Labor lawyers have a lot on their minds these days, including the Value Challenge from the Association of Corporate Counsel (ACC). Launched in 2008, the Challenge seeks to promote collaboration between in-house and outside counsel in order to reconnect value with the cost of legal services. Also, several major cases have lately grabbed attention in the employment-law sector, including 14 Penn Plaza LLC v. Pyett (129 S.Ct. 1456 (2009)), which held that mandatory arbitration clauses for age discrimination claims in collective bargaining agreements are, in fact, fully enforceable); Roby v. McKesson (47 Cal. 4th 686 (2009) which approved a one-to-one ratio of punitive to compensatory damages); and Chau v. Starbucks Corp. (174 Cal. App. 4th 688 (2009)) in which the Fourth District Court of Appeal reversed a trial court's ruling that the Starbucks policy of divvying tips among workers was illegal). Discussing these and other topics are panelists Catherine A. Conway and Rex S. Heinke, of Akin Gump Strauss Hauer & Feld in Los Angeles; Jahan C. Sagafi of Lieff, Cabraser, Heimann & Bernstein; Patricia K. Gillette of Orrick, Herrington & Sutcliffe; Anthony J. Oncidi of Proskauer Rose; and Brian T. Ashe of Seyfarth Shaw. California Lawyer moderated the roundtable, which was reported by Krishanna DeRita of Barkely Court Reporters. Moderator: How is the ACC challenge going? Conway: Law firms are really taking it seriously. It's putting guidelines around our relationship with in-house counsel. Everyone sitting around this table produces a high-value work product, but sometimes you don't know if there's something missing. The Challenge allows for important feedback. Gillette: This is just the tip of the iceberg of what will be a major sea change in the way that we practice law. Clients are speaking with a unified voice about the changes they want to see from their lawyers. Instead of being inwardly focused as law firms have traditionally been, we will now have to be focused on what our clients want. The ACC Value Challenge will result in different work structures, different fee arrangements, more partnering - true partnering of law firms with clients so that the interests are aligned. Oncidi: It represents an essential and much-needed dialogue between law firms and in-house counsel on the most efficient and effective ways for firms to increase the value of the services they are providing. Law firms can't shy away from these issues. In the end, it's about cost predictability and value. The best way a firm can provide that is through partnerships with clients in which they produce results but also remain flexible so they can identify ways of providing the best service within a cost structure that works for everyone. Ashe: The idea that the Value Challenge is a reaction to the economy is wrong. The key is ongoing communication and the idea of transparent partnership between the inside counsel and the law firm. For the initiative to succeed, that communication should relate to listening to how the client defines value so the law firm's and the client's goals are aligned from the get-go. Conway: The economy has some impact. Clients are taking strong looks at what they are paying for their attorneys. But I don't know if it's a sea change - partnering with clients and alternative fee arrangements have been discussed and implemented for over 15 years. So now it has more form around it, which is great. Gillette: It's a sea change in that you can't just have an alternative fee arrangement. If you change the way you bill clients to an alternative fee arrangement like a flat fee, you also have to change the way you measure performance for associates, the way you compensate your associates, the way you think about the partnership. In short, the entire structure of the traditional law firm must change. Moderator: Are we seeing more discrimination class actions under the Obama administration? Gillette: The Equal Employment Opportunity Commission (EEOC) has been much more active recently than it has been in the past. As a result, we are beginning to see more activity in the traditional equal-employment opportunity (EEO) arena. I believe EEO class actions will be a focus of the Obama administration. Unconscious bias claims - based on gender and ethnicity - will also be more prevalent. And, as baby boomers are leaving the work force, you are going to see more age discrimination claims. Sagafi: After a 2006?2008 budget and hiring freeze, the EEOC's efforts have had new life breathed into them by the Obama administration, with several five percent budget increases, resulting in many new hires. The EEOC's Systematic Task Force, which has brought about a dozen cases a year since its inception in 2005, is poised to become even more active. Oncidi: With three out of five positions vacant at the EEOC and an open general counsel spot, I think it's still a bit early to know exactly what to expect. But given the Americans with Disabilities Act Amendments Act of 2008 (Pub. L. 110-325), the Genetic Information Nondiscrimination Act (Pub. L. 110-223), the Lilly Ledbetter Fair Pay Act (Pub. L. 111-2) and, if it passes, the Paycheck Fairness Act (H.R. 12), as well as a number of other proposed laws, employers are in for a radically changed landscape at the federal level. And that is to say nothing of what the Office of Federal Contract Compliance Programs has in store for federal contractors. In short, for better or worse, we're witnessing the "California-zation" of the rest of the country. Ashe: For a period of time well before the Obama administration came into office, there has been a growing trend of discrimination-based class actions. Independent-contractor cases and benefits cases are certainly growing class cases too. So while the Obama administration's aiding the growth by its rhetoric and policies, the private-practice sector has been focused on it for the past several years after the low-hanging fruit of easier wage-and-hour cases has been eaten up. It seems to me it's something that was here well before Obama took office. Sagafi: Individual employees confront discrimination every day, and while the most egregiously explicit discrimination was more common in past decades, discrimination continues in subtler forms. One such form is unconscious bias, which is allowed to flourish through subjective decision-making processes in hiring, promotions, compensation, and other decisions. Courts have been increasingly accepting of the validity of psychological research showing how subjective processes can allow unconscious bias to have its nefarious impact, which is critical because much discrimination these days happens that way. Conway: It will continue to be a more difficult case to be made because oftentimes you don't have an overt act and you were relying on statistics or relying on unsaid circumstances. It's a much harder case for the plaintiff to win. Gillette: Two things are at play here. One is the plaintiffs bar has gotten used to the low-hanging fruit, and number two, some law firms have not maintained the kind of expertise that they need for pattern-and-practice cases and EEO class actions. These are much harder cases in which to develop the kind of expertise you need to competently litigate them. A major area of class litigation, if the legislation passes, will arise from the Fair Pay Act and the Paycheck Fairness Act. Those laws actually provide for class actions. Given the focus on data showing, for example, that women continue to earn less than men, I believe we are going to see a lot more activity in this area. Heinke: It depends on the area. Some areas like age discrimination are likely to see a very large increase in litigation just because the population is aging. In some other areas, racial discrimination, for example, you are still going see individual cases. I don't think you are very likely to see massive class actions like we saw after the passage of Title VII, where there was a huge wave of filings. A lot of this depends on which discrete areas you are looking at, as to whether or not you are talking about individual cases or class actions. Oncidi: I think it will be very interesting to see what happens in the Reid v. Google case, which is still pending before the California Supreme Court (S158965, hearing granted Jan. 30, 2008). There, the plaintiff used regression analysis to show a negative correlation between the employee's age and performance ratings. They used expert analysis to defeat summary judgment. That's something you don't see every day. Ashe: You will see geography play a role in the growth of class litigation with less collective action in certain conservative, right-to-work states and more cases in what are often considered liberal forums through the plaintiffs bar forum shopping. Sagafi: Some parts of the country are much more hostile to employee rights and discrimination claims than others. So plaintiffs have to be very careful about where they are willing to invest the massive amounts of time and money required by employee rights cases. A viable case may be much more successful in one jurisdiction than another. Moderator: What are the expected ramifications of Chau v. Starbucks Corp.? Heinke: The enthusiasm for tip cases may decline some as a result. But the more difficult problem here is that the tip statutes were written by people who probably had one view of tipping-the context of the waiter or waitress, and busboys. These laws were written years ago before operations like Starbucks came along with a team approach. We've got a set of laws that don't reflect the current economy and that don't fit too well with unique industry practices, whether it's in casinos or the retail industry. Oncidi: So many of these laws - particularly in the wage-and-hour area - are terribly outdated. They were designed to regulate very hierarchical, blue-collar workplaces that no longer exist in the numbers they once did. A legislative and regulatory overhaul is long overdue. I was encouraged, however, to see the Ninth Circuit's recent opinion in Cumbie v. Woody Woo, (2010 WL 610603 (9th Cir. 2010)), finding no employer liability for tip-pooling under the Fair Labor Standards Act (FLSA, 29 U.S.C. §§ 201-219). Sagafi: The law was written under certain historical circumstances, but its application shouldn't be limited to those circumstances. The court clearly stated that the statute's purpose is to protect money that is being earned by employees, and we must heed the wishes of the tipper. It does present interesting factual questions about who tippers intend to reach in the chain of service. Heinke: The courts are going to be inclined to allow the practices that have arisen in the different industries to continue, whether they're casinos or banquets. For banquets, everybody who works on the banquet shares in a tip pool for the entire banquet. The courts are going to be reluctant to step into each industry and say, "We know better than you do how to allocate these monies." Sagafi: It's a delicate business. Individual perception alone cannot drive the determination of the boundaries of one's rights. We see that all the time in other types of employment litigation, such as misclassification cases. An employee may heartily believe that she is an exempt employee, but the law may require that she be paid overtime, making her understanding irrelevant. Gillette: I am interested in what you think might be a solution legislatively to this. I just don't see the courts really wanting to get involved in saying, "Gee. What does Olive Garden do," versus Denny's versus some other chain restaurant on this issue. Ashe: I don't see judges going too deep into an inquiry into how a restaurant chooses to function. There will be a distinction between a fast-food, over-the-counter tip pooling case, versus a more traditional restaurant. I don't expect them to go much deeper than just looking at it as a restaurant, and drawing a fairly clear line in the sand, which is how it's been for decades. Heinke: In the end, the primary criterion that any court is going to use is to look at what was the point of these laws. Everybody agrees that the point was so that the people who ran the business, whatever that business was, couldn't go to their employees and say, "Oh, by the way, give me a portion of the tips the customers are leaving for you." Ashe: So you transcend these issues of title. If we are left to consider the intent of the tip, then I'm interested in whether it's the customer's intent, the employer's intent, or the employee's intent. I don't think that's terribly developed in the case law. It invites muddy water. Conway: Ultimately the customer intent was not necessary for the resolution of Chau. The court focused on the fact that the part-time hourly team provided the customer service. Ultimately Starbucks' method of distributing the tips was the most fair and equitable method. Moderator: What's going on there in the wage-and-hour world of misclassification suits? Sagafi: There has already been significant litigation to recover overtime pay for misclassified "managers" who aren't really managers. Insurance claims adjustors have gotten overtime, including in Bell v. Farmers (see 137 Ca. App. 4th 835 (2006)). More recently, we have represented thousands of technical support workers at companies like IBM, Wells Fargo, Chase, and AT&T. It's a very interesting, dynamic area of the law because it's so complicated. The administrative exemption analysis is not easy. That often makes individual cases too costly and risky to pursue, so the class or collective action is often the most efficient, effective way to vindicate those claims. Gillette: It has become a bit of the game with the plaintiffs bar bringing a lot of these class actions, some of which have merit, some of which don't, all of which seem to end up being settled. You are seeing more energy on the side of the defense bar and more commitment on the part of the employers to say, "We are not going to roll over and pay money any more. We are actually going to litigate these cases and force people to prove their claims." These cases are more often going to class-certification motions, and we are winning them because the claims never should have been brought as class actions. Sagafi: Plaintiffs attorneys fees are proportional to the benefit to the class members and society, so it makes sense for us to litigate a thousand people's claims on a class-wide basis rather than one by one, even if the class case requires ten times the effort. Obviously there are a variety of cases and attorney skill levels. Case selection is critical, so you have to be very thorough in your investigation. Then you have to know the law, and you have to surmount many hurdles to be able to recover. Ashe: I have not seen a diminution of interest in the plaintiffs bar at large in bringing lousy class cases. We still get a flood of pretty weak management exempt/nonexempt cases. I can name a half dozen law firms that would take an out-of-state paycheck case because they know it has got some manner of value to them - even though it's the simplest thing in the world to cure and should not be worth litigating in a practical world. Oncidi: Of course, all eyes remain on the California Supreme Court as it deliberates in the Brinker Restaurant v. Superior Court case (S166350, hearing granted Oct. 22, 2008) about whether an employer is obligated merely to "provide" meal periods and rest breaks or whether it must in fact "ensure" that such breaks are taken. Meal-and-rest-break litigation has been one of the great engines driving this class action boom in California, and if the Supreme Court adopts the more sensible "provide" standard used by the lower court in Brinker, it will be much more difficult for plaintiffs to get these cases certified. Sagafi: The other perspective, of course, is that many companies have failed to follow the law, and need to be brought into compliance. For example, the exemptions have often been expansively interpreted, and courts are starting to push back on that, because the instruction from the FLSA and California law is to narrowly construe these exemptions. Employees are waking up to the fact that they have these rights that they didn't always appreciate before. Moderator: Let's talk about 14 Penn Plaza LLC v. Pyett. Have you seen any impact from this case? Sagafi: Justice Thomas's opinion in this 5?4 decision stakes out an aggressively conservative position. When you have employees' right to a jury trial being bargained away without the opportunity to appreciate what it is that they are losing, you can find substantive rights abridged or even, as a practical matter, eliminated. The proposed Arbitration Fairness Act may fix this problem. Gillette: What's amazing to me is that the employers run to arbitration for cover. In court, you have so many more protections than you have in arbitration. I would always rather be in court rather than in front of an arbitrator. In court, I've got motions, the rules of evidence, and the right to appeal. So I don't think it's a bad thing that we aren't allowed to arbitrate everything. Oncidi: In the year since the Supreme Court decided this case in our client's favor, we have had numerous inquiries from employers all over the country about how best to modify and improve their arbitration policies and programs. So, there is a lot of interest in this case in the employer community - almost as much interest as there is among certain members of Congress who are determined to overrule it legislatively. That said, I tend to agree with Pat [Gillette]. At least in California, arbitration is slower, more expensive and less predictable than a typical court proceeding. Conway: Over the years, there are circumstances where arbitration works. But largely, I would rather be in court where summary judgment is available. Ashe: I don't think that there is an easy answer to the question of "Is it better to be an arbitrating employer or a litigating employer?" It's important to pull data to see who has been hit by juries, and how often you get claims. Also, what is your management philosophy, both in terms of risk tolerance and in terms of providing a voice to the employee? Arbitrators are sophisticated and are known at times to issue summary judgment. But, because the rules and incentives are different, there is fundamentally a greater likelihood that you will have a hearing and an actual decision. My tendency is to vote against arbitration agreements, but one shouldn't have a hardened predisposition either. Gillette: On the other hand, there are situations, such as with broker/dealers, where you want people who know the industry and understand the compensation systems. Having that knowledge can be extremely valuable. So there are certain situations where arbitration is more appropriate and advantageous. Heinke: People's attitude about arbitration is a direct function of whether they won or lost. When people lose, they want to appeal. Of course if you are under the Federal Arbitration Act, the grounds on which you can overturn an arbitration award are extraordinarily narrow. Clients are used to thinking, if I don't win, I can appeal. You think you can, but the grounds are going to be so narrow. A lot of people have become a lot less enthusiastic about arbitration because it has been moving towards a process that is not as quick and not as cheap. That used to be the main selling point. Arbitration hasn't quite panned out to be the panacea that everybody had hoped it would be. Gillette: As courts are mandating mediation more often right at the beginning of cases, is the old idea of having employers require mediation before an employee can bring a claim worth supporting again? Here is why I raise that: Now that courts are mandating mediation early on in the litigation, it seems like lawsuits get filed, you go to mediation within the first six months of the case and the case goes away. But of course, the settlement demand from the plaintiff is increased because attorneys fees have been incurred. Sagafi: Early neutral evaluation and mediation are wonderful tools for efficient resolution of claims, and judges are right to encourage them. But if you're suggesting a required administrative procedure that must be exhausted before an individual can invoke her rights, then that's a problem. Individual and class plaintiffs often try to get the defendant's attention informally, but conclude they can't get justice without going through formal litigation. Ashe: One could never overestimate the cathartic value to the plaintiff of getting it off his or her chest. That value militates strongly towards doing something early in the case. Another thing that we've done is hire a mutual third party, not a mediator. Somebody to come in and call balls and strikes prior to litigation and be the judge based on his or her own investigation. Heinke: When you say investigation, do they actually read documents, interview witnesses? Ashe: You allow them to turn over any rock that they want, look in any closet, talk to as many people at any level of the organization that they want and draw their own conclusions. This requires a great deal of trust and is not for every case. Also, it works better in my estimation in individual cases than it does in class cases. I've tried early mediation in class cases unsuccessfully. Primarily because there's so much trench warfare in divulging information that it becomes very difficult to have that level of trust that is essential to early mediation. Sagafi: I agree that trust is crucial, and that your approach might be tougher with a class complaint, because the defendant can be quite resistant to discussing a class-wide problem. Once it does, what's the scope of the class? That can be a real obstacle. Conway: It depends on the class and the circumstances. There are class cases prior to doing any discovery that can be settled. And it depends on the sophistication of the client, the sophistication of the plaintiffs lawyer and obviously trying to avoid the massive attorneys fees in some circumstances where there is potential exposure. There has to be trust and a willingness to address the problem. Moderator: What are some recent developments in damages analysis, such as the fluctuating-workweek (FWW) method in FLSA cases? Sagafi: The FWW approach has been used to calculate overtime damages outside California for years, without plaintiffs attorneys pushing back much. It turns out the regulation imposes very particular requirements that defendants often can't meet. This is important, because the FWW method results in much lower damages calculations than the California, or "statutory" method. So this is applicable only to claims outside of California. In Russell v. Wells Fargo (2009 WL 3861764 (N.D. Cal.)), the court held the FWW method inapplicable to misclassification cases. Conway: Do you think you had an advantage because you had a California judge deciding this case? Because I guarantee you if it was a Florida judge, where the fluctuating workweek is allowed, there may have been a different result. Sagafi: We were fortunate to have a judge who took the time to delve very carefully into the issue - more than most courts to have addressed it. I hope to see more litigation of the issue, because it's hugely important to our clients, and we have the better argument. Ashe: Case law seems to be a mixed bag in the FLSA context. There's a recent opinion letter written by Alex Passantino, former Deputy and Acting Administrator of the U.S. Department of Labor (DOL), Wage and Hour Division, where he says, for the DOL purposes, they do use a fluctuating workweek. Employees who are paid a salary week after week and year after year are accepting the agreement that their salary is designed to cover them for all of the hours worked. If employees were misclassified, the only liability would be for that portion of the overtime pay that would be the penalty for overtime, or half-time pay. That's the stated position of the DOL in these types of cases. They've published an opinion letter to that effect. Sagafi: That's the January 14, 2009 opinion letter from the waning hours of the Bush Administration, which glosses over key requirements set forth in the regulation. Ashe: Yes, that's one case in California. There are cases all over the country with different results. In California, this issue is not so pertinent to us because the fluctuating workweek does not exist in California state law. Moderator: By blurring the line between the evidence plaintiffs can introduce in support of a discrimination claim, compared to that for harassment, did Roby v. McKesson it make it more challenging to defend against harassment claims? Gillette: I don't think Roby changed much from a defense perspective in terms of defending harassment claims. Instead, the interesting part of the case is the punitive damage part. It emphasizes that there has to be some relation to the actual damages. That is a powerful tool to use in responding to multimillion-dollar demands by plaintiffs lawyers. Roby has actually put some definition around how much plaintiffs can expect in punitive damages and that takes the wild speculation piece out of the equation for settlement. Conway: I've already seen judges react to it very favorably in reference to looking at the relationship to damages. So mediators certainly are more than happy to use it in settlements. Sagafi: It's important to keep in mind the purpose of punitive damages, which is to deter wrongful conduct. Courts, like juries, require flexibility to achieve that. The Roby court carefully applied the State Farm guideposts and explicitly limited its one-to-one ratio to the facts. I would be surprised to see a court going so far as to mandate particular ratios or mandate even an upper-end ratio, which the U.S. Supreme Court itself hasn't even done. Oncidi: I think it has the potential to create a lot of jury confusion and that it will definitely be a challenge to come up with appropriate jury instructions - now, as a result of Roby, a supervisor's "official employment actions" can be cited by the plaintiff as evidence of harassment. How do you figure out whether an "official employment action" is merely that - as opposed to some covert form of harassment? Ashe: The case will be an effective tool, either for negotiating with plaintiffs counsel in settlement efforts or for a judge saying, "At least I've got some avenue to proceed with some degree of reliability; I know what excessive means when I see it." Oncidi: I really like the state Supreme Court's recent opinion in Chavez v. City of Los Angeles (47 Cal. 4th 970 (2010)) in which they denied an $871,000 attorneys fee application to an employee who recovered only $11,500 at trial. Maybe, as a result of this case, there will be less of the tail wagging the dog when it comes to the attorneys fees issue. Gillette: We've also been bringing more motions for summary judgment on punitive damages because in most cases it's an uphill battle for plaintiffs to establish that a managing agent was involved in the decision. We are seeing some success on these motions. Conway: We are too. That changes the whole dynamic of the case once you win that.