An often-stated principle in class certification law is that the class certification motion is not a motion on the merits; the merits of the case are distinct from the analysis of the class certification requirements. However, in practice, the line between a class certification and merits is blurred. Two recent California Court of Appeal cases illustrate this point.

In Ghazaryan v. Diva Limousine, Ltd., 169 Cal. App. 4th 1524 (2009), the employee drivers filed a lawsuit challenging Diva’s policy of paying its drivers an hourly rate for assigned trips but failing to pay for on-call time between assignments, referred to as “gap” time. The trial court denied plaintiffs’ motion to certify two overlapping subclasses, one based on Diva’s alleged failure to pay earned overtime and straight time and a second targeting Diva’s failure to provide mandatory rest breaks. The denial focused on the potential difficulty of assessing the validity of Diva’s compensation policy in light of variations in how drivers spend their gap time. Diva had submitted numerous employee declarations stating that drivers typically used unpaid gap time for their own purposes such as working out at a gym, napping or eating at home or running personal errands. The trial court’s order denying certification, however, suggested that if plaintiffs’ claims are valid, class treatment of those claims is appropriate, but stated that the court must first determine if Diva’s practices are improper and, if so, which drivers fit into the appropriate class.

The Court of Appeal found that the trial court utilized improper criteria in analyzing the motion because it had injected a merits analysis into the certification analysis. Id. at 1531-32. The appellate panel held that rather than denying certification because it cannot weigh the merits, as the trial court did, the trial court must evaluate whether the theory of recovery advanced by the plaintiff is likely to prove amendable to class treatment.

The Court of Appeal found that the “theory of recovery” identified by plaintiffs was amenable to class treatment and reversed the trial court. In doing so, appellate panel found that the predominate common legal question of whether an employer is obligated to pay overtime compensation for on-call shifts depends on an interpretation of the term “hours worked” in the IWC Wage Order and stated “ the common legal question remains the overall impact of Diva’s policies on its drivers, not whether any one driver, through the incidental convenience of having a home or gym nearby to spend his or her gap time, successfully finds a way to utilize that time for his or her own purpose.” Id. at 1536.

Shortly after the Ghazaryan opinion was issued, the Fourth District issued its decision in Ali v U.S. Cab Ltd., 176 Cal. App. 4th 1333 (2009), blurring the Diva Court’s clear line between the merits and class analyses. In Ali, plaintiff cab drivers alleged that they had been misclassified as independent contractors and were, in fact, employees. Plaintiffs moved to certify the class of drivers, submitting in support a copy of the Standardized Lease Agreement between the cab company and the drivers, and the training manual the company provided to its lessees, which contained requirements for driver conduct. Plaintiffs claimed these documents showed the cab company exercised sufficient control over the drivers so as to render them employees rather than independent contractors. In opposition to the motion for class certification, the cab company presented 20 declarations from current drivers who not only considered themselves to be independent contractors, but described flexible working arrangements with minimal control by the company, as well as facts defendant claimed established variations in the driver’s actual conduct.

The trial court denied certification on the grounds that individual issues predominated over common issues, found that class treatment is not the superior method of trying the case and that plaintiffs made an inadequate showing of plausible liability claims on a classwide basis and that the named representatives are not adequate class representatives.

Plaintiffs appealed contending that the order denying class certification, which relied the numerous declarations of putative class members, erroneously ruled on the ultimate question in the case and determined that they were independent contractors rather than employees. The Court of Appeal disagreed, first citing case law making the traditional distinction between merits and class certification analyses, but also citing opinions holding that the court may, assuming the merit of the class claims, determine whether issues affecting the merits of the case may be meshed with class action requirements (such as whether substantially similar questions are common to the class and predominate over individual question or whether the claims or defenses of the representatives are typical of the classes).

Unlike Diva, however, the Ali court found that the trial court did not abuse its discretion in denying class certification, reasoning that the declarations of putative class members’ actual conduct supported denial of class certification. However, the Court of Appeal’s decision is curious given the law it cited on the independent contractor analysis. As stated by the Supreme Court in S.G. Borello & Sons Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989), the primary test of an employment relationship is whether the person for whom services are rendered has the right to exercise complete control over the manner and mean of accomplishing the desired result, rather than a mere suggestion as to detail. This legal principle and theory of recovery focuses the right to control retained by the defendant not on the individual conduct of the class members. Borello also cites secondary indicia of the nature of the relationship such as: (1) whether when performing the services the drivers are engaged in a distinct occupation or business; (2) the kind of occupation, with reference to whether, in the locality, the work is done at the direction of the principal or a specialist without supervision; (3) the skill required for the particular occupation; (4) whether the principal or worker supplies the instrumentalities, tools, and place or work; (5) the length of services to be performed; (6) the method of payment; and (7) whether or not the work is a regular part of the business of the principal. All of these factors focus on common conduct of the defendant and not on individual class member conduct. Accordingly, it would seem that by focusing on the individual conduct stated in the class member’s declarations that the Court of Appeal ruled inconsistent with the standards. The Court of Appeal noted that other courts have found this misclassification theory of recovery appropriate for class treatment and stated that “perhaps another trial judge considering the matter in the first instance would have allowed class treatment but that does not merit reversal. Id. at 1351.

Diva and Ali highlight the struggles that trial and appellate courts have in separating merits evidence from the certification analysis. It also is worth noting that merits evidence presented by the defendants in Ali appeared to overwhelm the evidence supplied by the plaintiff. Perhaps one lesson to be learned is that, regardless of where the line is drawn between merits and certification analyses, a court is more likely to certify a case that it thinks will win on the merits.

The United States Constitution acts to guarantee fundamental rights concerning conditions of confinement and treatment for all criminal defendants sentenced to U.S. prisons. Pursuant to the Eighth Amendment of the U.S. Constitution, individuals convicted of a crime have the right to be free of cruel and unusual punishment while in prison. While no universal definition exists of what constitutions “cruel and unusual” punishment, it is settled that any punishment that is clearly inhumane or that violates basic human dignity may be deemed “cruel and unusual.” Typically, an inmate’s Eighth Amendment complaint regarding punishment and confinement conditions are brought in connection with federal civil rights laws, including the Prison Litigation Reform Act (PLRA), 18 U.S.C. §3626, and 42 U.S.C. §1983.

The PLRA has two sets of requirements for relief: requirements regarding all prison-conditions-related litigation, and requirements that apply specifically to population reduction orders. The latter order - which can only be given by a three-judge panel - requires the court to find, by clear and convincing evidence, that:(i) crowding is the primary cause of the violation of a Federal right; and (ii) no other relief will remedy the violation of the Federal right.

When challenging conditions of confinement, such as the standard of California Department of Corrections and Rehabilitation’s medical services, an inmate must show the institutional officials acted with “deliberate indifference” to the inmate’s constitutional rights. Deliberate indifference means the inmate must show more than mere negligent behavior on the part of the institution’s officials and generally demonstrate that (1) the institution’s employees were aware of some risk of harm or danger to the inmate; (2) the institution’s employees chose not to take any steps to remedy the problem; AND (3) the inmate’s fundamental rights were violated as a result.

By no measure are prisons required to be a walk in the park, or provide state of the art care to inmates, but rather, prisons are required to only offer care consistent with the minimum requirements of the Constitution, i.e.: the minimal civilized measure of life’s necessities. Despite this low standard, California’s inability to make its prisons offer even the bare minimum medical and mental health care to inmates is apparent through the two leading cases of Plata v. Schwarzenegger and Coleman v. Schwarzenegger respectively. Stephen Reinhardt, U.S. Circuit Judge for the 9th Circuit Court of Appeals; Lawrence Karlton, U.S. District Judge for the Eastern District Court of California; and Thelton Henderson, U.S. District Judge for the Northern District Court of California, who make up the three-judge panel presiding over the litigation, have determined in their 184 page opinion and order in the matter of Coleman v. Schwarzenegger and Plata v. Schwarzenegger, that California’s prisons are violating inmates’ constitutional rights.

“The medical and mental health care available to inmates in the California prison system is woefully and constitutionally inadequate...” “Tragically, California inmates have long been denied even minimal level of medical and mental health care, with consequences that have been serious, and often fatal…” See Aug. 4, 2009 Opinion Order, page 6.

Unfortunately, when the State’s 45 days were up, the prison reform plan presented to the judges by Governor Schwarzenegger provided for the reduction of only 23,000 inmates in the course of two years - a little more than half of what the Federal Court had ordered. Not surprisingly, the three federal judges rejected Schwarzenegger’s plan, indicating that the State could do better and must do better. The judges threatened, in their seven page decision, that any further failure to comply with their orders will leave them with no alternative but to develop their own independent plan, and implement it. See Order Rejecting Defendant’s Population Reduction Plan and Directing the Submission of a Plan that Complies With the August 4, 2009 Opinion and Order, Page 6. As it stands, Governor Schwarzenegger and his team have one more chance to fix the problem. The California Department of Corrections and Rehabilitation (CDCR) filed a revised plan on November 12, 2009 with the federal three judge panel that addresses the panel’s concerns about the department’s previous filing submitted on September 18, 2009. However, the governor has already asked the U.S. Supreme Court to hear an appeal on the judges’ 184 page order - that request is still pending.

Just recently, on January 12, 2010, the judges approved Governor Schwarzenegger’s November plan to reduce overcrowding. In order to reduce the prison population by 40,000 inmates within two years, the governor will be transferring prisoners to other states and requesting private prison construction. Schwarzenegger is ordered to implement the plan pending the resolution of his appeal to the Supreme Court. In the interim, California prisons continue to provide woefully inadequate medical and mental health care to inmates in violation of the Eighth Amendment.

In January 1999 Merck began their Vioxx Gastrointestinal Outcomes Research (VIGOR) study which compared Vioxx to naproxen, which is the active ingredient in some brand name pain relievers. At the conclusion of the study it was not only apparent that there was a lower incidence of gastrointestinal events in patients being treated with Vioxx , but more significantly there was a higher risk of cardiovascular events in those same patients. On March 27, 2000 Merck issued a public statement explaining those results:

“Among patients treated with Vioxx, there was significantly reduced incidence of serious gastrointestinal events compared to patients treated with naproxen…………In addition, significantly few thromboembolic events were observed in patients taking naproxen in this GI outcomes study, which is consistent with naproxen’s ability to block platelet aggregation. This effect on these events had not been observed previously in any clinical studies for naproxen. Vioxx, like all COX-2 selective medicines, does not block platelet aggregation and therefore would not be expected to have similar effects.”

On November 6, 2003 the first class action securities fraud complaint was filed against Merck & Co., Inc. claiming that Merck had made misrepresentations and omissions about Vioxx’s safety. Prior to this action being filed, the Sarbanes-Oxley Act was enacted on July 30, 2002 which extended the time in which a securities fraud claim can be filed to two years from the date the facts constituting the violation were discovered or five years from the actual violation, the earlier of the two.2

Merck brought two motions to dismiss which included statute of limitations arguments. On April 12, 2007 the District Court or New Jersey dismissed the class action claims on the ground that they were time barred. The court explained that in order to determine when Plaintiffs’ securities fraud claim accrued, an inquiry notice standard was to be applied which meant that the claim accrued when the plaintiffs discovered or in the exercise of reasonable diligence should have discovered the fraudulent scheme.3 The court discussed that in order to determine whether inquiry notice existed, it would look objectively at whether sufficient information of wrongdoing or “storm warnings,” essentially any data which would lead a reasonable person to believe that misleading statements or omissions had been made, existed.4 The court held that with all of the articles written regarding the unreliability of the naproxen theory, all before November 6, 2001, along with the other lawsuits filed, and FDA warning letter issued in September 2001, any reasonable investor would have recognized the storm warnings, even with the positive dissemination of information by Merck throughout it all.5

The investors appealed and the United States Court of Appeals for the Third Circuit subsequently reversed the District Court’s ruling and found that there was nothing in the record to demonstrate that with the public debate regarding the naproxen theory that Merck did not actually believe in it.6 As such, the investors were not on inquiry notice until October 2003, which was when the results of a Harvard study revealed an increased rate of heart attacks in patients taking Vioxx as opposed to Celebrex and placebo and for the first time contradicted Merck’s naproxen theory.7 Essentially, the court reasoned that neither the articles, filed lawsuits or FDA warning letter, that the District court relied on to find that storm warnings existed, abandoned the naproxen hypothesis that Merck was standing behind, and therefore investors were not on inquiry notice because they did not have the information needed to show that Merck knew the theory was inaccurate and committed fraud.

On May 26, 2009, the Supreme Court granted cert, and oral arguments were heard on November 30, 2009. In their brief, Merck argued that discovering facts to show scienter is not a prerequisite to securities fraud claim accrual and the investors should have at least suspected that Merck was acting with scienter.8 It further argued that there was an overwhelming amount of information in the public realm before October of 2001 that suggested that Merck had committed securities fraud.9 The investors, in their brief, argued that when determining claim accrual, the facts constituting the violation includes the facts supporting the elements of the claim of which scienter is one. Also, they argued that information requiring an inquiry by the investors does not alone trigger the limitations period, since it would not have lead to the discovery of facts from which a reasonable person would infer fraud. They explained that if a defendant concealed facts or provided legitimate explanations, as was the case here, then the plaintiff is not on inquiry notice of the true facts which would give rise to a fraud claim. In other words, how could the investors have discovered facts constituting the violation when they neither could nor should have known them through reasonable diligence.10

During oral arguments, Merck again argued that there was enough information out there to suggest that it may have engaged in securities fraud when they were backing the naproxen theory.11 Specifically, it refers to the FDA warning letter in which the FDA accuses Merck of deliberate wrongdoing with respect to its representations regarding Vioxx’s safety.12 Merck, then argued that there were a number of things that the investors could have done to investigate Merck’s potential wrongdoing and fraud, all of which was heavily critiqued by the Justices. Those things included talking to experts regarding the naproxen theory, talking to former Merck employees and consultants, and speaking with lawyers who had filed other Vioxx-related lawsuits.

Now the Supreme Court must weigh the arguments regarding inquiry notice, actual notice, storm warnings, whether the investors needed to investigate, etc. to determine whether the Third Circuit erred and whether the case continues. But in the midst of all of the fancy legal arguments and maneuvers being made in this case, there is one fascinating detail that has not received much attention by the courts, the two faces of Merck. Throughout the public debate, in response to every lawsuit, and in trial after trial, Merck maintained their belief in the naproxen theory and reaffirmed the safety of Vioxx, but when faced with a securities fraud class action, it claims that its investors should have known what it claimed to not know itself until 2004, as indicated by Merck’s Senior Vice President and General Counsel. Merck argues now that with all of the information that was out there, any reasonable investor would have suspected that Merck may have been committing fraud, even though, again, Merck itself claimed to not know of Vioxx’s cardiovascular effects. Seems ironic that the arguments Merck made to defend their public image and other lawsuits is now being challenged by Merck itself to throw out this securities fraud case. One thing that this case seems to suggest is that knowing and not knowing are apparently not mutually exclusive concepts.

1Kenneth Frazier, The Vioxx Story (September 26, 2005), http://www.washingtonpost.com/wp-dyn/content/article/2005/09/25/AR2005092501105.html
228 U.S.C. §1658 (b)
3In Re Merck & Co., Inc. Sec., Derivative & “ERISA” Litig., 483 F. Supp. 2d 407, 418 (D.N.J. 2007)
4Id.
5Id at 419-421.
6In Re Merck & Co., Inc. Sec., Derivative & “ERISA” Litig. 543 F. 3d 150,172 (3d Cir. N.J. 2008)
7Id.
8See Petitioners Brief, page 30
9See Petitioners Brief, page 33
10See Respondents Brief, pages 30-32
11Merck & Co., Inc., et al v. Richard Reynolds et al, Supreme Court No. 08-905, Oral Argument, Transcript page 8, lines 6-10.
11Merck & Co., Inc., et al v. Richard Reynolds et al, Supreme Court No. 08-905, Oral Argument, Transcript page 8, lines 24-25.