Retail and Consumer Products Law Roundup

Supreme Court Declines to Weigh In on Website Accessibility

By Donald R. Brown, Partner, Litigation

In a closely watched case that many hoped would bring some clarity—and sanity—to the subject of website accessibility under the Americans with Disabilities Act, the Supreme Court has instead chosen to punt. Domino’s Pizza had asked the Supreme Court to review a Ninth Circuit ruling that Domino’s was required to make its website compatible with screen-reading software that visually impaired people use to navigate the web and—in this case—to order a pizza. The ADA has no regulations that require website accessibility or specify any online accessibility standards, and Domino’s argued that the Ninth Circuit’s response—that Domino’s must figure out for itself how to satisfy the ADA’s “equal access” and “effective communications” requirements—was so vague as to be unconstitutional. The Supreme Court, however, has denied review without comment.

What does this mean? For now, business as usual: Opportunistic plaintiff’s lawyers will continue to troll the internet with testing tools and serve lawsuits and demand letters on businesses whose websites and apps do not interface seamlessly with screen-reading software. While not all appellate circuits agree on this issue, those distinctions are increasingly irrelevant, as plaintiff’s lawyers usually find a putative client in a plaintiff-friendly jurisdiction.

What should I do? With no regulations on the horizon for nongovernmental websites and apps, the best line of defense is to make your website and app accessible under non-binding standards such as the Website Content Accessibility Guidelines promulgated by the World Wide Web Consortium, or regulations under the Rehabilitation Act that govern accessibility for federal government websites. The Ninth Circuit ruling declined to accord those guidelines legally binding status, but bringing your website or app into compliance with those guidelines—and keeping them in compliance—will keep your online platforms off the plaintiff’s bar radar.

How to get there? It depends on the nature and complexity of your website/app. Simple testing tools can detect problems like the lack of alternative-text tags that describe images—the most frequent complaint by visually impaired users. But a website or app of any complexity typically requires a larger commitment, including, if necessary, an audit by an accessibility professional and the development of web-design protocols to follow whenever a site is created or updated.

What if I get sued or receive a demand letter? Contact counsel with experience in handling online accessibility litigation. You need to take the right steps up front, and experienced counsel can help to realistically assess your options.

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Advocate Behind the CCPA Announces Second, More Expansive Ballot Initiative

By Thomas R. McMorrow, Partner, Government and Regulatory | Scott T. Lashway, Partner, Privacy and Data Security | Brandon P. Reilly, Counsel, Privacy and Data Security | McKay S. Carney, Legislative Advisor, Government and Regulatory | Delilah L. Clay, Legislative & Regulatory Advisor, Government and Regulatory

California Attorney General Confirms Regulations Coming in October

On September 24, the privacy advocate and real estate investor who initially qualified the California Consumer Privacy Act (CCPA) for the November 2018 ballot, Alastair Mactaggart, announced that he would seek to qualify a new consumer privacy initiative for California’s November 2020 ballot.

Mactaggart discussed his new proposal—referred to as the California Privacy Rights and Enforcement Act of 2020—at an industry conference on the morning of September 25. Describing the measure as “new rights in response to new technology,” Mactaggart said the measure would ensure consumers greater control over “sensitive personal information” such as race, health, sexual orientation and geolocation data than is provided under current law. He also noted the new measure would mandate a new opt-in requirement for certain data collection, require the disclosure of algorithms used to profile individual consumers, and establish a dedicated California agency to enforce privacy protections and issue regulations. The California Privacy Protection Agency would be overseen by a five-member board appointed by the governor, legislative leadership and the attorney general. The agency would be funded from fines on companies that violate the act. The new measure is to take effect January 1, 2021, if passed by voters.

This 2020 measure comes on the heels of two years of intense legislative negotiation over the meaning and breadth of the CCPA, widely regarded as the strongest privacy protection law in the U.S. Mactaggart reportedly spent over $3 million of his own money to qualify the original CCPA for the ballot in 2018, but ultimately withdrew the measure after reaching a compromise with legislative leaders and the Brown administration to enact the CCPA legislatively last summer.

Mactaggart told the audience not to expect a legislative alternative to his proposed 2020 initiative. He views the CCPA as a floor for consumer privacy protection and wants the 2020 initiative to lock in those protections while also adding new protections. He described watching the 2019 legislative process and seeing the countless hours and the effort spent to clarify, change and sometimes weaken the CCPA’s provisions before it takes effect January 1, 2020. Although the legislature either rejected or failed to act on the vast majority of the proposed changes, Mactaggart saw the process as evidence that he needs to have voters lock in the CCPA’s current protections via a ballot initiative, thus overriding any legislative efforts to weaken it.

Mactaggart filed the measure on September 25 and must gather more than 620,000 signatures to place the initiative on the November 2020 ballot. He expects broad opposition from the business community, but expresses poll-driven optimism that the new measure will be adopted by California’s voters. If approved, the new measure is to take effect January 1, 2021.

Read the proposed California Privacy Rights and Enforcement Act of 2020 here.

At the same industry event, California Deputy Attorney General Stacey Schesser confirmed the office will publish draft regulations in October and final rules by the end of the 2019. The public will have 45 days to submit comments upon the release of the draft regulations. Manatt’s California government and privacy and data security teams will continue to update you on CCPA developments as we head toward the effective date.

Additional Resources:

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Final 2019 Amendments to the CCPA Head to Governor’s Desk

By Donna L. Wilson, CEO and Managing Partner, Co-Leader, Privacy and Data Security | Scott T. Lashway, Partner, Co-Leader, Privacy and Data Security | Brandon P. Reilly, Counsel, Privacy and Data Security | Anand Raj Shah, Associate, Privacy and Data Security

September 13, 2019 marked the last day of California’s 2019 legislative session and, importantly, the last call for any 2019 amendments to the landmark California Consumer Privacy Act (CCPA). In the end, the legislature passed bills that largely seek to clarify application of the CCPA and to set the stage for the California Attorney General to release his draft regulations. Given the potential impacts from the CCPA and some of its lack of clarity when applying it to business operations, businesses nationwide had focused their attention on Sacramento hoping and expecting to receive news that the legislature actually clarified impactful aspects of the CCPA. The amendments, which are outlined below, now head to Governor Gavin Newsom for consideration and possible approval by October 13, 2019. If they are signed into law, the amendments will go into effect on January 1, 2020. While none of the rumored major structural changes to the CCPA came to pass, moderately helpful clarifications should be considered as businesses roll out their readiness programs in advance of impending deadlines in 2020.

Here are the legislative amendments that currently await the Governor’s review and approval:

AB 25 (Chau)—Employment-Related Information Granted One-Year Exemption with Sunset

Perhaps the most highly anticipated amendment, AB 25 exempts employment-related information with a one-year sunset until January 1, 2021. Certain limited requirements remain: businesses must disclose categories of employment-related personal information collected and the purposes for its use, and employment-related information is still subject to the CCPA’s private right of action for data breaches. In addition to the employment-related provisions, AB 25 clarifies verifiable consumer request procedures, specifying that a business “may require authentication of the consumer that is reasonable in light of the nature of the personal information requested.” Businesses may further require consumers to use preexisting accounts with the business to submit a CCPA verifiable consumer request.

AB 1355 (Chau)—Miscellaneous Fixes

This bill received a number of revisions over the past few weeks regarding unrelated modifications. The salient changes are:

  • One-year exemption for certain B2B data. This amendment exempts personal information that reflects a communication or transaction with a business and the employees (or similar) of a third-party entity in the context of conducting due diligence or in connection with the provision or receipt of a product or service, albeit with a one-year sunset on January 1, 2021. The effect appears to remove from the scope of the CCPA B2B contact information and other related information directly collected from business’ employees or personnel, if the information can be said to “reflect” the communication or transaction. Notably, the amendment does not exempt businesses from the “do not sell” or data breach provisions, including the private right of action, which B2B employees or personnel may seek to exercise.
  • Clarification to the nondiscrimination provisions. The amendment makes an important revision to the exemptions to the nondiscrimination provisions by clarifying that differing prices or services can be provided based upon the value of the provided data to the business, not the consumer. These revisions would make it easier for businesses to tie their loyalty incentives to the value of provided data. It should be noted that AB 846 (Burke), which would have exempted customer loyalty programs outright from the CCPA’s nondiscrimination provisions and limited sales of personal information collected through such programs, did not pass.
  • Support for a data minimization approach. AB 1355 clarifies that the CCPA should not be construed to require a business to “collect personal information that it would not otherwise collect in the ordinary course of its business, retain personal information for longer than it would otherwise retain such information in the ordinary course of its business, or reidentify or otherwise link information that is not maintained in a manner that would be considered personal information.” This clarification provides support for businesses wishing to minimize their data intake for verification purposes, but should nonetheless be weighed against the interest in protecting sensitive personal information from unauthorized requestors.

AB 874 (Irwin)—Definition of Personal Information to Include Reasonableness

In a modest narrowing of the definition of “personal information,” AB 874 clarifies that personal information must “reasonably” be “capable of being associated with” a particular consumer or household.

AB 1130 (Levine)—Additional Data Types Will Trigger Data Breach Provisions

This amendment adds new types of data to the list that triggers the CCPA’s data breach provision as well as California’s existing data breach notification requirement. The new data types enumerated are unique biometric data, tax identification numbers, passport numbers, military identification numbers, and other unique identification numbers issued on a government document.

AB 1146 (Berman)—Exemption for Vehicle Information

This bill provides a narrow exemption, clarifying that the CCPA’s right of deletion and right to “opt out” of the sale of personal information do not apply if a business or service provider needs the personal information to fulfill the terms of a warranty or product recall that is conducted in accordance with federal vehicle safety law. The bill specifically enables the retention and sharing of a consumer’s vehicle or ownership information between automobile manufacturers and dealers for effectuating repairs covered by a vehicle’s warranty or pertaining to a manufacturer’s recall.

AB 1202 (Chau)—Registration Required for Data Brokers

Businesses engaged in “data sales,” as defined by the CCPA, that involve personal information of consumers with whom they do not have a direct relationship must now register with the California Attorney General’s Office. Credit reporting agencies and financial institutions are exempted. The Attorney General will set registration fees and post information about the data brokers on its website. Failure to register exposes the business to civil penalties, injunctive relief, fees and costs.

AB 1564 (Berman)—No Phone Number Required for Online Only Businesses

This amendment updates the designated consumer request methods provision for businesses that operate exclusively online by removing the obligation to provide a toll-free phone number to exercise a rights request.

Why It Matters

As we have previously written, the amendments passed offer a mixed bag. While certain fixes are helpful (for example, the nondiscrimination provision), others provide only modest assistance to businesses racing to comply with the law, including those providing only momentary clarity via one-year sunset provisions, leaving long-term solutions still to be negotiated (for example, B2B exemptions). With the compliance deadlines nearing, we will continue to closely monitor all CCPA developments and provide stakeholders with meaningful updates as the bills head to Governor Newsom’s desk and any draft regulations are published.

Additional Resources:

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Tainted Beef Definitely an Emergency, California Federal Court Rules

By Christine M. Reilly, Leader, TCPA Compliance and Class Action Defense | A. Paul Heeringa, Counsel, Manatt Financial Services

Prerecorded calls made to warn consumers about tainted beef qualified for the “emergency purposes” exemption to the Telephone Consumer Protection Act (TCPA), a California federal court recently ruled.

According to Derrick Brooks’ putative class action, The Kroger Co. violated the TCPA by making unauthorized marketing calls using a telephone dialing system. Brooks received his unwanted call on Dec. 7, 2018, he said.

Kroger moved to dismiss the action, relying on the emergency exception of the TCPA because the phone call warned consumers about salmonella-tainted beef and was related to consumers’ injury or death. Therefore, the calls were not made for a marketing purpose, Kroger told the court.

U.S. District Court Judge Anthony J. Battaglia of the Southern District of California granted the motion, expressing concern about the plaintiff’s misrepresentations in the complaint. Brooks purposely omitted details from customer complaint information found online to make Kroger’s calls seem nefarious, the court said.

For example, Brooks cited one consumer complaint as “Automated call from Kroger ….” In full, the actual consumer complaint read: “Automated call from Kroger requesting that you return ground beef that was purchased between August and September of 2018, due to the threat of salmonella. Stores would include Smith’s, Ralph’s, Baker’s and other Kroger stores.”

The plaintiff included another comment as “Call from Kroger stores ….” The full text of the comment stated: “Call from Kroger stores advising that we purchased ground beef between Aug 15 & sept 10, 2018. If you still have any in your freezer, be sure you return it back to the Kroger Store.”

Agreeing with Kroger that the quotes could be considered as evidence that it indeed called Brooks under the emergency exception, the court dismissed the complaint.

“The complaint makes only conclusory allegations that the calls were done for marketing purposes, and even goes so far as to misrepresent information to the Court in doing so,” Judge Battaglia wrote. “As such, the complaint fails to state that the calls were done for marketing purposes.”

The court also denied the plaintiff’s request for leave to amend his complaint.

“[T]here are no set of facts which would solve Plaintiff’s problem,” the court wrote. “Plaintiff’s theory of the emergency exception doctrine is that an individual must be in direct harm to justify a call. However, there is no statutory or legal justification to read the exception so narrowly. Here, Kroger had a bona fide emergency in its tainted and potentially life-threatening beef, and thus called potential consumers of that beef to warn them.”

To read the order in Brooks v. The Kroger Co., click here.

Why it matters: Troubled by the plaintiff’s misrepresentations about the comments of other consumers included in the complaint, the court granted the defendant’s motion to dismiss. It also rejected the argument that an individual must be in direct harm in order to trigger the emergency exception under the TCPA, finding no statutory or legal justification for such a narrow reading of the statute. Tainted and potentially life-threatening beef constituted a bona fide emergency, the court said. Further, while TCPA plaintiffs are often granted leave to amend, this case represents a rare occasion where an initial TCPA case was dismissed with prejudice and without leave to replead.

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False Sale Prices Result in Real $6M Settlement

By Richard P. Lawson, Partner, Consumer Protection

General Nutrition Centers (GNC) agreed to pay $6 million to settle a class action accusing the national retailer of promoting “phantom markdowns” on its website.

Three separate class action lawsuits were filed against GNC, alleging that the company falsely advertised the existence of discounts on its website to consumers across the country. After three years of what the court’s memorandum called “vigorous” litigation, the parties reached an agreement that included both monetary and injunctive relief.

Class members—an estimated 3.6 million consumers nationwide who made a purchase through a promotion from GNC’s website dating back to January 1, 2012—can choose a $5 cash payment or a $15 voucher that may be redeemed for merchandise through the site. The voucher is fully transferrable, has no expiration date and can be redeemed with no additional purchase.

An additional $5 cash payment or $15 voucher is available for class members who made a total of five or more purchases or a purchase in excess of $100 in a single transaction from the website within the class period.

Class members will also receive a coupon for $30 off a purchase totaling $100 or more through the GNC site. The coupons are additional consideration on top of the voucher relief and class payments and will not diminish claimant recoveries.

In addition, the fund will cover class counsel fees and expenses up to $1.5 million and service payments of $5,000 for each of the five named plaintiffs.

The settlement agreement also requires GNC to take reasonable steps to ensure its comparative discount advertising on the website complies with then-existing law. The defendant also promised to disclose on its site the basis of any reference pricing or similar practices.

To read the memorandum in support of preliminary approval of settlement in Carter v. General Nutrition Centers, Inc., click here

Why it matters: Calling the proposed deal “an excellent result in a complex, high-risk, hard fought case,” the plaintiffs asked the Pennsylvania federal court to approve the settlement. The $6 million agreement fits comfortably within the range of other deceptive pricing cases, such as Fossil, Inc.’s $4.5 million payout, the $5 million Ross Stores agreed to pay and a $6.8 million resolution in a case against The Children’s Place.

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Class Actions: Ninth Circuit Panel Allows Judge to Prohibit Precertification Settlement Negotiations

By Richard E. Gottlieb, Partner, Manatt Financial Services | Scott M. Pearson, Partner, Manatt Financial Services | Brad W. Seiling, Partner, Litigation

Taking the cautious view of a district court’s judicial discretion, the U.S. Court of Appeals for the Ninth Circuit declined to grant a writ of mandamus seeking to overturn a case management order that prohibited precertification class settlement discussions.

What happened

Under a long-standing procedure imposed by U.S. District Judge William Alsup of the Northern District of California, parties in putative class actions are prohibited from conducting settlement negotiations until after the issue of class certification has been decided.

In May 2018, James Porath sued Logitech Inc. for false advertising, accusing the company of making deceptive claims about its Z200 speakers. When the litigation began, Judge Alsup issued his traditional standing order that the parties could not enter settlement negotiations until after the issue of class certification was decided. If the parties believed they could reach a deal before that point, they were required to file a motion to appoint interim class counsel, Judge Alsup ordered.

The parties started talking about a deal, and, seeing an end in sight, Porath filed a motion to appoint interim class counsel. But Judge Alsup denied the motion in August, effectively directing the parties to continue litigating the case.

Logitech responded by filing a petition for writ of mandamus to the federal appellate panel, asking the Ninth Circuit to direct the district court to withdraw the standing order prohibiting them from negotiating settlement prior to class certification.

Whether to grant a writ of mandamus involves a three-part test, the panel explained, focusing on the third factor: clear error. While Logitech argued that the order clearly violated both the Federal Rules of Civil Procedure (specifically, Rule 23, which governs class actions) as well as the First Amendment, the Ninth Circuit disagreed.

Rule 23 does contemplate the simultaneous certification of a class and settlement—albeit with permissive and not mandatory language—the court said, but it also provides district courts “with wide discretion.”

“Given the discretion afforded district courts by Rule 23 and its lack of mandatory class settlement language, we cannot say the order’s prohibition on class negotiations before certification is clear error,” the panel wrote.

The Supreme Court has recognized that class actions present “opportunities for abuse” and that district courts have “both the duty and the broad authority to exercise control over” such cases. Judge Alsup didn’t make any specific findings of abuse or consider narrower means of protecting the parties, but that didn’t mean the order had to be reversed, the court said.

“Courts can reject class settlements after they have been negotiated, and it is unclear why that approach was not taken here,” the panel wrote. “That the order appears to be neither drawn as narrowly as possible, nor based on a specific record showing the abuses particular to this case, however, does not amount to clear error.”

Turning to First Amendment concerns, even if the order involved serious restraints on expression, “it is unclear whether the expression is protected by the First Amendment,” the court said.

“Discussing and agreeing to class settlement—or petitioning for such a settlement—may not be protected speech because Logitech does not have a right to negotiate with absent, unrepresented, potential class members before there is class or interim class counsel. The order is not clearly erroneous under the First Amendment, and we decline to issue a mandamus order.”

To read the memorandum in In re Logitech, Inc., click here.

Why it matters

Judge Alsup’s standing order is itself not news; his court has enforced its no-contact provisions in other cases. What is important here is that a three-judge panel of the Ninth Circuit was not sufficiently troubled by it to force the district court to draw a more narrow order. But will the Ninth Circuit’s unpublished opinion encourage other courts to enter similar orders? That is harder to say. If yes, the trend could put a damper on early settlement talks between parties and potentially increase the length—and cost—of litigation for both sides.

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Employer-Sponsored Health Insurance: The Beginning of the End?

By Michael S. Kolber, Partner, Manatt Health

Editor’s Note: A new rule from the IRS and other federal agencies could kick off the same kind of transformation for employer-sponsored health insurance that turned traditional pension plans into employee-directed 401(k)s. In a new article for The Hill, summarized below, Manatt Health looks at whether 2020 will be the beginning of the end for employer-sponsored health plans—and the dramatic consequences of the potential changes ahead. Click here to read the full article.

Beginning in January 2020, any employer can give employees pretax compensation to buy individual market health insurance instead of providing a traditional employer-sponsored group health plan. Although thinkers from across the political spectrum have long decried the uniquely American phenomenon of tying health benefits to employment, two factors have generally preserved the status quo, with about half of Americans in employer-based coverage:

  1. Until the Affordable Care Act (ACA) was implemented, the individual market for health insurance was not functional in many places, leaving employers few options if they wanted to ratchet back their health benefits.
  2. Employers have a significant incentive to provide generous health benefits, because employer spending on a health plan is not treated as taxable income for employees, effectively increasing the value of this form of compensation. This incentive was strengthened by the ACA’s requirement that large employers share in the responsibility for providing health coverage to employees, as well as by Obama-era rulings interpreting that the ACA precluded employers from contributing to the costs of individual coverage obtained by employees. 

The ACA solved the first issue but exacerbated the second. The new federal rule now solves the second by permitting employers to fund health reimbursement arrangements (HRAs) for employees to buy individual market health insurance. Employees do not have to pay tax on amounts employers contribute to the HRA.

The major remaining constraint on the 401(k)-ization of employer health benefits will be the pressures of the labor market. Will employees accept jobs that don’t guarantee them particular health benefits—and will employers be willing to test the labor market?

The federal government estimates that within five years about 11 million people will receive individual market coverage funded through an HRA, but those people will be spread across 800,000 employers, meaning only about a dozen employees will get healthcare this way from each participating employer. The Internal Revenue Service (IRS) admits this estimate is highly uncertain. As with other disruptive innovations, it is entirely plausible that what begins in the low end of employers will take over the entire sector.

The Consequences of the Change

The consequences of moving away from traditional employer-sponsored health insurance could be dramatic. Today, reimbursement by employment-based health plans is the fuel that drives many sectors of the health economy—including physicians, hospitals, drug and device makers, and other providers who may receive lower reimbursement for Medicaid and Medicare patients and nothing for uninsured patients. In addition, at least for today, the individual market coverage that the HRA would buy is quite different than employment-based coverage, often with fewer providers, lower reimbursement rates, no out-of-network benefits except for emergencies, and higher deductibles and other enrollee cost sharing.

If millions more people join the individual market through HRAs, these plan design features may change to look more like employment-based coverage—or HRAs may further incentivize lower-premium, less comprehensive plans. Either way, each sector of the healthcare system will need to think about the implications. Hospitals and doctors will need to continue their focus on collecting payments from patients with high-deductible plans—and all providers could face lower reimbursement and higher enrollee cost sharing. Brokers and tech vendors will need to help employees navigate increasingly complex coverage decisions. Insurers may need to adjust to higher administrative costs.

The change also could affect political realities. A significant hurdle to “single payer” healthcare reform is the general satisfaction with employment-based insurance, which covers 60% of nonelderly adults. If people are shifted to plans with higher deductibles and narrower provider networks—and forced to comparison shop each year—a single-payer system could look more attractive. 

Landmark Legislation AB5 Codifies Dynamex ABC Test and More

By Michael E. Olsen, Associate, Employment and Labor

In a signing statement on September 18, 2019, Governor Gavin Newsom declared Assembly Bill 5 “landmark legislation for workers and our economy.” AB5 codifies last year’s landmark decision, Dynamex Operations West, Inc. v. Superior Court, in which the California Supreme Court adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders promulgated by the Industrial Welfare Commission (IWC). Wage orders govern a limited number of basic working conditions for employees, including the payment of minimum wages, meal and rest period protections, and overtime. Specifically, there is now a presumption that workers are employees (and therefore not contractors) unless the employer can affirmatively prove three things (sometimes referred to as the “ABC” test): (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

AB 5 also clarifies that Dynamex applies to the Labor Code and Unemployment Insurance Code. In other words, if workers are employees under Dynamex, they are also entitled to other employment benefits, including paid sick days, and the protections of the unemployment insurance code. For example, individuals who qualify as employees under Dynamex also now have claims they should be reimbursed for business expenses that arise from California Labor Code Section 2802 (for example, mileage for business-related travel or data reimbursement if required to use a personal cell phone).

Importantly, AB 5 exempts specified occupations from Dynamex. Among the exemptions are licensed insurance agents, certain licensed healthcare professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services with another business entity or under a subcontract in the construction industry. The last category covers a variety of services, including marketing, human resources administration, graphic design, grant writing, and freelance writing, editing, and photojournalism, provided that they do not license or provide content to the putative employer more than 35 times a year and there is a written contract that defines the scope of the services.

This does not mean that these professions are statutorily employees but that the employer must still meet the less onerous “Borello” test previously applied by California courts to determine whether an individual is an employee or independent contractor. Specifically, the Borello test’s principal factor is whether the putative employer has “the right to control the manner and means of accomplishing the result desired.”

To read the full text of AB5, click here.

Why it matters: The new law provides some clarification and certainty to employers following last year’s Dynamex ruling. It also codifies that certain professions may qualify for independent contractor classification if the right steps are taken. For instance, a freelance journalist may have been considered an employee under Dynamex alone—however, such a person may now qualify for independent contractor status if they have a written contract and provide only a limited number of content submissions in a year. Despite this, there remain ambiguities about AB5 and the interpretation of each element of the ABC test. And misclassification of workers can still result in significant legal exposure with respect to wage and hour compliance.

What is clear is that California is still aggressive in classifying individuals as employees, and that the decision to classify a worker as an independent contractor in California should be done with the skilled assistance of counsel. 

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California Delays Sexual Harassment Training Requirements 

By Ryan Patterson, Associate, Employment and Labor

California employers set to comply with the new sexual harassment training requirements arising out of last year’s Senate Bill 1343 got a recent reprieve with new legislation that provides a partial one-year extension.

Enacted last year, SB 1343 requires an employer that employs five or more employees—including temporary or seasonal workers—to provide at least two hours of sexual harassment training to all supervisory employees and at least one hour of sexual harassment training to all nonsupervisory employees by January 1, 2020, and once every two years after that.

Facing pushback from employers struggling to meet the rapidly approaching deadline, Governor Gavin Newsom signed Senate Bill 778 into law in late August. The measure extends the deadline for nonsupervisory employee training from January 1, 2020, until January 1, 2021.

The bill—which took immediate effect—also clarified that supervisors trained in 2018 don’t need to be trained again until 2020. New nonsupervisory employees must still be provided the required training within six months of hire, and new supervisory employees need it within six months of when they became supervisors.

To read SB 778, click here.

Why it matters: SB 778 provides a much-needed extension of time for employers to comply with the new sexual harassment training requirements, although the clock is still ticking and employers should continue to prepare themselves for the updated deadline.

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California Supreme Court: Unpaid Wages Are Not Recoverable Under PAGA

By Chiquita Brooks-LaSure, Managing Director, Manatt Health | Ian Spatz, Senior Advisor, Manatt Health | Gayle E. Mauser, Manager, Manatt Health

In a welcome surprise for employers, on September 12, 2019, the California Supreme Court resolved the significant issue of whether unpaid wages constitute a civil penalty recoverable in Private Attorneys General Act (PAGA) claims premised on violations of Labor Code Section 558. In addition to assessing fixed-amount penalties, Section 558 provides for the recovery of “underpaid wages” that can vary from employee to employee.

In ZB, N.A. v. Superior Court (Lawson), the issue on appeal was to what extent the recovery of unpaid wages as a civil penalty in a PAGA case was arbitrable—a subject that has been mired in appellate litigation in recent years. The employer sought to compel individual arbitration of that portion of the plaintiff’s PAGA claim which the employer deemed was “victim-specific relief” covered by the arbitration agreement that the plaintiff signed. Initially, the employer’s motion was granted by the trial court, but then it was overturned by the appellate court, which determined that the recovery of unpaid wages under Section 558 constituted a civil penalty within the meaning of PAGA, and therefore was not arbitrable at all.

In resolving the issue, the California Supreme Court broadened the inquiry, and after an extensive statutory review of Section 558, confirmed that it was appropriate to deny the employer’s motion to compel arbitration, but not because PAGA civil penalties cannot be compelled to arbitration. Instead, the California Supreme Court announced that recovery of unpaid wages under Section 558 is actually not a civil penalty at all. Recovery of unpaid wages is “compensatory relief” separate from, and in addition to, the fixed-amount civil penalties provided by Section 558. Consequently, because PAGA only permits the recovery of civil penalties, the California Supreme Court held that the compensatory relief of unpaid wages cannot be recovered in a PAGA action. 

Notably, the California Supreme Court’s analysis went further to hold that, in fact, there is no private right of action under Section 558. For that reason, only the Labor Commissioner can enforce the recovery of underpaid wages under that particular statute. If an employee seeks to recover unpaid wages, he or she must do so under another statute and not with a PAGA claim premised on Section 558.

To read the decision in ZB, N.A. v. Superior Court (Lawson), click here.

Why it matters: In an odd turn of events, while the plaintiff succeeded in having the denial of the motion to compel arbitration confirmed, it is the employer, and the defense bar at large, that won a major victory in this decision. The California Supreme Court’s decision is a significant development, as it greatly reduces the possible exposure in PAGA actions. Going forward, plaintiffs will not be able to recover unpaid wages as civil penalties on behalf of themselves and other aggrieved employees, and may not seek unpaid wages at all under Section 558 in their private capacity. Overall, this decision significantly limits the amount of risk an employer faces in defending a PAGA claim.

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Congress and Administration Consider Significant Drug Pricing Policy Changes

In both chambers of Congress, passing legislation to bring down drug prices is a policy priority—and the savings from such possible legislation is slated to offset other healthcare legislative proposals (such as addressing impending Medicaid Disproportionate Share Hospital (DSH) allotment reductions). Nonetheless, gaining traction on changes designed to bring down drug pricing is proving challenging, for Congress and the administration.

Following the August recess, Speaker of the House Nancy Pelosi (D-CA) plans to unveil her long-anticipated drug pricing proposal, which is expected to require the Department of Health and Human Services (HHS) to negotiate drug prices for certain high-cost drugs in Medicare (along with other measures, such as establishing a Part D maximum out of pocket for Medicare beneficiaries). Simultaneously, Senate Finance Committee Chair Chuck Grassley (R-IA) is working to move his own drug pricing and Medicare drug benefit reform plan forward in the Senate—but without strong support from the Republican majority.

At the same time, President Trump, seeking to advance his own leadership on the issue, is weighing his response to these legislative initiatives while continuing to pursue ideas first advanced in his drug pricing blueprint. While some components of the administration’s drug pricing plan have recently fallen flat,1 President Trump announced that he will soon issue an Executive Order that is expected to direct HHS to advance and potentially expand upon the administration’s International Price Index (IPI) proposal2 and put forth a “most favored nation” proposal. Exactly what this means remains unclear, but one thing is certain: the President sees addressing drug pricing as a major component of his healthcare plan heading into the 2020 presidential race. In the coming weeks and months, we are likely to see the administration advance increasingly significant drug pricing proposals via regulatory action and cooperation with Congress on legislation.

Although the President has supported the Senate Finance Committee proposal behind the scenes, continued resistance to the bill among some Republican senators—and the potential that it could be “watered down” in coming weeks—could temper the White House’s interest, shifting its attention to other priorities (such as the House bill and administration actions).

Senate Finance Committee Bill

On Thursday, July 25, the Senate Finance Committee voted 19–9 (with all nine votes against the bill coming from Senate Republicans) to advance the Prescription Drug Pricing Relief Act of 2019 (PDRPA).3 The PDRPA would make significant changes to the Medicare Part D prescription drug benefit as well as introduce new and increased rebates in Medicare Parts B and D and Medicaid—but the bill’s prospects are far from certain. Several Republicans who voted for the bill said that they would not support its final passage without changes, and Ranking Member Ron Wyden (D-OR) said that he and other Democrats would not support bringing the legislation to the floor unless other healthcare provisions—including Medicare drug price negotiation and pre-existing condition protections—are also considered.

The most controversial part of the bill—its requirement that drugmakers pay rebates based on their Part D sales if list prices rise more than inflation—survived in a 14–14 vote (a majority was needed to remove the provision). The Committee also rejected, in a 16–12 vote, a Democratic amendment that would have given HHS the authority to negotiate drug prices in Medicare Part D.

In addition to the rebate provisions, the PDRPA’s most notable provisions would, if enacted:

  • Create a $3,100 out-of-pocket cap on beneficiary spending in Part D while changing the respective payment obligations of the government, plans and manufacturers.
  • Limit Part B drug reimbursement for certain new and high-cost drugs.
  • Increase the maximum rebate amount under the Medicaid Drug Rebate Program from 100% to 125% of the Average Manufacturer’s Price.

Notably, the bill’s savings could be used to fund other major healthcare legislative priorities—including impending Medicaid DSH allotment reductions that will otherwise take effect October 1. The Congressional Budget Office (CBO) did not provide exact projections, noting that the estimates are not complete, but it estimates total federal savings to be over $20 billion in the five-year window and over $100 billion in the ten-year window. Below are CBO’s preliminary estimates of the PDRPA by category:

  • Part B provisions would save $3.9 billion over five years; $12.9 billion over ten years.
  • Part D provisions would save $20.8 billion over five years; $92.1 billion over ten years.
  • Medicaid provisions would save a net $3.1 billion over five years; $16.5 billion over ten years.

CBO also notes that Medicare beneficiaries’ costs would decrease by about $25 billion over ten years due to the inflation rebate policies and the Part D redesign provisions.

1 Just one day prior to its scheduled effective date, a federal court struck down the White House’s rule that would have required manufacturers to include in television advertisements the list price of the advertised drug. HHS recently dropped its plans to advance its “rebate” rule due at least in part to concerns that it could raise beneficiary premiums.

2 The IPI proposal was first promulgated via an Advance Notice of Proposed Rulemaking (ANPRM). A proposed rule is currently under review by the Office of Management and Budget (OMB)—the last stop in the administration’s review process before a rule is released.

3 The Senate Finance Committee does not make legislative text public during the markup; rather, it conducts what is known as a “conceptual markup” of the proposal—known as the “Chairman’s mark”—without legislative text. The Chairman’s mark is available here, and the modifications to the Chairman’s mark are available here. All Committee documents and a recording of the hearing are available here.

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