knell” doctrine. “[An order denying class certification] is appealable if it effectively terminates the entire action as to the class, in legal effect being tantamount to a dismissal of the action as to all members of the class other than plaintiff . . . .The appeal is allowed, as a matter of state law policy, because the order has the ‘death knell’ effect of making further proceedings in the action impractical . . . .” Stephen v. Enterprise Rent-A-Car, 235 Cal. App. 3d 806, 6 811 (1991) (internal quotations omitted); Richmond v. Dart Indust., 29 Cal. 3d 462, 470 (1967). The right of appeal applies only to orders denying certification in its entirety and the appeal must be taken immediately or lost. Stephen, 235 Cal. App. 3d at 811. On the other hand, an order granting class certification may only be challenged after judgment or on an interlocutory basis by means of a writ of mandate, a highly discretionary appeal sparingly granted by the courts of appeal. See e.g. Sav-On Drugs, 34 Cal. 4th 319 (2004).
6. Depositions of Unnamed Class Members – Under California law, defendant may subpoena the deposition of an unnamed class member without a court order. Cal. R. of Court 3.768. In contrast, federal courts require the defendant to justify discovery against unnamed class members and impose a particularly heavy burden for depositions. Baldwin & Flynn v. National Safety Associates, 149 F.R.D. 598, 600 (N.D. Cal. 1993).
7. Injunctive Relief Prior to Certification – California Code of Civil Procedure §527(b) permits a trial court to issue a temporary restraining order or a preliminary injunction in a class action before the class has been certified. The Ninth Circuit does not permit broad injunctive relief prior to certification. Zepeda v. I.N.S., 753 F.2d 719, 727- 728 (9th Cir.1984).
8. Tolling of Individual Claims - This is one area where federal law is somewhat more protective of the rights of class members. Federal law holds that the filing of a class action tolls statutes of limitation for all members of the purported class until certification is denied or the case is resolved. American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). Under California law, tolling is not guaranteed. In Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1118-1119 (1988), the California Supreme Court read American Pipe narrowly, holding that tolling depends on the quality of notice to the defendants and 7 whether it furthers the economy and efficiency of the litigation. But see Hatfield v. Halifax PLC, 564 F.3d 1177 (9th Cir. 2009) (applying California law, court finds that equitable tolling doctrine preserved the claims of California residents even where American Pipe tolling did not).
9. Costs of Class Notice - Under federal law, the plaintiff pays for class notice. Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 176 (1974). Under California law, the court may direct either party to pay for the costs of notice. Cal. Rule of Court 3.766(c). While a plaintiff ordinarily bears the cost and burden of providing notice, the court may shift the costs if defendant’s conduct has complicated the identification and notice process. Hypertouch, Inc. v. Superior Court, 128 Cal. App. 4th 1527, 1553 (2005)
10. Availability of Attorneys’ Fees – While not strictly an issue of class action law, the issue of attorneys’ fees often has significant ramifications in class action cases. In at least two respects, the California Supreme Court has explicitly rejected federal precedent in favor of a more plaintiff-friendly interpretation of attorneys’ fees law. In Graham v. Daimler/Chrysler Corp., 34 Cal. 4th 553, 567 (2004), the California high court reaffirmed that a party may be entitled to attorneys’ fees where the lawsuit has been a “catalyst motivating the defendants to provide the . . . relief sought,” even if the prevailing party has not yet obtained any affirmative relief in the litigation. The Court expressly rejected the U.S. Supreme Court’s holding in Buckhannon Bd. and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598, 610 (2001), which precluded attorneys’ fees for parties who have not, through the litigation, obtained a material change in the legal relationship with the defendant. Graham, 34 Cal. 4th at 568. The availability of fees based upon a ‘catalyst’ theory is particularly important in 8 injunctive relief class actions, such as environmental or government reform cases. California has also taken a different approach to the calculation of statutory attorneys’ fees based upon the lodestar method, permitting enhancements for risk, while the federal law prohibits the use of risk multipliers. Compare Ketchum v. Moses, 24 Cal. 4th 1122 (2001) with City of Burlington v. Dague, 505 U.S. 557, 567 (1992).

Hot Topics in California Class Action Law

We focus here on three issues that have gotten the most attention among class action practitioners in the Golden State.

A. Class Action Waivers in Arbitration

Since 2005, the California Supreme Court has charted a somewhat unique jurisprudential course in refusing to uphold class arbitration waivers in certain circumstances. See Michael B. Cooper, Class-Less? An Analysis of the California Supreme Court’s Denial of Employers’ Right to Use Class Arbitration Waivers in Employment Agreements in Gentry v. Superior Court, 2 J. BUS. ENTREPRENEURSHIP & L. 459 at n. 198 (noting that the California Supreme Court’s refusal to uphold class arbitration waivers further lead California away from the mainstream on this issue). The Court has addressed the issue of class action waivers in arbitration agreements, and has invalidated certain provisions if found to be unconscionable or in violation of California’s public policy.

Procedural and Substantive Unconscionability

In Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), the California Supreme Court addressed the issue of class action waivers in arbitration provisions. Discover Bank involved a credit card holder who filed a class action against the card 9 issuer, challenging its late fees and finance charges. The parties’ cardholder agreement was an adhesion contract that required arbitration of disputes at a party’s election. At issue in the case was the enforceability of an arbitration provision in the cardholder agreement that waived the right to participate in group arbitration. The Court acknowledged that, although arbitration agreements are valid in California, their enforceability is limited by the same principles of contract law that apply to the enforceability of contracts. Id. at 160-161. Thus, the class action waiver is not enforceable if it is unconscionable. Id.

A contract is not enforceable if it is both procedurally and substantively unconscionable. Olvera v. El Pollo Loco, Inc., 173 Cal. App. 4th 447, 454 (2009). Procedural unconscionability focuses on oppression or unfair surprise, while substantive unconscionability focuses on overly harsh or one-sided terms in the contract. Id.

Discover Bank concluded that the class arbitration waiver, which was provided to the cardholder as a “bill stuffer” that amended the cardholder agreement, was procedurally unconscionable because the cardholder was deemed to accept the amendment if one did not close the account. Id. at 160. The court also found that the waiver was substantively unconscionable as an exculpatory clause because: (a) in a consumer contract, where disputes usually involve small sums of money, the waiver effectively immunized the credit card company from class actions, which often provide the cardholders with “the only effective way to halt and redress” the company’s wrongful conduct (id. at 161); and (b) the waiver was unfairly one-sided because the credit card companies usually do not sue their customers in class action lawsuits. As such, the Discover Bank court invalidated the class action waiver.

Gentry: Discover Bank in the Wage and Hour Context

In Gentry v. Superior Court, 42 Cal.4th 443 (2007), the Supreme Court extended the Discover Bank rationale to wage and hour cases involving unwaivable statutory rights. In Gentry, the employer, Circuit City Stores, hired Gentry and provided him with a packet of information that included dispute resolution procedures. Id. at 451. The procedures included a mandatory arbitration provision with a class action arbitration waiver stating that the “arbitrator shall not consolidate claims of different Associates into one proceeding, nor shall the Arbitrator have the power to hear arbitration as a class action.” Id. Gentry alleged that Circuit City had illegally misclassified as exempt a category of employees that should have been provided overtime pay, and sought to bring his action on a class basis. The litigation initially progressed through to the California Supreme Court, which remanded Gentry’s case for reconsideration. The appellate court denied Gentry’s petition on remand, concluding that because the arbitration clause had a thirty day opt-out provision, it was not an adhesion contract and thus not unconscionable (as in Discover Bank), and because Gentry’s claims did not seem as modest as the cardholders in Discover Bank. Id. at 452.

The California Supreme Court again granted review of Gentry’s claim to further clarify its holding in Discover Bank and its applicability to Gentry’s claim. Accordingly, Gentry determined whether a class arbitration waiver would lead to a de facto waiver of statutory rights, or whether the ability to maintain a class action or arbitration was necessary to enable an employee to vindicate unwaivable rights in an arbitration forum. 42 Cal.4th at 457. Gentry concluded that a class arbitration waiver is contrary to public policy, and thus invalid if the waiver improperly interfered with the employee’s ability to 11 vindicate unwaivable statutory rights. Id.

Gentry held that one’s rights to overtime compensation under the California Labor Code are not waivable. Id. at 455-456. The Court based its conclusion on the important public policy underlying the wage and hour laws -- concern for the health and welfare of workers as well as the public health and general welfare. Id. at 456. With this nonwaivable right, and a fundamental public policy at issue, the Gentry court proceeded with a similar Discover Bank analysis of the class action waiver provision that Gentry challenged.

First, the Gentry Court determined that individual awards in wage and hour cases tend to be modest, involving lower wage workers rather than those who are properly classified as exempt from overtime regulations. Id. at 457-458. The Court reasoned that the prospect of only a modest recovery of damages and attorney fees effectively hinders employees from seeking an individual recovery of their overtime pay. Id. at 458-459.

Moreover, the Court acknowledged that for current employees, the prospect of bringing an individual claim for overtime pay and retaining one’s job without suffering retaliation for bringing legal action is not “a viable option for many employees,” especially for lower level employees. Id at 459-460. Thus, “federal courts have widely recognized that fear of retaliation for individual suits against an employer is a justification for class certification in the arena of employment litigation. . . .” Id. at 460.

Furthermore, the Gentry court noted that “some individual employees may not sue because they are unaware that their legal rights have been violated. . . . [I]t may often be the case that the illegal employer conduct escapes the attention of employees.” Id. at 461. On the other hand, a class action device will likely provide current and former employees 12 with written information of their rights involved in the litigation. Finally, the Gentry Court directed that trial courts must also consider “other real world obstacles to the vindication of class members’ rights to overtime pay through individual arbitration.” Id. at 463.

The Gentry Court concluded that, if class arbitration is likely to be a significantly more effective, practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and the court finds that the disallowance of the class action device will likely lead to a less comprehensive enforcement of overtime laws, the court must invalidate the class arbitration waiver to ensure that the employees can vindicate their unwaivable rights in an arbitration forum. Id.

Trial courts must make these determinations, and must also determine that the proposed class arbitration meets the following community of interest requirements for all class actions: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class. Id. at 463-464.

Gentry expressly declined to hold that all class arbitration waivers in cases involving overtime laws are unenforceable. Id. at 462. In each case, the trial court must assess the facts and determine whether class arbitration would be a significantly more effective means than individual arbitration actions of vindicating the right to overtime pay. Id. at 466.

Gentry Standards As Applied

Courts have since extended Gentry’s holding to the unwaivable statutory rights of employees to meal and rest periods, Franco v. Athens Disposal Co., Inc., 171 13 Cal.App.4th 1277, 1290 (2009), as well as to the reimbursement of job-related expenses, Sanchez v. Western Pizza Enterprises, Inc., 172 Cal.App.4th 154 (2009).

Moreover, even post-Gentry, California courts have continued to apply the Discover Bank analysis (based on unconscionability rather than violations of public policy) to invalidate class action waivers in arbitration agreements that involve employee challenges to “unwaivable” statutory rights to overtime pay. For instance, in Murphy v. Check ‘N Go of California, Inc., 156 Cal.App.4th 138 (2007), the plaintiff employee, who brought a claim for overtime pay, challenged the enforceability of a class action arbitration waiver in an employment agreement. The trial court concluded that the waiver provision was unconscionable under a Discover Bank analysis because of an unconscionable provision that the arbitrator could decide any question of unconscionability, and that those provisions could not be severed from the arbitration agreement. Id. at 142-143. Thus, the Murphy court did not invalidate the waiver provision on public policy grounds as in Gentry, but on unconscionability grounds as in Discover Bank. Furthermore, in Olvera v. El Pollo Loco, Inc., 173 Cal. App. 4th 447 (2009), the court invalidated a class-wide waiver in an arbitration clause because it was unconscionable, not because it was a violation of public policy, even though the case involved an employee’s claim for the unwaivable right to overtime pay. Id. at 457.

As such, the California trend continues to be for courts to broaden their available tools of analysis that enable them to invalidate class arbitration waivers if they are unconscionable or in violation of public policy.

B. Class Member Communications and Discovery

Issues concerning who can communicate with unnamed class members and whether they are subject to discovery regularly arise in class actions. In California, these issues have a unique twist because the state’s Constitution includes an express right to privacy. Cal. Const. Art. 1 § 1. In Pioneer Electronics v. Superior Court, 40 Cal.4th 360, 373-374 (2007), defendants sought to use the class member’s right to privacy as a means of restricting the information that plaintiffs could obtain about putative class members. The Supreme Court rejected the argument that plaintiffs would be limited to receiving the names of putative class members who affirmatively agreed to disclosure of their identities. We summarize some of the recent cases on these issues below.

Class Plaintiffs Are Entitled to Obtain the Contact Information for Putative Class Members to Develop Their Case

Under California law, class action plaintiffs are entitled to discover the names and contact information of putative class members except in limited circumstances. Pioneer Electronics (USA), Inc. v. Super. Ct., 40 Cal.4th 360, 373 (2007). The California Supreme Court has held that “[c]ontact information regarding the identity of potential class members is generally discoverable, so that the lead plaintiff may learn the names of other persons who might assist in prosecuting the case.” Pioneer, 40 Cal.4th at 373. This follows from California’s liberal rule on the scope of discovery codified in Code of Civil Procedure section 2017.010:

any party may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action or to the determination of any motion made in that action, if the matter is itself admissible in evidence or appears reasonably calculated to the discovery of admissible discovery.

Code Civ. Proc. § 2017.010. 15

The Courts of Appeal have repeatedly authorized class action plaintiffs to discover the contact information for putative class members from the defendant. See, e.g., Crab-Addision, Inc. v. Super. Ct, 169 Cal.App.4th 958, 969 (2008) and authorities cited therein. Over twenty years ago, the Court of Appeal in Atari, Inc. v. Superior Court, 166 Cal. App. 3d 867 (1985), affirmed the right of a plaintiff both to obtain precertification discovery of the names, addresses and telephone numbers of putative class members and also to contact them because there is no justification for “denying any party equal access to persons who potentially have an interest in or relevant knowledge of the subject of the action, but who are not yet parties.” Id. at 869. The Atari court held that “consistent with fundamental fairness . . . neither party should be precluded from investigating and preparing the case.” Id. at 873. See also Howard Gunty Profit Sharing Plan v. Super. Ct., 88 Cal. App. 4th 572, 578 (2001) (plaintiff’s counsel “are permitted precertification communication with potential class members for the purpose of investigation and preparation of their claims or defenses”).

This general rule in favor of disclosure is subject to limited exceptions where restrictions are necessary to protect the safety or privacy of the putative class member. See Puerto v. Superior Court, 158 Cal. App. 4th 1242, 1254 (2008) (“[I]t is only under unusual circumstances that the courts restrict discovery of nonparty witness’ residential contact information.”); accord Lee v. Dynamex, Inc., 166 Cal. App. 4th 1325, 1337 (2008); Crab Addison, Inc., 169 Cal. App. 4th at 967. Although contact information is “private,” it is not particularly sensitive, unlike personal medical or financial information. Pioneer, 40 Cal. 4th at 372; accord Belaire-West Landscape, Inc. v. Superior Court, 149 Cal. App. 4th 554, 561-62 (2007); Puerto, 158 Cal. App. 4th at 1254. Thus, any intrusion into the putative class member’s privacy rights resulting from the release of their contact information will not be considered serious. Belaire-West, 149 Cal. App. 4th at 562; Puerto, 158 Cal. App. 4th at 1254.

Nor is there a need to balance the privacy interest in contact information against a plaintiff’s right to discovery where appropriate safeguards are put in place such as affording putative class members the right to opt out of the disclosure, the use of a third party administrator, and/or a protective order. Pioneer, 40 Cal. 4th at 373; accord Belaire-West, 149 Cal. App. 4th at 562; Puerto, 158 Cal. App. 4th at 1254; Lee v. Dynamex, 166 Cal. App. 4th at 1338.

Class Plaintiffs Are Also Entitled to Obtain the Contact Information for Putative Class Members to Identify Potential Additional Representative Plaintiffs

In California, class action plaintiffs are also entitled to such contact information in order to identify potential additional plaintiffs. Safeco Ins. Co. of Am. v. Superior Court 173 Cal. App. 4th 814, 824-25 (2009); CashCall, Inc. v. Superior Court, 159 Cal. App. 4th 273, 284, 296-300 (2008); accord Budget Fin. Plan, 34 Cal. App. 3d at 799. The Court of Appeal in Safeco recently upheld the trial court’s order granting a plaintiff’s request to discover the identities of putative class members in order to help identify potential substitute plaintiffs even though the trial court had found that the original representative plaintiff lacked standing. Safeco Ins. Co., 173 Cal. App. 4th at 836. Likewise, the courts in Best Buy and CashCall also affirmed trial court orders granting a plaintiff, who had been found to be unsuitable as a class representative, the right to discover the identity of the putative class members in order to find a substitute plaintiff. Best Buy Stores v. Superior Court, 137 Cal. App. 4th 772, 779 (2006); CashCall, 159 Cal. App. 4th at 296-300. As the CashCall court noted,

[A]n original plaintiff who lacks standing in a class action should be allowed to file a motion for, and potentially obtain, precertification discovery of the identities of actual class members (i.e., potential plaintiffs with standing who may elect to serve as substitute class representative plaintiffs).

Cashcall, 159 Cal. App. 4th at 290.

In determining whether such pre-certification discovery should be allowed, the courts apply the balancing test set out in Parris v. Superior Court, 109 Cal. App. 4th 285 (2003). That test requires the trial court to “expressly identify any potential abuses of the class action procedure that may be created if the discovery is permitted, and weigh the danger of such abuses against the rights of the parties under the circumstances.” Id. at 301. In Safeco, the Court of Appeal upheld the trial court’s findings that the rights of the putative class outweighed any risk of abuse of the class action process—even after the trial court had found that the plaintiff knew that she lacked standing—because the rights of the putative class members were substantial and because she and her counsel had a good faith belief that she had standing. Safeco, 173 Cal. App. 4th at 834-35. The court found that the rights of the class were substantial because (1) it would be difficult for an individual class member to determine whether he had been injured, (2) individual class member claims might have been barred by the statute of limitations, (3) there were no other action or enforcement proceedings that could provide relief, and (4) there was a strong offer of proof regarding the merits of the complaint. Id. at 834.

Similarly, in CashCall, the Court of Appeal held that the trial court did not abuse its discretion in finding that the rights and interests of the class members outweighed the potential for abuse of the class action procedure. CashCall, 159 Cal. App. 4th at 292-93. In that case, the trial court considered in reaching its conclusion the ignorance of the class members of their injury, potential statute of limitations problems, and the fact that there was no other action or enforcement proceeding pending to provide class members relief. Id. at 293.

However, in First American Title Insurance Co. v. Superior Court, 146 Cal. App. 4th 1564 (2007), the Court of Appeal reversed the trial court’s decision to allow a plaintiff with no standing to discover the identities of potential replacements because the potential for abuse far outweighed the rights of the absent class members. Key to this 18 holding was the fact that the plaintiff never had any good faith belief that he had standing to bring the class action and the fact that the putative class had already largely been compensated by settlements that the defendant had reached with multiple government agencies prior to the filing of the class action. Id. at 1577. Moreover, the plaintiff in that case made no argument that any future actions pursued by putative class members would be time barred. Id. Accordingly, the court held that the interest of the absent class members was minimal but the potential for abuse “overwhelming.” Id.; see also Cryoport Systems v. CAN Ins. Co., 149 Cal. App. 4th 627, 634 (2007).

The Parties May Communicate With Putative Class Members Subject to Limitations

The parties may communicate with putative class members after the initiation of litigation. In many respects, putative class members are treated similar to third party witnesses prior to class certification. Although counsel for the parties in class actions sometimes contact putative class members to gather information or to obtain witness statements and declarations, these communications are subject to restrictions both before and after class certification. Particular caution is warranted where the putative class members are the employees of a class action defendant. California Rules of Professional Conduct, Rule 2-100, prohibits a member of the bar representing a client from communicating about the subject of the representation with a party known to be represented by another lawyer unless the other lawyer has consented to the communication. The term “party” includes “an officer, director or managing agent of a corporation.” Cal. Rules of Professional Conduct, Rule 2-100(B)(1). Class action plaintiffs and defendants have invoked this rule in an effort to restrict communications with putative class members.

In representing the defendant in a wage and hour class action brought on behalf of general managers and assistant managers in Koo v. Rubios Restaurants, Inc., 109 Cal. 19 App. 4th 719 (2003), the Carlton firm raised Rule 2-100 to restrict the plaintiffs’ ability to communicate with putative class members. A lawyer with the firm filed a declaration stating that his firm represented the corporate defendant and the defendant’s “current assistant and general managers.” Id. at 724. In light of this assertion, plaintiff’s counsel moved to disqualify defendant’s counsel because it allegedly had a conflict of interest in representing both the corporate defendant and its managers. Although defendant’s counsel attempted to clarify and disavow the implications of its earlier statements, the trial court granted the motion to disqualify. Id. 726-27.

The Court of Appeal subsequently reversed the disqualification order, finding that the statements of defendant and defendant’s counsel were insufficient to establish that the firm actually “represented” the assistant and general managers. Id. at 729. Therefore, the court concluded that the plaintiffs had failed to meet their burden of establishing grounds for disqualification based upon an actual conflict. Instead, it found that defendant’s counsel “misspoke” in attempting to utilize Rule 2-100 to prevent plaintiffs’ counsel from contacting the defendant’s managerial agents. Id. at 733. The Court did not reach the question of whether the Carlton firm had properly invoked the rule.

In Shahrokhshahi v. Round Table Pizza, Inc. (Alameda County Superior Court, Case No. RG05194700), the Carlton firm once again raised Rule 2-100 in an effort to prevent plaintiffs’ counsel from communicating with managers included in a putative wage and hour class action. As in Koo v. Rubio’s Restaurants, plaintiffs’ counsel moved to disqualify the Carlton firm for an alleged conflict of interest in representing both the corporation and its managers. The trial court, relying upon La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court, 121 Cal. App. 4th 773 (2004), found the Carlton firm’s assertion of Rule 2-100 to prevent communications between plaintiff’s counsel and putative class members “improper.” Round Table Pizza, slip op. at 7. However, because the Carlton firm did not actually enter into an attorney-client 20 relationship with the managers, the court concluded that there was no evidence of an actual conflict of interest. Id. at 9.

Importantly, the Round Table court went on to address the propriety of the Carlton firm’s efforts to obtain declarations from putative class members. California Rules of Professional Conduct, Rule 3-600(D), requires an attorney dealing with a corporation’s employees to identify his or her client whenever the corporation’s interests are adverse to the employee and to avoid misleading the employee. After finding that the putative class members contacted by the Carlton firm were potentially entitled to thousands of dollars in unpaid overtime but might be unaware of their rights and that the Carlton firm’s purpose in communicating with the employees was to defeat their potential interests in the class litigation, the court concluded that the Carlton firm was required to “take every reasonable step to ensure that such employees are not misled into believing that they should or must communicate information to counsel.” Slip op. at 13. The Carlton firm’s declarations did not say that employees were affirmatively told that their communications would not be held confidential, that they were not the employee’s attorneys, that their legal interests might be at stake, that their interests might be adverse to Round Table, or that the information provided might be used against those interests in litigation. Id. at 15. Under the circumstances, the court concluded that the communications were potentially misleading. Although the court declined to disqualify the Carlton firm, it ordered a curative notice. Id. at 19.

Once the class is certified, however, communication with class members is subject to greater restrictions. Gainey v. Occidental Land Research, 186 Cal. App. 3d 1051, 1057 (1986) (defendant could not make an end run around the court’s supervisory powers by sending its own notice to the certified class). These restrictions are illustrated by the recent opinion in Hernandez v. Vitamin Shoppe Industries, 174 Cal. App. 4th 1441 (2009). In Hernandez an attorney representing one of the plaintiffs in a class action sent a letter to the members of a settlement class in a similar class action urging them to opt 21 out of the settlement and to retain him as counsel in another class action against the defendant. Id. at 1447. The Court of Appeal upheld an order enjoining the attorney from communicating with class members other than those who retained him before preliminary approval of the class settlement. Id. at 1454-56. Such an order was found justified under the trial court’s duty and authority to protect the rights of all parties in a certified class action and to insure a neutral and objective class notice and opt out process. Id. Moreover, the Court concluded that the conditional certification of the settlement class triggered Rule 2-100’s “no contact” requirement and the attorney’s post-certification letters to class members violated the rule. Id. at 1459.

C. Class Action Settlement Approval

Class action settlements require trial court approval to ensure that the interests of absent class members are protected. Fed. R. Civ. P. 23(e). The need for thorough and independent scrutiny by the trial court is particularly important since the parties, no longer in an adversarial relationship, will present a united front urging approval of a proposed settlement. Manual for Complex Litig. Fourth § 21.644 (2004).2 In a number of recent high-profile cases, federal judges have refused to approve class settlements where, after close scrutiny, the court concluded that the proposed settlement did not provide significant benefits to the class. See T. McLawhorn, So You Think the Court Will Approve Your Class Settlement? Think Again, CADS Report (ABA Section of Litigation, Spring/Summer 2008). Several recent decisions from the California Court of Appeal suggest that California superior court judges must apply the same rigorous and independent scrutiny to class settlements coming before them.

In Kullar v. Foot Locker Retail Inc., 168 Cal. App. 4th 116 (2008), objectors appealed from a judgment approving a wage and hour class action settlement against the retailer. The original complaint alleged that the employer’s practice of requiring employees to purchase and wear particular shoes violated the Labor Code provision on work uniforms. A year later, plaintiffs amended the complaint to add a broad range of wage and hour violations, including overtime and meal and rest break claims. A few months later, the parties reached a pre-certification settlement through mediation and submitted a proposed settlement for approval. Id. at 121-22.

Objectors challenged the settlement on the grounds that plaintiffs’ counsel had conducted insufficient investigation to evaluate the strength of the claims added by the amended complaint. Plaintiffs conceded that they had conducted no formal discovery of those claims but instead relied on an informal exchange of information in the mediation. Id. at 126. Citing Cal. Evidence Code § 1119, which protects the confidentiality of mediation-related communications, the trial court did not permit objectors to review this information nor did it compel the parties to provide the information to the court. The trial court nonetheless approved the settlement. Id. at 126-27.

The Court of Appeal reversed and remanded for a re-evaluation of the settlement. The court affirmed that the trial court had an independent obligation to evaluate the terms of the settlement, even if the accord was reached in the course of mediation. The trial court must review “information about the nature and magnitude of the claims in question and the basis for concluding that the consideration paid for release of those claims 23 represents a reasonable compromise.” Id. at 133. The court also put to rest the notion that the mediation privilege would preclude any review of data about the merits of the settlement, since the underlying data would not be immune from discovery. Id. at 131- 32. Finally, the court left to the trial court’s discretion the scope of the discovery to which the objectors would be entitled on remand. Id. at 132-33.

Another wage and hour class action settlement recently failed on similar grounds. Clark v. Am. Residential Servs., 175 Cal. App. 4th 785 (2009). The parties settled numerous wage and hour claims for a total of $2 million, which included $640,000 in fees and costs and incentive payments to the two named plaintiffs of $25,000 each. Id. at 791. The approximately 2300 class members would receive an average payment of $561. Id. at 789. The parties initially provided the court with no explanation of the strength of the case or the “realistic range of outcomes of the litigation.” Id. at 801. Plaintiffs’ counsel later provided an evaluation that the overtime claim had “absolutely no” value, although no supporting data was included. Id. at 796. According to the objectors, counsel’s explanation for this valuation evidenced a “staggering mistake” about the proper method for calculating overtime. Id. at 797. The record also demonstrated that the defendant had valued the case between $21 million and $32 million in connection with its unsuccessful petition for removal to federal court earlier the case. Id. at 791. Despite this, the trial court approved the settlement, concluding that the settlement was entitled to a presumption of fairness that the objectors had not rebutted. Id. at 798.

The Court of Appeal held that the trial court failed to independently assess the strength of the case, particularly the dispute concerning the value of the overtime claim. Id. at 801-03. The court also concluded that the trial court abused its discretion in 24 approving the $25,000 enhancements to the named plaintiffs, where the record failed to support a payout of 44 times the average payment to class members. Id. at 804-06. Finally, the court disallowed costs that exceeded the amount set forth in the class notice. The panel remanded with directions to the trial court to make an independent assessment of the reasonableness of the settlement, based upon receipt of information sufficient to do so.

Conclusion

California courts will continue to be key players in the development of class action law and procedure.