9th Cir.: Court Abused Its Discretion In Finding Predominance Requirement Satisfied, Based-In Large Part-On Employer’s Internal Policy Of Treating Its Employees As Exempt From Overtime

In re Wells Fargo Home Mortg. Overtime Pay Litigation

The case was before the Court on Defendant’s interlocutory appeal, challenging the reasoning of the lower Court in granting class certification on Plaintiff’s California state law claims. The dispute centered around whether the lower court abused its discretion in finding that the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) was satisfied, based-in large part-on an employer’s internal policy of treating its employees as exempt from overtime laws. The Ninth Circuit, remanded for further factual findings, holding that while such uniform exemption policies are relevant to the Rule 23(b)(3) analysis, it is an abuse of discretion to rely on such policies to the near exclusion of other relevant factors touching on predominance.

Analyzing the issue, the Court stated, “[u]nder Rule 23(b)(3), a class may be certified where “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”Fed.R.Civ.P. 23(b)(3). The predominance inquiry of Rule 23(b)(3) asks “whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” Local Joint Executive Bd. of Culinary/Bartender Trust Fund v. Las Vegas Sands, Inc., 244 F.3d 1152, 1162 (9th Cir.2001) (citation and internal quotation marks omitted). The focus is on “the relationship between the common and individual issues.” Hanlon v. Chrysler Corp., 150 F.3d 1011, 1022 (9th Cir.1998).

The question here is whether the district court abused its discretion in finding Rule 23(b)(3)‘s predominance requirement was met based on Wells Fargo’s internal policy of treating all HMCs as exempt from state and federal overtime laws. To succeed under the abuse of discretion standard, Wells Fargo must demonstrate that the district court either (a) should not have relied on its exemption policy at all or (b) made a clear error of judgment in placing too much weight on that single factor vis-a-vis the individual issues.

The first line of attack, that Wells Fargo’s exemption policy was an impermissible factor, is a non-starter. An internal policy that treats all employees alike for exemption purposes suggests that the employer believes some degree of homogeneity exists among the employees. This undercuts later arguments that the employees are too diverse for uniform treatment. Therefore, an exemption policy is a permissible factor for consideration under Rule 23(b)(3).

Wells Fargo’s arguments are better construed as a challenge to the weight accorded to the internal exemption policies under the third abuse of discretion prong: mulling the proper factors but committing clear error in weighing them. To analyze this question, we first ask how much weight the district court gave to the exemption policy. Plaintiffs suggest the weight was minimal; Wells Fargo claims that the district court’s reliance was tantamount to estoppel.

A review of the California certification order lends substantial credence to Wells Fargo’s position. Although the court’s analysis of each exemption was careful and considered, its ultimate decision was clearly driven by Wells Fargo’s uniform exemption policy. Indeed, the court found “serious issues regarding individual variations among HMC job duties and experiences” but nevertheless concluded that common questions predominated because “it is manifestly disingenuous for a company to treat a class of employees as a homogenous group for the purposes of internal policies and compensation, and then assert that the same group is too diverse for class treatment in overtime litigation.”E.R. 17. As such, we must conclude that the district court’s reliance on Wells Fargo’s internal exemption policy was substantial.

This leads to the central question: whether such heavy reliance constituted a clear error of judgment in assaying the predominance factors. District courts within this circuit have split on the relevance of exemption policies. The district court relied primarily on Wang v. Chinese Daily News, Inc., 231 F.R.D. 602, 612-13 (C.D.Cal.2005), which found predominance of common issues based on an employer’s policy of treating all employees in a certain position as uniformly exempt from overtime compensation requirements. In contrast, another district court has expressed doubt about Wang, and found that uniform exemption policies are merely a minor factor in the predominance analysis. See Campbell v. PricewaterhouseCoopers, LLP, 253 F.R.D. 586, 603-04 (E.D.Cal.2008) (rejecting “estoppel” position of Wang ).

In determining which rule is appropriate, we begin by examining Rule 23 itself. A principal purpose behind Rule 23 class actions is to promote “efficiency and economy of litigation.” Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 553 (1974). In particular, Rule 23(b)(3)‘s predominance and superiority requirements were added “to cover cases’in which a class action would achieve economies of time, effort, and expense, and promote … uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results.’” Anchem Prods., Inc. v. Windsor, 521 U.S. 591, 615 (1997) (quoting Fed.R.Civ.P. 23(b)(3) Adv. Comm. Notes to 1966 Amendment). Thus, the ” ‘notion that the adjudication of common issues will help achieve judicial economy’ ” is an integral part of the predominance test. Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1189 (9th Cir.2001) (quoting Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir.1996)). Whether judicial economy will be served in a particular case turns on close scrutiny of “the relationship between the common and individual issues.” Hanlon, 150 F.3d at 1022.

Viewed in light of these principles, the rule espoused in Wang has little justification. Wang essentially creates a presumption that class certification is proper when an employer’s internal exemption policies are applied uniformly to the employees. Such an approach, however, disregards the existence of other potential individual issues that may make class treatment difficult if not impossible. Indeed, this case is a prime example, as the district court identified “serious issues regarding individual variations” that were not susceptible to common proof, but nevertheless felt compelled to certify the class.

Of course, uniform corporate policies will often bear heavily on questions of predominance and superiority. Indeed, courts have long found that comprehensive uniform policies detailing the job duties and responsibilities of employees carry great weight for certification purposes. Damassia v. Duane Reade, Inc., 250 F.R.D. 152, 160 (S.D.N.Y.2008) (“Where … there is evidence that the duties of the job are largely defined by comprehensive corporate procedures and policies, district courts have routinely certified classes of employees challenging their classification as exempt, despite arguments about ‘individualized’ differences in job responsibilities.”). Such centralized rules, to the extent they reflect the realities of the workplace, suggest a uniformity among employees that is susceptible to common proof.

But Wells Fargo’s blanket application of exemption status, whether right or wrong, is not such a rule. In contrast to centralized work policies, the blanket exemption policy does nothing to facilitate common proof on the otherwise individualized issues.

To illustrate, consider the federal outside salesperson exemption. This exemption applies where, among other things, the employee is “customarily and regularly away from the employer’s place of … business….”29 C.F.R. § 541.500(a). Often, this exemption will militate against certification because, as the district court noted, it requires “a fact-intensive inquiry into each potential plaintiff’s employment situation….” E.R. 11. A centralized policy requiring employees to be at their desks for 80% of their workday would change this individual issue into a common one. Therefore, such a corporate policy would be highly relevant to the predominance analysis. A uniform exemption policy, however, has no such transformative power. Whether such a policy is in place or not, courts must still ask where the individual employees actually spent their time. As one court succinctly explained, “[t]he fact that an employer classifies all or most of a particular class of employees as exempt does not eliminate the need to make a factual determination as to whether class members are actually performing similar duties.” Campbell, 253 F.R.D. at 603.

In short, Wells Fargo’s uniform exemption policy says little about the main concern in the predominance inquiry: the balance between individual and common issues. As such, we hold that the district court abused its discretion in relying on that policy to the near exclusion of other factors relevant to the predominance inquiry.”

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