CALIFORNIA LITIGATION REPORT

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1 SUMMER 2012 We are pleased to present the inaugural edition of the Sidley Austin LLP California Litigation Report a newsletter focusing on recent trends and events, and notable decisions affecting litigation in California state and federal courts. For this edition, we discuss current trends in the California courts arising from two of the most significant U.S. Supreme Court decisions in 2011 Wal-Mart v. Dukes, 131 S. Ct (2011), and AT&T Mobility LLC v. Concepcion, 131 S. Ct (2011) as well as changes caused by the state court budget crisis and practical tips for addressing those challenges. Wal-Mart v. Dukes One Year Later The U.S. Supreme Court s decision in Wal-Mart v. Dukes, issued on June 20, 2011, was quickly recognized as a seminal opinion on federal class certification requirements. In its first year, Wal-Mart was cited in six Ninth Circuit decisions, four California appellate decisions, and 131 opinions from U.S. District Courts in California. 1 Here s our Top Five list regarding the impact of Wal-Mart and the questions that remain outstanding. 1. Wal-Mart is to Rule 23 what Twombly was to Rule 8. In Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), the U.S. Supreme Court reformulated the standards for stating a claim under Rule 8. If nothing else, Wal-Mart has done the same for certifying a class under Rule 23. Wal-Mart s most frequently cited aspects are its most elemental: a plaintiff must affirmatively prove compliance with Rule 23, and the district court must perform a rigorous analysis to resolve factual and legal disputes, even where they overlap with the merits. See, e.g., Ellis v. Costco Wholesale Corp., 657 F.3d 970, 981 (9th Cir. 2011) (citing Wal-Mart, 131 S. Ct ). Just as the U.S. Supreme Court followed Twombly with Ashcroft v. Iqbal, 556 U.S. 662 (2009), it has recently granted certiorari in Comcast Corp. v. Behrend, No an antitrust case in which the Third Circuit certified a Rule 23(b)(3) class. Behrend raises the question of [w]hether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis. Thus, the granting of review in Behrend may portend further defense-friendly class certification standards to come from the U.S. Supreme Court, although more time and experience will be necessary to determine the actual impact, as noted below. 2 1 Statistics are from the Westlaw Keycite feature, as of June 20, The impact of the Twombly/Iqbal standards remains under debate. Compare Joe S. Cecil et al., Motions to Dismiss for Failure to State a Claim After Iqbal: Report to the Judicial Conference Advisory Committee on Civil Rules (Fed. Judicial Ctr. Mar. 2011) (finding that Twombly/Iqbal standards have led to a higher rate of decisions granting motions to dismiss, but not dismissals with prejudice), with Jonah B. Gelbach, Locking the Doors to Discovery? Assessing the Effects of Twombly and Iqbal on Access to Discovery, 121 Yale L. J (Apr. 2012) (discussing limits in FJC study and finding significant impact ). This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, and One South Dearborn, Chicago, IL 60603, Prior results do not guarantee a similar outcome.

2 Page 2 2. The Commonality Requirement Gets Teeth, but the Size of the Bite Remains Unclear Wal-Mart also notably enhanced Rule 23(a) s commonality element, explaining that it requires not merely common questions but ones capable of classwide resolution which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. Wal-Mart, 131 S. Ct. at 2551 (emphasis added). 3 Wal-Mart thus highlights plaintiffs burden to prove the existence of a common practice applicable to all class members. Failure to do so has doomed class treatment in a variety of contexts, such as: product warranty cases where not all class members experienced defects; 4 consumer protection claims where plaintiffs could not show uniform sales transactions; 5 and wage-and-hour disputes where plaintiffs could not establish a uniform policy. 6 Wal-Mart has not, however, been a death knell for class actions. According to Westlaw s Keycite feature, numerous California district courts have distinguished or declined to extend the decision; even among cases that examined or discussed Wal-Mart, over half of the decisions addressing class certification granted it in whole or in part. 7 Moreover, while Wal-Mart s commonality holding is significant for Rule 23(b)(2) class actions, it is less so for Rule 23(b)(3) class actions which have a more stringent predominance requirement. Courts continue to distinguish Rule 23(a)(2) commonality from Rule 23(b)(3) predominance, 8 and often reach different results on separate causes of action depending on the nature of the evidence and elements of the claims Daubert s Applicability on Class Certification The Wal-Mart majority also expressed doubt that the Daubert standards for the admissibility of expert testimony did not apply on class certification. Wal-Mart, 131 S. Ct. at (citing Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993)). There remains some question as to whether courts should apply a full Daubert analysis or more lenient one 3 See id. ( What matters to class certification... is not the raising of common questions even in droves but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. (quotation omitted)). 4 See, e.g., Tietsworth v. Sears, Roebuck & Co., No. 09-CV-00288, 2012 WL (N.D. Cal. May 4, 2012 (denying certification of claims for breach of express warranty and under California Unfair Competition Law ( UCL ), Consumer Legal Remedies Act ( CLRA ), and Magnusson-Moss Warranty Act ( MMWA )); Cholakyan v. Mercedes-Benz, USA, LLC, --- F. Supp. 2d ---, 2012 WL (C.D. Cal. Mar. 28, 2012) (finding lack of commonality for product defects). 5 See, e.g., In re Countrywide Fin. Corp. Mortg. Mkt g & Sales Pracs. Lit., No. 10cv0257, 2011 WL (S.D. Cal. Dec. 16, 2011) (UCL claims for nondisclosures, unfair practices in mortgage loans); Stone v. Advance Am., 278 F.R.D. 562 (S.D. Cal. 2011) (UCL claims for not providing Spanish-language assistance for pay-day loans); see also Gass v. Best Buy Co., --- F.R.D. ---, 2012 WL (C.D. Cal. Feb. 13, 2012) (denying certification of proposed class asserting Song-Beverly Act violations in sales transactions collecting consumer ZIP code information). 6 See, e.g., Novak v. Boeing Co., No. SACV , 2011 WL (C.D. Cal. Dec. 19, 2011); Rosales v. El Rancho Farms, No. 09-CV , 2011 WL (E.D. Cal. Dec. 12, 2011). 7 There were 68 cases addressing Rule 23 certification motions in the above-referenced categories, and we counted 42 out of 68 as granting class certification in whole or in part (i.e., as to at least one claim or part of the class); the count was 29 out of 54 granting class treatment among cases examining or discussing Wal-Mart. 8 See, e.g., Mazza v. Am. Honda Motor Co., 666 F.3d 581 (9th Cir. 2012) (in false advertising case, court presumed commonality but found failure of predominance due to limited scope of advertising campaign); In re Facebook, Inc., PPC Adv g Lit., --- F. Supp. 2d ---, 2012 WL (N.D. Cal. Apr. 13, 2012) (finding that a single significant classwide issue was sufficient to satisfy commonality, but that predominance failed on UCL and breach of contract claims); In re Google AdWords Litig., No. 08-CV-3369, 2012 WL (N.D. Cal. Jan. 5, 2012) (finding common issue of liability under UCL, but lack of predominance on whether class members are entitled to restitution); Pryor v. Aerotek Sci., LLC, 278 F.R.D. 516 (C.D. Cal. 2011) (commonality but not predominance met as to labor dispute involving pre-shift work). 9 See, e.g., Stearns v. Ticketmaster Corp., 655 F.3d 1013 (9th Cir. 2011) (analyzing UCL, CLRA, and Electronic Fund Transfer Act claims separately); Jimenez v. Allstate Ins. Co., No CV , 2012 WL (C.D. Cal. Apr. 18, 2012) (granting certification in part and denying in part on different kinds of Labor Code claims); Chavez v. Lumber Liquidators, Inc., No. CV , 2012 WL (N.D. Cal. Mar. 26, 2012) (certifying class challenge to uniform method of calculating overtime but denying certification of claims for misclassification, missed meal breaks, and unpaid vacation).

3 Page 3 (i.e., whether expert testimony would be admissible at trial or simply is sufficiently reliable to show Rule 23 elements), 10 although the Supreme Court may resolve the issue in Behrend.. In any event, motions to strike expert testimony provide another, often fruitful, tool in opposing class certification. 4. The Availability of Monetary Relief for Rule 23(b)(2) Classes In a unanimous vote, the Wal-Mart Court held that a party seeking Rule 23(b)(2) certification cannot pursue individualized monetary relief. Wal-Mart, 131 S. Ct. at The Court did not reach the broader question of whether Rule 23(b)(2) precludes all monetary claims, but it rejected the Ninth Circuit s predominance test while citing without approval or disapproval the Fifth Circuit test allowing monetary relief incidental to injunctive or declaratory relief, in that damages flow directly from liability to the class as a whole. Id. at (quoting Allison v. Citgo Petro. Corp., 151 F.3d 402, 415 (5th Cir. 1998)). In a non-precedential opinion, a panel of the Ninth Circuit read Wal-Mart as adopting the non-incidental test, and district courts have indicated the same, although few have specifically addressed the issue Application of Wal-Mart in State Court Remains Uncertain California Code of Civil Procedure Section 382 which governs class actions in state court is not modeled on Federal Rule 23 but similarly asks whether a community of interest exists and requires review of the merits where necessary. See Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004, (2012) (citing Wal-Mart). In Duran v. U.S. Bank Nat l Ass n, 137 Cal. Rptr. 3d 391 (2012), a California Court of Appeal cited Wal-Mart heavily in an employment overtime-classification class action on appeal after a bench trial. The court ordered the class decertified and found that it violated due process to conduct a Trial by Formula based on statistical sampling while precluding the defendant from offering individualized evidence to defend itself. But on May 16, 2012, the California Supreme Court granted review, No. S200923, to address the issues concerning the certification of class actions in wage and hour misclassification litigation and the use of representative testimony and statistical evidence at trial of such a class action. On review, Duran is expected to resolve issues left open in the Brinker decision, 12 and may provide further insight into class certification requirements in state versus federal courts. Application of Concepcion at Issue in State Courts, Legislature In another significant 2011 decision, AT & T Mobility LLC v. Concepcion, U.S., 131 S.Ct (2011), the U.S. Supreme Court rejected California s Discover Bank rule, which categorically precluded enforcement of class-action waivers in consumer contracts requiring arbitration, on the grounds that they are unconscionable. 13 The Concepcion court found that this rule conflicted with, and was thus preempted by, the Federal Arbitration Act ( FAA ), because it disfavored and interfered with the enforcement of arbitration agreements. Id. at Two state courts of appeal have now split on Concepcion s effect on employment contracts that require individual arbitration and would preclude representative actions for Labor Code violations under California s Private Attorney 10 See Ellis, 657 F.3d at 982 (noting with approval that district court conducted Daubert analysis); Cholakyan, 2012 WL (applying Daubert based on Ellis, excluding testimony, and finding no commonality); Bruce v. Harley-Davidson Motor Co., No. CV , 2012 WL (C.D. Cal. Jan. 23, 2012) (same); see also Stone, 278 F.R.D. at 566 & n.2 (noting that the 8th Circuit has applied a relaxed Daubert inquiry, while the 7th Circuit has applied full inquiry). 11 See, e.g., Sepulveda v. Wal-Mart Stores, Inc., --- Fed. Appx. ---, 2011 WL (9th Cir. Dec. 30, 2011); Aho v. AmeriCredit Fin. Servs., Inc., 277 F.R.D. 609, 614 (S.D. Cal. 2011). 12 Some commentators suggest that review was granted to reconcile Duran with the approval of statistical sampling in the concurring opinion in Brinker, issued shortly after Duran was decided. 13 See Discover Bank v. Superior Court, 36 Cal. 4th 148, 153 (2005).

4 Page 4 General Act ( PAGA ). In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), a panel held that PAGA waivers remain unenforceable under state law, while the recent decision Iskanian v. CLS Transp. Los Angeles, LLC, --- Cal.Rptr.3d ----, 2012 WL (Ct. App. June 4, 2012), reached the opposite conclusion, holding that the FAA preempted state law to the extent it bars enforcement of PAGA waivers. Given the direct split in authority, the California Supreme Court is expected to take review of the issue. The California Senate had also introduced SB 491, a bill that would more broadly bar class-action or representativeaction waivers in any contract of adhesion. The intent of the sponsors was that, by barring such waivers in any form of contract not just arbitration agreements the law would avoid the Concepcion problem of disfavoring arbitration. Whether the bill would pass constitutional muster seemed doubtful, but in all events it failed in the State Senate on July 3. The State Court Budget Crisis and What to Do About It On June 15, the California legislature passed a proposed budget that would slash an additional $540 million from the Judicial Branch budget, after $653 million in prior budget cuts have already resulted in the closure of courtrooms and serious reductions in court support staff. 14 To cope with the budget crisis, the Los Angeles and San Diego Superior Courts, for example, have announced plans each to layoff hundreds of employees and close dozens of courtrooms. Los Angeles Superior Court also recently adopted a new policy in which it will no longer provide court reporters for civil trials and will provide them for a courtroom s law and motion and calendar matters only two half-day sessions per week. It is said that it takes up to ten staff to support a single courtroom, and each courtroom closure adds to the other judges already crowded dockets. With further layoffs and cuts likely, one can expert serious delays for civil matters. Some courtrooms, for example, have limited the days and times for law and motion matters, such that motions that are normally heard within 16 court days of filing and that are necessary to move a case along e.g., demurrers or discovery motions may take three to five months to be heard. Worse, there is no indication that these cuts or trends are only temporary. While these delays present multiple challenges, the parties can take various measures even aside from removal to federal court to ease the burden on their clients and the courts, and to help expedite (relatively speaking) the resolution of cases. For example, the Los Angeles Superior Court offers a procedure where a judge will help informally mediate discovery disputes, without the need for a formal motion, and the court s website also offers guidelines, forms, and Voluntary Efficient Litigation Stipulations for various other matters. 15 Planning ahead will also be critical. With court calendars filling up, it may be necessary to reserve hearing dates well before the motion is filed, and judges are not likely to have much patience for ex parte applications designed simply to cut the line or based on an emergency of the party s own making. Making briefs succinct and focused, seriously meeting and conferring with opposing counsel, and avoiding unnecessary motion practice are all hallmarks of good practice, and they will be all the more important under the current circumstances. Parties can also try to take advantage of California s unique judicial reference procedure, in which all or parts of an action can be referred to a privately compensated referee. Under Code of Civil Procedure section 638(a), the parties can agree by stipulation or in a pre-dispute contract for a general reference in which the referee will decide all issues or fact or law in the case through a jury-waived trial. Unlike arbitration, a reference proceeding abides by all state 14 See Key Provisions of the state budget agreement, L.A. TIMES, June 21, 2012, at 15 Forms are available online at the Superior Court s website ( Tools for Litigators ).

5 Page 5 court rules and procedures; the referee s decision is binding, gives rise to a judgment, and is fully subject to appellate review. The judge s function is simply replaced by the referee. In addition, Section 638(b) allows parties to agree to a special reference to ascertain a fact necessary to enable the court to determine an action or proceeding and issue an advisory opinion thereon. Finally, a party can move for an involuntary reference pursuant to Section 639 to handle certain enumerated issues, including discovery disputes (upon a showing of exceptional circumstances). California Rules of Court provide further rules governing judicial reference motions and selection of referees, among other matters. While it is not clear that the budget crisis has caused an uptick in the number of judicial references, this unique procedure presents a viable option for expediting resolution of a case without foregoing most of the procedural and substantive protections provided by traditional state court proceedings. If you have any questions regarding this report, please contact the Sidley lawyer with whom you usually work. The Complex Commercial Litigation Practice of Sidley Austin LLP Sidley s Complex Commercial Litigation practice group has significant experience and a record of success in resolving a broad variety of business and commercial disputes. We practice in federal and state trial and appellate courts as well as in the full range of alternative dispute resolution fora. On behalf of plaintiffs and defendants, our lawyers have won precedent-setting victories in cases involving RICO, business torts, class actions, commercial law, contracts, document spoliation, joint ventures, privacy, unfair trade practice and other issues. To receive future copies of this and other Sidley updates via , please sign up at BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. Sidley Austin LLP, a Delaware limited liability partnership which operates at the firm s offices other than Chicago, New York, Los Angeles, San Francisco, Palo Alto, Dallas, London, Hong Kong, Houston, Singapore and Sydney, is affiliated with other partnerships, including Sidley Austin LLP, an Illinois limited liability partnership (Chicago); Sidley Austin (NY) LLP, a Delaware limited liability partnership (New York); Sidley Austin (CA) LLP, a Delaware limited liability partnership (Los Angeles, San Francisco, Palo Alto); Sidley Austin (TX) LLP, a Delaware limited liability partnership (Dallas, Houston); Sidley Austin LLP, a separate Delaware limited liability partnership (London); Sidley Austin LLP, a separate Delaware limited liability partnership (Singapore); Sidley Austin, a New York general partnership (Hong Kong); Sidley Austin, a Delaware general partnership of registered foreign lawyers restricted to practicing foreign law (Sydney); and Sidley Austin Nishikawa Foreign Law Joint Enterprise (Tokyo). The affiliated partnerships are referred to herein collectively as Sidley Austin, Sidley, or the firm.