Trial Court Alameda County Superior Court Trial Judge Honorable Robert B. Freedman (Alameda County Super. Ct. No. 2001-035537)
The opinion of the court was delivered by: Dondero, J.
CERTIFIED FOR PUBLICATION
Following a bifurcated bench trial, defendant U.S. Bank National Association (USB) has appealed the resulting $15 million judgment in this wage and hour class action brought under Business and Professions Code section 17200 (section 17200). The plaintiffs in the class action are 260 current and former business banking officers (BBO's) who claimed they were misclassified by USB as outside sales personnel exempt from California's overtime laws, and were thus unlawfully denied overtime pay. In addition to arguing the case should not have been certified as a class action, USB contends the trial court's trial management plan deprived it of its constitutional due process rights in that the plan prevented it from defending against the individual claims for over 90 percent of the class. We agree the trial management plan was fatally flawed and reverse the judgment. We also conclude the case must be decertified, and reverse an order awarding certain expert witness fees to plaintiffs.*fn1 We remand the two named plaintiffs' meal and rest break period violation claims for reconsideration in light of the California Supreme Court's ruling in Brinker Restaurant Corp. v. Superior Court (2008) 165 Cal.App.4th 25, review granted October 22, 2008 (S166350).*fn2
In January 2005, when plaintiffs moved to certify this case as a class action, USB reportedly operated over 130 traditional bank branches in California with approximately 40 persons then currently employed as BBO's. Each BBO was typically assigned to work with one to four bank branches. BBO's report to sales managers who in turn report to regional managers. Regional managers report to a division manager who then reports to the executive vice president.
USB applies a uniform wage exemption to BBO's, categorizing them as exempt outside salespersons to whom USB is not obligated to pay overtime and related wages.*fn3 The outside salesperson exemption is set forth in Labor Code section 1171, which states: "The provisions of this chapter [including Labor Code section 1194][*fn4 ] shall apply to and include men, women and minors employed in any occupation, trade, or industry, whether compensation is measured by time, piece, or otherwise, but shall not include any individual employed as an outside salesman . . . ." California Industrial Wage Commission Wage Order No. 4-2001 (Wage Order No. 4) (codified at Cal. Code Regs., tit. 8, § 11040) defines an "outside salesperson" as a person "who customarily and regularly works more than half the working time away from the employer's place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities."*fn5 (Cal. Code Regs., tit. 8, § 11040, subd. 2(M), italics added.)
The BBO classification was created after USB merged with another bank in 2001, when an existing small business banker (SBB) position was redesignated with the BBO title. A May 1997 job description states that SBB's were responsible for "developing and managing small business banking customer relationships by advising on and selling a wide range of financial services to include: credit, deposit, cash management and other applicable bank products and services." Persons in this classification were also responsible for "growing the business through prospecting, networking, cross-selling and relationship management in order to develop and expand the relations with [USB]." SBB's were encouraged to "build strong customer relationships and analyze data to determine the customer's business needs and financial condition." This job description was essentially retained when the BBO position was created in 2001.*fn6 However, a 2002 job description specifies that more than 80 percent of a BBO's time should be spent on "Outside Sales Activity."*fn7 Of the five functions listed in the job description under this heading, several are required to take place outside branch offices.*fn8
On December 26, 2001, Amina Rafiqzada, acting on behalf of herself and other similarly situated current and former USB employees,filed a class action complaint against USB. The complaint alleges Rafiqzada had been employed as an SBB, and that USB improperly classified her and other SBB's as "exempt" thereby denying them compensation for overtime hours in violation of Labor Code section 1194. The complaint contains three causes of action: (1) violation of the Labor Code for misclassification and failure to pay overtime, (2) violation of Business and Professions Code section 17200, and (3) conversion.
On February 26, 2003, a first amended complaint (FAC) was filed, removing Rafiqzada as the named plaintiff, and substituting Vanessa Haven, Abby Karavani, and Parham Shekarlab as the named plaintiffs. The amended complaint alleges the same causes of action as the prior complaint.
On March 28, 2003, USB filed its answer to the FAC. USB generally denied the allegations of the complaint and asserted 31 affirmative defenses. As its seventh affirmative defense, USB claimed the proposed class members were, at all relevant times, properly classified as exempt employees for overtime purposes under California law.*fn9
II. Contested Class Certification
On January 6, 2005, plaintiffs filed a motion to certify the case as a class action.*fn10 The motion was supported by declarations from 34 current and former BBO's who indicated they regularly worked overtime hours and spent less than half their work time engaged in sales-related activities outside of branch offices.
That same day, USB filed a motion seeking to deny class certification. As part of its motion, USB claimed class certification should be denied because plaintiffs could not establish that common issues predominate. USB also contended the named plaintiffs were not typical of the class because all four of the current and former named plaintiffs had admitted, at depositions or in interviews, facts establishing they were properly classified as exempt employees under the outside salesperson exemption. In its motion, USB included declarations signed by 83 putative class members who described their job duties. Of these declarants, 75 stated they regularly spent more than half their time engaged in sales activities outside USB branch offices.
On March 14, 2005, plaintiffs' counsel filed a second amended complaint (SAC), substituting two new class representatives, Sam Duran and Matt Fitzsimmons, in place of the previously named plaintiffs. The SAC contains the same causes of action as the prior complaints, and adds new allegations asserting Labor Code violations for failure to provide meal and rest break periods. (See Lab. Code, § 226.7.)
On March 16, 2005, the trial court granted plaintiffs' motion for class certification and denied USB's motion to deny class certification.*fn11
On April 29, 2005, the trial court filed an amended and corrected order after hearing regarding its certification rulings. The order defines the class as " 'all current and former California-based salaried employees with the title "small-business banker" (SBB's) and/or "business banking officers" (BBO's) employed by defendant any time between December 26, 1997 and April 28, 2005.' "*fn12 The order states the court found the proposed class to be both ascertainable and numerous, and that common questions of law and fact predominated over individual legal or factual disputes.*fn13
III. Summary Adjudication of Two Exemption Affirmative Defenses
On September 30, 2005, plaintiffs filed a motion for summary adjudication on USB's affirmative defenses that the BBO's were exempt from overtime laws under the administrative and the commissioned salesperson exemptions.*fn14
On February 17, 2006, the trial court filed its order granting plaintiffs' motion for summary adjudication as to the commissioned salesperson exemption. The court deferred ruling on the administrative exemption to allow USB an opportunity to conduct a limited amount of discovery relevant to its opposition.
On May 23, 2006, the trial court granted plaintiffs' motion for summary adjudication as to the administrative exemption, finding the evidence showed the performance of administratively exempt duties was atypical for BBO's.
A. The Trial Management Plan Is Selected
On June 22, 2006, plaintiffs submitted a trial setting conference brief. In response to USB's pretrial proposal to assign all class members to groups of 20 to 30 in order to conduct individualized evidentiary hearings before special masters, plaintiffs, citing to Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 337 [17 Cal.Rptr.3d 906, 96 P.3d 194] (Sav-On), asserted that USB "has no due process right to assert its affirmative defense against every class member in a class action."*fn15 Instead, plaintiffs proposed a "phased trial plan using surveys and random sampling."
Under plaintiffs' plan, the trial would have proceeded in three phases: (1) Task identification and classification, (2) use of a class-wide survey followed by the selection of a random sample of plaintiffs who would be made the subjects of the trial, and (3) damages. The survey instrument would "question the class members about the amount of time class members spent out of the branch and the amount of time spent on sales or sales related activities out of the branch." Plaintiffs included a declaration from their expert statistician Richard Drogin, in which he proposed a statistical methodology for assessing both liability and damages.
On September 7, 2006, the parties filed a joint case management and trial management statement in which USB noted its objections to plaintiffs' proposed use of a survey to gather data from which a representative sample of class members would then be selected to determine liability and potential damages for the entire class. USB claimed plaintiffs' proposed methodology was statistically unreliable, and was infeasible given the amount of time remaining before trial. USB also argued the proposed procedure would violate its due process right to assert its affirmative defense against each individual class member who sought to recover damages.*fn16
On September 13, 2006, a case management conference was held in which the trial court, on its own initiative, proposed the idea of taking a sample of 20 plaintiffs selected on a random basis to testify at trial. The court suggested this method would be preferable to conducting a survey, due to the possibility that bias might infuse the survey process.
On October 6, 2006, USB submitted a brief in which it again argued that representative testimony could not be fairly utilized in this case because it would violate USB's due process rights. USB further noted that the only California case relied on by plaintiffs in support of the use of representative testimony in an overtime case (our opinion in Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715 [9 Cal.Rptr.3d 544] (Bell III)), involved the issue of class action damages only, and not liability. USB stated that if a representative sample were to be used, USB must be permitted to call witnesses of its own choosing in order to meet its burden of proof. USB submitted another declaration from Gorman, who pointed out the possibility of "sampling error" if a small number of randomly selected class members were to be used to determine whether the entire class had been misclassified as exempt. Gorman further noted that even after the liability phase it would still not be possible to determine which nonsampled class members would be entitled to compensation.
At a hearing held on October 11, 2006, the trial court confirmed its intent to use a random sample of 20 class members to testify as representatives for the class. To choose the representatives, the court proposed putting the names of all the potential class members into a "hat" and drawing 20 names, along with 5 additional names to serve as alternates in case any of the initially selected plaintiffs were unavailable. Plaintiffs' counsel then informed the court that he intended to dismiss the SAC's legal claims and proceed to bench trial under section 17200 only.
After a hearing in which the trial court granted plaintiffs leave to dismiss the legal claims, the court required a second opt-out notice be sent to the class notifying it of the dismissal.*fn17 The court clerk then drew from a batch of index cards containing the names of each class member and compiled a list of 20 class representatives and 5 alternates.
On November 9, 2006, plaintiffs filed a motion to amend the SAC to include allegations that USB failed to provide meal and rest break periods to class members, and to conform the complaint in light of the dismissal of its legal claims.
On November 28, 2006, the parties submitted a joint case management and trial management statement.*fn18 USB asked that the second opt-out notice be sent without additional opt-out rights, noting that giving class members another opportunity to opt out "would [give] incentive [to] those who have been randomly selected to opt out based on their unwillingness to participate in the legal proceedings." On November 29, 2006, the trial court granted the motion to amend the SAC.
On November 30, 2006, plaintiffs filed their third amended complaint (TAC). The TAC asserts a single cause of action for violations under Business and Professions Code section 17200.*fn19 The bases for the Business and Professions Code section 17200 claim are alleged violations of Labor Code sections 204 (payment of wages), 216 (refusal to pay wages due), 226.7 (meal and rest periods), 1194 (overtime), 1198 (maximum hours), and 1199 (failure to comply with labor laws).
C. Results of Second Round of Opt-outs
On January 9, 2007, USB filed a trial management conference statement. USB reported that Steven Dias, one of the 20 randomly selected class members, had since opted out of the lawsuit. USB asserted that any member of the 20-person group who chose to opt out after receiving the second opt-out notice should be required to provide deposition and trial testimony in order to preserve the representative nature of his or her testimony and to ensure statistical reliability of the extrapolation process.
On January 29, 2007, USB filed its answer to the TAC.
On February 6, 2007, USB filed a motion regarding the status of the 20-person random witness group (RWG) members. USB asked the trial court to allow four RWG members, who had by now opted out of the action, the opportunity to opt back in. USB claimed the witnesses had decided to opt out because they felt they were properly classified as exempt employees, and because plaintiffs' counsel allegedly encouraged them to avoid involvement in the lawsuit.*fn20 USB argued the representative nature of the RWG was compromised because witnesses whose testimony would have supported its affirmative defense were now omitted from the representative group. A declaration provided by USB's statistical expert Phillip Gorman noted that while 4 of the 20 RWG members had elected to opt out, only 5 of the remaining 250 absent class members had done so. Thus, a much smaller percentage of non-RWG plaintiffs had opted out (2 percent), relative to the RWG, which saw a 20 percent opt-out rate. Gorman stated that removing these 4 witnesses would undermine the accuracy of any extrapolation process.
In opposition to USB's motion, plaintiffs submitted a declaration from Drogin, who opined that substituting the alternate RWG members for the four opt-out plaintiffs would be statistically acceptable as there was "no reason to infer that the sample is not representative, or that there is any bias in the sample." He remarkably concluded that "as long as the set of persons selected to testify at trial includes those in the original random selection made by the court, and is restricted to those in the class, the testifying group will be a random sample of the class. Under these conditions, the results determined by the court for those testifying can be reliably projected to the class as a whole." He deemed Gorman's statements to the contrary to be both incorrect and irrelevant.
On February 16, 2007, the trial court denied, without prejudice, USB's motion to allow Michael Lewis and Sean MacClelland to opt back into the lawsuit, noting that the issue of whether these witnesses would be allowed to testify should be addressed at trial.
On March 1, 2007, plaintiffs filed a motion for class certification of the meal and rest break claims. They also filed a motion to compel further responses to special interrogatories, requests for production of documents, and requests for admissions.
D. First Motion to Decertify the Class
On March 22, 2007, USB filed its opposition to plaintiffs' motion for class certification of the meal/rest break claims. USB also filed a motion to decertify the class action. In its motion to decertify, USB contended Proposition 64 requires each class member to prove "injury in fact."*fn21 USB also argued that then-recent case law affirmed the need for individualized inquiry in exemption cases. In connection with this argument, USB relied heavily on Walsh v. IKON Office Solutions, Inc. (2007) 148 Cal.App.4th 1440, 1456 [56 Cal.Rptr.3d 534] (Walsh), in which the Court of Appeal upheld an order decertifying a subclass of account managers in a wage and hour dispute. USB also included a declaration of Andrew Hildreth, an expert in the area of inferential statistics, who opined that "proceeding with the sample of 20 class members randomly selected by the court to determine the results for the entire population (class) would, from a statistical perspective, be highly inaccurate and unrepresentative."
On May 16, 2007, the trial court filed its order denying USB's motion for decertification and denying plaintiffs' motion to certify the meal/rest break claim. The order does not discuss either Walsh or Dunbar, and does not assess the issues raised by Hildreth's declaration.*fn22 Instead, the court indicated it was unpersuaded by USB's claim that individualized inquiries predominated over common questions with respect to liability.
On May 18, 2007, the parties filed their motions in limine.
In their motion in limine No. 11, plaintiffs sought to exclude the introduction of testimony or declarations from, or evidence or argument related to, any non-RWG BBO. Plaintiffs claimed the introduction of such evidence "would debase the trial and destroy the court's representative witness trial plan." Motion No. 11 was granted over USB's objections. In granting the motion, the trial court indicated it would allow USB to call any percipient witnesses for impeachment purposes, but would not allow non-RWG class members to increase the "bank of data" from which expert witnesses would ultimately draw their conclusions. In arriving at this decision, the court appears to have relied on Bell III, noting it had re-read that case with interest "because of its detailed discussion and approval of the trial management plan."
In its motion in limine No. 3, USB sought to require plaintiffs to rely on the testimony of all the witnesses originally selected for the RWG, to the extent they were willing to testify. The motion essentially claims the composition of the RWG members had been altered so much since the time of its original selection that it now lacked representative integrity. The court denied this motion.
In its motion in limine No. 4, USB sought to exclude testimony regarding the trial court's methodology of sampling. The motion reiterated USB's claims that the trial plan, particularly with respect to the issue of class-wide liability, failed to comport with the standards set by our opinion in Bell III because it was unreliable, was not generally accepted in the scientific field, and was not supported by a report from any expert witness. The trial court denied this motion and declined to revisit its trial management plan. The court also ruled the two named plaintiffs would be allowed to testify and to be present during the entire trial.
The liability phase (Phase I) of the trial began on May 24, 2007. All but one of the RWG members appeared at trial. They testified that they had spent more than half of their work time inside bank offices and had worked varying amounts of overtime. We summarize the relevant testimony of some of these witnesses.
Matt Fitzsimmons, one of the two named plaintiffs, was a BBO from April 2003 to March 2004.*fn23 He testified that when he was hired he was not told of any expectation as to the amount of time he was to spend outside bank property. Nor was he told he was entitled to an off-duty meal break. During his time with USB, he never saw a job description for the BBO position.
Fitzsimmons typically arrived at the bank at 8:30 a.m. Two days a week he would leave by 5:30 p.m. to pick up his daughter from day care, and the other three days he would leave between 6:00 and 6:30 p.m. On most weekends he would spend two or three hours folding flyers to send to prospective customers. He estimated he generally worked about 45 to 50 hours a week. He was never told to spend most of his time outside the bank. He estimated he worked inside branch offices 75 to 80 percent of the time, with the balance spent outside. There was never a week when he spent more of his time outside as opposed to inside. He also never received a 30-minute meal period in which he was relieved of all duties.
On cross-examination, Fitzsimmons testified that everything he did as a BBO was aimed towards selling USB's products and meeting his quarterly sales goals. He believed he was expected to work inside bank locations because the managers at two of the branches he was assigned to would ask him to come and work at their offices. His supervisor stated in a performance evaluation that he met his "ramp-up" sales goals in his first two quarters but met only 73 percent of his goals in the third, and final, quarter that he worked for USB. Fitzsimmons acknowledged he was one of the poorer performing BBO's in his supervisor's group during his third quarter. His supervisor advised him to make 15 client appointments per week, a strategy that normally results in three loan applications and one loan approval, thereby securing one loan funded per week. Two weeks after his evaluation he applied for a job at Citibank. One of the reasons he left USB was because he could not work the number of hours he believed the bank expected him to.
Chad Penza was a BBO from October 2001 through March 2005. He testified that initially he worked from 7:00 a.m. to around 5:30 p.m. After a few months, he began working from 6:00 a.m. to 6:30 p.m. or 7:00 p.m. He also worked at least three weekends a month, on both Saturday and Sunday, from around 7:00 a.m. to about 12:00 noon. Most of his time was spent calling potential clients on the telephone. From January 2002 to the end of his employment, he estimated he was in the office at least 80 percent of the time. He was never told to spend most of his time outside bank property. After his initial ramp-up period, his quarterly sales figures ranged from $5 million to $10 million. At one point, he was the most successful BBO in the entire company.
On cross-examination, Penza acknowledged he had signed a declaration for USB shortly after he started working as a BBO. In the declaration, he stated he was outside of the office 75 percent of the time. He testified he felt compelled to sign the declaration because he was a relatively new employee at the time. He admitted he provided all the information in the declaration to the attorney who interviewed him. He also signed another declaration in May 2004 in which he reaffirmed his prior declaration. When he signed the second declaration he had several commissions at stake. He chose to work longer hours because he wanted to be the top producer in the country and achieve the numbers that his supervisors wanted.*fn24 On redirect, he denied telling USB's attorney he had ever spent around 75 percent of his working hours outside of the bank.*fn25
Troy Petty worked for USB from 1997 to 2001. He became a USB employee after the bank he worked for merged with USB. At his former bank, his job title was "commercial loan officer." His job duties did not change when he became a USB employee. His employment with USB ended when he retired. During his time with USB, he was never told to spend most of his time outside the branch office.
Petty would make about 5 to 20 sales calls per week at customers' and potential customers' places of business. He estimated on average he spent 75 percent of his time inside the office. He spent no more than 35 percent of his time outside the office in any given week, or about two or three hours per day. At trial, he testified that he worked 50 to 60 hours per week. In his deposition, he had stated he worked 50 hours in a typical week.
On cross-examination Petty conceded he was expected to work eight hours a day only, and his manager never required him to keep certain hours and never told him what to do with his work time. USB's counsel introduced the job description for the "commercial banking relationship manager" and attempted to show Petty actually held this position, and was not an SBB. Petty admitted he had never been classified as an SBB.*fn26 He signed a release of all claims when he received his severance package.
Matthew Gediman was a BBO from April 2005 until December 2006. At the time of trial, he was still employed by USB as a district sales manager. As a BBO, he was never told that he was required to spend most of his time outside the bank, and he spent the majority of his time inside his office. His hours ranged between 30 to 50 hours per week. He rarely worked more than 40 hours per week or more than eight hours per day.
Sam Duran, the other named plaintiff, was a BBO from April 2003 to March 2004. He was not told he was required to spend most of his time outside of the branch office. In a typical day, he would go to the office, check his e-mail and voice messages, return phone calls, review loan packages, follow up with customers to get documents, and work on loan or line renewals for existing customers. He estimated that he worked 45 hours a week. He was never told that he was expected to arrive at a particular time and he was given flexibility to leave the office to meet with a client, go to doctor's appointments, or pick up his children from school.
When he was outside the office, Duran would meet with customers, pick up documents and review them for completeness, and conduct site inspections. He estimated he spent about 70 percent of his time inside the office. He would also work at least three hours on weekends. He understood that he could take a half-hour meal break when he wanted to. He would take 10- to 30-minute meal breaks, but believed he was expected to be available for work during lunchtime. He left USB voluntarily because he was frustrated with the difficulties in getting loans approved through the underwriting process.
On cross-examination, Duran stated he generally tried to have one meeting with a client outside the branch per day, and sometimes he had two or three such meetings. The meetings would last anywhere from five minutes to three hours, although three hours was very unusual. It would generally take between 15 and 30 minutes to travel from his branch to a customer's or a prospect's place of business. He did not recall telling USB's attorney in July 2003 that he spent, on average, 60 percent of his time outside the office.*fn27
Duran received a signing bonus when he accepted the position with USB. The bonus was conditioned on his remaining employed with USB for 12 months. He left before the 12-month period was up and did not return the bonus. In early 2004, his supervisor counseled him about the deficit in his loan production. She told him that he was expected to conduct 15 quality in-person sales calls on a weekly basis. He did not recall if she told him that these calls should take place at prospects' places of business. He failed to meet this requirement and resigned shortly after a focused counseling session with his supervisor.
Duran also admitted he falsified his USB salary figure when he applied for his next job. He claimed his head hunter told him to lie. The head hunter, David Vallecillo, testified that he contacted Duran about an employment opportunity with another bank. He denied telling Duran to falsify his salary information on the job application.
Brett Lindeman began working for USB in May 2005 as a BBO and was still employed at the time of trial. When he was hired he was told the job was a sales position involving new loans. He was never told that he would be expected to spend the majority of his time outside USB properties. He testified he typically works about 40 hours a week. There are times when he works more than 40 hours a week, but he was not able give an accurate estimate as to how often this occurs. Once or twice a month he takes a call from a client on a weekend. These calls last anywhere from two or three minutes to 40 minutes. More than half of his meetings with clients take place inside his branch office. He estimated that he spends the majority of his time inside USB branches and offices.
Lindeman stated he does hit his sales goals, but not in every quarter. He has never been told that he is expected to work more than 40 hours per week. At his deposition, he said it was "completely plausible" that there were weeks when he spent more than half his time outside of the office. At trial, after viewing his mileage claim records, he stated that he believed he regularly spent more time inside USB properties than outside.
At the time of trial, Adney Koga was employed by USB as a BBO. He was a BBO in California from July 2004 to April 2006. He left USB for a time and came back as a personal banker in October 2006. He became a BBO again in February 2007 in the state of Arizona. He was never informed that he was expected to spend most of his time outside the bank as a BBO.
After he was hired, Koga underwent a three-month training period. He spent about one month shadowing a BBO. During this period he would work from about 9:00 a.m. to about 6:30 or 7:00 p.m. As a BBO in California, he estimated he worked on average about 9 hours a day and about 45 hours a week. He estimated that he spent most of his time inside the branch, as opposed to at a customer's place of business. He was never counseled by any of his supervisors that he should spend more of his time outside of the bank location.
Koga had signed a declaration for USB prior to trial. At trial he denied ever having told USB's attorney that he spent 55 percent of his time outside of the office. On cross-examination, Koga admitted he did not make any changes to his declaration even though a cover letter instructed him to correct any inaccuracies. He was not promised any benefit in exchange for signing the declaration and his job was not threatened in any way by anyone at USB if he refused to sign it. Deposition testimony was introduced in which he stated he told USB's attorney that he spent 55 percent of his time outside of the office making sales calls.
Koga testified he had discretion and control over his daily work schedule. He had no set time to arrive at or leave work and no one ever told him the number of hours that he needed to work in a given day or week. He did not report his daily working hours to his manager.
Steven Bradley worked for USB as a BBO from March 2003 to July 2004, and again from May to August in 2006. When he was hired, he was told the job involved sales and that he would be paid partly on a base salary, but the most important part of his compensation would be derived from the commissions he would get for booking products and services. He was never told he had to spend more than half of his time outside bank locations. His normal work schedule was from around 9:00 a.m. to around 5:30 p.m. Sometimes he worked at home after he left the branch. He ...