In the Court of Appeal’s first major ruling following AT&T v. Concepcion’s groundbreaking Federal Arbitration Act pre-emption decision,, it evades the issue of whether AT&T overruled the California Supreme Court’s seminal employment decision relating to arbitration provisions, Gentry v. Superior Court. However, the decision, Brown v. Ralph’s Grocery, _ Cal.App.4th_ (July 12, 2011) does provide the first glimmer of hope for the fate of employment class actions in a post-AT&T world, finding unequivocally that AT&T’s preemption decision does not apply to actions brought pursuant to the Private Attorney General Act (“PAGA”).

In Brown v. Ralph’s Grocery, Plaintiff Terry Brown brought a class action as well as a representative action under PAGA against her employers, Ralph’s Grocery Company and the Kroger Company (“Defendants”) for alleged Labor Code violations. Defendants then moved to compel arbitration based on an arbitration provision contained in her employment contract, which also included a class action waiver and a waiver of PAGA representative actions. The trial court denied Defendants’ Motion to Compel arbitration on the grounds that the provision was unconscionable, prompting Defendants to appeal. On appeal, and despite requesting supplemental briefing on the issue, the court effectively dodged reaching a much-anticipated conclusion on whether AT&T over-ruled Gentry v. Superior Court, 42 Cal. 4th 443 (2007), finding that Plaintiff did not meet its burden of proof as to the Gentry factors (1) and thus any consideration as to whether the decision was overturned by AT&T was unnecessary. Despite its frustrating lack of guidance on this issue, the court did reach a conclusion as to AT&T’s impact on Plaintiff’s PAGA claim.

Enacted in 2004, PAGA gives employees the right to bring representative actions on behalf of other aggrieved employees for Labor Code violations. The Brown court unequivocally found that AT&T v. Concepcion’s preemption finding does not apply to representative actions under PAGA. See Slip. Op. at 2. In reaching its conclusion, the court noted that AT&T v. Concepcion “… provided that at least under some circumstances, the law in California is that class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to class wide arbitration and that the FAA [does not preempt] California law in this respect.” See Id. at 9. After going on to undertake a thorough analysis of PAGA’s purpose as a statute conferring a law enforcement role on private citizens rather than a statute aimed at damages, the court affirmatively concluded that “representative actions under the PAGA do not conflict with the purposes of the FAA.” See Id. at 12.

Though the Brown decision was disappointing to the extent that it failed to address AT&T’s impact on the Gentry decision, it still provides some significant and potentially promising insight into the future of class actions following AT&T. The insight that may be gleaned from the decision comes not only from what the court did say in relation to the viability of PAGA claims post AT&T, but also for what it fails to say with respect to the legislative policy concerns focused on in the AT&T decision regarding the need to enforce arbitration provisions as explicitly written. In fact, the Brown decision does not even address such concerns, instead basing its decision on the public policies favoring the representative enforcement of PAGA. This may be a promising signal that California courts will be willing to look to public policy considerations, as were paramount to the Gentry holding, when dealing with the enforceability of arbitration provisions in employment contracts.

1- In Gentry, the court identified several factors which, if present, could establish a situation in which a class action waiver could be deemed unconscionable. These factors include: (1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent members of the class may be ill informed about their rights, and (4) the consideration of other real world obstacles to the vindication of class members’ rights through individual arbitration.

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Two years after deciding that failure to warn claims against drug manufacturers are not preempted in the Wyeth v. Levine case, the Supreme Court essentially created an exception for generic drug manufacturers on June 23, 2011 with its decision in Pliva Inc., et al. v. Mensing. The Court explained the disparity between the two decisions by explaining that the federal statutes and regulations that apply to brand name drug manufacturers differ from those that apply to generic drug manufacturers and in Wyeth, it was possible for the brand name manufacturer to comply with both state and federal law.

Up until 1984, manufacturers seeking federal approval to market a new drug had to go through costly and lengthy clinical testing in order to meet the approval requirements. However in 1984 Congress passed what is commonly known as the Hatch-Waxman Amendments which allowed generic drugs to be approved simply by showing that they were equivalent to a brand name drug that had already been approved by the FDA. This included ensuring that the labeling on the generic drug was the same as that of the brand name drug. This issue before the Court now was what generic drug manufacturers can do after their drug has been approved.

The Court rejected the respondents’ position that generic drug manufacturers could have engaged in the “changes being effected” (CBE) process or sent “Dear Doctor” letters which would have provided the additional warnings. Instead, the Court deferred to the FDA and their positions that 1) manufacturers cannot engage in the CBE process unilaterally because that would violate the statutes and regulations requiring that their drug label be the same as the name brand drug and 2) that “Dear Doctor” letters are considered labeling and as such no letter can be sent out that contains additional warnings that are not contained in the brand name drug’s label.

Having adopted the FDA’s position, the Court found that there was impossibility since state law requires the generic manufacturers to adequately and safely label their products yet under federal law they were required to carry the same labels as the brand name drug. The Court found that generic manufacturers could not satisfy both their state law duty to unilaterally make their label safer while at the same time not violating their federal duty to keep their label the same.

Although it seems that the Court relieved generic drug manufacturers of any duty to ensure that the products they are providing to consumers contain adequate warnings that is not necessarily the case. One issue that was not resolved was what duty the generic drug manufactures have. Although it was clear that the CBE process and “Dear Doctor” letters were not an option, the FDA did point out that generic drug manufacturers are required to propose to the FDA stronger warnings if they believe such warnings are needed. The FDA explains that this duty is made clear in 21 U.S.C. §352(f)(2). The generic drug manufacturers argued that there was no such duty; however the Court did not feel the need to resolve this issue since it felt that there was preemption even if such a duty existed.

The Court explained that asking the FDA to change the label would still have not satisfied the generic manufacturers’ obligations under state law, and therefore, the analysis would be the same and impossibility exists. State law demanded that the generic manufacturers change the label to have stronger warnings and that was just not possible under federal law.

The Court does mention briefly the unfortunate situation that the injured parties were in by noting the “unfortunate hand that federal drug regulation” dealt them. The Court admits that had respondents taken the brand name drug, their lawsuit would still be alive but because pharmacists substituted generic drugs instead, their lawsuits were preempted.

The reality of what this means for patients did not go unnoticed by Justice Sotomayar, joined by Justices Ginsburg, Breyer, and Kagan who explained in their dissenting opinion that as a result of this decision whether a consumer harmed by inadequate warnings can obtain relief depends on whether their pharmacist filled their prescription with a brand name or a generic drug. Justice Sotomayar further explains the problems with the Court’s decision by stating that:

1) With the longstanding existence of failure to warn claims, had Congress intended to deprive injured parties of this avenue for compensation then it would have expressed that intent more clearly. Especially, given the fact that in some States the generic drug is required to be dispensed absent instructions from physicians, even if the consumer asks for the name brand, which means that some consumers will have no ability to preserve their right to recover for injuries caused by inadequate warnings.

2) The decision eliminates state law incentives for generic manufacturers to monitor and disclose safety risks. With brand name manufacturers leaving the marking once generics are available, there will be no level of protection for consumers.

3) The decision goes against the core principles of the Hatch Waxman Amendments that generic and brand drugs are the same and its goal to increase consumption of generic drugs. The expansion of the market for generic drugs stems from its cheaper production and increased acceptance of, and trust, in the generic drug. This decision could reduce consumer demand for generics and create an ethical dilemma for prescribing physicians.

Justice Sotomayor also disagrees with the majority’s interpretation of the Wyeth case. She rejects the notion that Wyeth requires that a manufacture be able to unilaterally act in order to satisfy both state and federal law. The fact that Wyeth was able to act unilaterally since they were the brand name manufacturer only validates the rejection of the impossibility defense in that case, it does not create a rule that unilateral action is necessary.

Wherever you stand on this issue, one thing is clear. The consequences of this decision are far reaching as generic drugs make up a majority of the drugs dispensed in the United States. Something to think about the next time you get a prescription filled.

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In United Parcel Service, Inc. v. Superior Court of the State of California for the County of Los Angeles, 196 Cal.App.4th 57 (June 2, 2011), a group of employee-drivers filed thirty-two coordinated actions against their employer, United Parcel Service, Inc. (“UPS”), alleging that they were not provided meal and rest breaks by UPS, among other violations, in accordance with California law. The plaintiffs sought compensation pursuant to Labor Code section 226.7, which provides:

“(a) No employer shall require an employee to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commission. (b) If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal or rest period is not provided.”

Arguably, the cited section is susceptible to two alternative interpretations. On the one hand, a conclusion can be drawn that the literal interpretation of the statute provides for one premium payment for both a missed meal and rest period. On the other hand, one can argue that a meal period and a rest period are two distinct events, requiring payment for each if an employee is prevented from taking his or her meal break or rest break. This was precisely the issue the Court of Appeal (Second District, Division Eight) faced in deciding United Parcel Service, Inc. v. Superior Court 192 Cal. App. 4th 1043; 121 Cal. Rptr. 3d 765 (Feb. 16, 2011) earlier this year. Initially, UPS sought a pretrial determination from the trial court on the number of daily payments recoverable under Labor Code section 226.7. UPS contended that section 226.7 allowed only one premium payment per day - regardless of the number of missed meal or rest breaks in any given day so long as one meal and/or rest break had occurred – by focusing on the words “compensation for each work day.” Id. at 1046, 1050. Conversely, the plaintiffs argued that up to two premium payments were allowed per day by honing in on the portion of section 226.7 that reads “in accordance with an applicable order of the Industrial Welfare Commission” - the inclusion of which evidences an intent to incorporate the wage orders that flesh out the requirements for meal and rest breaks in two separate actions. Id. at 1049. The trial court sided with the plaintiffs and ruled that they could recover two, which ultimately prompted UPS to petition for a writ of mandate. The Court of Appeal had a difficult task at hand since no published decision of a California court had addressed this issue. In order to effectively frame the issue it had to determine if the California Legislature intended one or two premiums payments per day under section 226.7.

The Court of Appeal began by focusing on the text of the wage and hour orders issued by the Industrial Welfare Commission (“IWC”) and noted that they “treat meal periods and rest periods in separate sections, each providing the additional hour of pay per work day for the designated type of violation.” Id. at 1048. The wage orders generally provide that employees are entitled to a off-duty rest period of ten minutes per four hours of work and an unpaid off-duty meal period of 30 minutes before the fifth hour of work. The wage orders further add that “[i]f an employer fails to provide an employee a meal period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each work day that the meal period was not provided.” Lab. Code § 226.7(b). Similarly, the wage orders provide ‘[i]f an employer fails to provide an employee a rest period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee’s regular rate of compensation for each workday that the rest period is not provided.’” Id. The Second District observed that the wording used by the IWC in its wage orders is virtually identical to the language used by the Legislature in section 226.7, subdivision (b), “except that instead of having separate sections for the meal and rest periods, the Legislature chose to describe both break periods together so that the additional hour of pay is for ‘each work day that the meal or rest period is not provided.’”

Additionally, the Court of Appeal also followed the reasoning on a recent federal district court decision, involving UPS, which held that an employee “may recover up to two additional hours of pay on a single work day for meal period and rest break violations: one if any meal period violations occur in a work day and one if any rest break violations occur in a work day.” (Marlo v. UPS (C.D. Cal. May 5, 2009, CV-03-04336 DDP) 2009 U.S. Dist. Lexis 41948, p. 21) Lastly, the Court of Appeal took into account “the public policy behind the statute and wage orders, and also the principle that [the court is] to construe section 226.7 broadly in favor of protecting employees” and concluded “that the employees in this case may recover up to two additional hours of pay on a single work day for meal period and rest period violations – one for failure to provide a meal period and another for failure to provide a rest period.” United Parcel Service, Inc., supra, 192 Cal. App. 4th at 1049.

UPS, dissatisfied with the Second District’s interpretation, petitioned for rehearing. The Court granted the UPS’s petition and on June 2, 2011 it re-issued its decision, confirming its earlier holding. The Court of Appeal held:

“In short, we conclude, based upon the wording of section 226.7, subdivision (b), the IWC’s wage words, the public policy behind the statute and wage orders, and also the principle that we are to construe section 226.7 broadly in favor of protecting employees, that the employees in this case may recover up to two additional hours of pay on a single work day for meal period and rest period violations – one for failure to provide a meal period and another for failure to provide a rest period.”

United Parcel Service, Inc., supra, 196 Cal.App.4th at 70.

While the Court’s decision is virtually identical to its earlier decision, it cited three recent decisions supporting its conclusion: Schuyler v. Morton’s of Chicago, Inc. (C.D. Cal. Jan. 25, 2011, CV 10-06762 ODW) 2011 U.S. Dist. Lexis 10130 and Lara v. Trimac Transp. Servs. (Western) (C.D. Cal. Aug. 6, 2010, CV 10-4280-GHK) 2010 U.S. Dist. Lexis 82420. (Both of these decisions followed the reasoning in Marlo that section 226.7 allows an employee to recover up to two additional hours of pay on a single work day); and Coleman v. Estes Express Lines, Inc. (C.D. Cal. 2010) 730 F.Supp.2d 1141, 1148-1149 [holding that class member employees were entitled to “one hour of pay for each work day that the meal period was not provided and also one hour of pay for each work day that the rest period was not provided.”] The Court of Appeal also confirmed that section 226.7 permits up to two premium payments per workday—one for failure to provide one or more meal periods, and another for failure to provide one or more rest periods. Id. at 69.

Since section 226.7 now allows for up to two additional hours of pay per work day for missed meal and rest breaks, it certainly creates added incentive for employers to be more attentive in providing both meal and rest breaks to its employees.

If you have questions or comments about this article, we would value the opportunity to hear from you. For information on other topics in consumer advocacy and to learn more about Khorrami Pollard & Abir, please visit our website or subscribe to our Consumer Advocate Legal Update blog.