California Supreme Court: Class Action Waiver in Arbitration Clause Void in Overtime Case; Opt-Outs Not a Shield

Well, the California Supreme Court giveth and it taketh away. If you enjoyed the Court's decisions in the Ralph's and Green cases issued last week, you might have been looking forward to another employer victory in the Gentry opinion. Not so much.

In fact, not at all. The California Supreme Court in another 4-3 split, decided that class action waivers may be deemed invalid. Trial courts must decide, case by case, whether a class action waiver is void according to these criteria:

when it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above:

- the modest size of the potential individual recovery,

- the potential for retaliation against members of the class,

- the fact that absent members of the class may be ill informed about their rights, and

- other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.

If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual
litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can “vindicate [their] unwaivable rights in an arbitration forum.”

The above may be the headline, but the rest of the opinion is worse. Disagreeing with the Ninth Circuit, the court decided that Circuit City's "opt-out" provision did not save an arbitration agreement from procedural unconscionability. Here the Court frankly just made up a rationale for why an employee who has a 30 day period to choose whether to sign an agreement actually may not have any choice. The Court had to do this, or its unconscionability jurisprudence would not apply simply because the employer gave the employee a meaningful chance to either sign or not sign the arbitration agreement.

Justices Moreno, Werdegar, Kennard, and ... Chief Justice George made up the majority. Justices Baxter, Corrigan and Chin joined in the dissent.

Wow, this is another blow to using arbitration agreements in employment cases. It's almost at the "why bother" stage.

The case is Gentry v. Superior Court (Circuit City Stores)

DGV

Virtual Entrepreneurship in Second Life: the New Pioneers

I just attended the Second Life Community Convention in Chicago and I’m happy to say that the pioneering spirit at the edge of the electronic frontier is not only still alive and well, it is thriving in the form of virtual entrepreneurs.

For those of you who haven’t heard of it, Second Life is an example of a metaverse – a virtual 3-d world that exists only out on the Internet. It’s been around for a few years now and over the last year there has been a lot of press (both positive and negative) about it in the last twelve months – though I think for the general population the idea of living an entire virtual life on the internet, complete with virtual businesses, virtual art, virtual relationships, is still a fairly fringe concept. Unlike many “games” there isn’t necessarily a game-plot in second life – i.e. your goal is not to kill monsters, but rather to live a virtual life (which might include killing monsters if that’s your thing). There are no points – but there are dollars – which you can make, buy, sell, and you can spend – just like in the real world. You can join and create both formal and informal social networks, or just make friends and socialize.

My mission was to find entrepreneurs in the virtual world and to assess the possibilites of starting and growing businesses based on this virtual world. What I found was that the convention and the businesses I ran across remind me alot of how the Web was perceived in 1995/1996 - a small but dedicated group of initial pioneers who are working on the cuttng edge but are still relatively low key.

There is no single event yet which marks the beginning of a “mad rush” into this new frontier by the investment community, like the Netscape IPO represented in the nineties. One candidate is the first time a virtual person – Anshe Chung – appeared on the cover of Business Week as a real estate mogul who was eventually worth at least a million US dollars but who owned no real land outside of Second Life, a lot of eyes (and eyebrows) were raised. For lots of investors, this was the first time they had even heard of Second Life.

In fact, despite this rush of users, the term pioneer is still a very good one for a vrtual entreprenuer – most businesses I encountered were small, doing pioneering work building new gadgets, location, clothing, etc. out in the virtual world. The landscape is evolving all the time – as users add new islands, new shops, new cafes, new dance clubs, etc. It still reminds me a little of the Old West – a relatively open landscape that is being shaped by dreamers and innovators that will eventually become something all of us have to pay attention to. There are now lots of more settlers, but the character of the place hasn't quite changed yet.

Altough there has been a large rush of users in recent months, the total number of registered users is still pretty small when compared to users of the web, or of social networking applications like MySpace or Facebook. While these social networking companies have been the poster boys for the “web 2.0” hype, I might argue that the real pioneering work of inventing a new kind of Internet which is used for collaboration, social interaction, education, marketing and business is going on virtual worlds like Second Life. This is “internet 2.0” – and may someday be more important than static web pages.

So here are some of the things that I found:

• Today, most transactions within second life are small by real-life standards. This is because they are conducted with Linden dollars, and the exchange rate is 266 linden dollars for each US dollars. However, the fact that there is an easy to find exchange rate and as the sheer volume of transactions adds up, more and more transactions within second life can add up to real money. Entrepreneurship is alive and on the rise. Today, there are a very large number of shops and vendors within second life who are selling and trading in virtual goods. Some of these have become well established, but many are new and just scraping by. To date, some of these kinds of businesses are making enough money to sustain their owner’s lifestyles but a few are rising beyond that level yet.
  
• The ability to build a community within the virtual world is one of its main strengths. While we talked about web 2.0 communities, the communities and interaction within a 3-d world allow a level of interaction that is unparalleled and so the communities formed tend to be stronger and more intimate than simply email or web based communities.
  
• The real money today and the largest companies in the virtual world are made by “builders” – who take real life corporations and build a presence for them in the virtual world. These projects today range in size form $20K to $100K – which again parallels the cost of establishing web presences a decade ago before it became mainstream.
  Real life companies like IBM are using shared collaborative spaces in Second Life rather than spending the money to go to actual physical locations to collaborate. Real life movies (300, Transformers) and publishers and authors (William Gibson for example) are starting to launch books and do special marketing events within Second Life. Reuters has a presence within second life as well.
  
• While the numbers are still small, the impact of an event in a Second Life can go well beyond the number of people who are actually at the event. For example, a book or movie event may only have 60 people attending in Second Life. That event is then rebroadcast on blogs, vlogs, podcasts, and described on blogs which start extending the reach to many thousands of end users.
  
• Think of the web and the metaverse as co-existing and working together; many applications which require more compl.ex interactions than can be done in second life today (such as the stock exchanges) start with a Second Life transaction, and then take you to web sites to implement the complex business logic. Expect to see more of this.
  
• The metaverses are going through growing pains and not yet mainstream, but given the growth rates they will be soon. The current infrastructure won’t hold up well as the numbers on virtual communities grow like the numbers on the web did.
  
• The amount of time spent by a consumer in Second Life paying attention to new products and spaces is significantly higher than the time spent by a user of the web on a web page or a banner ad. In some case, a Second Life user will spend 20 minutes before they decide whether a shop or a product is right for them – on the web think seconds.
  
• Initially the real opportunity long term may be in leveraging the virtual worlds not simply as a place to sell – but as a place to promote, provide thought leadership, cutting edge music and movies, and educational tools and tying into real products. However as the numbers and dollar volume of transactions grows, expect to hear about more businesses that have limited “real-life” presence at all but are thriving within virtual worlds. Expect that at some point, for certain sectors of the economy, having a presence in a metaverse maybe as important as having a website for your business is today. Remember even 10 years ago that most businesses did not have websites and today it is a requirement in certain industries.
  

While some of the numbers that exist on second life today might look “smallish” to a venture capital and entrepreneurial community that is used to seeing millions of US dollars invested in software and new media companies, my main point is this: Just Wait.

Conclusion: The metaverses today still represent a ground floor opportunity .. .they are still a bit like the wild west in the second half of the nineteenth century, and the World Wide Web in the last decade of the twentieth century. If you’re a pioneer you should be looking at it seriously…

Court of Appeal Rejects Trade Secrets Claim

The Court of Appeal in Yield Dynamics, Inc. v. Tea Systems Corp. undertook a detailed analysis of Yield's claims for misappropriation of trade secrets, asserted against a former employee. The court upheld the trial court's conclusions that Yield had failed to establish (1) the misappropriated items were properly defined as "trade secrets" because there was no independent economic value associated with their secrecy (2) damages. The court also upheld the trial court's decision in favor of the defense on a number of other claims, including breach of contract, fraud, and unfair competition. This case provides a useful roadmap to litigants attempting to establish trade secrets status.

DGV

California Supreme Court: Plaintiffs Must Prove They Are Qualified Individuals With Disabilities Under California Law

The federal ADA requires employees to prove as part of their prima facie case that they can perform the essential functions of the job they hold or seek, with or without reasonable accommodation. Put another way, if they can't do the job regardless of accommodation, they cannot claim discrimination under the ADA.
The California FEHA is broader than the ADA in many respects. Lower courts were split on whether the employee had to prove they were qualified - that they could perform essential job functions with or without accommodation. In Green v. State of California, the court of appeal held that employers, not employees, had the burden of proof on this issue. That is, the lower court said that employers must show the employee was NOT able to perform essential job functions with or without any accommodation.
The California Supreme Court, reviewing Green v. California, held that FEHA is analyzed like the ADA, in that employees have the burden of proving they can perform their essential job functions with or without reasonable accommodation.

DGV

California Supremes: Bonuses Legal in California!

When I am asked to give examples of California employment law that makes people in other states smack their foreheads, wage and hour law always provides the best ones. In recent years, courts held that profit-based bonus plans were illegal in California because they took into account costs such as workers' compensation premiums and breakage, merely within the FORMULA used in calculating a profit-based bonus. Pity me. When I advise out-of-state employers on this issue, I usually have to hold the phone six inches from my ear.

No more. A sliver of sanity was restored today. The California Supreme Court decided in PRACHASAISORADEJ v. RALPHS GROCERY COMPANY, INC., that such bonuses are perfectly legal. That is, employers no longer have to fear giving extra compensation to employees based on profitability. The essence of the Court's decision:

The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers’ compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store’s profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages.

Amen.