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LittlerThis article recently appeared in GC New York, January 31, 2005.

Stealth Class Actions

by Christina L. Feege, James N. Boudreau and Allan G. King

ON JUNE 21, 2004, a federal dis- quickly and quietly at the pre-liti- Preserve evidence -- often. Demand trict court in San Francisco certified gation phase, if the price is right. It letters are addressed to the CEO, a nationwide class of approximately is then up to in-house counsel to and may languish in his or her of- 1.6 million current and former fe- decide to settle at the outset, or risk fice for weeks before being shuffled male employees of Wal-Mart who large-scale and potentially messy off to another department. Equally claim sex discrimination in promo- litigation. dangerous, sometimes class action tions and pay at Wal-Mart stores demand letters land on the desk of around the country. ‘Dukes, et al. Why start with a demand letter an unsuspecting human resources v. Wal-Mart Stores, Inc.’, No. C 01- rather than a formal suit? First, professional. Neither the CEO nor 02252 [N.D. Cal. June 21, 2004]. economics. Class actions are ex- HR will typically view this type of Although this is a noteworthy case, pensive to mount and maintain, so demand letter as anything particu- it is not just about sex anymore. an up-front , even if it is larly urgent. But demand letters Wage and hour collective actions not for the full relief that would be trigger the same type of legal obli- now take up a significant portion available in court, is often the most gations as a formal , such of state and federal court dockets, cost-effective route for plaintiffs’ as document retention and “legal demonstrating that this once sleepy counsel. Savvy “class” counsel also hold” obligations of the type an- area of the law has caught the atten- know that their leverage is highest nounced in the UBS Warburg liti- tion of the plaintiffs’ bar. While the when they can “sell” confidential- gations. headlines suggest that these recent ity as part of an omnibus pre-suit class actions are won or lost in the resolution. Although conventional wisdom courts, the new “action” in class ac- has been that the duty to preserve tions comes from quiet demand let- How to Respond evidence accrues upon receipt of a ters that threaten employers across court complaint, courts are increas- the country. Corporate legal departments need ingly finding that it may accrue well to recognize that these demand let- before then. See, e.g., Zubulake v. “Stealth class actions” are phantom ters are different in kind from the UBS Warburg LLC, 2003 U.S. Dist. that are quietly initiated ones they are used to receiving in LEXIS 18771 at *9-11. For exam- with a short, carefully crafted de- single cases, and that the ple, the court in Zubulake found mand letter from aggressive, well- threat they present is real. Below that the ’ duty to pre- known class action counsel. These are some pointers on how to man- serve evidence began when “almost letters typically suggest that there age this threat in a manner that everyone associated with Zubulake is a large class action waiting in the enables the company to effectively recognized the possibility that she wings, and outlines in broad strokes negotiate a settlement, if appropri- might sue.” Zubulake, 2003 U.S. the areas where the organization is ate, while also preparing to mount Dist. LEXIS 18771 at *9-11. The potentially liable. The letter closes a vigorous defense. court found that this was 22 months with an offer to resolve the matter before the plaintiff filed her federal

T M LITTLER MENDELSON, PC The National Employment & Labor Law Firm www.littler.com A Littler Archive Newsletter page 2 court complaint and four months before she experienced in the area of employment dis- wide investigation, however, often results filed her Equal Employment Opportunity crimination pattern and practice litigation. in publication of the claims deep within the Commission (EEOC) charge. Make sure you get one of the good ones from organization, possibly to otherwise unaware the start. Second, you will likely need a la- potential plaintiffs. Thus, be careful. There is The federal district court ultimately sanc- bor economist to address damage allegations, a need to balance the instinct to investigate tioned UBS Warburg for failing to maintain such as pay disparities between male and fe- immediately against the desire for confidenti- e-mails germane to the case once the threat male employees or minority and non-minor- ality. Ethical considerations also play a role. In of litigation became apparent. Coincidental- ity employees. every case, establish a control group charged ly, the following day, the U.S. District Court with receiving information and investigating for the District of Columbia ordered tobacco Finally, and increasingly on the scene, are in- the basis of the claims. The control group giant Philip Morris to pay $2.75 million in dustrial psychologists. Plaintiffs increasingly should be small at the outset, consisting of sanctions for its own e- violations, use such experts to opine, for example, that senior ranking employees from legal, HR and including the deletion of relevant e-mails. the employer’s work force is “male-dominat- the affected business unit. Like a widespread U.S. v. Philip Morris, No. 99-2496 (D.D.C. ed,” and as a result, managers hold stereo- investigation, a large control group may very 2004). typical views concerning female employees’ well defeat the purpose of a quiet settlement. ability to succeed. This expert may sug- That is, you may get your settlement, but it Document and information retention obli- gest that these biases are unconscious, and will not be “quiet.” gations can be massive in scope when they will contend that absent specific checks on pertain to, for example, every sales associate managerial discretion, which are lacking, the As time goes by and the investigation con- employed by a nationwide retail organization discriminatory results found by the econo- tinues, employees in the company, many over the past five years. As Zubulake demon- mist/statistician are virtually inevitable. For of whom will be potential class members, strates, however, failure to preserve evidence example, in Dukes v. Wal-Mart, the sex dis- will inevitably learn of the action. A com- under these circumstances can place the crimination class action recently certified in pany may find itself wanting to get its mes- company at risk for sanctions in later litiga- , plaintiffs’ sociologist emphasized sage out to rank and file employees, but be- tion (which may be substantial, even if the that the “Wal-Mart culture” was the common ware — any such message must be carefully underlying case has little merit), as well as thread that tied together the seemingly un- scripted. One way to manage the message is weaken the company’s substantive defenses. related decisions managers made throughout to prepare “talking points” for HR and man- the nation. A company defending such al- agers. By controlling what is to be said in this As a first line of defense, therefore, legal de- legations will need an expert to rebut these manner, the organization can meet its ethical partments should put procedures in place to opinions. obligations in regard to communicating with deal with demand letters, just as they have putative class members and simultaneously with formal court and agency Given the importance of expert testimony in protect itself against claims that it is trying to charges. For example, a “legal hold” memo class litigation, early involvement of effective coerce potential class members to avoid the should detail a specific method by which em- experts, both consulting and testifying, is litigation or to speak directly to the company ployees should preserve potentially relevant imperative. Such early involvement enables about their claims. Companies may also con- e-mails. It is also imperative to inform the IT the company to identify relevant data, what sider a mass communication (for example, an department of the company’s newfound re- needs to be retained, and the best way to e-mail or intranet posting) that describes the tention obligations. The IT department will analyze it. Consulting experts are particularly , issues involved and the company’s likely have to stop or alter the company’s helpful because they can help to build a sta- position. As a general rule employers can is- current automatic document/e-mail deletion tistical model to study various employment sue mass communications to potential class practice. decisions at issue without risking the discov- members, so long as they are (a) not false or ery of results. This may give the company misleading and (b) contain a disclaimer indi- Line up your experts. When your company immeasurable leverage in settlement negotia- cating that the communication represents the receives a demand letter that appears cred- tions as it will already have defenses prepared position of the company and that no employ- ible, it is time to reach out to the small uni- to claims that plaintiffs’ counsel may make ee will be retaliated against for “participating verse of expert who specialize in during settlement negotiations. Further, the in the litigation.” Manual for Complex Litiga- employment class action litigation. Do not company will be in position to defend the tion (Third) §30.24, at 257 (citing Gulf Oil v. wait. If you do, you may find that plaintiffs’ case in the event a resolution is not reached, Bernard, 452 U.S. 89, 102-04 (1981)). counsel has already contacted the one you as it can use the data to defeat class certifica- want. Early involvement of the right experts tion if it proceeds to litigation. Judiciously manage the data. Of course, any can also help your organization evaluate its company trying to decide between settlement potential exposure early on. Manage communications with employees. and litigation in response to a threatened The threat of a class action poses another class action will need to evaluate the claims In employment discrimination cases, there very practical problem for companies: whom raised, and prepare for litigation if necessary. are three areas where expert evidence is gen- to tell. The first instinct upon receiving a de- It is necessary to start to identify potential erally required. First, a statistician should be mand letter is often to conduct a wide-scale class members, to assess the magnitude of retained. There are very few who are truly investigation into the merit of the claims. A potential exposure from best to worst case

T M LITTLER MENDELSON, PC The National Employment & Labor Law Firm www.littler.com A Littler Archive Newsletter page 3

scenarios, and to prepare defenses to class counsel will want to be cognizant of the fol- in Employment Act collective actions, which certification. lowing considerations: follow an “optin” procedure, and thus bind only those employees who have formally It is critical that these activities be done in a Tolling for trolling. Employers have leverage sought to join the suit. Depending on the na- manner that preserves privilege. It is not un- at the pre-suit stage. Experienced plaintiffs’ ture of the suit, an outside agency also may usual for human resources or business people counsel know that confidentiality and clo- have to get involved. For example, in FLSA to start generating data without counsel spe- sure make up the real product they are sell- litigation an employee may not waive his or cifically instructing them to do so. In all likeli- ing. Do not be afraid to demand broad con- her right to back pay and other relief absent hood, this information will not be privileged, fidentiality concerning the plaintiffs’ claims approval from a court or the U.S. Department and may be generated in a way that is poten- and all settlement negotiations. If the parties of Labor. Similarly, because a privately negoti- tially damaging to the company’s position. As involved decide to pursue settlement nego- ated release of claims will not bind the EEOC, part of a company’s standard response proto- tiations, they will generally be protracted. it may be necessary to involve the EEOC in col, therefore, counsel should instruct human As a result, plaintiffs’ counsel will likely ask settlement negotiations if the company wants resources and other support teams to wait to for an agreement tolling the statute of limi- to close out any possibility of future litiga- generate reports and other data concerning tations until settlement discussions end. Al- tion. Common settlement provisions. During contested claims until specifically instructed though there is generally nothing wrong with settlement negotiations of class-wide employ- to do so. As discussed above, this is also the entering a tolling agreement, it is important ment claims, plaintiffs’ counsel often make time to get consulting experts involved. They to demand that plaintiffs’ counsel agree not requests beyond monetary demands, some can help organize and generate data in ways to “troll” for new clients during settlement of which may even help a company prevent that assist the defense to the maximum ex- negotiations. Be aware, however, that if the future claims. For example, changes to the tent, all under the umbrella of privilege. U.S. Equal Employment Opportunity Com- company’s existing job posting processes may mission (EEOC) or National Labor Relations be demanded. Plaintiffs may demand ongo- Initially, the company should interview rele- Board gets involved, these agencies may not ing independent studies to determine vant decision-makers and hear their rationale countenance language that amounts, in their if the company is determining pay, job grades for the challenged decisions. Such interviews view, to gag orders. and promotions on a nondiscriminatory ba- may give the company viable defenses that sis. it can use to oppose class certification — for Understand what you are buying. Beware. If example, that the plaintiff’s experience does the company’s goal is to dispose of an action Structural changes may be required as a con- not reflect corporate “policy,” or to argue that quickly and quietly, a private settlement may dition of settlement if disparities are found. the contested policy has a narrow effect on as be an appropriate option. The settlement of These may include the creation of an ombuds limited a class of employees as possible. One a threatened class-wide claim without court office to resolve independent employee com- goal your company should have during the involvement, however, does not bar future plaints;1 and the creation of “affinity groups” investigations is to develop how processes litigation on the same claim (except to the of similarly situated employees, including the at issue in the potential class action actually extent individual releases are obtained). This provision of meeting space and other resourc- work, i.e., at what level are decisions made, may leave lingering, unresolved claims lurk- es that allow members to communicate about what kind of HR/managerial oversight was ing in the background. A company could ink common issues. Plaintiffs may even demand there, what are the objective components of a deal on Monday and be sued in court on that the company retain an industrial psy- the decision-making. To the extent the data Tuesday based on the exact same allegations. chologist to review and make recommended permits, it may also be possible to “play with If the company’s goal is to ensure full closure changes to job applications, performance the numbers” in a manner that demonstrates and to prevent the reoccurrence of a class appraisal forms and other human resources the weakness of plaintiffs’ claims and/or action threat, therefore, a private settlement policies. theories. A consulting expert may help the may not be the best vehicle. company develop facts showing that income Although these requests may appear taxing differences between men and women do not If the company wants more closure on threat- and burdensome, they are all subject to ne- reflect gender bias, but instead reflect in- ened claims, it will have to go public at some gotiation. The company’s goal should be to come, educational or experience-based dis- point and seek court approval of the settle- ensure that any agreements regarding ongo- parities that pre-dated employment with the ment. There are strategies and tactics for ac- ing monitoring or systemic changes have a employer. complishing this as quietly as possible, but minimal impact on the company’s day-to- notice of the proposed settlement will have day operations. Moreover, companies should So, You Want to Settle? to be sent to all potential class members and strive not to surrender day-to-day decision- a court will have to hold a fairness hearing making or control to outsiders, expert or not, If the company wants to pursue settlement, before approving the settlement. This strat- as a condition of any settlement. how should it proceed in the precomplaint egy will not necessarily work with Fair Labor context? As negotiations unfold, in-house Standards Act (FLSA) or Age Discrimination Where is the EEOC? The EEOC rarely walks

1 For example, in settling a nationwide class action asserting claims of race discrimination with both private plaintiffs and the EEOC, the Abercrombie & Fitch retail chain agreed to create a new “diversity” office, and to modify its workplace complaint procedures.

T M T M LITTLER MENDELSON, PC The National Employment & Labor Law Firm LITTLER MENDELSON, PC The National Employment & Labor Law Firm www.littler.com www.littler.com A Littler Archive Newsletter page 4 away from class actions (threatened or actual) you in keeping the issue of punitive without making programmatic changes to the from being sent to a or incurring liqui- employer’s existing workplace policies. If the dated damages in wage and hour litigation EEOC is involved, expect the agency to be based on “willful violations of law.” It may less focused on money than a private plaintiff also make your organization a less attractive would and more focused on implementing candidate for a stealth class action threat. programmatic changes (like affinity groups, (2) To promote good employee relations. pay equity studies and structural changes Employee satisfaction and retention will in- discussed above). A company may need to crease if employment policies are viewed as go the extra mile on programmatic relief to non-discriminatory and legally sound. ensure the EEOC’s cooperation in endorsing (3) To enhance the bottom line. Staying a favorable monetary settlement. out of the headlines and/or defeating a large class certification attempt could enhance the Preventative Strategies company’s share price, and the implementa- tion of preventative measures decreases the There are proactive measures that corporate cost of employment practices liability insur- legal departments can initiate to make sure ance. And do not forget about legal fees saved, that their case is not the next one featured on which are not insignificant in the context of “bigclassaction.com.” The best strategy is to potentially large-scale, nationwide class ac- be proactive: determine whether your com- tions. pany’s statistics and policies are a harbinger (4) To arm your company with a better of class certification and take corrective steps settlement posture, and a better body of evi- now rather than in response to a threatened dence should the case proceed to litigation. or actual claim. In-house counsel would be well-advised to do the following: • In a privileged fashion, become famil- iar with your employment statistics and the inferences that can be drawn from them; • If your company already has that famil- iarity, examine your policies regarding hiring, promotion and pay — again in a privileged fashion — to assess whether modifications can be made so that they do not appear to rely too much on subjective criteria; • Adopt or modify a job posting system so that job openings and promotional op- portunities (or more of them) are publicized internally; • Conduct a systematic assessment in a privileged fashion of potential barriers to the advancement of individuals in protected clas- sifications; • Adopt an process for decisions denying promotions or pay raises; and • Audit your pay practices to ascertain whether employees are appropriately classi- fied, and assess whether exempt employees are being paid for all hours worked, and overtime, if applicable. • Draft policies to fill in any gaps.

Why open up this potential can of worms? Four reasons: (1) To identify and correct problems. Even if it does not keep your company out of court, a demonstrably proactive approach at the corporate level will nevertheless assist

T M LITTLER MENDELSON, PC The National Employment & Labor Law Firm www.littler.com