Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Cal.: Wage-hour class action against McDonald’s remanded, (Aug 4, 2014)

Remanding a wage-hour class action that included Private Attorneys General Act claims back to state court, a federal district court in California found that the damages calculations of the defendants used to establish that the amount in controversy exceeded the $5 million threshold amount under the Class Action Fairness Act were unreasonable where they represented future damages for two years beyond the filing of the complaint. Moreover, in several instances the calculations of the defendants, several McDonald’s franchisees as well as McDonald’s Corp., assumed a 100 percent violation rate that the court disregarded as unreasonable and speculative (Hughes v. McDonald’s Corp., July 31, 2014, Hamilton, P.).

The employees filed a class action complaint in state court alleging multiple wage and recordkeeping violations and violations of California’s unfair competition law, plus state Private Attorneys General Act (PAGA) penalties, which the defendants removed to federal court under the Class Action Fairness Act (CAFA). In response, the employees sought to remand the case back to state court, claiming that the McDonald’s defendants had not shown the amount in controversy satisfied the $5M minimum CAFA jurisdictional requirement (although conceding that CAFA’s minimal diversity and class size requirements were met). Applying the preponderance of the evidence test to the defense, which bore the burden of establishing removal jurisdiction, the court evaluated each damages component of the parties’ conflicting estimates of the amount in controversy: McDonald’s estimate was a little over $16.2M, compared to the employees’ contention that the defendants’ evidence supported only about $3.7M.

Future damages. One of the primary points of contention was that the defendants wanted future damages included: They calculated the amount in controversy by using six years of damages (four years preceding the complaint and two years following the complaint) because the complaint alleged that “defendants have committed and continue to commit the violations.” However, the court found no basis for including future damages, pointing to precedent that it was “not reasonable” to assume that a defendant would continue to violate the Labor Code, at least not to the same degree it did before the complaint was filed. Distinguishing cases where future damages were included in the amount in controversy calculation, the court reasoned that in those cases, the parties had a right to specific ongoing payments of amounts that were certain. Here, the defendants’ continued violations were not certain, and because speculative future damages did not meet the preponderance of the evidence standard, the court eliminated two years of future damages from each cause of action for the total amount in controversy calculation.

Elimination of future damages. Accordingly, the court then calculated estimated damages for each claim under the state Labor Code (which included failure to pay overtime, meal period violations, rest break violations, failure to pay wages due to discharged and quitting employees, and failure to furnish accurate itemized wage statements) by reducing future damages so that the amount in controversy for non-PAGA claims was estimated to be $3,323,745. Separately, for the PAGA penalties (which included penalties for failure to pay all wages due, maintain records, pay wages due on termination or resignation, pay money due twice a month, furnish accurate itemized wage statements, and meal period violations), after eliminating only future estimates of PAGA penalties, the PAGA total was $2,616,456. Taken together, the amount in controversy initially was reduced to $5,940,201.

Assumption of high violation rates. Next on the table was whether the McDonald’s entities could assume violation rates of up to 100 percent — either based on allegations of the employees’ complaint or from defense evidence. The employees claimed that the defense had not provided any basis for those 100 percent violation rates; McDonald’s and the franchisees pointed to the complaint’s iteration of four pages of policies and practices to support its 100 percent violation rate. California district courts have disagreed about whether defendants may assume certain variables, such as “average hours of overtime worked per week or the rate of wage statement violations,” when calculating the amount in controversy. Some have found allowing defendants to rely on unsupported assumptions of 100 percent violation rates improperly shifts the burden to the non-removing party to refute “speculative assertions of jurisdiction.” But here the court decided the best approach was to examine each of the defendant’s calculations, plus the assumptions underpinning it, to determine whether the calculation was reasonable.

Estimated overtime damages. The court found unwarranted the defense assumption of a 100 percent violation rate based on complaint allegations that defendants “do not pay overtime” and “have a policy of altering recorded hours to eliminate hours.” Additionally, defendants’ assumption of overtime violations for every shift of 7.5 hours was speculative. Allegations that overtime violations were a “regular” occurrence were insufficient to assume a 100 percent violation rate, said the court, since overtime is owed only when employees worked more than eight hours a day or 40 hours a week. Plus, the employees’ complaint never alleged that McDonald’s always failed to pay overtime on every shift that was scheduled to last 7.5 hours. Finding the defense calculations unreasonable here, the court would not accept them as to the amount in controversy.

Meal and rest break damages. As to meal break violations, the employees agreed with the defense calculation of a 100 percent meal period violation rate for shifts of 5.5 hours. But the calculation of a 75 percent meal period violation rate on every other shift (other than 5.5 hours mentioned above) was speculative, since the defendants offered no evidence of frequency of late, missed, or interrupted meal periods. But the parties again agreed with a 100 percent violation rate on rest break damages for all shifts lasting more than 3.5 hours, based on the employees’ allegation that McDonald’s required class members to remain in the store during all rest breaks.

Discharged employees and wage statements. Finding no basis in either the complaint and no evidence from the defense to support its assumption calculating failure to pay wages to discharged and quitting employees on a 100 percent violation rate, the court refused to accept those calculations. And as for failing to furnish itemized wage statements, the only thing the employees challenged was the inclusion of future damages, which the court had already removed. All told, the total amount in controversy for non-PAGA claims was accordingly reduced to approximately $2,232,013.

PAGA claims. Under PAGA, 75 percent of the civil penalties recovered by aggrieved employees are distributed to a state labor commission, while the remaining 25 percent are distributed to the litigating employees. District courts are split and the Ninth Circuit has not yet ruled on whether the total claimed PAGA recovery — or only the 25 percent that goes to the litigating employees — should be treated as part of the amount in controversy. So the court decided to first determine the total amount of PAGA penalties that were supported by the complaint of evidence and only if necessary resolve the 75/25 split issue.

Failure to pay wages due. For the failure to pay all wages due, defendants’ calculations of PAGA penalties also included the amount the defense calculated for meal period and rest break violations, which the court had already eliminated, so the court further decreased that penalty. Applying that reduction resulted in a total estimated PAGA penalty of $1,064,269 for failure to pay all wages due. Although the McDonald’s defendants also calculated PAGA penalties for failing to pay twice monthly (under Labor Code Sec. 204), these damages were subsumed within Labor code Sec. 2010 penalties failure to pay all wages due. Since Section 204 doesn’t create any substantive rights, calculating damages for Sec. 204 and Sec. 210 was duplicative, and the court eliminated those calculations.

Finally, for the remaining PAGA penalties (failure to maintain required records, failure to pay wages due to discharged and quitting employees, and failure to provide a meal period for a work period of more than 5 hours), the employees challenged only the already-removed future damages, resulting in a total of $2,640,155.

Final calculations. If the court were to add 100 percent of the estimated PAGA penalties to the non-PAGA amount in controversy, the total would be $3,864,582. Having reduced the amount in controversy to remove future damages and to remove calculations based on unsupported assumptions, the amount in controversy was either $3,864,582 (if 100 percent of PAGA penalties was included) or at $2,640,155 (if only 25 percent of PAGA penalties was included).

Attorneys’ fees. Finally, the defendants also included estimated attorneys’ fees in their amount in controversy calculation, which is appropriate if the underlying law provides for the payment of attorneys’ fees. But, the court cautioned, the only fees that can be considered as part of the amount in controversy calculation “are those incurred as of the date of removal.” This case was removed only one month after it was filed, making it unreasonable to assume that any attorneys’ fees incurred before removal would raise the amount in controversy (under either PAGA approach) to the required $5,000,000 threshold. Accordingly, the court granted the employees’ motion to remand the case to state court.

The case is No. C 14-1700 PJH.

Attorneys: Barbara Jane Chisholm (Altshuer Berzon) for Jason Hughes. Fred W. Alvarez (Jones Day) for McDonald's Corp., McDonald's USA, LLC, and McDonald's Restaurants of California, Inc.

Companies: McDonald's Corp.; McDonald's USA, LLC; McDonald's Restaurants of California, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices CaliforniaNews