Arizona’s Implied Covenant of Good Faith and Fair Dealing May Apply to Workers in Multiple States

August 14, 2016 Litigation and Appeals

Class Action: In Garza v. Gama, the Arizona Court of Appeals found that Arizona’s implied covenant applied to the compensation arrangements between a trucking company and 80,000 drivers, even though not all of the drivers worked in Arizona.

According to the 2016 Carlton Fields Class Action Survey, more than sixty percent of in-house legal departments are currently defending at least one class-action lawsuit. The prevalence of class actions in federal court is evident from even a cursory review of the Supreme Court’s recent term, in which the Court issued multiple significant class action opinions.[1]

However, as a recent case from the Arizona Court of Appeals illustrates, the rise of class-action litigation is not a development confined to federal issues or litigated solely in federal court. In Garza v. Gama,[2] the Arizona Court of Appeals reversed a trial court order decertifying an 80,000-member class of both employee and independent contractor drivers who worked for Swift Transportation, finding that Arizona’s implied covenant of good faith and fair dealing applied to the compensation arrangements between Swift and 80,000 drivers, even though the drivers did not necessarily work in Arizona and were managed from terminal locations in 26 states.[3]

Facts and Procedural Background of Garza

As succinctly stated by the Court of Appeals, “Leonel Garza was a Swift [Transportation] truck driver who sued the company in 2005, alleging it systematically underpaid all of its drivers.”[4] The claims asserted by Garza and other class members involved two groups of drivers: about 1,000 drivers who entered into individual independent contractor agreements with Swift, and a larger group of employed drivers.[5] The trial court certified a class of 80,000 drivers, including both the employed drivers who had no written contract, and independent contractors. The court certified both groups in a single class of drivers, finding that the two claims raised by the drivers presented common questions of law or fact that predominated over the individual claims, as contemplated by Rule 23(b)(3). The two causes of action asserted by the drivers were breach of an express contract and breach of the implied covenant of good faith and fair dealing.[6]

The claims involved the mechanism through which Swift paid its drivers. Specifically, Swift paid the drivers for each trip based upon the mileage of the trip. It paid drivers for a certain number of miles per assignment, which was calculated prior to the inception of the trip. The drivers asserted that Swift systematically calculated, through the use of certain options in a software program it utilized, a low number of miles, failing to account for the miles actually driven on each trip.[7]

After the express breach of contract claim was resolved in Swift’s favor, the case was poised for trial in 2015. Prior to trial, however, the Superior Court reconsidered the decision to certify the class. It decertified the class, holding both that common issues no longer predominated and that the class was no longer manageable. Following this ruling, the class members sought review of the case by special action. The court of appeals accepted special action jurisdiction and reversed.

Application of Arizona Law

The trial court had found that choice-of-law issues presented unmanageability issues because not all of Swift’s employee-drivers worked out of Arizona. Rather, Swift hired and managed these employed drivers from terminal locations geographically dispersed among 26 states. Some of these states do not recognize a cause of action for breach of the implied covenant of good faith and fair dealing arising out of an employment relationship. Applying the factors set forth in the Restatement (Second) Conflict of Laws (1971) (“Restatement”), however, the Court of Appeals found that Arizona law governed the employed drivers’ claims.[8]

Specifically, the court noted that the drivers work, by definition, in multiple states. As a result, those states “lack a significant interest in the nature of those drivers’ relationships with Swift.”[9] In contrast, the acts at the center of the drivers’ claims – notably, the decisions around which options to select within the software – occurred in Arizona, finding that the structure of Swift’s relationship with its drivers was a “hub and spoke,” with the corporate office in Arizona as the center hub.[10] Because a single state law applied, the court held that the class of 80,000 was not unmanageable and reversed the trial court order decertifying the class.

Lessons in Class and Collection Actions

Employers located in many parts of the country can avoid employees’ class and collection actions through the use of waivers. The U.S. Supreme Court has upheld the enforceability of class-action waivers in a couple of fairly recent decisions.[11] While the Supreme Court has not yet ruled on the enforceability of such waivers in the employment context, it is likely that the issue will come to the Court because of a split in the circuits on the issue.

Employers in the Second[12], Fifth[13] and Eighth[14] Circuits can, for the time being, rely upon case law in their jurisdictions holding that such waivers are enforceable.

The Seventh Circuit, on the other hand, in Lewis v. Epic Systems Corp,[15] agreed with the position of the National Labor Relations Board that such waivers violate the National Labor Relations Act. In yet another approach, the Sixth Circuit, in Killion v. Kettle DistributorsLLC,[16] ruled that class- and collective-action waivers are enforceable only to the extent an alternative arbitration forum is available to the employee. Therefore, there is no real “waiver,” just an ability to shift the action from court to arbitration. To complicate matters even further, in the Ninth Circuit, one divided panel recently agreed with the Seventh Circuit’s approach, holding that class- or collective-action waivers violate the National Labor Relations Act, but a prior panel of that court had, seemingly, upheld a waiver as valid.[17]

Given cases like Garza II, it seems that employers in the circuits that uphold waivers should seriously consider whether waivers are an appropriate tool to implement, at least until enforceability is resolved by the Supreme Court.

The other lesson related to Garza II is the importance of considering which law an employer wishes to have apply to an employment relationship. Arizona employers have the ability to designate the applicable law, at least in circumstances in which they can establish that the employee was involved with and cognizant of the choice of law provision placed in the employment agreement.[18]

Certainly, it is easy to look back and see how the situation in Garza II could have been avoided. However, the case does point out the importance of considering waivers and choice-of-law provisions at the beginning of the employment relationship.

[1] For example, Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, 672 (2016) (holding an unaccepted settlement offer or offer of judgment does not moot a plaintiff’s case); and Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1550 (2016).

[2] Garza v. Hon. Gama/Swift, No. 1 CA-SA 15-0315 (July 12, 2016) (“Garza II”)

[3] This article focuses on Garza II’s holding that, notwithstanding the drivers’ work across multiple states, Arizona’s implied covenant of good faith and fair dealing applied, and that the Court of Appeals’ decision also addressed other issues regarding commonality and class manageability not discussed here.

[4] Garza ¶ 2.

[5] Mr. Garza’s initial request for class certification was denied by the trial court, and the putative class members appealed. Garza v. Swift Transp. Co., Inc., 222 Ariz. 281 (2009). Although the Court of Appeals agreed with the class members, the Supreme Court of Arizona vacated that decision, holding that the Court of Appeals lacked jurisdiction. Id. On remand, the trial court reconsidered its decision and certified the class of drivers. Garza II ¶ 2.

[6] Garza II ¶ 7.

[7] Garza II ¶ 8.

[8] Garza II ¶¶ 18-24 (citing RESTATEMENT §§ 6, 188, and 196).

[9] Garza II ¶ 21.

[10] Id. ¶ 23.

[11] AT&T Mobility, LLC. v. Concepcion, 131 S.Ct. 1740 (2011) (regarding consumer class action waivers) and Am. Exp. Co., v. Italian Colors Rest., 133 S.Ct. 2304 (2013 (regarding merchant waivers of class antitrust claims)

[12]Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013).

[13] Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015)

[14]Cellular Sales of Missouri, LLC v. NLRB, 2016 WL 3093363 (8th Cir. 2016)

[15] Lewis v. Epic Systems Corp, 2016 WL 3029464 (7th Cir. 2016)

[16] Killion v. Kettle Distributors, LLC., 761 F.3d 574 (6th Cir. 2014)

[17] Compare Morris v. Ernst & Young, LLP, No. 13-16599, (9th Cir.), decided August 22, 2016 with John Mohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1075 (9th Cir. 2014).

[18] See Swanson v. Image Bank, Inc., 206 Ariz. 264 (2003).