In the litigation process, addressing and managing insurance coverage issues can be critical. In many cases, the complexity of litigation increases as a result of a side-contest over coverage. Insurers either deny coverage or agree that there is coverage subject to a reservation of rights. More issues emerge as the insurer seeks to control the costs and dictate the defense of the claim. In this episode, Dorsey Partners Kent Schmidt and Skip Durocher explore insurance coverage issues, from tendering a claim to insurer, dealing with an adverse coverage decision, and working with insurance adjusters in manage claims to a successful completion.
Author: Kent Schmidt
California’s Sweeping Price-Gouging Statute Presents Unique Risks to Manufacturers, Wholesalers, Distributors and Retailers of Food and Consumer Products
State price-gouging laws have come into focus in recent weeks as all 50 states have declared an emergency in the wake of the COVID-19 crisis. There is a relatively underdeveloped body of interpretative case law addressing the contours of price-gouging liability. The dearth of case law stems from the fact that these statutes can only be violated during limited time periods—usually a few days or weeks following the declaration of state of emergency. The lack of guidance from the case law creates uncertainty as courts begin to grapple with these issues, deciding the extent to which free market principles must take a back seat to more immediate concerns of consumer protection.
The California Statute (Cal. Pen. Code § 396)
According to a frequently cited survey of U.S. jurisdictions, 38 of the 50 states plus the District of Columbia have a price-gouging statute. A review of these statutory schemes shows a variety of approaches to the problem of reining in opportunistic sellers.
California’s broad price-gouging statute stands out, unique from all other relatively narrowly tailored statutes. Typical of many California statutes, the statute creates several liability traps for the unwary. Given the vastness of the California market—14% of the U.S. economy and the fifth largest economy in the world—it is prudent for those companies selling covered products and services to consider the vulnerabilities and liabilities arising from the California law.
The California statute is part of the Penal Code and states its purposes as follows: “While the pricing of consumer goods and services is generally best left to the marketplace under ordinary conditions, when a declared state of emergency or local emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified increases in the prices of essential consumer goods and services be prohibited.” Cal. Pen. Code § 396(a). The stated legislative objective is advanced by several sector-specific provisions aimed at specific industries and markets. There are no reported California appellate decisions interpreting the statute.
Five Features of California Price-Gouging Statute
A plain reading of the statute suggests five features most material to understanding the scope of the law and its application:
- Products and Services Covered by the Statute. The statute is much broader in scope than other state statutes by virtue of the wide variety of products and services it covers. Price gouging is prohibited on all “consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels.” Cal. Pen. Code § 396(b). The phrase “consumer food items” is not defined but arguably extends to any food or beverage at a local supermarket. No distinction or exemption is made for subtypes of retailers which means that an e-commerce company outside the state is treated the same as a traditional retail establishment located in California. Restaurants are covered by the statute as they are also selling “consumer food items” to consumers.The statute extends to non-food items, including any “consumer . . . goods.” Id. There is no requirement that the consumer goods be either essential or subject to an extraordinary temporary demand. One service area that may create unexpected liability is “transportation, freight, and storage service.” Id. This is a defined phrase and includes “any service that is performed by any company that contracts to move, store, or transport personal or business property or that rents equipment for those purposes, including towing services.” Cal. Pen. Code § 396(j)(9).Unlike goods, the statute’s application to “services” is much narrower. Liability extends only to those services associated with emergency responses and other enumerated categories.
A plain reading of the statute also reveals that there is no distinction between essential food items that have been in high demand (eggs, dried pasta and canned goods) and luxury items and non-essentials (ice cream and alcohol).
- Price Increases that Violate the Statute. Rather than a subjective determinant as used in other statutes (e.g., “unconscionable” pricing), the California statute provides a specific standard for gouging: 10%. A seller is prohibited from charging “a price of more than 10 percent greater than the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency.” Cal. Pen. Code § 396(b). Despite all of the other uncertainties and imponderables in the law, this bright line brings some clarity to at least this issue.
- Beyond the Consumer Transaction—Supply Chain Transactions. The statute makes clear that the gouging prohibitions apply beyond the retailer transaction, extending up the supply chain to encompass business-to-business transactions. The California Attorney General has underscored this in a recent press release, stating that the law “applies to transactions between manufacturers, wholesalers, distributors, and retailers as it does between retailers and consumers.” A retailer or other party in the distribution chain may have a defense if it “can prove that the increase in price was directly attributable to additional costs imposed on it by the supplier of the goods” Cal. Pen. Code § 396(a).
- Duration of the Price Controls. The price-gouging prohibition extends for 30 days after the state of emergency has been lifted. Cal. Pen. Code § 396(b) and (g). “The prohibitions of this section may be extended for additional 30-day periods, as needed, by a local legislative body, local official, the Governor, or the Legislature, if deemed necessary to protect the lives, property, or welfare of the citizens.” Cal. Pen. Code § 396(g). Unlike most natural disaster state of emergency proclamations which last only a few days or perhaps weeks, it is possible that these prohibitions will extend for many months in the future, whether by the initial proclamation remaining in place or additional 30-day extensions.
- Potential Claimants. The most important feature of the California statute relevant to assessing this risk of legal action is the fact that enforcement is not left to public prosecutors alone; consumers are empowered to commence a lawsuit. See Cal. Pen. Code § 396(i). Consumer class action plaintiffs are doubtless scouring pricing activities in search of class representatives. What should a company do if, perhaps unaware of these restrictions, it learns that products or services covered by the statute may have been sold at a price that exceeds the 10% threshold? Consideration should be given to the following five steps:
Steps to Implement if a Potential Violation has Occurred
What should a company do if, perhaps unaware of these restrictions, it learns that products or services covered by the statute may have been sold at a price that exceeds the 10% threshold? Consideration should be given to the following five steps:
- Take Remedial Steps. Terminate the questionable pricing transaction to reduce liability and lower the prices. If a business-to-business transaction is at issue, consider providing a credit or refund to negate an overcharge. Although not a defense to the initial violation, these types of remedial measures may be compelling factors in resolving later civil or criminal matters, whether negotiating a plea agreement with a prosecutor or mediating a consumer class action.
- Implement Internal Controls. As in any internal investigation that sheds light on a compliance problem, steps should be implemented to prevent future violations. If a pricing issue for one product line or service has been uncovered, an analysis may lead to the conclusion that there is a wider problem.
- Examine Defenses. A variety of defenses may be triggered by the unique aspects of the transaction at issue, providing a basis to argue that the statute is inapplicable or no violation has occurred.
- The “additional cost” defense noted above may be available if another participant in the supply chain has raised their prices necessitating an adjustment to the price. Cal. Pen. Code § 396(a).
- Other defenses may relate to the extra-territorial application of the California statute to transactions occurring outside the state. Suppose a New York food processer sells its product to a grocery wholesaler in New Jersey for an inflated price. Is the mere foreseeability that the product will eventually reach a California consumer who will be charged a higher price sufficient to create liability and is California’s attempt to regulate that New York-New Jersey transaction permitted?
- Calculate the Exposure. A preliminary review of pricing in the relevant period may provide an estimate of the scope of potential liability and inform a response including voluntary disclosure to a prosecutor and an offer to take remedial steps. The earlier this can be calculated and the potential liability assessed, the better informed the company will be on how to mitigate the liability risks, whether civil or criminal.
- Preserve Documents. Document preservation is essential to the extent that legal action is reasonably anticipated. In addition to avoiding discovery sanctions, preserving documents early can be vital to ensuring that evidence useful in the defense of a criminal prosecution or civil action is obtained.
By taking early and decisive action, a company can avoid or mitigate this unprecedented risk of criminal and civil liability.
1. Remarkably, the term “price gouging” appears in only one reported decision. See Bldg. Permit Consultants, Inc. v. Mazur, 122 Cal. App. 4th 1400, 1412 (2004).
2. California regulations typically use the misnomer “person” to describe the wide variety of entities covered by the law.
COVID-19 Retaliation Claims—A 2020 Trend in Employment Litigation?
Tracking the onslaught of new lawsuits filed in response to the COVID-19 crisis has demonstrated that three primary categories of plaintiffs are bringing these claims against companies:
- Employees; and
(My updated list of COVID-19 class actions (available here) tracks these three plaintiff classifications with several subspecies of consumer and other claims.) Studying the legal theories that plaintiff firms are crafting—both individual claims and class actions—even in the middle of the crisis is a useful exercise for those of us preparing to defend our clients against similar claims in the coming months. Gleaning insights from these newly-filed lawsuits is also among the highest and best use of time for in-house loss prevention professionals during these weeks.
Why Employment Claims Lag Behind Consumer Claims
As predicted a few weeks ago, the volume of COVID-19 employment class actions is initially lagging behind the consumer claims. The consumer claims lead the pack by a wide margin. But we expect employment filings to pick up pace in the coming weeks. One reason for the delay in employment case filings is that the operative facts relating to these claims are still unfolding in real time as employees are being required to work remotely or perform essential services under extraordinary conditions, encountering risks never contemplated.
Potential claims against employers are widely varied as reflected in a “top six” list of employee claims I gave in a webinar last month. One of the COVID-19 claims filed earlier this week, although not a class action, prompts me to add a seventh distinct risk for employers: claims by employee “whistleblowers” alleging retaliation for reporting compliance concerns, including compliance with ever-evolving health and safety guidelines and regulations.
The New Trader Joe’s Claim
In Kristopher King v. Trader Joe’s East, Inc.., filed in state court in Kentucky, a Trader Joe’s employee is asserting claims relating to his termination for voicing concerns relating to working conditions. (Although not a client—I never write about litigation against current Dorsey clients—this lawsuit targets one of my favorite companies. My family and I are loyal Trader Joe’s customers and we have a friend bravely working there on the front lines of this pandemic.)
In his lawsuit against Trader Joe’s, Mr. King alleges that on March 13, he created a private Facebook group with his fellow employees to address their collective concerns about Trader Joe’s alleged lack of support in implementing specific safety measures for its employees. Upon his return to work from a short illness on March 21, Mr. King was confronted by his manager who had learned of the private Facebook group and did not approve of the statements. Mr. King admitted to creating the group and reiterated his concerns about the health and safety of the employees interacting with the public. He urged the company to make several changes in order to comply with the Kentucky Governor’s Executive Orders and CDC Guidelines. The changes he urged included providing additional sanitizers and cleaning products, giving employees gloves to be changed with each customer contact and allowing employees to wear masks.
The Trader Joe’s manager allegedly urged Mr. King to resign if he was so concerned about these issues. When he refused to do so, Mr. King was allegedly terminated on March 28. According to Mr. King, in communicating the news of the termination, Trader Joe’s management “specifically referenc[ed] the creation of the Facebook group page and post with other Trader Joe’s employees in an effort to voice their concerns and complaints.” An April 2 New York Times article followed and now Trader Joe’s faces a lawsuit asserting a variety of claims including a discharge in violation of public policy.
- (Update: Hours after this was posted, a second whistleblower lawsuit was also filed in Kentucky by an employee against her funeral home employer. See Norris v. Schoppenhorst-Underwood Brooks Funeral Home, LLC.)
- (Further update 4/17: Thanks to Wayne Garris, J.D., Writer/Analyst, Labor and Employment Law at Wolters Kluwer Legal & Regulatory U.S. for tipping me off to this new retaliation case against a hospital filed in Cook County (IL). See Norris v. Schoppenhorst-Underwood Brooks Funeral Home, LLC Mazurkiewicz v. Northwestern Memorial Hospital,)
A Whistleblower Era
Reviewing these claims against Trader Joe’s (as well as a recent class action against the State of Alaska (Alaska State employees v. State of Alaska)) prompts me to consider the connection between the top two major stories in this far too eventful year: the COVID-19 outbreak and the Trump impeachment trial. Although it now seems like ancient history, it was only a few months back that our nation was fixated on the impeachment trial of President Trump. From start to finish, that saga centered around the claims of a whistleblower. Just as other impeachment trials in recent years have impacted Americans’ perspectives on matters beyond politics, the Trump impeachment trial has, among other things, burnished in our collective consciousness the power that a rank-and-file whistleblower holds and the protections the law provides against retaliation against such employees.
Even if the whistleblowing impeachment story had not been immediately followed by the current health crisis, it would have been reasonable to expect an increase in both whistleblowing claims and related employee claims alleging retaliation by employers. But the combination of these two major events in 2020 may present a perfect storm for whistleblower retaliation cases in the immediate future.
COVID-19 Whistleblower Claims
The challenges employers face in the COVID-19 crisis are daunting. While attempting to keep the business afloat and profitable, employers are scrambling to comply with all types of federal, state and local regulations of general applicability, in addition to the new directives being rolled out on a daily basis. Conflicting messages from various governmental entities only add to the confusion. These challenges will continue into the coming weeks as workplaces transition to the new normal—whatever that may look like.
The lawsuit against Trader Joe’s provides a rough outline of a whistleblower retaliation claim arising from COVID-19 and what an employer should not do (assuming for the moment, the core allegations are accurate). The lawsuit underscores the fact that all employers, both public and private companies, are susceptible to these types of claims. While public companies and government contractors have long been accustomed to managing risks associated with whistleblower claims and employee protections against retaliation under the Sarbanes-Oxley Act and the False Claims Act, it would be a mistake for any employer to disregard these risks, as virtually any employee in almost every jurisdiction may assert some variation on such a claim.
California has enacted a rather robust statute protecting employees from retaliation by an employer. Cal. Lab. Code § 1102.5. The law prohibits an employer from enacting a policy that prevents an employee “from disclosing information to a government or law enforcement agency, to a person with authority over the employee, or to another employee who has authority to investigate, discover, or correct the violation or noncompliance, or from providing information to, or testifying before, any public body conducting an investigation, hearing, or inquiry, if the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation, regardless of whether disclosing the information is part of the employee’s job duties.” Cal Lab Code § 1102.5(a). The law separately prohibits retaliation against an employee for engaging in these activities. Cal. Lab. Code § 1102.5(b). The law further prohibits an employer from retaliating against an employee “refusing to participate in an activity” that would result in a violation of the law. Cal. Lab. Code § 1102.5(c). There is even a provision that covers an employer’s retaliation “because the employee is a family member of a person who has, or is perceived to have, engaged in any acts protected by this section.” Cal. Lab. Code § 1102.5(h). There are thus several ways in which an employer can violate the statute. The California statute has features designed to provide teeth to the prohibitions, including the right to recover a substantial penalty and attorney fees (only the successful employee-plaintiff can recover, not the successful employer-defendant). Cal Lab Code § 1102.5(f) and (j).
Even in states that do not have a detailed statute like California’s, whether by statute or judicially-created rules, most all jurisdictions recognize an exception to the general rule that an at-will employee can be terminated with or without cause: a termination of an employee in violation of public policy may give rise to a wrongful discharge claim. A discharge in retaliation for whistleblowing will in almost every instance constitute such a termination.
What Steps Can Employers Take to Avoid These Claims?
The risk to employees are significant—perhaps more today than before the combination of whistleblower stories and pandemic issues came to the horizon. Prudent and vigilant employers are searching for ways to mitigate this risk.
The prophylactic measures employers can take to avoid these types of employee lawsuits range from the obvious policies to the more nuanced, and vary depending on the size of the organization. A few guiding principles should be considered in mitigating this litigation risk and creating a robust defense against these types of claims:
- Beginning with the obvious, an employee should never be terminated for complaining about a perceived violation of law or health and safety issues. The claim against Trader Joe’s—at this point, merely unsubstantiated allegations—is that Mr. King was expressly discharged on the basis of his concerns about violations of health and safety directives. In the more typical retaliation claim, the employee alleges that his or her termination for another reason (e.g., a layoff or tardiness) was a mere pretext or that he or she was constructively discharged because the blowback from raising his or her concerns created intolerable working conditions.
- Now is a good time to review the organizational structures and reporting mechanisms for employees to express concerns ranging from health and safety to fraud and embezzlement. Some companies field these calls internally through a human resources group and others use an outside service that allows for anonymity in fielding the calls.
- Employers should take steps to remind employees, particularly those in supervisory or management positions, of the need to take seriously any concern raised by an employee. Processes must be implement so that complaints can be escalated to the appropriate department or individuals. A process for documenting the concern, resolving the compliance issue and, above all, ensuring against retaliatory complaints, should be implemented and updated as with organizational changes.
- In training or retraining all levels of management on these issues, it is important to remind employees that, under most statutory schemes, the law protects a whistleblower against retaliation regardless of the merits of the claim. An employee who, under a mistake of fact or law, raises concerns that are not merited and faces retaliation may still assert a claim.
Defending employers against these types of claims presents inherent challenges for lawyers defending employees. Based on my own experience in defending clients in these cases, there are many frivolous retaliation claims. Employees aware of these protections and desiring to negotiate a lucrative severance package may quit for their own reasons and manufacture an after-the-fact story about some technical violation they raised with a supervisor months before. Courts have worked to weed out these meritless claims by requiring evidence a causal connection between the alleged termination and the employee’s complaint. Whistleblowing cases nonetheless remain an active area of the law for employee plaintiff lawyers to pursue.
The New List of COVID-19 Employee Claims
Preventing and defending against a whistleblower retaliation claim is even more challenging in the current pandemic. Management and HR staff are being forced to make rapid-fire assessments of risks, address employee concerns about working conditions, adapt from normal practices and structures and forego some of the daily oversight over employers working remotely.
So while it did not make my initial list (for which I received valuable insight from two of my L&E partners), I would now add whistleblower retaliation claims to the types of potential employee lawsuits that we continue see in the coming weeks. The new list of potential claims against employers is as follows:
- WARN Act Claims: The announcement of layoffs will likely result in a number of claims relating to compliance with the WARN Act and similar state laws, including questions of whether certain exemptions apply.
- Wage & Hour Claims: As a result of employees working remotely, standard operating procedures and controls relating to meal and rest breaks have been disrupted. A lack of adequate recordkeeping and oversight increases the risk of wage and hour claims, including overtime pay. The use of personal equipment for business purposes triggers questions and claims relating to companies’ reimbursement policies.
- Employee Safety and Claims: Companies have been required to balance urgent business needs with employee health and safety during the crisis. There will likely be class actions relating to exposures to the virus in the workplace. In addition, the stress of the pandemic and resulting mental health needs will increase the likelihood of individual as well as class claims.
- [NEW] Whistleblower Claims: Employees claiming to be subject to retaliation for raising concerns about health and safety or compliance with laws, including COVID-19-related directives.
- ERISA Claims: As the bottom falls out of 401ks and pension plans, there will likely be ERISA claims. Any down market prompts greater scrutiny of past fiduciary decisions. This is a risk even after Retirement Plans Committee of IBM v. Jander, (No. 18-1165)
- Employee Medical Privacy Claims: Employee privacy claims are likely to follow as the manner in which companies handle sensitive information concerning employees’ medical diagnoses is questioned. This includes internal as well as external reporting. If employee records, normally maintained on a secured server, are accessed and stored outside the normal environment, there are risks relating to unauthorized access to private information and resulting privacy claims.
- Disparate Impact Layoffs: As companies address the need for layoffs and furloughs, the disparate impact of decisions on who is retained and who is terminated will face scrutiny, opening the door to possible claims for age discrimination.
Coronavirus Class Action Webinar—Taking Steps to Prepare for the Coronavirus Class Action
On Friday, my partner, Jaime Stilson and I presented a webinar discussing several class action lawsuits that have already been filed relating to the coronavirus and how companies’ business practices during this crisis are facing scrutiny. Consistent with expectations, the list of class actions continues to grow and covers the three categories of plaintiff classes: shareholders, consumers and employees.
An analysis of the legal theories in this first wave of claims is useful for those companies wishing to implement prophylactic measures to minimize this risk. The video playback is available below. Check back periodically as the list of coronavirus class actions will be updated in the coming days.