When Numbers Lie: The Limits of Statistical Methodology in California Class Action Management

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Courts that oversee class actions can use class sampling and other statistical methods to manage litigation involving large numbers of plaintiffs and the vast amount of data associated with them. In California, however, those methods must be reliable, and cannot strip defendants of the right to litigate affirmative defenses.

The California Supreme Court recently announced its decision in Duran v. U.S. Bank National Association, 2014 WL 2219042, finding that the trial court had abused its discretion in managing a class action employee misclassification case. The Court criticized various aspects of the trial court’s plan, but focused significant attention on the faulty statistical methods utilized by the trial court to assess both liability and damages. Additionally, the Supreme Court found that the trial court’s plan prevented U.S. Bank (“USB”) from litigating its affirmative defenses.   In a 43-page opinion that will likely have implications in class action case management beyond the employment context, the Supreme Court held that “[a] trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced.”

In Duran, USB business banking officers (BBOs) sued their employer, asserting that they had been misclassified as exempt employees who were not entitled to overtime. USB had classified them as outside sales employees exempt under California Labor Code Section 1170, which requires such employees to spend more than 50% of their workday in sales outside of the office. The trial court certified a class of 260 BBOs.

After certification, USB proposed dividing the class members into groups and appointing special masters to conduct individual hearings on liability and damages. Plaintiffs, on the other hand, proposed using a class-wide survey and random sampling.  Rejecting both USB’s and Plaintiffs’ proposal, the trial court devised its own plan to select a random group of 20 class members plus the 2 class representatives (the “Random Witness Group” or “RWG”) who would testify at trial and determine both liability and damages for USB, and to then extrapolate those outcomes to the class as a whole.

USB objected repeatedly to the trial court’s management of the case, and unsuccessfully moved to decertify the class due to the predomination of individual issues. Once trial began on liability, the trial court refused to accept any evidence related to the classification of any class member not in the RWG. On the issue of liability, USB sought to offer evidence that some class members worked outside the office more than 50% of the time, and therefore had been properly classified. Because those class members were not in the RWG, however, the court refused to allow USB to present any of that evidence.

In criticizing the trial court’s approach, the Supreme Court focused first on the certification and trial management plan. Not only does the trial court have to consider the predominance of common issues, it also must “conclude that litigation of individual issues, including those arising from affirmative defenses can be managed fairly and efficiently.” If a class is certified and then proves unmanageable, the trial court has a duty to decertify. 

The Supreme Court also criticized the trial court for “rigidly adhering to its flawed trial plan and excluding relevant evidence central to the defense.” By using a small statistical sampling to determine liability – an individual issue driven by the number of hours spent in the office – not just damages, it glossed over the potential that USB was not liable to some of the BBOs. In short, the trial court “did not manage individual issues.  It ignored them.”

As to the flawed trial plan, the Supreme Court highlighted several rulings that compromised the randomness of the RWG. First, while 20 of the class members were chosen by the court, the RWG also included the two named plaintiffs, who had been selected by class counsel. In fact, the named plaintiffs had been substituted several times, based on friendliness to the class’s position. The Supreme Court noted that the inclusion of the 2 named plaintiffs was the opposite of random, and skewed the sample in favor of the plaintiffs. Additionally, there was no explanation by the trial court of whether or how it had determined that twenty plaintiffs was an appropriate sample size for the RWG.

The Court also pointed out that, after the RWG was selected, the Plaintiffs amended the complaint. This in turn led the trial court to allow an additional opt-out opportunity for class members who no longer wanted to be a part of the class under the amended complaint.   In the RWG, 4 out of 20 opted out (20%), while only 5 of the remaining 250 members opted out (2%).  Such a large discrepancy in opt-out rates was “very unlikely to be attributable to random chance,” according to USB’s expert. When USB investigated the RWG class opt-outs, some of the RWG members who had opted out said that class counsel had encouraged them to do so, further calling the randomness of the sample into question.

As for the use of statistical sampling, the Supreme Court noted that “the court’s attempt to implement random sampling was beset by numerous problems.”  While not going so far as to say that sampling is never permissible, the Supreme Court laid out how the trial court failed to use sampling properly and protect parties’ rights. Specifically, the sample size was too small, not random, and had intolerably large margins of error – for example, 43.3% as to estimated overtime.

The Duran opinion makes clear that – whatever the methods used by courts to make class actions manageable – individual issues must be fairly managed, and, when a court utilizes statistical sampling, the sample “must be representative and the results obtained must be sufficiently reliable to satisfy concerns of fundamental fairness.” This focus on the fairness and reliability of class action management methods raises parallels to the United States Supreme Court’s Daubert opinion’s focus on the relevance and reliability of expert testimony. Just as Daubert seeks to avoid undue intrusion into the parties’ rights to call whichever scientific expert they see fit while ensuring that the resulting testimony is still scientific, so Duran seeks to avoid unnecessarily limiting trial court’s discretion to manage unwieldy litigation, while ensuring that the methods employed are still fundamentally fair. And while Daubert and Duran apply to plaintiff and defense equally, the nature of the two sides approaches to litigation suggest that Duran will evolve into authority widely perceived as defense-friendly.

Image courtesy of Flickr by LendingMemo.com.

Topics:  Affirmative Defenses, Class Action, Complex Litigation, Employer Liability Issues, Exempt-Employees, Misclassification, Non-Exempt Employees, Statistical Sampling

Published In: Civil Procedure Updates, Civil Remedies Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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