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Roundtable-Class Action

This Oracle May Be Prophetic

A Ninth Circuit ruling could lead to the application of the state’s Unfair Competition Law to national class actions involving conduct in California.

Five years after California voters reined in application of the state's Unfair Competition Law by passing Proposition 64, a string of recent decisions in an unpaid-overtime case involving Oracle Corp. have reignited employers' concerns that the law could be applied in wage-and-hour class actions.

The UCL (Bus. & Prof. Code § 1720017210), known simply as section 17200, provides a longer statute of limitations (four years) than the state labor code does and, when linked to violation claims, it would cover such things as unpaid overtime. Employers fear that if section 17200 applies to out-of-state workers visiting California, it may also apply to claims against California-based companies brought by victims in consumer, civil rights, and other cases.

The underlying dispute arose in 2003, when plaintiffs filed a federal class action claiming that Oracle Corp., based in Redwood Shores, had misclassified its instructors as "teachers," who are exempt from the overtime provisions of California's labor code and the federal Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. §§ 201219). (Gabel & Sullivan v. Oracle Corp. ("Sullivan I"), No. 03-348 (C.D. Cal., filed Mar. 29, 2005).) The suit was brought by three instructors who train purchasers on how to use Oracle's complicated database software, and who live outside California.

Charles S. Russell, an attorney with Callahan, Thompson, Sherman & Caudill in Tustin who represents the trio, says that his clients had commonly put in 10-to-15-hour days preparing, presenting, and writing reports for their training sessions, which usually last three to five days each.

Following settlement of that suit, the plaintiffs filed a second suit in state court. Oracle removed the case to federal court, where it was assigned to the same district judge who heard Sullivan I. The company, meanwhile, had begun to pay overtime to its California-based instructors in 2003, and to all of its instructors in 2004.

In Sullivan II, the instructors alleged violation of California Labor Code section 510(a) for overtime work performed in California, and violation of section 17200 predicated on an underlying violation of the FLSA for overtime work performed in other states.

U.S. District Judge Alicemarie Stotler in Santa Ana granted summary judgment to Oracle, holding that California's labor code (and derivatively, section 17200) does not apply to nonresidents who work primarily in other states.

But in November 2008 the Ninth Circuit reversed in part, holding that California's wage law can apply to out-of-state employees when they work in California, and that it permits claims under section 17200. However, the panel rejected the far broader claim that a California-based employer's failure to comply with the overtime provisions of the FLSA would subject the employer to state UCL and federal claims for overtime worked in other states (Sullivan v. Oracle Corp., 547 F.3d 1177 (9th Cir. 2008)).

The decision confirming the right of nonresidents to sue for wage violations while working here temporarily set off a flurry of panicked client alerts by management-side employment practice groups. Proskauer Rose warned that the ruling could have "enormous ramifications" for companies whose out-of-state employees do any work in the state. K&L Gates cautioned, "The price tag on conferences and business trips in California just went up." And Morgan, Lewis & Bockius said Sullivan "has potentially far-reaching implications for California and non-California employers alike."

But attorney Russell says the decision isn't a big deal, likening it to state income tax obligations. A resident of Colorado, for instance, has to pay California tax on money earned here. And Russell argues by analogy that because the benefits of the state labor code apply to people regardless of immigration status, citizens who live in Arizona, for example, certainly ought to be covered when working in California.

When both sides filed petitions for rehearing, however, the Ninth Circuit backpedaled. In February it withdrew its opinion in Sullivan II and certified three questions to the California Supreme Court. First, does state overtime law apply to out-of-state residents who work for a California company inside the state? Second, if state law does apply, can plaintiffs make a section 17200 claim? And third, if a California employer sets policies that violate the FLSA for its out-of-state workers, does a section 17200 claim apply to the federal violation for those employees no matter where they work? (See Sullivan v. Oracle Corp., 557 F.3d 979 (9th Cir. 2009).)

Lawyers on both sides of the issue say the most significant question is whether section 17200 applies to employees hired by California companies but who work in other states. If the answer is yes, "There could even suddenly be a private right of action under the [federal] prevailing wage statute," says Michael J. Walsh, an employment law specialist with Walsh & Walsh in Irvine who represents employees. Currently, he adds, only the Department of Labor can sue to recover under the prevailing wage provisions of the Davis-Bacon Act, which sets minimum wages on federal projects.

Another critical issue is the different ways class actions are treated under federal labor law and section 17200. Federal FLSA class actions are "opt in," requiring workers to affirmatively choose to join the class. By contrast, section 17200 claims are "opt out," including all class members unless they request to be excluded from the litigation.

Attorney Walsh suggests that the state Supreme Court might narrow the issue by expressly limiting the application of section 17200 to the labor law context. But Paul W. Cane Jr., a partner at San Francisco's Paul, Hastings, Janofsky & Walker who represents Oracle, says that applying state wage-and-hour laws to work time spent in California by business travelers who live and work primarily in other states could still create a personnel quagmire for employers.

Both management and labor groups can be expected to weigh in on the issue, which the court probably won't schedule for oral argument until early next year.

Pamela A. MacLean, a freelance writer based in the Bay Area, has reported on state and federal courts for 25 years.


Kari Santos

Daily Journal Staff Writer

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