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The long-awaited decision by the United States Supreme Court on business method patents was issued on June 19, 2014.  Unfortunately, the decision raised more questions than it answered.  The expectation was that the Supreme Court would clearly explain the difference between unpatentable abstract ideas and patentable software, including business methods.  Instead, the Court issued a very narrow decision with broad, but uncertain ramifications.  The Court applied a test it has previously relied upon, striking down all of the patents in the case and expressly stating that it was not opining on the patentability of software or business methods in general.

The case is Alice Corporation Pty. Ltd. v. CLS Bank International, 2014 U.S. Lexis 4303 (U.S. Supreme Court, June 19, 2014). Alice Corporation’s patents were directed to a computer-implemented process of minimizing “settlement risk” – the risk to a party in a financial transaction that the other party would not perform the transaction, by creating an intermediary using “shadow” financial records of both parties.  The claims covered the computer system to perform the process, the computerized method itself, and a computer-readable medium with the instructions to perform the method.

Alice Corporation had sued CLS Bank for patent infringement.  The district court had granted summary judgment for CLS Bank on the grounds that all of the claims were not eligible for patent protection as they were directed to an abstract idea.  A panel of the Federal Circuit Court of Appeals had reversed the district court, but then, in an en banc hearing, affirmed the district court in a set of multiple opinions.  A plurality of the Federal Circuit found all of Alice Corporation’s claims patent-ineligible, relying on the Supreme Court’s 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 132 S.Ct. 1289 (2012).

The Supreme Court unanimously affirmed the Federal Circuit’s decision.  The Court applied the “framework” it had set forth in Mayo for determining whether a claim is directed to a patent-ineligible law of nature, natural phenomenon, or abstract idea, or to a patent-eligible application of those concepts.  Under that framework, a court must first determine whether the claim is directed to a patent-ineligible concept.  If the answer to the first question is yes, then the second step is to decide whether the elements of the claim, individually or as a combination, “transform the nature of the claim’ into a patent-eligible application.”  (2014 U.S. Lexis 4303 at *16.)

In applying the Mayo framework to Alice Corporation’s patent claims, the Court answered the first step affirmatively.  The Court found that the claims were directed to the abstract idea of an intermediate settlement.  (Id. at *17.)  The Court compared Alice Corporation’s method of using an intermediary third party to minimize settlement risk to the method of hedging against financial risk in price fluctuations that the Court had held to be an abstract idea in Bilski v. Kappos, 561 U.S. 593 (2010).  According to the Court, both methods were “fundamental economic practice[s] long prevalent in our system of commerce.”  (Id. at *20.)

The Court then analyzed Alice Corporation’s claims under the second Mayo step.  The Court explained that the use of a computer does not necessarily transform a patent‑ineligible abstract idea into a patent-eligible invention.  (Id. at *22, *26.)  General purpose computers or related components do not make a claim patent-eligible as the Court said, at *26:

“Stating an abstract idea while adding the words ‘apply it’ is not enough for patentability eligibility.  [citation omitted.]  Nor is limiting the use of an abstract idea ‘to a particular technological environment.’  [citation omitted.]  Stating an abstract idea while adding the words ‘apply it with a computer’ simply combines those two steps, with the same deficient result.”

The Court explained the long-standing rationale for excluding abstract ideas from patentability, at *14:

“We have described the concern that drives this exclusionary principle as one of pre-emption.  See, e.g. Bilski, supra, at 611-612 (upholding the patent ‘would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea’).  Laws of nature, natural phenomena, and abstract ideas are ‘the basic tools of scientific and technological work.’  [citation omitted.]  Myriad, supra, at ___ (slip op. at 11).  ‘[M]onopolization of those tools through the grant of a patent might tend to impede innovation more than it would tend to promote it …’”

With respect to computer-implemented inventions, the Court stated, at *26-27:

“Given the ubiquity of computers [citation omitted], wholly generic computer implementation is not generally the sort of ‘additional feature[e]’ that provides any ‘practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.’”

The Court held that Alice Corporation’s claims did nothing more than instruct the user how to perform the abstract idea of an intermediated settlement on a generic computer using generic functions.  (Id. at *28-*29.)  The claimed function was “purely conventional.”  Id.

Based on the application of the Mayo framework, the Court concluded that Alice Corporation’s method claims were not patent eligible.  The Court summarily reached the same conclusion as to the system claims, stating that the hardware described in the claims was “a handful of generic computer components.”  (Id. at *31.)  Lastly, the Court reached the same conclusion as to Alice Corporation’s computer-readable media claims.

In its decision, the Court stated that it was cautious in its approach.  In trying to explain what is patent-eligible, the Court said, at *15:

“[w]e tread carefully in construing this exclusionary principle lest it swallow all of patent law.  [citation omitted.]  At some level, ‘all inventions…embody, use, reflect, rest upon, or apply laws of nature, natural phenomena, or abstract ideas.’  [citation omitted.]  Thus, an invention is not rendered ineligible for patent simply because it involves an abstract concept.  See Diamond v. Diehr, 450 U.S. 175, 187 (1981).  ‘[A]pplication[s]’ of such concepts ‘to a new and useful end,’ we have said, remain eligible for patent protection.”

Despite its suggestion that claims “involving” abstract ideas are still patent eligible, many practitioners are concerned that software is going to be more difficult to patent.  Even though the Court did not even use the word “software”, its decision struck down the three ways that software is typically claimed.  Perhaps the Federal Circuit will limit the impact of the case by narrowing its application to financial processes, but, even so, it is clear that software will be now much harder to patent, much more uncertain, and more costly than it was before.

The California legislature has a number of important bills pending passage that would significantly affect employers. We are following these bills closely so that employers can be prepared for what 2015 may bring. Click here for a look at the status of the bills of interest to California private-sector employers as the legislature begins its summer recess on July 3.

With the prevalence of smartphones in today’s society, one cannot help but to have at least heard of Google’s Android operating system.  This operating system came about with the intent of competing with the superpower known as Apple’s iPhone.  Of course, when Google released this platform for the first time in 2007, the Android operating system was perceived to be the first generation.  Recently, however, an Illinois man asserted that perhaps Google’s Android was not the first generation.  Well, not quite, but he did assert that Google infringed his federally registered trademark, “Android Data.”

During the Dot.com Boom of the late 1990s Erich Specht decided he wanted to get into the lucrative software business.  As such, in 1998, he founded a suite of e-commerce software that became known as Android Data Corporation (“ADC”).  Through his entity, he intended to license software to his would-be clients, and provided website hosting and computer consulting services.   Two years after the company’s inception, Mr. Specht applied to the United States Patent and Trademark Office for federal registration of the “Android Data” mark.  The mark was registered in 2002.

Unfortunately for Mr. Specht, by the end of 2002, his company had hit the end of the road.  It ceased all major operations, lost the bulk of its clients, and moved its headquarters into Mr. Specht’s home.  Mr. Specht then caused ADC to transfer the Android Data mark to his wholly-owned company, The Android’s Dungeon Incorporated (“ADI”).  For the remainder of the year, Mr. Specht attempted to sell ADC’s assets, including the mark, but was unable to find a willing buyer.  He kept the ADC website running for a short period thereafter, but eventually allowed the registration for the company URL to lapse.

Five years later in 2007, Mr. Specht made a meager attempt to revive the use of the Android Data mark by trying to promote his software suite to catalog companies and sending out mass mailings bearing the mark.  These efforts were fruitless.  A few months after, Mr. Specht attempted to license his software to a healthcare consulting firm, but that also failed.  He did not attempt to use the mark again until April 2009, when he attempted to bring his website back from the dead under a slightly different URL.

During the tumultuous years for Mr. Specht’s company, another start-up company, Android, Inc., began developing what eventually became the Android operating system.  In 2005, Google purchased Android, Inc.  Two years later, in 2007, Google released a beta version of the Android software to the public.  This release preceded Mr. Specht’s attempt to revive his use of the Android Data mark by approximately one month.  About a year after the release of the beta version of the Android software, T-Mobile US, Inc., released the first smartphone to run the Android operating system.  Since that release in 2008, Google has continued to use the Android mark in commerce.  Google even attempted to register the mark with the United States Patent and Trademark Office, but its application was denied when the trademark examiner found there to be a likelihood of confusion with Mr. Specht’s Android Data mark.  Nonetheless, Google continued to use the mark in commerce.

Mr. Specht eventually sued Google over its use of the Android mark for trademark infringement under the Lanham Act in the United States District Court for the Northern District of Illinois, Eastern Division.  Mr. Specht also named the founders of Android, Inc. and the Open Handset Alliance (an industry consortium created to foster innovation in mobile phone technology) as defendants.  However, the district court dismissed all defendants except Google.  Google answered the allegations and counterclaimed that Mr. Specht had abandoned the mark and that the mark should be canceled.

Google moved for summary judgment on its counterclaims. The district court found that Mr. Specht had abandoned the mark in 2002 when the business ceased its major operations.  The court held that the few isolated uses by Mr. Specht thereafter did not constitute continued use or an intent to resume use.  As such, the court found that Mr. Specht had forfeited any right he had to the mark, and his claims failed as a matter of law.  The district court also granted Google’s request to cancel Mr. Specht’s mark.

The 7th Circuit heard the matter on appeal and addressed whether the evidence demonstrated that Mr. Specht’s mark had been abandoned in 2002.  This analysis was pivotal to the decision below because if the mark had been abandoned in 2002, then Google could not have infringed Mr. Specht’s right in the mark through its use of the Android operating system in 2007.  15 U.S.C. section 1127; Central Manufacturing, Inc. v. Brett, 492 F.3d 876, 881 (7th Cir. 2007).

A trademark is abandoned when its “use in commerce” is discontinued with no intent to resume use.  15 U.S.C. section 1127; Rust Env’t & Infrastructure, Inc. v. Teunissen, 141 F.3d 1210, 1214 (7th Cir. 1997).  The Lanham Act provides that “nonuse for three consecutive years shall be prima facie evidence of abandonment.”  15 U.S.C. section 1127.  In order to overcome the prima facie presumption, the party must provide evidence that excuses the nonuse or demonstrates an intent to resume use of the mark.  Sands, Taylor & Wood Co. v. Quaker Oats, Co.,  978 F.2d 947, 955 (7th Cir. 1992).

The 7th Circuit found that Mr. Specht discontinued use of the Android Data mark at the end of 2002 when he shut down ADC and transferred its assets to ADI.  Mr. Specht argued that his attempts to sell his business’ assets in 2003 and 2004 constituted an intent to resume use, but the court found that an attempt to sell assets of a business is different from using the goodwill of a mark to sell a business’ goods or services.  As such, the court found that the foregoing uses did not constitute use of the mark in commerce.

Mr. Specht also argued that his website bearing the trademark continued to operate until 2005, and such a website constitutes a bona fide use in commerce.  Nonetheless, the court pointed out that Mr. Specht did not identify any goods or services that Android Data Corp. could have provided through the website.  As such, the website did not constitute a use in commerce either.  Finally, Mr. Specht argued that his two sales efforts in 2007 constituted evidence of commercial use, but the court disposed of this argument by citing to case law holding that sporadic attempts to solicit business are not a “use in commerce” meriting the protection of the Lanham Act.

In light of the court’s finding that Mr. Specht had abandoned the Android Data mark by 2007, the mark had thereby returned to the public domain.  Thus, Google’s appropriation of the mark beginning in 2007 was proper and the mark has been in continuous use since that time.  As such, Google is the “senior user” of the mark and entitled to federal trademark protection under the Lanham Act.

The take away for owners of valuable marks is quite clear—use it or lose it.  If you want to keep your established trademark rights, you must continue to use them in commerce, or clearly document your intent to resume their use.  As Erich Specht learned the hard way, an attempt to sell your business’ assets, including the registered mark, to third parties is insufficient to maintain protection under the Lanham Act.  Thus, it is imperative to your rights as the owner of a federally registered trademark that you continue its use in commerce or have clear evidence to demonstrate your intent to resume.

On July 1, 2014, California’s minimum hourly wage will increase from $8.00 to $9.00 per hour. The minimum wage will increase again on January 1, 2016 to $10.00 per hour. Most employers are aware of the increase and are prepared to comply by paying their minimum wage workers $9.00 per hour starting July 1, 2014. However, what many employers have overlooked is that the increase affects their minimum salary obligations for their white collar exempt employees.

Under California law, if an employer classifies an employee as exempt under the “executive,” “administrative,” or “professional” exemption (“white collar” exemptions), they must meet certain exemption requirements. One requirement is that the employee earns a set weekly salary of no less than two times the state minimum wage for a full-time employee. Currently that wage is $640.00 per week (or $33,280 per year). On July 1, 2014, the set salary requirement will increase to $720 per week (or $37,440 per year).

As a result, in addition to increasing the hourly rate of pay for minimum wage employees, employers should evaluate the compensation paid to their white collar exempt employees and ensure it meets the minimum salary requirement. Failure to pay the minimum salary requirement can result in the loss of the exemption which can open a whole host of potential liability – e.g. failure to pay overtime.

Finally, the California Department of Industrial Relations (aka Labor Commissioner) has updated all Wage Orders to reflect the new minimum wage (see section 4). Employers should post the updated Wage Order applicable to their industry or business along with their other employment law posters. Wage Orders can be obtained at the Labor Commissioner’s website – www.dir.ca.gov.

By: Intellectual Property Group

The 2013 NFL season was not kind to the Washington Redskins, and after winning only 3 games and losing 13, there are many in the Washington Redskins organization who might have wanted to hide behind a new name.  Now they might have to.

The USPTO officially cancelled the Washington Redskins trademark registration stating that the team’s name is offensive to Native Americans.  Although it is unusual for the trademark office to take such action, this move is consistent with the Trademark Manual of Examining Procedure, Section 1203.01, as well as Section 2(a) of the Lanham Act, which provide that trademarks which disparage or belittle any group are not permitted to be registered under federal law.

Although the cancellation of a federal trademark registration does not mean that the Washington Redskins must stop using their name, cancellation of their trademark might significantly reduce the overall value of the team.  A significant source of revenue for most professional sports teams comes from the sale of a variety of licensed products bearing the team name and logo.  Ownership of a valid and enforceable trademark registration in connection with this name and logo helps a sports team to control this intellectual property, license it, and otherwise exclude other parties from profiting through unlicensed use of the marks.  Cancellation of the federal registration will remove a significant number of enforcement tools available to the Washington Redskins, rendering it potentially more difficult to exclude others from using their marks.

Periodically the Trademark Office receives applications for registration, or complaints about an already registered mark, which contain “immoral, deceptive or scandalous matter” or is disparaging to “people, institutions, beliefs, or national symbols.”  Although it is a somewhat rarely cited basis for the rejection or cancellation of a trademark, the Washington Redskins join a dubious list of marks that have run afoul of this provision.  For example, in 2012, the Court of Appeal for the Federal Circuit affirmed the Trademark Office’s rejection of a trademark application covering the rather graphic name of a rooster shaped lollipop product, on the grounds that the name affixed to this particular product was “immoral or scandalous.”

Yet in a different case, the Old Glory Condom Corporation was granted a federal trademark registration in connection with American flag-adorned condom packages.  The apparent discrepancy between this outcome and the Redskins or lollipops highlights the seemingly impossible task faced by the Trademark Office – to discern what type of mark might be “immoral or scandalous” or otherwise offensive to members of the public, while considering the fact that what is vulgar to one person often is not in the eyes of another.

In light of the significant number of protestations received from Native American communities across the country, and a growing public concern about the use of a racial slur such as “Redskins” for the name of a professional sports team, the Trademark Office’s decision in this case likely was easier than debating about lollipops or condoms.  Now that they have tackled the Redskins, perhaps the Trademark Office will knock Chief Wahoo of the Cleveland Indians out of the park.

By Trusts & Estates

Last Thursday, the United States Supreme Court ruled in Clark v. Rameker that funds held in inherited individual retirement accounts (IRAs) are not “retirement funds” for bankruptcy purposes.

In October 2010, the Clarks filed for bankruptcy and claimed that Heidi Clark’s $300,000 inherited IRA was exempt from their bankruptcy estate under Section 522 of the Bankruptcy Code (which provides that tax-exempt retirement funds are exempt from a bankruptcy estate). The bankruptcy trustee and creditors objected to this, taking the position that the funds were not “retirement funds” within the meaning of Section 522. The Bankruptcy Court agreed with the trustee and creditors.

The district court ruled that inherited IRAs are exempt because they retain their character as retirement funds, but the US Court of Appeals for the Seventh Circuit reversed that ruling. The Supreme Court agreed with the Seventh Circuit, holding that the funds in an inherited IRA are not set aside for the debtor’s retirement and, thus, are not “retirement funds” under the exemption in Section 522.

Driving the Court’s decision is the fact that “[i]nherited IRAs do not operate like ordinary IRAs.” First, in contrast to traditional IRAs, which impose a ten percent penalty on funds withdrawn before age 59 ½, individuals may withdraw funds from an inherited IRA at any time without paying a penalty. What is more, the owner of an inherited IRA must either withdraw the entire account balance within five years of the original owner’s death or take annual minimum distributions. Finally, unlike a traditional or Roth IRA—where the whole purpose of the account is to provide tax incentives to the owner for making contributions—the owner of an inherited IRA may never add funds to an inherited IRA.

Justice Sonia Sotomayor, writing the opinion, noted that “the possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to “retirement funds” because it is possible for an owner to use those funds for retirement.”

The Clark decision highlights an important estate planning tool that many individuals and attorneys often overlook: the IRA trust. Briefly, an IRA trust (sometimes referred to as a “conduit trust”) is a trust that has special—very technical—provisions that allow the trustee of the trust to manage the IRA for the benefit of the beneficiary, while at the same time preserve the ability to “stretch” the tax-deferred growth of the IRA over the life expectancy of the individual beneficiary. In this regard, the tax advantages associated with naming an individual directly as the beneficiary of the IRA are combined with the advantages of leaving a gift in trust, which includes (among other things) the ability to shield the assets of the trust from a beneficiary’s creditors—even in bankruptcy.

If you would like to discuss how your retirement benefits fit into your estate plan, or see whether your existing trust qualifies as a conduit trust, please contact one of the experienced estate planning attorneys at Weintraub Tobin.

“People rarely appreciate a ‘how can you do this to me?’ scene when they first give their notice,” added Chuck Post, Shareholder of Weintraub Tobin.

Find out What to Do When Your Best Employee Quits.

What do yoga instructors, event planners and exterminators have in common?  These are fields that are reportedly witnessing an increase in the use of noncompete provisions in employment agreements.  Details of this increase in the use of noncompete provisions were reported in a New York Times article this Sunday.  Click here to view article.

While the article makes clear that such provisions are generally illegal in California, it observes that there is a large variation between other states’ laws, from states having some restrictions on the use of noncompetes to Texas and Florida which place relatively few limits on them.  These variations can raise significant issues for California employers who are in the process of hiring or recruiting employees who either work outside California or work for non-California based companies.  In making such decisions, employers are advised to determine whether potential employees are subject to a noncompete provision and obtain legal advice as to the enforceability of such provision under the applicable state law.

In the one corner, Paula Petrella, the daughter of Frank Petrella, co-author of the 1963 Raging Bull screenplays and book.  In the other corner, MGM, the owner of the copyright in the critically acclaimed motion picture Raging Bull, based on the life of boxing champion Jake LaMotta.   At issue, a 2009 copyright infringement suit against MGM in which Petrella alleged that MGM violated and continued to violate her copyright in the 1963 screenplay by using, producing, and distributing the Raging Bull motion picture.  MGM, landed two very solid blows in both the District Court of the Central District of California and at the 9th Circuit;  MGM was able to have Petrella’s case dismissed on the equitable doctrine of laches.  However, the Supreme Court decided that Petrella could go another round.

After retiring from boxing, Jake LaMotta worked with Frank Petrella to tell his life story.  Their efforts resulted in two screenplays, one registered in 1963, the other in 1973, and a book, registered in 1970.  In 1976, Frank Petrella and LaMotta assigned their rights in the three works, including renewal rights, to Chartoff-Winkler Productions, Inc. Two years later, an MGM subsidiary, United Artists, acquired the motion picture rights to the book and both screenplays.  In 1980, MGM released the film Raging Bull.

A year after the release of the film, Frank Petrella died.  Works registered under the pre-1978 regime (such as the 1963 screenplay) enjoyed an initial 28-year period of protection followed by a renewal period of up to 67 years.  Congress provided that the author’s heirs inherit the renewal rights.  Since Frank’s death occurred during the initial terms of the copyrights in the screenplays and book, his renewal rights reverted to his daughter, who could renew the copyrights unburdened by Frank’s assignment of the renewal right to Chartoff-Winkler.  Paula Petrella renewed the copyright in the 1963 screenplay in 1991.  (The copyrights in the other screenplay and book were not timely renewed.)  In 1998, Petrella’s attorney informed MGM that Petrella was the owner of the copyright in the 1963 screenplay and that MGM’s exploitation of any derivative work, including the Raging Bull motion picture,  infringed her copyright.  For two years, Petrella and MGM took jabs at each other by exchanging letters in which MGM denied the validity of the infringement claims and Petrella repeatedly threatened to take legal action.

On January 6, 2009, Petrella filed a copyright infringement suit in which she alleged that MGM violated and continued to violate her copyright in the 1963 screenplay by distributing the Raging Bull motion picture.  Petrella sought relief only for acts of infringement occurring on or after January 6, 2006.  MGM moved for summary judgment on, among other grounds, the equitable doctrine of laches.   MGM argued that Petrella’s delay of 18-years from the time she renewed the copyright until the time she sued, was unreasonable and prejudicial.  The District Court agreed and granted MGM’s motion, stating  “[i]f any part of the alleged wrongful conduct occurred outside of the limitations period, courts presume that the plaintiff ’s claims are barred by laches.”  Since Petrella became aware of her potential claims more than three years before she filed suit, her claims were barred under the doctrine of laches.  Petrella appealed to the Ninth Circuit which affirmed the District Court’s decision.  The Supreme Court granted certiorari.

At issue before the supreme Court was whether the doctrine of laches may bar claims for infringement when the infringing activity is one in a series of continuing similar acts and the copyright owner was aware of such acts well prior to the three-year limitation term.  MGM contended that the doctrine of laches is an independent affirmative defense, discrete and separate from the statute of limitations.  As such, MGM argued, the doctrine of laches could apply to a claim brought within the statute of limitations period.  MGM argued that laches must be available as a defense to prevent a copyright owner from waiting to see what the outcome of an alleged infringer’s activities will be. MGM made issue of the fact that Petrella conceded that she waited to file the complaint because the film was deeply in debt and would probably never recoup.

The Supreme Court was not convinced. The Court noted that copyright owners are not required to challenge each and every actionable infringement, and there is nothing wrong with waiting to see what effect the infringer’s work has on the copyrighted work.  “Even if an infringement is harmful, the harm may be too small to justify the cost of litigation” the Court stated.  Further, under the separate accrual rule, each time a defendant commits an act of infringement, a separate cause of action arises with its own limitation period.  If the Court adopted MGM’s position,  copyright owners would have to file a federal lawsuit for each and every act of infringement, regardless how innocuous they may seem.  The Act’s three-year limitations period and the separate-accrual rule, avoids these this unwanted result; a copyright owner may defer suit until she can estimate whether litigation is worth the effort.

The Supreme Court noted that when a defendant has engaged in a series of independent acts of copyright infringement, if the copyright holder brings suit it will be timely under the Act’s three year statute of limitations with respect to acts of infringement that occurred within the three-year window, but untimely with respect to prior acts of the same or similar kind.  Only by disregarding the Copyright Act’s statute of limitations provision and the separate-accrual rule the Supreme Court determined could the Court of Appeals presume that infringing acts occurring before January 6, 2006 bar all relief.  The Court determined that “Congress’  time provisions secured to authors a copyright term of long duration, and a right to sue for infringement occurring no more than three years back from the time of suit. That regime leaves “little place” for a doctrine that would further limit the timeliness of a copyright owner’s suit.”

By: Labor & Employment

On May 29, 2014, the California Supreme Court in Duran v. U.S. Bank National Association clarified employers’ rights in defending against employee misclassification class action cases. The Court held that in defending against such claims, employers must be permitted to present relevant defenses, even if such defenses involve individual issues. The Court’s analysis should have a sweeping effect on trial courts by requiring a more thorough analysis at the time of class certification. Trial courts can no longer leave the issue of a trial plan in the queue and wait to see if the case proceeds to trial, which is exceedingly rare in class actions. Rather, trial courts will need to consider and define a manageable and fair trial plan at the outset that will permit employers to litigate individual liability defenses.

Duran arose from a class action brought by 260 current and former loan officers of U.S. Bank. The employees claimed they had been misclassified as exempt employees under the outside salesperson exemption and, therefore, had been denied overtime pay.

The class was certified and a trial management plan was created that allowed a random sampling of 21 employees to testify at trial. Although the Bank tried to introduce numerous declarations from absent class members who claimed they met the exemption standard, the court refused to admit the declarations. The employer was only permitted to present evidence related to the 21 class members in the sample.

In the court’s words, Duran was “an exceeding rare beast, a wage and hour class action that proceeded through trial to verdict.” Based on the testimony of the random sampling of class members, the trial court awarded $15 million in restitution and $18 million in attorneys’ fees to all of the class members.

The Bank appealed. The California Court of Appeal reversed the trial court, decertified the class, and held that the trial plan was “fatally flawed” because it deprived the employer of its due process right to litigate affirmative defenses – the trial plan prevented the employer from defending against the individual claims of 90% of the class members. The employees appealed to the California Supreme Court.

In a decision that can be called a “win” for employers, the Supreme Court affirmed the appellate court’s decision that the trial plan was flawed and prevented the Bank from presenting evidence that some of the class members were not misclassified. Although the court rejected the idea that an employer can present individual evidence for every class member, the court confirmed the right of an employer to present individualized evidence to challenge “common evidence” in a class action.

The court did not wholly reject the use of sampling, but emphasized that, at the class certification state, the litigation of individual issues, including those arising from affirmative defenses, must be managed fairly and efficiently. In the court’s words, “Trial courts must pay careful attention to manageability when deciding whether to certify a class action.” The court clarified that such statistical methods must not undermined a defendant’s right to present relevant evidence.

The court remanded the case to the lower court for a new trial and held that the trial court may hear a new motion for class certification.

Duran should be useful guidance for trial courts in determining whether employee wage class actions can be certified, and, if so, how individual issues must be managed through a trial plan. Much more time will likely be expended by both sides to argue the feasibility of any trial plan based on sampling and statistics. Trial courts may also be asked to review class certification decisions to determine if, in light of this recent clarification, a certified class action should, in fact, remain certified.