Retailers Prevail Over Pharmacy Customers in California Tax Suit
By Benjamin G. Shatz, Co-Chair, Appellate
Retailers have won a victory in the realm of California taxation in McClain v. Sav-on Drugs (March 13, 2017) __ Cal.App.5th __ (Nos. B265011 & B265029).
In McClain, pharmacy customers brought a class action to require retail pharmacies to file an administrative claim with the Board of Equalization to seek a refund of sales tax paid for certain products used by diabetics. The retailers won because California's tax code does not provide for this remedy and although the courts have the power to fashion a new remedy, the prerequisites for doing so did not exist in this case.
California law requires retail pharmacies to pay sales tax for certain products used by diabetics. To cover the cost of that sales tax, pharmacies charge customers a "sales tax reimbursement." But what happens if the customer wants to argue that no tax was actually owed? The customer cannot seek a refund directly from the Board of Equalization, because the customer is not the taxpayer. In theory, the pharmacies could file an administrative claim for a refund, of course, but in reality the stores have no incentive to do so, since they would then have to pass any recovery along back to their customers. So, can customers go to court to require pharmacies to file an administrative claim to recover the wrongfully paid tax? The Court of Appeal held that the answer to that legal question is "yes" if three "unique circumstances" exist: (1) the customers seeking the tax refund have no other remedy available; (2) allowing the suit would not be inconsistent with existing tax refund remedies; and (3) the Board must have already determined that refunds are actually owed, such that not allowing the customer to force the store to get the refund will unjustly enrich the store or the Board.
In this case, the retailers prevailed, because the court found that none of the three prerequisites for allowing the remedy were present. First, the customers have other remedies—they can urge the Board to initiate an audit or they could petition the Board to repeal the regulation requiring collection of the sales tax. Second, allowing suit when the Board has not yet determined any refund is due is inconsistent with other provisions of the Revenue and Taxation Code. Third, the Board has not yet decided whether the retail pharmacies, and thus the customers, are entitled to a refund.
Why it matters: This is a solid win for retailers—in this case. The three-part test seems like it would be difficult for most customer groups to satisfy. But in the right case, the "unique circumstances" could arise. Thus, retailers who charge customers for taxes that retailers must pay should be aware of this law and how it might be applied to their specific situation.
Moreover, the court itself concluded that the result "is not an entirely satisfying one" because the pharmacies lack any financial incentive to seek tax refunds, and the statutory remedies available to the customers are merely "the practical equivalent of allowing them to tug (albeit persistently) at the Board's sleeve." The court directs the Legislature's attention to this topic. Whether Sacramento responds will remain to be seen.
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California Appellate Court: Commissioned Employees Must Be Paid for Rest Periods
Are employees paid on commission entitled to separate compensation for rest periods mandated by state law, and if so, do employers who keep track of hours worked, including rest periods, violate this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods?
A California appellate court recently answered both questions in the affirmative.
After Ricardo Vaquero and Robert Schaefer were terminated, they filed suit against their former employer, Ashley Furniture HomeStores. The pair alleged that the store's parent company—Stoneledge Furniture LLC—violated California law with its commission plan. From 2009 through March 2014, Stoneledge compensated sales associates like Vaquero and Schaefer strictly on a commission basis. If an employee failed to earn at least $12.01 per hour in commissions in any pay period, Stoneledge paid the associate a draw against future commissions.
The commission agreement did not provide separate compensation for any non-selling time, such as time spent in meetings, on certain types of training, and during rest periods. Stoneledge authorized and permitted sales associates to take rest periods of at least 10 consecutive minutes for every four hours worked or major fraction thereof.
Stoneledge filed a motion for summary judgment, arguing that the rest period claim failed as a matter of law because the employer paid its sales associates a guaranteed minimum for all hours worked, including rest periods. A trial court judge agreed.
The plaintiffs appealed. They countered that payment for rest periods is mandated under two separate provisions of law: Wage Order 7-2001 and section 226.7 of the state Labor Code. Section 226.7 provides that employers "shall not" require employees to work during a meal or rest or recovery period mandated by law, while Wage Order 7 (applicable to the mercantile industry) establishes an employer's duty to pay such employees the minimum wage "for all hours worked."
Recognizing that state wage and hour laws "reflect the strong public policy favoring protection of workers' general welfare," the appellate court concluded that the law required Stoneledge to separately compensate its sales associates for rest periods.
"The plain language of Wage Order No. 7 requires employers to count 'rest period time' as 'hours worked for which there shall be no deduction from wages,'" the court wrote. "Wage Order 7 requires employers to separately compensate employees for rest periods if an employer's compensation plan does not already include a minimum hourly wage for such time."
This requirement applies equally to commissioned employees, employees paid by piece rate, or any other compensation system that does not separately account for rest breaks and other nonproductive time, the court said. "[N]othing about commission compensation plans justifies treating commissioned employees differently from other employees," the panel wrote, adding that "the purpose of a rest period is to rest, not to work."
Stoneledge argued that commission sales may continue through rest periods because commissions are routinely earned while employees are not present, including when they are on break. But it "makes no sense to assume that a commission-based employee who works 100 minutes per 40-hour work week longer than another employee—for example, by greeting new customers, following up with potential leads, or answering emails and phone calls related to pending orders—would not earn more in commissions than the employee who spent those same 100 minutes in a break room," the court said.
The court found support for its conclusion in the Division of Labor Standards Enforcement Policies and Interpretations Manual as well as public policy, which has "long viewed mandatory rest periods 'as part of the remedial worker protection framework,'" and so sacrosanct a right that it is unwaivable. "Compensation plans that do not compensate employees directly for rest periods undermine this protective policy by discouraging employees from taking rest breaks," the panel said.
As Stoneledge's plan did not separately compensate sales associates for rest periods, it violated state law, the court held. "The problem with Stoneledge's compensation system … is that the formula it used for determining commissions did not include any component that directly compensated sales associates for rest periods," the panel wrote. "Sales associates who were paid their commission received the same amount of compensation regardless of whether they took rest breaks."
When the employer paid an employee only a commission, that commission did not account for rest periods and when Stoneledge compensated an employee on an hourly basis (including for rest periods), the company took back that compensation in later pay periods, the court explained. "In neither situation was the employee separately compensated for rest periods."
The court noted that its decision did not cast doubt on the legality of commission-based compensation. "Instead, we hold only that such compensation plans must separately account and pay for rest periods to comply with California law," the panel said. "Nor will our decision lead to hordes of lazy sales associates. The commission agreement in effect during the class period provided that a sales associate who failed to meet minimum sales expectations (which generated commissions well above the guaranteed minimum) was subject to disciplinary measures up to and including termination. Thus, employers like Stoneledge have methods to ensure that an employee's productivity does not suffer as a result of complying with with California law by paying a minimum wage for rest periods."
To read the opinion in Vaquero v. Stoneledge Furniture LLC, click here.
Why it matters: Paid exclusively through commissions, the associates were paid a "draw" against future commissions if they failed to earn at least $12.01 per hour during any pay period. Separate compensation was not provided for non-selling time, including rest periods. The appellate panel found that the commission plan violated state law because it failed to separately compensate the sales associates for the time they worked but could not earn commissions, reversing summary judgment in favor of the employer. A commission plan "must separately account and pay for rest periods to comply with California law," the court ruled.
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Hobby Lobby Crafts a Deal With Virginia AG
Hobby Lobby reached a deal with the Virginia Attorney General in an action accusing the retailer of deceptive pricing.
According to the complaint, the arts and crafts retail chain "routinely" advertised discounts compared to "other sellers," but did not disclose what its prices were actually being compared to, as required by state law.
"Comparison shopping can be a useful tool for finding good deals, but comparison price advertising only works if businesses are clear about their prices and how they compare to competitors," AG Mark Herring said in a statement.
In addition to paying the state an $8,000 civil penalty, Hobby Lobby is subject to a permanent injunction against future violations of the state's Comparison Price Advertising Act.
Why it matters: Deceptive pricing suits have been a popular choice for consumer class actions—JCPenney was one recent target—and now regulators, such as the Virginia AG, are getting in on the act.
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Nike Sprints to Victory in Pricing Suit
Nike lived up to its "just do it" tagline with a victory in Oregon federal court when a judge granted the company's motion to dismiss a deceptive pricing suit.
Monika Taylor claimed that Nike outlet stores ran afoul of California consumer protection laws by using fictional "suggested retail" prices that are higher than the items' actual prices to scam consumers into thinking they are getting a bargain. The store used tags with two prices: a "Sugg. Retail Price" and a lower "Our Price," leading her to believe that the items with tags were discounted, she said.
The court granted Nike's motion to dismiss. Although her complaint listed the date on which she purchased her items, the location of the outlet store, and the type of product she purchased, Taylor failed to state her claims with sufficient specificity, the court said, finding it "unclear what exactly Ms. Taylor is alleging."
She provided no meaning to the terms "former," "original," or "regular," which U.S. District Court Judge Michael W. Mosman said represent three different concepts even though the complaint treated them as if they were indistinguishable, leaving it hard to determine the exact theory upon which Taylor claims she and other consumers were deceived by the dual price tags.
"Did she believe the Sugg. Retail Price to be one at which the same items were previously offered at Nike retail stores or other, non-outlet retailers?" the court asked. "Or, did she believe the Sugg. Retail Price to be one at which the same items were being currently offered by other stores in the relevant market? Or, did she believe the Sugg. Retail Price to be one at which an independent manufacturer determined the items to be worth? Without answering these or similar questions, it is difficult to identify Ms. Taylor's theory of fraud in a way that allows Nike to adequately defend against the allegations."
The court also struggled with the plaintiff's allegations that Nike's items were "outlet exclusive," and was unclear if Taylor was alleging the products were never sold anywhere but Nike Outlet stores or that they did not sell at the suggested retail price within 90 days of being marked.
Lacking clarity, Judge Mosman dismissed the complaint's fraud allegations, also finding that Taylor lacked standing to seek injunctive relief. Her "economic injury is rooted in Nike's alleged deception; without such deception, she would not have purchased the merchandise or paid as much as she did," the court said. "By virtue of her past injury, however, Ms. Taylor is now aware of any false pricing scheme in which Nike might be engaged. Therefore, she cannot demonstrate 'the imminent prospect of future injury' because she can no longer be deceived."
To read the opinion and order in Taylor v. Nike, Inc., click here.
Why it matters: The court's order eliminates liability based on Nike's outlet store pricing model—for now, as Taylor was granted leave to amend her complaint. The shoe giant is only the latest retailer facing a deceptive pricing suit, joining the likes of Kohl's and Columbia Sportswear Company.
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FCRA Suit Against Amazon Moves Forward
A Fair Credit Reporting Act (FCRA) suit against Amazon can move forward in Florida federal court, a judge recently ruled. Donovan Hargrett accused the online retailer of violating the statute by failing to provide two separate forms for his job application and background check authorization at a fulfillment center.
Amazon moved to dismiss, arguing that the lack of a stand-alone disclosure document was not sufficient to create standing (i.e., the right to sue) to pursue an FCRA violation. But the court disagreed.
In 2015 Donovan Hargrett sought employment as a "fulfillment associate" at Amazon's fulfillment center in Ruskin, Florida. During the online application process, Amazon notified individuals of its intent to procure a background check report, including criminal background information, from Accurate Background, Inc.
The online application form completed by Hargrett was accompanied by a second document that consisted of two forms: one titled "Background Check Disclosure," which explained that, pursuant to the FCRA, Accurate or another consumer reporting agency acting on behalf of Amazon would process a "background check" on the applicant and furnish it to Amazon.
It also asked applicants to review and sign the second form, the "Background Check Authorization," if the applicant authorized a background check to be conducted on behalf of and provided to Amazon.
Only after selecting "I Accept" and "Save & Continue" for the "Background Check Disclosure" form was the applicant directed to the "Background Check Authorization." By signing the Authorization, the applicant agreed that he had read and understood both the Authorization and the Disclosure forms and "consent[ed] to the preparation and release of consumer and/or investigative consumer reports to the Company."
Underneath a heading titled "Additional State Law Notices," the Authorization form also featured paragraphs of information regarding rights under the laws of certain states (none of them applicable to Hargrett).
Hargrett brought suit under the FCRA, asserting that Amazon violated Section 1681(b)(2)(A) because the online employment application forms included "extraneous information." Amazon did not utilize a stand-alone FCRA disclosure or authorization form, he said, and the disclosure form was included within and as part of the online job application form, accompanied by a liability release and extraneous information.
The putative class action did not request actual damages but sought an award of statutory damages for Amazon's willful FCRA violation. Hargrett's case was consolidated with a similar action filed by two other applicants.
Amazon moved to dismiss for lack of standing. The case was stayed pending the outcome of the U.S. Supreme Court's decision in Spokeo, Inc. v. Robins.
Once the justices published their opinion in that case, U.S. District Court Judge Richard A. Lazzara determined that the plaintiffs suffered a concrete injury from Amazon's alleged FCRA violations sufficient to establish Article III standing to sue Amazon.
Spokeo "reaffirmed well-established Article III standing principles—that 'intangible injuries can nevertheless be concrete,' just as can injuries based on a risk of harm," the court held. "The Supreme Court further explained that '[i]n determining whether an intangible harm constitutes injury in fact, both history and the judgment of Congress play important roles.' The Court recognizes the split in persuasive authority as to this issue, however, it is convinced that Article III standing is sufficiently established in this case inasmuch as Plaintiffs have at least three kinds of harm: invasion of privacy, informational harm, and risk of harm. The invasion of Plaintiffs' right to receive a stand-alone disclosure document required by the FCRA is not hypothetical or uncertain."
For support, Judge Lazzara cited post-Spokeo decisions finding an injury-in-fact may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing, from the U.S. Court of Appeals for the Eleventh Circuit as well as district courts in Florida and Virginia.
Most recently, the Ninth Circuit found standing in a nearly identical FCRA case, holding that a prospective employer violates Section 1681(b)(2)(A) when it procures a job applicant's consumer report after including a liability waiver in the same document as a statutorily mandated disclosure.
Judge Lazzara noted that the forms at issue "include no less than five pages of 'eye-straining, tiny typeface writing,'" with additional information such as five different state law notices (none of which applied to the plaintiffs) and a statement indicating that applicants could either consent to the terms or would not be hired.
All of these extraneous additions to the form stretch what should be a simple disclosure form to five full pages of writing, the judge wrote. "Neither of the two forms at issue here constitute a document consisting solely of a disclosure that a background check will be procured for employment purposes," the court said. "Because these were the only two forms Defendant provided to Plaintiffs prior to procuring a report on them, the Court must agree with Plaintiffs that Defendant violated Section 1681(b)(2)(A)(i) and (ii)."
The plaintiffs also sufficiently alleged that Amazon's violation was willful, the court added. Accurate, the national consumer reporting agency hired by Amazon to procure its consumer reports, readily made available information on the FCRA's requirements—including stand-alone documents—in white papers and guidance on its website.
In addition, Amazon had already been accused of FCRA violations in litigation involving thousands of employees across the country, making it "illogical for Defendant to argue that it was unaware of its obligations under the FCRA as it has been involved in high-stakes FCRA class litigation for nearly an entire year," starting before Hargrett's lawsuit, the court said.
Accordingly, Judge Lazzara denied Amazon's motion to dismiss.
To read the order in Hargrett v. Amazon.com, click here.
Why it matters: "The court recognizes the split in persuasive authority as to this issue, however, it is convinced that Article III standing is sufficiently established in this case inasmuch as plaintiffs have at least three kinds of harm: invasion of privacy, informational harm and risk of harm," the judge wrote. Further, the court noted that the allegations may amount to a willful violation of the FCRA because Amazon included a liability waiver with the disclosure form despite the statute's clear mandate that no "extraneous information" be added to the FCRA disclosure.
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In Case You Missed It: Criminal Immigration Enforcement vs. Employers: The New Normal?
By Jacqueline C. Wolff and John F. Libby, Partners and Co-Chairs, Corporate Investigations and White Collar Defense
In a recent client alert, Jacqueline Wolff and John Libby, co-chairs of Manatt's Corporate Investigations and White Collar Defense practice, discussed the risk of criminal immigration enforcement actions under the new Administration and described proactive steps that companies can take to protect themselves. If you are an employer that may have undocumented or unauthorized workers in your workforce, it is important to understand these risks.
Click here to read the full article.
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