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Duran v. U.S. Bank National Assn.

Supreme Court of California

May 29, 2014

SAMUEL DURAN et al., Plaintiffs and Respondents,
U.S. BANK NATIONAL ASSOCIATION, Defendant and Appellant

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Superior Court of Alameda County, No. 2001-035537, Robert B. Freedman, Judge. Court of Appeal, First Appellate District, Division One, No. A125557, No. A126827.

Carlton Disante & Freudenberger, Carothers Disante & Freudenberger, Timothy M. Freudenberger, Alison L. Tsao and Kent J. Sprinkle for Defendant and Appellant.

Horvitz & Levy, Jeremy B. Rosen and Robert H. Wright for Chamber of Commerce of the United States of America and Retail Litigation Center, Inc., as Amici Curiae on behalf of Defendant and Appellant.

Fred J. Hiestand; Morrison & Foerster, Miriam A. Vogel, Janie F. Schulman and M. Natalie Naugle for California Business Roundtable, Civil Justice Association of California and California Bankers Association as Amici Curiae on behalf of Defendant and Appellant.

Deborah J. La Fetra and Christina M. Martin for Pacific Legal Foundation as Amicus Curiae on behalf of Defendant and Appellant.

Altshuler Berzon, Michael Rubin; Jocelyn Larkin, Della Barnett and Michael Caesar for Impact Fund, AARP, Asian Law Caucus, Asian Pacific American Legal Center, Disability Rights Education & Defense Fund, Disability Rights Legal Center, National Consumer Law Center, Public Citizen, Inc., and Public Justice, P.C., as Amici Curiae on behalf of Defendant and Appellant.

Gibson, Dunn & Crutcher, Theodore J. Boutrous, Jr., Theane Evangelis Kapur and Bradley J. Hamburger for National Association of Security Companies, California Association of Licensed Security Agencies, ABM Security Services Inc., AlliedBarton Security Services, G4S Secure Solutions (USA) Inc., and Securitas Security Services USA, Inc., as Amici Curiae on behalf of Defendant and Appellant.

Littler Mendelson, Allan G. King, Julie A. Dunne and Margaret Hart Edwards for The Gallup Organization as Amicus Curiae on behalf of Defendant and Appellant.

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Paul Hastings, Paul Grossman, Paul W. Cane, Jr., Sean D. Unger and Rishi N. Sharma for California Employment Law Council and Employers Group as Amici Curiae on behalf of Defendant and Appellant.

Shaw Valenza and D. Gregory Valenza for California Chamber of Commerce as Amicus Curiae on behalf of Defendant and Appellant.

Law Offices of Ellen Lake, Ellen Lake; Lewis, Feinberg, Lee, Renaker & Jackson, Brad Seligman; Wynne Law Firm, Edward J. Wynne and J.E.B. Pickett for Plaintiffs and Respondents.

Robbins Geller Rudman & Dowd and Kevin K. Green for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

The Kralowec Law Group, Kimberly A. Kralowec; Bryan Schwartz Law, Bryan J. Schwartz; Cohelan Khoury & Singer, Michael D. Singer; Rudy, Exelrod, Zieff & Lowe and Steven G. Zieff for California Employment Lawyers Association as Amicus Curiae on behalf of Plaintiffs and Respondents.

Opinion by Corrigan, J., with Cantil-Sakauye, C. J., Baxter, Werdegar, Chin, Liu, and Kennard[*], JJ. Concurring Opinion by Liu, J.


[172 Cal.Rptr.3d 376] [325 P.3d 920] CORRIGAN, J.

We encounter here an exceedingly rare beast: a wage and hour class action that proceeded through trial to verdict. Loan officers for U.S. Bank National Association (USB) sued for unpaid overtime, claiming they had been misclassified as exempt employees under the outside salesperson exemption. (Lab. Code, § 1171.) This exemption applies to employees who spend more than 50 percent of the workday engaged in sales activities outside the office. ( Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785 [85 Cal.Rptr.2d 844, 978 P.2d 2] ( Ramirez ).)

After certifying a class of 260 plaintiffs, the trial court devised a plan to determine the extent of USB's liability to all class members by extrapolating from a random sample. In the first phase of trial, the court heard testimony about the work habits of 21 plaintiffs. USB was not permitted to introduce evidence about the work habits of any plaintiff outside this sample. Nevertheless, based on testimony from the small sample group, the trial court found that the entire class had been misclassified. After the second phase of trial, which focused on testimony from statisticians, the court extrapolated the average amount of overtime reported by the sample group to the class as a whole, resulting in a verdict of approximately $ 15 million and an average recovery of over $ 57,000 per person.

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As even plaintiffs recognize, this result cannot stand. The judgment must be reversed because the trial court's flawed implementation of sampling prevented USB from showing that some class members were exempt and entitled to no recovery. A trial plan that relies on statistical sampling must be developed with expert input and must afford the defendant an opportunity to impeach the model or otherwise show its liability is reduced. Statistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions. However, as outlined below, the trial court's particular approach to sampling here was profoundly flawed.


USB is a nationwide financial services provider. During the relevant period, it operated over 130 branches in California. This class action was brought by USB employees who worked as business banking officers [325 P.3d 921] (BBOs). [1] BBOs sell bank products, including loans and lines of credit, to small business customers. Their primary job is to cultivate new business. After a BBO acquires a new client, a client manager handles the portfolio and maintains the relationship. A BBO can be assigned to work with up to four bank branches. Although they typically use one branch office as a home base, some BBOs [172 Cal.Rptr.3d 377] work from multiple branches or their homes.

A May 1997 job description states that BBOs were expected to develop and manage customer relationships and to " grow[] [USB's] business through prospecting, networking, cross-selling and relationship management." Among several other " essential functions," BBOs were required to " call[] on customers and/or prospects." They were expected to use a " high degree of creativity and independence in managing account relationships and developing new business." This job description was essentially unchanged until May 2002, shortly after the complaint here was filed. The new job description splits the list of a BBOs essential functions into separate categories for " Outside Sales Activity," " Incidental Activity to Outside Sales," and " Other Activity," and specifies that more than 80 percent of a BBOs time should be spent on " Outside Sales Activity." During all relevant times, USB has classified the BBO position as exempt from overtime compensation, primarily based on the outside salesperson exemption in Labor Code section 1171. [2]

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A. Pretrial Proceedings

On December 26, 2001, a putative class action complaint was filed alleging USB had improperly classified BBOs as exempt, denying them overtime pay in violation of Labor Code section 1194. [3] Class counsel later replaced the original named plaintiff with three new class representatives. In March 2005, when dueling certification motions were pending, counsel replaced these representatives with the two currently named plaintiffs, Samuel (Sam) Duran and Matt Fitzsimmons. All replaced representatives had testified in deposition that they spent more than 50 percent of their workday engaged in sales activities outside USB offices, which would have brought them within the exemption. [4]

1. Initial Class Certification Proceedings

On January 6, 2005, plaintiffs moved to certify the case as a class action. At that time, USB employed approximately 40 BBOs in California. There were over 200 current and former BBOs in the putative class. Plaintiffs provided declarations from 34 current and former BBOs, all averring that they worked overtime hours and spent less than half of their workday engaged in sales-related activities outside their branch office. USB opposed certification. It argued that plaintiffs could not establish a predominance of common issues or that the class action device was superior to other methods of adjudication. USB filed declarations from 83 putative [172 Cal.Rptr.3d 378] class members, 75 of whom [5] said [325 P.3d 922] they typically spent more than 50 percent of their workday engaged in outside sales. [6] USB also submitted deposition testimony from the four former class representatives stating that they regularly worked more than half the day outside the office.

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The trial court certified the class. Relying on Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319 [17 Cal.Rptr.3d 906, 96 P.3d 194] ( Sav-On ), it found common questions of law and fact predominated over individual issues based on evidence that (1) the BBO position was " standardized" ; (2) USB classified all BBOs as exempt without examining each employee's duties or work habits; and (3) USB failed to train or monitor BBOs to ensure that exemption requirements were satisfied. The class was ultimately defined as all California-based BBOs who worked overtime for USB at any time during the period from December 26, 1997, until September 26, 2005. [7]

2. Trial Management Plan

About a year after certification, the parties presented competing trial management plans. USB proposed to divide the class into 20 or 30 groups and have special masters conduct individualized evidentiary hearings on liability and damages. Plaintiffs opposed this idea, arguing that USB had no due process right to assert its affirmative defenses against each individual class member.

As an alternative, plaintiffs proposed the use of surveys and random sampling, as described in a declaration from statistics expert Richard Drogin. First, the parties would identify all tasks performed by BBOs and classify which were sales related. Next, the amount of time class members typically spent on outside activities would be assessed using a classwide survey. The parties' experts would then jointly design a random sample of surveyed class members to proceed through focused discovery and a phase one trial. Finally, aggregate, classwide damages would be determined at a phase two trial. Once an aggregate damages figure was established, the parties would agree upon a claims procedure to distribute damages to individual class members.

USB strenuously objected to the use of representative sampling. If the court rejected its proposal for focused trials of all class members, USB proposed that the parties each select an equal number of class members for the trial sample. USB argued that a survey would not yield a truly representative sample because class members who were properly classified as exempt would have no interest in participating in trial or returning the survey. Thus, any survey-based sample would be skewed in plaintiffs' favor.

At a case management conference, the court also expressed concern about the potential for biased survey results and proposed an alternative of its own devising. The court suggested that it could select a random sample of 20 class members to testify at trial. Any findings on liability and damages for this

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sample would then be extrapolated to the remainder [172 Cal.Rptr.3d 379] of the class. USB again objected that an attempt to extrapolate liability from representative testimony would violate due process. There was no precedent for using random sampling to establish liability in a class action involving the outside sales exemption. Indeed, neither side was aware of any such case even proceeding to a liability phase trial. The premier case approving the use of representative testimony in an overtime class action, Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715 [9 Cal.Rptr.3d 544] ( Bell ), concerned the trial of damages only, not liability. Finally, a declaration from USB's expert, Phillip Gorman, explained that reliance on a small sample would present a high risk of error.

Notwithstanding these objections, the court decided to proceed with its own plan, taking testimony from 20 randomly selected class members in addition to the two named plaintiffs (hereafter, the representative witness group or RWG). The court directed its clerk to draw names " from the proverbial [325 P.3d 923] hat" to select 20 class members plus five alternates. [8] The record does not reflect how the court determined that this number or method of selection was appropriate. The court contemplated trying the case in two phases: Phase one would include testimony from those in the RWG. Phase two would consider evidence, including expert testimony, " seeking to extrapolate the results of Phase I evidence to the class."

3. Additional Pretrial Proceedings

a. Dismissal of Legal Claims and Opt-out Proceedings

In November 2006, around the same time the trial court finalized the trial management plan and selected the RWG, plaintiffs moved to dismiss their claims under the Labor Code and proceed solely on a claim for equitable relief under the unfair competition law (UCL). (Bus. & Prof. Code, § 17200 et seq.) The court allowed the amendment but also ordered that class members be notified and given a second opportunity to opt out. USB objected that the randomness of the sample would be compromised if members of the RWG withdrew. In total, nine people opted out: Four were members of the RWG, and five were among the remaining 250 people in the class.

USB then asked the court to readmit the four RWG members. It produced declarations from two RWG members stating they had opted out at class counsel's urging. These declarants believed they had been properly classified as exempt and felt the lawsuit was frivolous. In addition, a declaration from

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USB's expert Gorman explained that the much higher opt-out rate for RWG members (20 percent, as compared with 2 percent for the rest of the class) was statistically " very unlikely to be attributable to random chance." In his opinion, removal of the four RWG members created a biased sample that, if extrapolated, could result in large overestimates of the percentage of misclassified class members and of any overtime pay owed to the class. The court denied the motion, observing that questions about the admissibility of testimony from non-RWG witnesses would be more appropriately addressed at trial. The final class was composed of 260 individuals.

b. USB's First Decertification Motion

In March 2007, USB moved to decertify the class action. Citing new case law [9] and [172 Cal.Rptr.3d 380] deposition testimony from RWG members, it argued that individual issues predominated. USB also submitted a declaration from statistician Andrew Hildreth opining that the RWG sample size was too small to produce a reasonably accurate estimate of classwide liability or damages. Hildreth explained that a high margin of error was inherent in such a small sample size. As a result, it was very likely that a classwide judgment would encompass some employees who were properly classified, and the damages estimate extrapolated from the small sample would be highly inaccurate. The motion was denied.

B. Trial

1. Phase One: Liability

There were many in limine motions, but one was particularly significant. USB sought to introduce declarations [10] and live testimony from class members outside the RWG. These included formerly named plaintiffs, class members who had previously given depositions supporting USB, and individuals who had opted out of the class. The court substantially denied these requests, [325 P.3d 924] ruling: " Defendant may not introduce testimony[,] evidence[,] or argument related to BBOs who were not selected in the RWG and/or were not supervising sales managers of the RWG members where the purpose of such testimony or evidence is to impact the data or analyses on the ultimate

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question of liability or damages. To the extent such witnesses are shown to have admissible percipient witness or impeach[ment] testimony as to RWG members, the testimony may be permitted by [the] Court after determination of objections thereto." Throughout the trial, the court refused to hear any testimony about the work habits of BBOs not included in the RWG.

Phase one of the bench trial lasted 40 court days. The two named plaintiffs and 19 of the 20 other RWG members testified. [11] USB called several corporate witnesses and the direct supervisors of some of the RWG witnesses.

a. Summary of Evidence Presented

All RWG witnesses worked exclusively on sales. All set their own schedules, deciding when and where they worked. They consistently testified that USB never told them where to work, or that they were required to spend more than half of their work time outside a branch office. USB kept no records of BBOs' working hours or the proportion of time spent either in or outside bank offices. The RWG witnesses all testified that they generally spent more than half of their workday inside bank offices.

[172 Cal.Rptr.3d 381] The RWG testimony varied somewhat, however, on the subject of overtime work. Some RWG witnesses testified that they typically worked no more than 40 hours per week. Some testified to relatively small amounts of overtime, reporting workweeks of up to 45 hours. Others reported working more overtime. One RWG member, Chad Penza, was something of an anomaly. At one point during the three and a half years he worked for USB, Penza was the top-producing BBO nationwide. He initially worked 10 and a half hours a day, but after a few months he began working 12 to 13 hours a day, including several hours on weekends. Penza explained that he chose to work long hours because he was trying to reach sales goals and succeed. Other RWG witnesses similarly testified that their work schedules and habits were motivated by the desire to meet sales goals and not by any expectation from the bank that they work overtime.

Some of the RWG members were impeached with contrary declarations they had previously signed. For example, top producer Penza executed two declarations, in 2002 and 2004, stating that he spent from 75 to 100 percent of his time making outside sales calls. Another BBO, Adney Koga, signed a declaration and testified in deposition that he typically spent 55 percent of his time away from the office on sales calls.

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USB called several witnesses. Ted Biggs, the western regional manager for USB's small business group, testified that BBOs were expected to spend the majority of their time making outside sales calls, networking, and visiting customers' businesses. Biggs encouraged all his BBOs to meet sales goals using a " 15-3-1-1" model. According to this model, a BBO who makes an average of 15 customer contacts a week should obtain three loan applications, which will normally yield one loan approval and one funded loan. Given the length of the average sales call, Biggs estimated that BBOs should spend up to 30 hours a week meeting with potential customers at the clients' businesses. Other USB managers testified that they routinely counseled BBOs to spend a majority of their time meeting with customers outside bank locations.

Managers also described their supervision of those in the RWG. District manager Michael Lewis supervised RWG member Matthew Gediman for over a year. He estimated that Gediman spent from 55 to 70 percent of his time outside the office during the first six months. Later, when Gediman's production waned, Lewis encouraged him to spend more [325 P.3d 925] time on outside sales. Similarly, sales manager Pat Collins testified that she hired class representative Sam Duran and told him he was expected to spend the majority of his time on outside sales calls. When Duran failed to meet sales goals, she encouraged him to follow the 15-3-1-1 model and make more outside calls.

b. Posttrial Motions

At the close of evidence in phase one, USB filed a due process motion seeking to introduce deposition excerpts and over 70 declarations from class members outside the RWG. The court barred this evidence as inconsistent with its selected trial plan. The court also denied USB's motion for judgment under Code of Civil Procedure section 631.8.

In anticipation of phase two, plaintiffs moved to amend the declaration of their expert, Jon Krosnick, to permit trial testimony about the results of a telephone survey Krosnick had conducted of class members' work hours. The court allowed the amendment, and USB moved to exclude the survey evidence. In opposition, plaintiffs [172 Cal.Rptr.3d 382] filed a declaration from their statistics expert, Richard Drogin. Drogin opined that phase one findings of liability and average weekly hours of unpaid overtime could be " reliably projected to the whole class" because they were based on a random sample. Taking the court's indicated findings for phase one, with adjustments for vacation time and other breaks in service, Drogin calculated a weighted average of overtime

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for the RWG at 11.87 hours per week, [12] with a margin of error of plus or minus 5.14 hours at a 95 percent confidence interval. The relative margin of error for the overtime estimate was plus or minus 43.3 percent. [13] Although this margin of error based on the RWG sample alone was quite large, Drogin observed that Krosnick's survey had actually produced a higher estimate of weekly overtime (14.39 hours per week). Drogin asserted that Krosnick's study corroborated the accuracy of the RWG estimate. Nevertheless, the court ruled Krosnick's survey evidence inadmissible unless it became relevant for impeachment.

Shortly before the formal statement of decision was issued in phase one, USB moved again to decertify the class. USB argued that because trial evidence revealed wide variations among class members, individual issues predominated as to both liability and restitution. The motion was denied. The court decided to extend liability findings for RWG members to the class as a whole. It dismissed as premature USB's objection to the calculation of restitution by extrapolation from phase one evidence.

c. Statement of Decision

The trial court issued a phase one statement of decision on September 22, 2008, approximately a year after the close of evidence. It found that, during all relevant times, USB did not have a policy requiring BBOs to spend more than half their time away from bank locations. Although some defense witnesses testified the bank expected BBOs to spend most of their time away from the office, the court discredited this testimony based on its assessment of the evidence and the lack of documentary support. The court found that BBOs were never told they were expected to spend time outside the bank. USB did not track the time BBOs worked inside or outside of bank offices. Consistent with their classification as exempt employees, the bank kept no record of BBOs' work hours. USB had no compliance program to ensure BBOs were properly classified, and no BBO had ever been disciplined for spending excessive time inside the bank. The trial court also found that it was unrealistic [325 P.3d 926] for USB to expect BBOs to work more than half their time outside the bank because many BBO job duties could only be performed, or could most easily be performed, inside bank offices.

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The court also found that the practice of working more than half the time inside the [172 Cal.Rptr.3d 383] bank did not diverge from USB's realistic expectations for work performance because USB had no expectations concerning where the work would be performed. " [T]he only expectation [USB] had for its BBOs was that they hit their production goals." BBOs were evaluated, ranked, compensated, rewarded, and disciplined based solely on their sales production. Where BBOs worked, or even how they ...

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