Chicago Business Litigation Lawyer Blog

NPR Reports: Supreme Court Case Tests Bans On Class-Action Suits November 09, 2010

December 19, 2010 | Peter S. Lubin and Patrick Austermuehle

Supreme Court Case Tests Bans On Class-Action Suits November 09, 2010 … class action could bring potentially millions of dollars for all those consumers improperly charged. But the cell phone contract barred class actions

By Nina Totenberg

Our Oak Park, Illinois consumer rights private law firm handles individual and class action predatory lending, unfair debt collection, lemon law and other consumer fraud cases that government agencies and public interest law firms such as the Illinois Attorney General may not pursue. Class action lawsuits our law firm has been involved in or spear-headed have led to substantial awards totalling over a million dollars to organizations including the National Association of Consumer Advocates, the National Consumer Law Center, and local law school consumer programs. The Chicago consumer rights attorneys at Lubin Austermuehle are proud of our achievements in assisting national and local consumer rights organizations obtain the funds needed to ensure that consumers are protected and informed of their rights. By standing up to consumer fraud and consumer rip-offs, and in the right case filing consumer protection lawsuits and class-actions you too can help ensure that other consumers’ rights are protected from consumer rip-offs and unscrupulous or dishonest practices.

USA Today Reports: “States, feds crack down on firms using ‘contract workers'”

December 13, 2010 | Peter S. Lubin and Patrick Austermuehle

USA Today reports that companies in order to save money in this economic downturn are treating employees as “independent contractors” in name even though the employer is controlling all aspects of their employment in order to skirt federal and state wage and overtime laws and to avoid paying withholdings. If an employer controls all aspects of a worker’s terms of employment it cannot legally call them indepedent contractors and avoid the requirments of wage laws.

The article reports that this practice is growing and that lawsuits and government actions to prevent it are also on the rise. The article states:

Companies are increasingly using contractors to meet peaks in demand and complete short-term projects. The trend intensified in the recession as firms cut staff. The portion of contingent workers in the labor force is up to about 10% from 8% five years ago, Asin says.

Using these contingent workers cuts labor costs about 30%, Labor says, as employers avoid paying unemployment taxes, workers’ compensation, health care and other benefits.

About 62% of employers said at least some of their workers are misclassified, according to a September survey by SIA. Labor estimates misclassification cut federal revenue by $3.4 billion in 2010. The practice is common in construction, trucking and home health care.

The question of whether workers should be labeled employees or contractors largely hinges on whether employers control their activities. A report last week by the National Employment Law Project concluded port trucking firms misclassify most of their workers.

To read this article in full click here.

Elizabether Warren Outlines First Goal for Federal Consumer Protection Agency to Ensure Financial Products Terms are Disclosed in Plain English

December 13, 2010 | Peter S. Lubin and Patrick Austermuehle

Elizabeth Warren the head of the new Federal Consumer Protection Agency sat down with Michelle Singletary the Washington Post to explain the first goal of the new agency. Warren told Singletary the the Ageny’s first initiative would be to ensure that banks and finance companies compete on an even playing field on the interest rates and other terms they offer consumers rather than hiding those terms in a thicket of legalese. If pricing for financial products is clearly disclosed then more consumers will know what they are purchasing and will not get caught unawares by a teaser loan rate that suddently spikes making it impossible for them to pay their mortage or credit card bills. This will also encourage that banks and finance companies begin to compete more on pricing.

The article states:

But right now, Warren says her focus is on helping consumers understand how much they are paying for debt on everything from credit cards to mortgages. At a recent conference held by the Consumer Federation of America, Warren said the bureau’s initial goal isn’t to impose a series of “thou-shalt-not rules.” Instead, she said that first on the agenda is providing consumers with better and shorter credit disclosures. Although this goal may sound so simple, it has the potential to greatly reduce the financial burden for people, because they don’t fully comprehend how much their debt is really going to cost them. “There are a lot of financial institutions that make their money by keeping products confusing so the price isn’t clear until it’s way too late,” Warren told me. “They make money by concealing risk, which means that people can’t compare the products head to head.”

Court Orders Managing Disputed Family Business Not Appealable as Injunctions, First District Rules

December 12, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Oak Brook, Ill. shareholder dispute attorneys and Chicago business law lawyers took note of a recent appeals court decision in a heavily disputed case involving a family business. In Santella v. Kolton and Food Groupie Inc., Nos. 1-08-1329, 08-1357 & 08-1847 consolidated (Ill. 1st July 31, 2009), Rick Santella accused his sister, Mary Kolton, and her husband William of undermining the family’s business to enrich themselves once they became majority shareholders. The business is Food Groupie, Inc., which markets and sells use of anthropomorphic food characters and educational products that promote healthy eating. According to Santella, the intellectual property is the collective work of the family.

When Food Groupie was originally formed in 1987, Santella held a 35% interest; Mary and William Kolton held 25% each; and a non-party, their brother Ron Santella, held 15%. All four were named directors. In 1988, the plaintiff bought Ron Santella’s interest, giving him a 50% interest in the corporation to match the Koltons’ combined 50%. Shortly afterward, plaintiff transferred 1% of his interest to Mary Kolton, with the understanding that William Kolton would transfer his 25% to Mary, giving her a majority 51% interest with the idea that Food Groupie would be more successful if it was known as a woman-owned company. In exchange for this transfer, Santella claims, the parties executed an agreement that company decisions would be made only by a unanimous vote.

The business ran without incident until 2002. During that time, Santella claims Food Groupie made a profit each year between 1992 and 2001 and the three shareholders always unanimously approved compensation. But in 2002, Santella alleges that the Koltons called a shareholders’ meeting without him or Ron Santella, and gave themselves salary increases, bonuses and 401(k) contributions. This cost Food Groupie a total of 45% of gross company sales, despite a profit that year of only $15,000. The alleged ruse was repeated in 2003 and 2004. As a result, Santella claims, he was paid only one dividend of $1,470 during that time, rather than the $28,808 he believes he was entitled to as a 49% shareholder.

When he confronted his sister about this in 2003, he says she froze him out of the business decisions, changed the locks on the office and was interested only in buying him out. He further claims she usurped Food Groupie’s intellectual property by trademarking characters in her own name, and inappropriately licensed the company’s intellectual property without his consent. Finally, he claims the Koltons held a secret shareholder meeting in 2004 at which they voted to replace him with William’s brother, Anthony Kolton. He sued the Koltons, individually and as a shareholder derivative claim, for breach of the shareholder agreement, breach of fiduciary duty, usurpation of corporate opportunities and violations of the Illinois Business Corporations Act.

In 2005, that lawsuit resulted in the court’s appointment of John Ashendon as custodian of Food Groupie. In 2008, Santella filed an emergency motion to stop what he claimed was his sister’s plan to liquidate the company and move its misappropriated intellectual property to a similar business called Healthypalooza. He also alleged that the couple had continued to pay themselves inappropriately high salaries and commissions, and use the company’s profits for their personal legal defense. He sought to remove the Koltons as officers and enjoin them from using the company’s assets or competing with it, among other things. The court eventually found for Santella on some issues, removing the Koltons and ordering them to return the $144,019 in commissions they had been paid in 2005, 2005 and 2007. It said the court would appoint new officers and directors. It did not say any of these remedies were interlocutory or time limited.

The Koltons filed an interlocutory appeal in 2008, but failed to move to stay the repayment order or actually repay the $144,019. The trial court found them in contempt and ordered them to pay a fine for every day they were late. They eventually paid back the $144,019, but not the roughly $20,000 or so in fines.

On appeal, the Koltons argued that the relief granted to Santella was not supported by sufficient evidence or proof. Specifically, they argued that the Business Corporations Act requires a plaintiff like Santella to prove his claims of improper conduct before the court may order return of the allegedly improper bonuses or their removal as corporate officers. For that reason, they said, the court orders must be reversed. Santella made several arguments against the appeal, most notably that the appeals court lacked subject matter jurisdiction over the non-financial claims. The defendants filed their appeal pursuant to Rule 307(a)(1), which applies to appeals concerning injunctions, and Santella argued that the trial court’s orders removing and replacing directors and officers were not injunctions.

The First agreed with this, saying it lacked subject matter jurisdiction over those orders because they were not direct orders to the Koltons “to do a particular thing, or to refrain from doing a particular thing.” In fact, it took the analysis a step further and examined whether it had jurisdiction over the repayment order. That order was an injunction, the First wrote, but it also must be interlocutory to fall under Rule 307(a)(1). If it was a permanent order, it was outside the scope of the rule. The appeals court found that it was a permanent order, because it did not preserve the status quo. In fact, the court noted, the trial judge had specifically said so when she made her contempt ruling. The trial court had also made conclusions about the rights of the parties and had not time-limited the order. For those reasons, the First found that it also lacked subject matter jurisdiction over the repayment order, and dismissed the appeal entirely. The opinion noted that appellants may still seek a finding from the trial court under Rule 304(a).

Enforcing Noncompetition Agreements is Tricky Business

December 8, 2010 | Peter S. Lubin and Patrick Austermuehle

Any business owner should keep abreast of laws and court rulings that can affect the way they conduct their operation and interact with employees. The law constantly evolves, and that is why our lawyers are vigilant in tracking changes that affect our clients. Citadel Investment Group v Teza Technologies is one such ruling that provides clarity regarding noncompetition agreements between employees and employers.

In this case, Defendants Malyshev and Kohlmeier worked for Plaintiff Citadel Investment Group until February of 2009, when they resigned. When Malyshev and Kohlmeier were initially hired by Citadel, they each signed a nondisclosure agreement and an employment agreement containing a noncompetition clause. The noncompetition clauses contained language giving Citadel the discretion to set the length of the restrictive period at zero, three, six, or nine months. Citadel elected for a nine month restricted period for both Malyshev and Kohlmeier upon their resignation.

Malyshev and Kohlmeier formed Defendant Teza Technologies two months after leaving Plaintiff Citadel in April of 2009. When Citadel discovered the existence of Teza and its status as an entity performing similar high frequency trading in July of 2009, the present legal proceedings began. Plaintiffs initially sought a preliminary injunction against Defendants based upon the noncompetition agreements signed by Malyshev and Kohlmeier. This injunction was granted in October 2009 for relief through November of 2009. The trial court made its decision based upon the agreed upon nine month period contained in the noncompete and calculated the time from February of 2009 when Malyshev and Kohlmeier resigned.

Citadel appealed the decision, and asked the appellate court to grant the injunction for nine months from October until July of 2010. Citadel argued that they had not received the benefit of the restricted period prior to the preliminary injunction being entered, and the Court should adjust the start date of the restricted period accordingly. The Court did not find the Plaintiff’s argument persuasive and denied the appeal because the plain language of the agreements signed by Malyshev and Kohlmeier contained no provision allowing for an extension of time or modification of the commencement date. Thus, the restrictive covenant properly ended in November as was required by the agreement signed by both parties.

Citadel Investment Group v. Teza Technologies serves as a warning to business owners who utilize noncompetition agreements and a potential boon to employees who sign them. Whether you are a business already in a dispute over a noncompetition agreement or a former employee seeking employment with a new company in the same field, you should contact a Chicago business litigation attorney to be apprised of your rights.

Court Rules Quantum Meruit Is Appropriate Standard in Dispute Between Former Law Partners

December 1, 2010 | Peter S. Lubin and Patrick Austermuehle

As Chicago corporate dispute lawyers, we were interested to see a ruling in a dispute between former law partners. In Bernstein and Grazian, P.C. v. Grazian and Volpe, P.C., No. 1-09-0149 (Ill. 1st June 25, 2010), both firms, and the individual partners, accused each other of breach of contract and breach of fiduciary duty in a dispute about how to allocate payment on cases that were pending during the breakup of their first firm. At trial, the trial court found no breach of any duty. It also found that quantum meruit was the correct standard to apply and awarded Bernstein 10 percent of attorney fees generated from those cases by Grazian and Volpe. Both Bernstein and Grazian appealed this ruling, and the First District Court of Appeal made no changes except to vacate the 10 percent fees awarded to Bernstein.

Isadore Bernstein hired John Grazian in the 1990s as an independent contractor to Bernstein’s law practice. They eventually formed the law firm of Bernstein & Grazian, P.C., which focused its practice on personal injury and workers’ compensation cases. Bernstein was president and 70 percent owner, who provided the office, cases and money; Grazian was a salaried employee and vice president. They later hired Richard Volpe as an employee to handle workers’ compensation cases. In January of 2003, they agreed to change the firm’s structure and compensation scheme. The agreement said the three would split the office overhead equally. Bernstein and Volpe were to split expenses of workers’ compensation cases equally and split the fees equally. Similarly, Bernstein and Grazian were to equally split expenses and fees for personal injury cases.

In 2005, Grazian and Volpe decided to leave and form their own firm. The three attorneys agreed that Grazian & Volpe would take over Bernstein & Grazian’s open cases, but they disagreed on how they were to split the fees. Bernstein testified that he was promised 50 percent of the coming fees, but Grazian testified that he offered, and Bernstein accepted, only one-third of the fees. They also disagreed about whether they intended to file forms to substitute attorneys in the open cases before there was a formal separation and exit agreement. Bernstein and his firm sued Grazian, Volpe and their firm, alleging breach of contract and breach of fiduciary duty and demanding an accounting; defendants filed a counterclaim for breach of fiduciary duty.

At a bench trial, the court dismissed every claim but breach of contract. It found that the agreement to dissolve the firm was the controlling contract. But since that document was silent on compensation, the court found that Bernstein should receive compensation under quantum meruit — that is, he should be paid according to the value of his actual services. Noting that it was difficult to determine this from the record, the trial court nonetheless awarded Bernstein 10 percent of the fees. Bernstein and Grazian appealed. Volpe is not a party to the appeal. Because Bernstein died during the pendency of the case, his estate was the appellant.

The appeals court started by dismissing Bernstein’s entire appeal for lack of jurisdiction. Bernstein filed in trial court to dismiss his appeal about two months after filing it. This was granted. About six weeks later, he moved in the appeals court to vacate that dismissal and reinstate the appeal, saying his attorney had made a mistake. This was granted as well. But according to the First, it had no authority to grant that motion, because an order dismissing an appeal is final under Physicians Insurance Exchange v. Jennings, 316 Ill. App. 3d 443, 456 (2000) and Rickard v. Pozdal, 31 Ill. App. 3d 542 (1975). Thus, Bernstein’s entire appeal was dismissed.

On cross-appeal, Grazian argued that the trial court was improper in finding no breach of fiduciary duty by Bernstein. Bernstein had formed a separate law firm in 2004, after the revenue-splitting agreement but before Grazian & Volpe was formed. Isadore M. Bernstein & Associates P.C. (IMB) existed to refer medical malpractice claims to other attorneys. Bernstein bought television advertisement time for both firms, but claimed he paid for the IMB commercial himself. Grazian claimed he had never been told about IMB and its advertisements. The commercials resulted in many new inquiries for both firms, but Bernstein claimed he did not spend a lot of extra time or firm resources on IMB-related work. Grazian disagreed, testifying that this cost the firm resources but did not generate income for him or Volpe, and caused Bernstein’s fee income to drop dramatically. This was the basis for the breach of fiduciary duty claim.

The First did not accept Grazian’s argument. The standard for overturning the trial court was “the manifest weight of the evidence,” it noted — and much of the evidence is unclear because Bernstein and Grazian had sharply conflicting accounts of this situation. What evidence there is does not lead to a conclusion that Bernstein clearly breached his fiduciary duty, the court said. Thus, it could not find that the trial court’s finding on fiduciary duty was against the manifest weight of the evidence.

Grazian had more luck with his argument that while quantum meruit was proper, it should have led to an award of nothing rather than of 10 percent of the attorney fees, because Bernstein provided no evidence required for recovery. Under caselaw including Hayes Mechanical, Inc. v. First Industrial, L.P., 351 Ill. App. 3d 1, 9 (2004), the burden is on Bernstein to show that he provided services of reasonable value to the defendants, and at least some evidence to prove that value. The First found that Bernstein had never provided any such evidence; testimony at trial showed that he did not do several major duties of an attorney, such as going to court, on those cases. In fact, he admitted that his fee generation dropped sharply. Having done “something” is not enough by itself to support a quantum meruit award, the First wrote. Therefore, it vacated the trial court’s 10 percent award to Bernstein.

Summary Judgment Inappropriate in Dispute Over Assignment of Legal Malpractice Claim

December 1, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Illinois legal malpractice attorneys were interested to see a recent decision allowing corporate litigants to assign their claims to former shareholders after a merger. Learning Curve International, Inc. v. Seyfarth Shaw LLP, No. 1-08-0985 (Ill. 1st June 18, 2009). In the underlying case, PlayWood Toys sued Learning Curve International for misappropriation of trade secrets. During that litigation, Learning Curve merged with RC2 Brands. Learning Curve settled that litigation, but then sued its attorneys in the matter and their law firms for legal malpractice. This claim gave rise to the dispute over assignment of claims.

Attorneys Dean A. Dickie and Roger L. Price represented Learning Curve in the PlayWood litigation, which began in 1995. Both attorneys were at the law firm of D’Ancona & Pflaum at the time, but due to personnel moves and mergers, Dickie was at Dykema Gossett and Price was at Seyfarth Shaw during the instant case. In April of 1998, PlayWood offered to settle its trade secrets claim for $350,000; Learning Curve counteroffered $225,000. There was no deal. A jury verdict reached in 2000 held Learning Curve liable for misappropriating the trade secret, but the judge granted a post-trial motion from Learning Curve for judgment notwithstanding the verdict, saying PlayWood had not proven the information at issue was a trade secret. PlayWood appealed to the Seventh Circuit.

While the appeal was pending, Learning Curve merged with RC2. As part of the merger, it agreed to indemnify RC2 from liability related to the PlayWood litigation. Learning Curve remained a separate corporation for tax purposes, but without separate operations. Five months later, the Seventh Circuit ruled, making Learning Curve liable for $6 million in compensatory damages and requiring a new trial on exemplary damages. Rather than face trial, RC2 settled with PlayWood for nearly $12 million, which came from an escrow account set aside for this purpose. RC2 and Learning Curve then agreed in writing to pursue a legal malpractice claim against the attorneys in the original case. This agreement gave former Learning Curve shareholders 90% of any proceeds, but explicitly said nothing in the agreement should be interpreted as an assignment of the claim or its proceeds.

RC2 and Learning Curve then sued Dickie, Price and all of their current and former law firms for malpractice, claiming they negligently failed to advise Learning Curve to settle for $350,000 and negligently failed to explain that they could be liable for millions, including exemplary damages. They sought the cost of the $12 million settlement and all attorney fees paid after the $350,000 settlement offer. The defendants moved for summary judgment on several grounds, saying the claim was not timely; Illinois law does not allow legal malpractice claims to be assigned; and that Learning Curve had not suffered the alleged damages because RC2 paid the settlement. The trial court granted summary judgment on the assignment of claim grounds and ruled that Learning Curve had no right to sue for any costs incurred after the merger. Learning Curve appealed.

The First District started with the issue of the alleged assignment of the claim. Illinois law generally forbids assigning legal malpractice claims, it wrote, and it looks at intent when judging whether a claim has been assigned. That means the disclaimer in the agreement between RC2 and former Learning Curve shareholders was not relevant. However, Illinois and foreign courts have allowed assignment of a malpractice claim in certain circumstances where many interests have passed from one party to another, including, in other states, as part of the transfer of assets in a merger. Because many assets are being transferred in this case, the court wrote, assigning the malpractice claim does not violate public policy. It reversed the trial court’s judgment on that count.

It also rejected the defendants’ argument that the two-year statute of limitations for legal malpractice in Illinois barred plaintiffs’ claim. The defendants argued that the clock started running after the bills came for the original trial in 200, in which Learning Curve was found liable. However, the court wrote, the judge in that trial granted judgment notwithstanding the verdict, leaving Learning Curve liable only for its attorney fees. It was not obvious then that the defendants’ advice was bad. Instead, the First District wrote, the clock started running on this claim after the Seventh Circuit’s verdict. Because this claim was filed within the two-year period from that date, the court wrote, it is not time-barred.

Learning Curve’s luck ran out when the First District considered whether it had any damages from the alleged malpractice. The trial court found that it did not because RC2 paid all post-merger costs, including the judgment from the Seventh Circuit and attorney fees, and reimbursed itself from the escrow account. The appeals court agreed, saying those payments did not affect Learning Curve’s assets. Furthermore, an indemnity clause in the merger agreement eliminated Learning Curve’s losses from those sources. However, the appeals court did say that Learning Curve’s former shareholders, who actually suffered the alleged loss, should substitute as the real parties in interest on the post-merger parts of the claim, writing that “if the defendants committed malpractice, the merger of the corporate client should not cause the claim to vanish.” Thus, the case was reversed and remanded to trial court.

Filing Counterclaims Does Not Waive Contractual Right to Arbitration, Fourth District Rules

November 30, 2010 | Peter S. Lubin and Patrick Austermuehle

As Illinois mediation and arbitration lawyers, we were interested to see a decision confirming that parties may invoke their contractual rights to arbitrate even after some participation in the other side’s lawsuit. TSP-Hope Inc. v. Home Innovators of Illinois, Inc., No. 1-07-1028 (Ill. 4th June 26, 2008) pits a Springfield housing nonprofit, TSP-Hope Inc., against residential construction company Home Innovators of Illinois. The two made a contract in July of 2005 for the construction of houses. In the summer of 2006, construction stopped. Shortly after, TSP-Hope sued for breach of contract and other causes.

About a month later, the defendant filed for an extension of time to plead, saying the plaintiff had served a demand three days before for the defendant to file suit to enforce its liens. Another month later, the defendant filed an answer and counterclaims, including duress in contract formation, breach of contract and enforcement of the liens. After a series of motions and counter-motions, the defendant in July of 2007 filed to dismiss all claims and compel arbitration. In this motion, the defendant claimed that the plaintiff had verbally agreed to mediation before the lawsuit. The parties’ contract specified that they should use mediation at first, and then binding arbitration with a specified arbitration company, to resolve disputes. The trial court eventually granted the defendants’ motion to dismiss a breach of contract claim, saying it had not been waived by participation in the litigation. After a motion to reconsider failed, the plaintiff appealed.

Unusually, the Fourth said, the defendants did not file a brief in the appeals case. However, the court said it had sufficient evidence from the plaintiffs’ brief. That brief argued that defendants had waived their right to arbitration by waiting almost 11 months to assert it, and by submitting arbitrable issues to the trial court in the meantime. To determine whether this is true, the Fourth wrote, it needed to determine whether the defendant had acted inconsistently with its right to arbitrate. Under Cencula v. Keller, 152 Ill. App. 3d 754, 757, 504 N.E.2d 997, 999 (1987), this can include submitting arbitrable issues to the court.

The Fourth then ran down a list of past cases in which a party was found to have waived its right to arbitration. In all of those cases, the court noted, parties had conducted discovery and made pleadings that were more than just responses to the other side. Neither of these was true in this case, it said. It is true that the defendant’s counterclaims could have waived its right to arbitration, the court said, but this is not automatic. In this case, the counterclaim “appeared to be responsive to plaintiff’s complaint” as well as the plaintiff’s demand to enforce its liens. Under those circumstances, the Fourth concluded that the defendant had not acted inconsistently with its right to arbitrate. Thus, the appeals court affirmed that trial court was correct to find that there was no waiver.

Courts Must Decide Admissibility of Questionable Expert Testimony Before Certifying Class

November 23, 2010 | Peter S. Lubin and Patrick Austermuehle

A recent decision by the Seventh U.S. Circuit Court of Appeals will have important implications for our practice as Illinois class action attorneys. In American Honda Motor Company Inc. v. Allen et al., No. 09-8051 (7th Cir. April 7, 2010), the Seventh ruled that trial courts must conclusively rule on the admissibility of expert testimony before certifying a class — when the testimony is essential to the class certification decision. The case is a proposed class action filed in the Northern District of Illinois by people who bought Honda’s Gold Wing GL1800 motorcycle. The plaintiffs claim there is a defect creating unusual amounts of “wobble,” or oscillation of the front steering assembly.

To support a motion for class certification, the plaintiffs used a report prepared by motorcycle engineering expert Mark Ezra. Ezra used a standard of his own devising to support his opinion that the Gold Wings’ wobble was beyond what was reasonable to avoid overcorrections or fear by the rider. He tested one such motorcycle, found it insufficient and suggested that Honda could fix the problem by using a different shape of ball bearings. Honda moved to strike this report, claiming it was unreliable and that the testing based on one motorcycle was not reliably applied.

The district court agreed that Honda had raised some important concerns, and that class certification rested largely on Ezra’s report, but declined to exclude the report entirely so early in the case. It dismissed Honda’s motion without prejudice and certified two classes. Honda appealed the class certification decision, and the Seventh found the appeal appropriate, because the issue is “heavily contested” and has not been addressed at the appellate level.

The Seventh wrote that the district court started off correctly by starting an analysis of the expert testimony as provided by Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). Despite the detail in its analysis and the several troubling flaws it noted, however, the district court declined to exclude the report entirely “at this early stage of the proceedings.” By ruling in this way, the district court left an open question about which aspects of the report would be excluded, and ultimately, whether the plaintiffs met the standards for class certification. That was so insufficient that it was an abuse of discretion, the appeals court said.

Furthermore, the court wrote, the record shows “exclusion [of Ezra’s report] is the inescapable result when the Daubert analysis is carried to its conclusion.” The record shows Ezra’s report fails several tests laid out in Daubert and is “unreliable,” the Seventh wrote, which means it should not be admitted. And without admission of that testimony, the plaintiffs do not have enough evidence to show that their class meets standards of class certification. Thus, the Seventh vacated the lower court decision to grant class certification and remanded the case for further proceedings. In general, the court wrote, when the testimony is essential to the class certification decision, as it is here, a district court must conclusively rule on any challenge to the expert’s submissions or qualifications.

Class Certification Under the Fair Labor Standards Act Section 216(b)

November 17, 2010 | Peter S. Lubin and Patrick Austermuehle

As a firm that focuses on class-action litigation, and wage and hour class-actions in particular, our attorneys are always mindful of judicial rulings that may affect our clients. Early this year, a case in Federal Court in the Northern District of Illinois’ Eastern Division addressed a couple of issues that are important to both employers and employees. The opinion from Collazo v. Forefront Education, addressed questions surrounding a motion to certify a class action under under 29 USC 216(b) for violations of Fair Labor Standards Act (FLSA) flowing from the Defendant’s failure to pay overtime wages to the Plaintiff class members. The Court also commented on the effect of employee-signed releases on an employee’s rights under FLSA.

Plaintiffs are former Illinois admissions representatives of Defendant Forefront Education, a for-profit educational institution with campuses in Illinois and Florida. Plaintiffs sought to certify a class including all current and former admission reps at both locations who did not receive overtime pay from October 20, 2005 – present. Defendants argued that:

1) Plaintiffs provided no basis for sending notice to Florida employees;
2) Plaintiffs failed to show that notice was warranted for the Illinois class members;
3) Plaintiffs failed to identify an adequate class representative; and
4) the language in the class notice was deficient.

To conditionally certify a class under 216(b), Plaintiffs must make a “modest factual showing sufficient to demonstrate that they and potential plaintiffs together were victims of a common policy or plan that violated the law.” The Court found that Plaintiffs failed to make the required showing as to the Florida employees. The only evidence provided by the Plaintiffs was copies of job descriptions pulled from the Florida location’s website, which the Court deemed insufficient. The judge also noted that Plaintiffs had no affiant with personal knowledge of the work schedules or conditions of admissions reps at the Florida locations in ruling against certifying the Florida employees as class-members.

The Court granted the motion as to the Illinois admissions reps due to the less stringent standard under 216(b) as compared to the requirements for class certification under Federal Rule of Civil Procedure 23. The Court found that the class representatives were able to make 216(b)’s “modest factual showing” because: the named Plaintiffs were all employed at the Illinois campus, they each submitted a declaration to the court detailing their respective work schedules and the schedules of coworkers, and they provided documentary evidence that employees were required to work Saturdays.

The Court found one Plaintiff to be an adequate class representative despite the Defendant’s argument that Plaintiff had signed a post-employment release of all claims, including any claims under the FLSA. The Court found that “rights under the FLSA cannot be abridged by contract or otherwise waived,” and the release in question was impermissibly broad as it purported to waive rights under the FLSA. Lastly, the Court required that the class definition be amended to include only those admissions reps who actually worked more than forty hours per week and were not paid overtime.

The ruling in Collazo has something for everyone. The Court makes it clear to potential Plaintiffs that they will not rubber-stamp class certifications under the FLSA, despite the fact that certification requirements under the Act are less burdensome than in other federal class-action lawsuits. For business owners, the ruling means that while a release may effectively remove the threat of some legal claims, they cannot contract away an FLSA wage and hour lawsuit in the same manner.