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Mar 14

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Seventh Circuit bars class certification because of damages

The Seventh Circuit decided Espenscheid vs. DirectSat, Inc., (No. 12-1943, February 4, 2013), upholding the district court’s decision to not certify a class of employees containing wage and hour law violations. The ruling is notable as class certification was denied because the class members had different amounts of claimed work that had not been properly compensated. The District Court concluded:

“There would have been no problem had the plaintiffs been seeking just injunctive or declaratory relief, because then the only issue would have been whether DirectSat had acted unlawfully. But the plaintiffs didn’t seek either form of relief … And to determine damages would, it turns out, require 2341 separate evidentiary hearings, which might swamp the Western District of Wisconsin with its two district judges. For it’s not as if each technician worked from 8 a.m. to 5 p.m. and was forbidden to take a lunch break and so worked a 45-hour week (unless he missed one or more days because of illness or some other reason) but was paid no overtime. Then each technician’s damages could be computed effortlessly, mechanically, from the number of days he worked each week and his hourly wage.”

Statistical sampling and related inferential statistics could be used to address these issues and create an estimate of damage with precise error rates and confidence levels. The Seventh Circuit acknowledged this, but then concludes that the measure of damages would have to be used as the same direct basis for damage distribution to the class, rather than using a more typical claim process once the damages have been settled or adjudicated. Consequently, even though this plaintiff group failed to use statistics to overcome the measurement challenges, the Seventh Circuit claims that proper statistical inferences would still not provide an acceptable solution. In the Seventh Circuit’s words:

“Remember that the technicians are paid on a piece-rate system, which implies—since workers differ in their effort and efficiency—that some, maybe many, of the technicians may not work more than 40 hours a week and may even work fewer hours; others may work more than 40 hours a week. Variance would also result from different technicians’ doing different tasks, since it’s contended that the employer told them not to report time spent on some of those tasks, though – further complicating the problem of proof – some of them reported that time anyway.

The plaintiffs proposed to get around the problem of variance by presenting testimony at trial from 42 “representative” members of the class. Class counsel has not explained in his briefs, and was unable to explain to us at the oral argument though pressed repeatedly, how these “representatives” were chosen— whether for example they were volunteers, or perhaps selected by class counsel after extensive interviews and hand picked to magnify the damages sought by the class. There is no suggestion that sampling methods used in statistical analysis were employed to create a random sample of class members to be the witnesses, or more precisely random samples, each one composed of victims of a particular type of alleged violation.

And even if the 42, though not a random sample, turned out by pure happenstance to be representative in the sense that the number of hours they worked per week on average when they should have been paid (or paid more) but were not was equal to the average number of hours of the entire class, this would not enable the damages of any members of the class other than the 42 to be calculated. To extrapolate from the experience of the 42 to that of the 2341 would require that all 2341 have done roughly the same amount of work, including the same amount of overtime work, and had been paid the same wage. No one thinks there was such uniformity. And if for example the average number of overtime hours per class member per week was 5, then awarding 5 x 1.5 x hourly wage to a class member who had only 1 hour of overtime would confer a windfall on him, while awarding the same amount of damages to a class member who had 10 hours of overtime would (assuming the same hourly wage) undercompensate him by half.”[Citations omitted]

There are lots of cases rejecting the Seventh Circuit’s argument. In Espenscheid vs. DirectSat, the Seventh Circuit does not even mention these other contrary findings. Nevertheless, for defendants, Espenscheid vs. DirectSat encourages the argument that damages are unique for various class members.

I wonder whether the Seventh Circuit would have been more tolerant of class certification if the Court had evidence of actual statistics before them. These statistics would have measured the variation within the population, so the Court could have assessed the relative justice of allowing the class to proceed. Instead, Plaintiffs wanted a group of 42 test cases, but declined to state how the 42 had been selected, and declined to provide assurances that whatever sampling method was in place was random. The cost of performing proper statistics would not have been great, yet might have rescued the case.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2013/03/seventh-circuit-bars-class-certification-because-of-damages/

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