June 10, 2014

Duran Is a Sleeping Giant on the Future of Due Process Issues in Trial Management in California

The bifurcation of trials and the use of statistical sampling to evaluate liability and damages is also included.
Stacey H. Wang

Not only is Duran v. U.S. Bank Nat'l Assoc., -- P.3d -- 2014, 2014 WL 2219042 (Cal. May 29, 2014) "an exceedingly rare beast" (id. at *1) as a wage and hour misclassification class action that proceeded through trial to verdict, but it is also very rare for a high court to find that a bifurcated trial plan violated due process.1 As the California Supreme Court noted, Duran "highlights difficult questions about how individual issues can be successfully managed in a complex class action." Id. at *10. The tensions between promoting innovative techniques in trial management versus due process rights; the need for plaintiffs to prove predominance of common issues in class actions versus the defendant’s right to litigate affirmative defenses; and the “rigor” required of trial courts in examining the use of statistics as a means of common proof while managing individual issues, were all discussed but not resolved by the California Supreme Court in Duran.  Instead, the broad conceptual instructions in Duran are only the starting point upon which the contours of due process will be tested and shaped in future complex tort and class action litigation. 

Background in Duran: The trial court certified a class and devised its own trial management plan, rejecting both parties' competing proposals and competing experts

The substantive legal issue in Duran was whether the plaintiffs, business banking officers  employed by defendant U.S. Bank National Association (USB), were misclassified as exempt employees such that USB owed overtime pay. Under Labor Code Section 1771, the exemption from overtime pay applies to employees who spend more than 50 percent of the workday engaged in sales activities outside of the office. USB uniformly treated all business banking officers as exempt employees. The trial court certified a class of 260 business banking officer plaintiffs.

Plaintiff's proposed plan

After certification, the parties proposed competing trial management plans, each supported by competing expert testimony. The plaintiffs proposed the use of surveys and random sampling in which "the parties would identify all tasks performed" and "classify which were sales-related." Id. at *2. The amount of time class members "typically spent" on activities outside of the office would be assessed through a survey. Then, the experts would design a random sample of surveyed class members to proceed through discovery and a liability phase trial, followed by a damages trial to determine aggregate classwide damages. After the damages trial, the parties would agree on a claims procedure to distribute damages to individual class members. Id. USB opposed plaintiffs' plan on the basis that the survey would not yield a truly representative sample due to selection bias, i.e., those who were properly classified as exempt would have no interest in participating in the trial or the survey. Id. at **2-3.

Defendant's proposed plan

USB proposed to divide the class into 20 or 30 groups and have special masters conduct individual evidentiary hearings on liability and damages. Plaintiffs opposed USB's plan on the basis that USB did not have a due process right to assert its affirmative defenses against each individual class member. Id. at *2.

The trial court's plan

The trial court rejected both plans and devised its own plan, under which twenty class member names would be drawn out of "the proverbial hat" by the court clerk, in addition to the two named plaintiffs, to form a "representative witness group." Id. at *3. The court then conducted a two-phase trial. In phase one, only those from the representative witness group would testify. In phase two, the parties would present statistical evidence to extrapolate the phase one evidence to the entire class. Id. After the group was selected, the trial court allowed certain representative witnesses to opt out.

On appeal, the Court of Appeal found that USB's due process rights were violated by the trial court's sampling and bifurcation plan, and decertified the class. The Court of Appeal held that the trial plan's reliance on representative sampling denied USB its due process right to litigate affirmative defenses. Id. at *9. 

The California Supreme Court affirms the Court of Appeal's due process decision and remands class certification to the trial court

The California Supreme Court affirmed the Court of Appeal's judgment that the trial plan violated USB's due process rights, and remanded the case to the trial court for a new trial on both liability and restitution, with instructions that it may entertain a new class certification motion. Id. at *29.

The Court's critique of the trial plan

The Court criticized the trial court for ignoring the individual issues instead of managing them. Id. at *16.  In doing so, the trial court sacrificed substantive law for procedure and deprived the defense its due process right to litigate relevant defenses. The court's plan failed to properly follow basic statistics concepts such as using a sufficient sample size to account for variability and avoiding selection bias in the sample selection process. The 43.3% margin of error on the findings was intolerably high.  Id. at **22-26.  Moreover, the trial court's bifurcation of the trial improperly reframed the individual questions going to the "fact of liability" as questions about the "extent of liability," which avoided allowing USB to present the individual issues during the liability trial.  Id. at **19, 21.

The Court instructed that the trial court has an "obligation to consider the manageability of individual issues in certifying a class action." Id. *10."In particular…a class action trial management plan must permit the litigation of relevant affirmative defenses, even when these defenses turn on individual questions." Id.2 

The trial court's obligations at the class certification stage

Importantly, the Court emphasized that "at the certification stage," the trial court should consider "whether a trial plan has been developed to address [the] use [of statistical evidence]." Id. at *15 (emphasis in original). "Rather than accepting assurances that a statistical plan will eventually be developed, trial courts would be well advised to obtain such a plan before deciding to certify a class action." Id. "In the misclassification context, as in other types of cases, trial courts deciding whether to certify a class must consider not just whether common questions exist, but also whether it will be feasible to try the case as a class action." Id. at *11. "Class certification is appropriate only if these individual questions can be managed with an appropriate trial plan." Id. "If the court makes a reasoned, informed decision about manageability at the certification stage, the litigants can plan accordingly and the court will have less need to intervene later to control the proceedings." Id. at *13 (emphasis added).

Justice Liu's separate concurring opinion outlines guidance to trial courts trying to be "procedurally innovative" in managing class actions: the "threshold" task for the trial court is to determine whether the substantive law is amenable to class treatment.  Id. at *29. The trial court must also find that the individual issues, including the defendant's affirmative defenses, "can be managed fairly and efficiently." Id. at *12, 33.  He explained that there are two ways that a trial court should consider individual issues: (1) individual issues should inform the design of the sampling plan and (2) even where a plan has been settled on, "the defendant is entitled to raise individual issues that challenge the result of the plan as implemented." Id. at *34. Procedurally, he suggested that the trial court has an "obligation" to consider innovative tools "proposed by a party to certify a manageable class," but that such tools must permit a defendant "to present their opposition, and to raise certain affirmative defenses," using devices such as bifurcation, subclasses, questionnaires, and individualized hearings. Id. at *35.

Limitations on the design of a sampling plan

While the use of statistics and sampling is still available as a method in class actions to obtain relevant evidence, the California Supreme Court placed significant limitations on its design. 

  • Statistical evidence is not proof of predominance of common questions, it should be used to demonstrate how individual issues may be managed: The plan cannot "entirely substitute" statistical methods for common proof and may not use statistical sampling "to manufacture predominate common issues where the factual record indicates none exist." Id. at *15. "There must be some glue that binds class members together apart from statistical evidence." Id. This means that a statistical sampling plan does not, in an of itself, satisfy the predominance requirement; the trial court must still require that the plaintiffs prove the class action element that common questions of fact and law predominate over individual issues. The sampling plan is only used to "manage individual issues" after it is found that sufficient common questions exist to support class certification. Id.
  • Management of the individual issues, including defendant's relevant affirmative defenses, must be "baked into" the plan: Statistical proof cannot be used to bar the presentation of valid defenses to either liability or damages, even if it means that the defense has to be adjudicated on an individual level.  Id. at *28. However, the Court also observed that no case has found a due process right for a defendant to litigate its affirmative defense against each individual class member; rather, the defendant must have an "opportunity to present proof of affirmative defenses within whatever method the court and parties fashion to try these issues." Id. at **20, 28.   
  • The plan must be statistically sound and the margin of error acceptableThe Court faulted the Duran trial court's plan for violating Statistics 101: having too small of a sample size, failing to account for selection bias, and for an extremely high margin of error. Specifically, the Court questioned whether a margin of error approaching 50% can ever be reliable for use in litigation. Id. at *26.   

Potential implications:

  • Duran is only the beginning of what will likely be a lengthy judicial discussion on the boundaries of due process in complex case management, both in and outside the class context.  
  • Plaintiffs in complex class cases will no doubt creatively apply statistical and sampling techniques in an effort to convince the trial court to certify a class.  Duran obligates the trial court to take into account a defendant's affirmative defenses and due process rights, and once common issues have been tried, a defendant must still have the "opportunity to contest each individual claim on any ground not resolved in the trial of common issues."  Id. at *13. However, Duran leaves the trial court with no further instruction on how to implement these obligations other than to be innovative. Thus, defense counsel will need to actively analyze the due process issues -- to be as resourceful as plaintiffs and courts are innovative -- and be ready to focus expert analysis on the statistical deficiencies and other potential due process pitfalls.
  • The Duran Court cited almost exclusively to state court authorities, which seems to signify a reluctance to follow federal cases on class procedures.  A number of California Court of Appeal cases have instructed that courts may look to federal authority on class procedure matters.  See, e.g. Cellphone Termination Fee Cases, 186 Cal.App.4th 1380, 1392, fn.18 (2010). With the U.S. Supreme Court's decision last year in Comcast Corp. v. Behrend (2013) -- U.S. -- , 133 S.Ct.1426, 1435 (2013) now requiring putative class plaintiffs to propose a damages methodology at the class certification stage in federal court as part of demonstrating the "predominance" requirement in Rule 23(b)(3) of the Federal Rule of Civil Procedure, it seems Duran presented a timely opportunity for the California Supreme Court to explicitly approve the reasoning in Comcast for state cases.  However, the Court seems to be approaching this area with a delicate hand.  Duran instructs that trial courts "should" consider at the certification stage the use of sampling to manage individual issues.  Duran, 2014 WL 2219042 at *15. The Court also instructed that "[c]lass certification is appropriate only if these individual questions can be managed with an appropriate trial plan" and that the court must make a "reasoned, informed decision" about manageability "at the certification stage." Id. at **11, 13.  
  • Based on this, Duran may end up indirectly and independently requiring trial courts to do effectively what Comcast expressly requires of class plaintiffs in federal district courts. That is, a trial court must implement the "sufficient rigor" and reach the "reasoned" and "informed" decision at the class certification stage. While Duran could have been more forceful, logic compels that a trial court cannot truly satisfy itself that individual issues may be effectively managed unless the plaintiffs present a methodology at class certification for the trial court to evaluate.  Delaying these decisions beyond class certification only means that the trial court may be faced with a decertification motion once the plan is finally unveiled. Thus, from a case management standpoint, it makes practical sense to have these issues determined at the class certification stage rather than to split into three proceedings (i.e., certification, trial plan, decertification) what should be a single inquiry. 

1 Few high courts have addressed this issue.  See, e.g., State of West Virginia ex rel. J.C. v. Mazzone, No. 14-0207, 2014 WL 2440032 (W. Va. May 27, 2014) (finding a violation of due process in the Mass Litigation Panel's interpretation of an administrative rule to substantively divide mass litigation panel cases into 25 civil actions); In re Flood Litigation Coal River Watershed,  222 W. Va. 574, 585-86 (2008) (reversing appellate court's finding that trial management plan in mass tort case violated due process: "A creative, innovative trial management plan developed by a trial court which is designed to achieve an orderly, reasonably swift and efficient disposition of mass liability cases will be approved so long as the plan does not tress upon the procedural due process rights of the parties.")

2 However, the Court also stated that affirmative defenses does not mean that a defendant has a right to cross-examine each class member; rather, the parties and the court are to engage in a process which provides the defendant with the ability to challenge liability.  Id. *17. 

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