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Supreme Court Says CMA May Proceed Against Aetna for Unfair Competition

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Aetna Health of California Inc. provides health insurance. For its preferred provider plans, Aetna contracts with a network of physicians and other medical providers who offer care to insured individuals at an agreed rate. Member patients can also see providers outside the network on referral from in-network physicians, but may bear a greater share of the cost.

Effective in 2009, Aetna adopted a “Network Intervention Policy” designed, according to its terms, to “reduce the number of non par [i.e., nonparticipating, or out-of-network] referrals by par providers and if necessary take further action against participating providers who refuse, after warning and education to comply with the terms of their contract.”

The California Medical Association (CMA) is a nonprofit professional organization, founded in 1856, that advocates on behalf of California physicians. By CMA’s count, it has more than 37,000 physician members.

In 2010, at least two years before it filed suit, CMA learned of Aetna’s Network Intervention Policy from its members and became concerned that in threatening termination or actually terminating participating physicians for their referrals to out-of-network providers, the policy’s implementation interfered with physicians’ exercise of their sound medical judgment.

CMA diverted 200-250 hours of staff time to respond to the policy. That time was spent on activities including: (i) investigation for the purpose of “advis[ing] physicians and the public regarding how to address Aetna’s . . . interference with the physician patient relationship in an effort to avoid litigation over this issue”; (ii) “prepar[ing] a 3-page document entitled the ‘Aetna Termination Resource Guide,’ which [CMA] publicized, advising . . . members about Aetna’s new policy . . . , including ways to proactively address and counteract Aetna’s policies”; (iii) engaging with physicians affected by Aetna’s policy and interacting with Aetna on physicians’ behalf; and (iv) “prepar[ing] a letter to California’s Department of Insurance and California’s Department of Managed Health Care requesting that they take action to address” Aetna’s change in policy.

In July 2012, CMA sued Aetna, alleging Aetna’s implementation of the Network Intervention Policy violated the unfair competition law (UCL; Bus. & Prof. Code, § 17200 et seq.) both because it was unfairly oppressive and injurious and because it violated specified sections of the Insurance Code, Business and Professions Code, and Health and Safety Code. CMA sought to enjoin Aetna from enforcing the policy.

The UCL confers standing on a private plaintiff to seek relief under the statute only if that plaintiff has “suffered injury in fact” and “lost money or property as a result of the unfair competition” at issue.

Aetna moved for summary judgment. It argued that CMA lacked UCL standing because CMA had not lost money or property as a result of the policy. Aetna emphasized that the policy applied to individual physicians – not to CMA. CMA countered that it had diverted resources in response to the policy. The trial court granted Aetna’s motion for summary judgment on standing grounds. The Court of Appeal affirmed. (California Medical Assn. v. Aetna Health of California Inc. I (2021) 63 Cal.App.5th 660).

The California Supreme Court agreed to hear the case, and reversed the dismissal in the case of California Medical Assn. v. Aetna Health of California Inc. II – S269212 (July 2023)

The issue between the parties is whether resources that an organization has spent to counter an unfair or unlawful practice constitute “money or property” that has been “lost . . . as a result of the unfair competition.” (§ 17204.)

The California Supreme Court held that the UCL’s standing requirements are satisfied when an organization, in furtherance of a bona fide, preexisting mission, incurs costs to respond to perceived unfair competition that threatens that mission, so long as those expenditures are independent of costs incurred in UCL litigation or preparations for such litigation.

When an organization has incurred such expenditures, it has “suffered injury in fact” and “lost money or property as a result of the unfair competition.” (§ 17204.)

In this case the record discloses a triable issue of fact as to whether the plaintiff association expended resources in response to the perceived threat the health insurer’s allegedly unlawful practices posed to plaintiff’s mission of supporting its member physicians and advancing public health.

The evidence was also sufficient to create a triable issue of fact as to whether those expenses were incurred independent of this litigation. For these reasons, the trial court erred in granting summary judgment for the defense. It therefore reversed the judgment of the Court of Appeal, which affirmed the grant of summary judgment.

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CHSWC Reporting Delays Cause Another Extension of Debit Card Sunset

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In 2018, the California Legislature passed SB 880 which was modeled after the Employment Development Department’s program that utilizes prepaid cards to issue unemployment insurance and disability insurance payments. The purpose was to conduct a pilot program to transmit workers’ compensation disability indemnity benefits via prepaid card, rather than a paper check.

It authorized employers to begin a program where disability indemnity benefits may be deposited on a prepaid card account if the injured worker has provided written consent to receive his or her benefits on a prepaid card and prohibits account fees being charged to an injured worker, except for an expedited replacement prepaid card, out-of-network ATM fees on the third and subsequent withdrawal per deposit, and fees associated with foreign transactions.

The bill also required CHSWC to report data to the Legislature by December 12022 about the number of employees who elected to receive their benefits via prepaid card – the cash value of benefits sent via prepaid card, and the number of employees who opted to change their method of payment from prepaid card to either a written instrument or electronic deposit.

The pilot program authorized by SB 880 was due to sunset on January 1, 2023. Last year, AB 2148 (Calderon, Chapter 120, Statutes of 2022) extended the sunset date to January 1, 2024. The CHSWC report required by SB 880 has not yet been submitted to the Legislature.

This year AB 489 was passed by the legislature and has now been signed by Governor Newsom. This law extends an existing pilot program by one year to allow workers’ compensation temporary and permanent disability indemnity payments to continue to be made using prepaid cards.

Passage of this extension was supported by the following organizations:

– – American Property Casualty Insurance Association
– – California Association of Joint Powers Authorities
– – California Coalition on Workers Compensation
– – Housing Contractors of California
– – Public Risk Innovation, Solutions, and Management

There was no opposition to the extension of time.

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Arbitration of Individual Claims Does Not Preclude Concurrent PAGA Litigation

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Erik Adolph, was a driver for UberEATS, a meal delivery service. The company through which drivers are connected with those in need of UberEATS’ services is owned by Uber Technologies Inc.

Before he began making deliveries for UberEATS in March 2019, Adolph created an account to use the UberEATS app. In creating his account, Adolph accepted an arbitration agreement, which “is governed by the Federal Arbitration Act.”

In October 2019, Adolph filed a putative class action complaint against Uber, claiming that Uber had misclassified employees as independent contractors, and had therefore failed to reimburse the class members for necessary work expenses. The complaint was amended to include only a California Private Attorney General Act (PAGA) cause of action. Uber filed a petition to compel arbitration of Adolph’s individual claims, strike the class action allegations, and stay all court proceedings.

But the trial court denied Uber’s petition to compel arbitration citing California Supreme Court’s 2014 decision in Iskanian v. CLS Transportation Los Angeles, LLC 59 Cal.4th 348, 384 and the cases following it, In Iskanian the California Supreme Court held “that an employee’s right to bring a PAGA action is unwaivable,” and that “here . . . an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”

Uber appealed the ruling of the trial court. On April 11, 2022 the Court of Appeal affirmed the trial court in the case of Adolph v Uber Technologies Inc. -G059860 (consol. w/ G060198). The case was unremarkable at the time, hence it was “unpublished.”

About two months later, The Supreme Court of the United States published its decision in Viking River Cruises, Inc. v. Angie Moriana, on June 15, 2022, agreeing with the employer who had appealed nearly the same issue as in Adolph v Uber. SCOTUS thus limited the application of Iskanian in California. It said “When an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.” As a result, Moriana would lack statutory standing to maintain her non-individual claims in court, and the correct course was to dismiss her remaining claims.

The U.S. Supreme Court decision in Viking had – at least temporarily – disrupted the PAGA process against employer’s who have arbitration agreements in California. Hence, on July 22, 2022 the California Supreme Court granted Uber’s Petition for Review in the Adolph case. The Uber case which was unremarkable and unpublished, is now remarkable, since the timing make it the case chosen to decide how Viking will work in California.

The California Supreme Court agreed to hear Adolph v Uber Technologies Inc in order to consider whether an aggrieved employee who has been compelled to arbitrate individual claims “premised on Labor Code violations actually sustained by” the plaintiff (Viking River, supra, 596 U.S. at p. __ [142 S.Ct. at p. 1916]; see Lab. Code, § 2699, subd. (a)) maintains statutory standing to pursue non-individual “PAGA claims arising out of events involving other employees” (Viking River, at p. __ [142 S.Ct. at p. 1916]) in court.

In deciding Viking River the U.S. Supreme Court concluded that a PAGA plaintiff loses standing in this situation: “[A]s we see it, PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding. Under PAGA’s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action.”

And SCOTUS reasoned that “When an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”

Nonetheless, the California Supreme Court in it’s Adolph v Uber Technologies -S274671 (July 2023) decision published today, disagreed with the Viking River interpretation of PAGA, a state law, because “[t]he highest court of each State . . . remains ‘the final arbiter of what is state law’ ” (Montana v. Wyoming (2011) 563 U.S. 368, 378, fn. 5), “we are not bound by the high court’s interpretation of California law.”

The centerpiece of PAGA’s enforcement scheme is the ability of a plaintiff employee to prosecute numerous Labor Code violations committed by an employer and to seek civil penalties corresponding to those violations.

“Uber makes several arguments in urging that a PAGA plaintiff loses standing to litigate non-individual claims in court when the plaintiff’s individual claims are subject to arbitration. None is persuasive.”

In sum, where a plaintiff has filed a PAGA action comprised of individual and non-individual claims, an order compelling arbitration of individual claims does not strip the plaintiff of standing to litigate non-individual claims in court. This “is the interpretation of PAGA that best effectuates the statute’s purpose, which is ‘to ensure effective code enforcement.’ ”  

“We reverse the judgment of the Court of Appeal and remand the case for further proceedings consistent with this opinion. We limited our review to the question of PAGA standing and express no view on the parties’ arguments regarding the proper interpretation of the arbitration agreement.”

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$6M Punitive Damages Justified by Employer’s “Despicable” Conduct

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Alki David Productions, Inc. (ADP) is an entertainment and media company owned by its principal, Alkiviades David. ADP initially produced internet programming, but in 2014 it began focusing on hologram technology, by which images are projected onto a screen and reflected for audience viewing.

Karl Zirpel was employed by ADP from 2013 to 2017. During his employment, Zirpel became heavily involved in hologram production. He learned the technology, how to install the equipment, and how to stage productions that ADP created for television shows, concerts, and museums. Zirpel became ADP’s vice president of operations in March 2014. His annual salary at the time ADT terminated his employment was $72,800.

In September 2017, Zirpel began working at a church on Hollywood Boulevard that ADP was converting into a theater for hologram productions. Zirpel was responsible for installing production equipment used to create the hologram.

Zirpel was at the theater on September 25, 2017, when four different Los Angeles City inspectors arrived. He learned of approximately 20 code violations, including plumbing and electrical violations.

Zirpel was concerned about the plumbing and electrical work in relation to the hologram equipment he was to install. Projection equipment weighing 700 pounds would be installed in the ceiling directly over the audience. Zirpel was concerned about the integrity of the ceiling and the floor and whether the equipment could fall on the theater attendees.

ADP had scheduled a private, invitation-only special event at the theater for celebrities and potential investors to take place on September 28, 2017 After the inspectors finished their September 25, 2017 walk throughs, Zirpel asked two of the inspectors whether ADP could obtain approval of the completed work before the event. Both inspectors told Zirpel that approvals would be impossible given their respective schedules and the amount of work to be done at the theater.

Zirpel and David had conversations about safety concerns, with Zirpel suggesting that the event be postponed. David “immediately blew up,” and told Zirpel to shut up and “go with the program,” Zirpel kept repeating what they were doing was not safe. David went into a “fit of rage,” yelled in Zirpel’s face, and using numerous obscenities as he fired Zirpel. One of the comments made by David revealed that Zirpel was gay.

Zirpel found the situation “traumatic,” because he “wasn’t out to a lot of people,” including many with whom Zirpel worked in a very masculine construction environment. Zirpel had also trusted David, one of the few people who knew Zirpel was gay.

Zirpel sued David and alleged his termination constituted retaliation under Labor Code section 1102.5, subdivision (b), for disclosing to ADP information Zirpel reasonably believed evidenced a violation of a statute, rule, or regulation, and under Labor Code section 232.5, subdivision (c) for disclosing information about the employer’s working conditions.

A jury found ADP liable for whistleblower retaliation under Labor Code section 232.5, which prohibits an employer from discharging an employee who discloses information about the employer’s working conditions, and section 1102.5, subdivisions (b) and (c), which prohibits an employer from retaliating against an employee who refuses to participate in an activity that would violate the law or who discloses information the employee reasonably believes would disclose a violation of law. The jury awarded Zirpel $7,068,717 in damages (consisting of $368,717 in economic damages, $700,000 in non-economic damages, and $6 million in punitive damages).

David appealed. The Court of Appeal affirmed the judgment in the published case of Zirpel v. Alki David Productions, Inc -B317334 (July, 2023).

One of David’s contentions on appeal was that the punitive damages award should be reversed because it was unconstitutionally excessive.

The Court of Appeal noted that of the guideposts for determining the constitutionality of a punitive damages award, reprehensibility is the most important factor. In the case of State Farm Mut. Auto. Ins. Co. v. Campbell (2003) 538 U.S. 408, 419) the United States Supreme Court has instructed courts to determine the reprehensibility of a defendant’s conduct by considering whether “the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.” (Ibid.) A reviewing court must consider the totality of the circumstances when determining the reprehensibility of a defendant’s conduct. (Ibid.)

“There is substantial evidence of reprehensible conduct on the part of ADP and its principal, David. David and Zirpel’s superiors ignored Zirpel’s repeated disclosures of potentially hazardous conditions at the theater, evincing a disregard of the health and safety of others. Conscious disregard of the safety of others can also constitute malice for purposes of a punitive damages award.”

Despicable conduct is conduct that is so “base, vile or contemptible” that it would be despised and looked down upon by ordinary people. (Angie M. v. Superior Court (1995) 37 Cal.App.4th 1217, 1228.) There is substantial evidence David acted with malice when terminating Zirpel’s employment. When Zirpel voiced his concerns regarding workplace safety, David yelled and screamed obscenities at Zirpel in front of his coworkers.

After telling Zirpel he was fired, David followed Zirpel out of the theater building and continued to scream at him. The totality of the circumstances here supports a finding of reprehensible conduct.

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June 26, 2023 – News Podcast

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Rene Thomas Folse, JD, Ph.D. is the host for this edition which reports on the following news stories: WCAB En Banc Rejects “Vocational” Theory of Apportionment. Caregiver Injury During Transit Not Barred by Going and Coming Rule. Chamber of Commerce & Others Sue Government Over Drug Pricing Plan. Riverside Nursing Facility Resolves Doctor Kickback Case for $3.8M. CWCI Reviews California Private Self-Insureds’ 2022 Claim Experience. UCSF Study Shows Calif ER Demand Increasing as ER Facilities Decline. Is the New Tenth Annual FDA Report on Drug Shortages Accurate? Biden Suspends VA Accountability and Whistleblower Protection Act.

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1996 Finance Agreement Binds Disneyland to a 2018 Living Wage Ordinance

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In 1996 and 1997, the Anaheim Public Financing Authority, the City of Anaheim, Walt Disney related entities, and a bond trustee signed several contracts. Under the Finance Agreement, Disney, the City, and the Authority agreed “to combine resources on the terms and conditions hereof to bring about a revitalization of the entire Anaheim Resort and to finance the public improvements needed for the Anaheim Resort, the expansion of the Convention Center, and the Disneyland Resort Project.”

The Anaheim Resort spans about 1046 acres. The Disneyland Resort is located within the Anaheim Resort and includes all the theme parks, hotel rooms, retail establishments, and other facilities located on Disney property. In the Finance Agreement, Disney agreed to build a new theme park (California Adventure), a pedestrian bridge, additional hotel rooms, as well as new retail, dining, and entertainment facilities (Downtown Disney). The Authority agreed to issue municipal bonds to raise money to help pay for the project.

In 2018, Anaheim voters approved Measure L, a Living Wage Ordinance (LWO). (Anaheim Mun. Code, § 6.99 et seq.) The LWO applies to hospitality employers in the Anaheim or Disneyland Resort areas that benefit from a “City Subsidy.” Affected employers were required to pay their employees a minimum of $15 per hour under the LWO starting in 2019, with annual increases of $1 an hour. In 2023, the wage would then be tied to the consumer price index.

In 2019, Kathleen Grace and other employee plaintiffs filed a class action complaint against the Walt Disney Company, Walt Disney Parks and Resorts, U.S., Inc. and Sodexo, Inc., and Sodexomagic, LLC alleging a violation of the LWO. Sodexo operates restaurants in Disney’s theme parks. The Employees alleged they were employed by either Disney or Sodexo, and they were not paid a living wage, beginning on January 1, 2019.

It was undisputed the Employees were not being paid the required minimum hourly wage under the LWO. However, Disney argued it was not covered under the LWO as a matter of law because it is not benefiting from a “City Subsidy.”

Disney and Sodexo filed a motion for summary judgment. The Employees argued the City issued municipal bonds in 1997, which gave “Disney over $200 million dollars to help finance the construction of California Adventure and a parking garage to serve the new park.” The bonds issued under the Finance Agreement will not be paid off until 2036.

The trial court granted the motion for summary judgment.  It concluded that “A ‘rebate . . . of taxes,’ as that phrase is used in the [LWO], refers not only to a refund of taxes already paid, but also to an abatement of taxes yet to be paid, an exemption from taxes, etc.” Nonetheless, the court concluded “there is no evidence that the Finance Agreement somehow lessens [Disney’s] tax obligation. Therefore, the public benefit conferred . . . by the Finance Agreement does not create a City Subsidy.”

The employees appealed, and the Court of Appeal reversed in the published case of Grace v. The Walt Disney Company – G061004 (July 2023).

Pursuant to Anaheim Mun. Code § 6.99.110 “A ‘City Subsidy’ is any agreement with the city pursuant to which a person other than the city has a right to receive a rebate of transient occupancy tax, sales tax, entertainment tax, property tax or other taxes, presently or in the future, matured or unmatured.”

The word “rebate” is not defined within the LWO. Generally, a “rebate” means “a return of a part of a payment.” (Webster’s 11th New Collegiate Dict. (2003) p. 1037.) This definition is consistent with California statutes, in which a “rebate” ordinarily means any kind of “retroactive abatement, credit, discount, or refund.”

Here, under the Finance Agreement, the City agreed to issue municipal bonds through the Authority. The bondholders were to be repaid based on the incremental increases in the City’s transient occupancy tax (paid by hotel guests on Disney property and other properties in Anaheim), sales tax (paid by consumers in businesses located within Disney owned property), and property tax (paid directly by Disney).

Under the Enhancement Agreement, Disney agreed if there was any year in which the City’s tax revenues in the debt service fund failed to meet its bond obligations to the bond trustee, Disney would then make up the shortfall. And under the Reimbursement Agreement, the parties agreed Disney would then be reimbursed by the City for any of its shortfall payments in those years when the City’s incremental tax revenues rebounded and were sufficient to meet its bond obligations

“We find that under these three agreements, particularly the Reimbursement Agreement, Disney has the right to receive a rebate – a return – of a portion of the incremental transient occupancy tax (paid by hotel guests), the local sales tax (paid by consumers), and the local property tax (paid by Disney) in those “rebound” years when the City’s incremental tax revenues exceed its bond obligations.”

“In short, we hold Disney receives a “City Subsidy” within the meaning of the LWO and is therefore required to pay its employees a living wage. Thus, we reverse the trial court’s order granting the defendants’ motion for summary judgment.”

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Lawsuit Blocks Enforcement of New Calif Privacy Protection Agency Regs

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The implementation of privacy rights in California began In 1972, when California voters amended the California Constitution to include the right of privacy among the “inalienable” rights of all people.

Since California voters approved the constitutional right of privacy, the California Legislature has adopted specific mechanisms to safeguard Californians’ privacy, including the Online Privacy Protection Act, the Privacy Rights for California Minors in the Digital World Act, and Shine the Light, but consumers had no right to learn what personal information a business had collected about them and how they used it or to direct businesses not to sell the consumer’s personal information.

To facilitate that missing right, the legislature passed a landmark data privacy law in 2018, the California Consumer Privacy Act of 2018 (CCPA) into law. It gives consumers more control over the personal information that businesses collect about them.

In November of 2020, California voters approved Proposition 24, also known as the California Privacy Rights Act, (CPRA), which amended the CCPA and added new additional privacy protections that began on January 1, 2023.

The California Privacy Rights Act (Amended by the CPRA) established a new agency, the California Privacy Protection Agency (CPPA) to implement and enforce the law. The CPPA is governed by a five-member Board. One board seat is currently vacant.

The Act’s enforcement provision as it applies to the Agency appears in section 1798.185, subdivision (d) of the Civil Code. The timeline for adopting final regulations was July 1, 2022.

Businesses that are subject to the CCPA are those that meet the complex criteria established by this law, including the definitions specified in Civil Code 1798.140(d) and other sections of the law and regulations. These businesses have several responsibilities, including responding to consumer requests to exercise these rights and giving consumers certain notices explaining their privacy practices.

However on June 30, 2023, the California Superior Court issued a decision blocking the California Privacy Protection Agency (“CPPA” or the “Agency”) from enforcing new regulations governing the collection and use of consumer data until March 2024.

On March 29, 2023, the Agency’s first set of regulations under the Act were approved by the Office of Administrative Law (OAL) in twelve of the fifteen areas contemplated by Section 1798.185. The Agency concedes in the action brought by the Chamber of Commerce that it has not yet finalized regulations regarding the three remaining areas–cybersecurity audits, risk assessments, and automated decision-making technology – as contemplated by Section 1798.185. Regulations will not be finalized in these areas until sometime after July 1, 2023.

The June 30, 2023 disposition of the Court in the Chamber of Commerce Action was “Enforcement of any final Agency regulation implemented pursuant to Subdivision (d) will be stayed for a period of 12 months from the date that individual regulation becomes final, as described above. The Court declines to mandate any specific date by which the Agency must finalize regulations. This ruling is intended to apply to the mandatory areas of regulation contemplated by Section 1798.185, subdivision (a). Consistent with the plain language of Section 1798.185, subdivision (d), regulations previously passed pursuant to the CCPA will remain in full force and effect until superseding regulations passed by the Agency become enforceable in accordance with the Court’s Order.”

In reaching its decision, the court found that the text of the CPRA “indicates the voters intended there to be a gap between the passing of final regulations and enforcement of those regulations.” If the CPPA were to begin enforcing the regulations on July 1, 2023, about three months after it adopted the final regulations, businesses subject to the CPRA would have “no time to come into compliance,” which “would not be in keeping with the voters’ intent.” Accordingly, the court concluded that the CPPA “may begin enforcing those regulations that became final on March 29, 2023 on March 29, 2024.“

Nonetheless, on July 14, 2023, the California Attorney General announced an investigative sweep, through inquiry letters sent to large California employers requesting information on the companies’ compliance with the California Consumer Privacy Act (CCPA) with respect to the personal information of employees and job applicants.

The Attorney General announced that he “is committed to the robust enforcement of the CCPA. And as an example, he noted that in August 2022, he announced a settlement with Sephora resolving allegations that it failed to disclose to consumers that it was selling their personal information and failed to process opt-out requests via user-enabled global privacy controls in violation of the CCPA.

Moreover, he has conducted several investigative sweeps, most recently of popular mobile applications compliance with consumer opt-out requests.

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California Legislature Resurrects Dormant Industrial Welfare Commission

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The Industrial Welfare Commission (IWC) was established in California in 1913 to regulate the wages, hours, and working conditions of women and children employed in the state.

The IWC’s first order, issued in 1916, established a minimum wage for women and children in the garment industry. The order also set limits on the number of hours that women and children could work per day and per week. In the years that followed, the IWC issued a series of orders covering other industries, including manufacturing, retail, and agriculture.

In 1972, the California Legislature amended the Labor Code to authorize the IWC to establish minimum wages, maximum hours, and standard conditions of employment for men as well as women. The IWC promulgated a series of wage orders in 1976 and 1980. These orders were challenged in court, but ultimately upheld.

In 1988, appointees of Governor Pete Wilson on the IWC repealed the “daily overtime” provisions in many of the wage orders. This change was controversial, and it was eventually reversed in 1999.

The IWC is currently not in operation. The Division of Labor Standards Enforcement (DLSE) continues to enforce the provisions of the wage orders.

However, the IWC has just been revived as a result of the new budget just signed into law. On July 10, Governor Gavin Newsom signed A.B. 102, the final step in moving the State Budget Act of 2023 into law. It takes effect immediately upon signing. The 2023-24 state budget includes total spending of approximately $310.8 billion, of which $225.9 billion is from the General Fund.

The new budget allocates $78,650,000 “for support of Department of Industrial Relations.” and Schedule (5) of that allocation provides the sum of $3,000,000 for the now dormant Industrial Welfare Commission. The allocation provisions contained the following earmark.

“Of the amount appropriated in Schedule (5), $3,000,000 shall be available for the Industrial Welfare Commission to convene industry-specific wage boards and adopt orders specific to wages, hours, and working conditions in such industries, provided that any such orders shall not include any standards that are less protective than existing state law. The commission shall prioritize for consideration industries in which more than 10 percent of workers are at or below the federal poverty level. The Industrial Welfare Commission shall convene by January 1, 2024, with any final recommendations for wages, hours, and working conditions in new wage orders adopted by October 31, 2024.”

California Labor Code section 1178 permits the Industrial Welfare commission to convene these Wage Boards. Ultimately there is a great probability that higher minimum wages, especially in targeted industries, will be arriving by the end of next year.

The back story to the resurrection of the IWC may have been minimally successful efforts to increase wages in various industries in California in previous years, such as the Fast Food Accountability and Standards Recovery Act (AB 257 – FAST Recovery Act) aimed at fast-food workers. It became law in 2022.

This law was to have established the Fast Food Council within the Department of Industrial Relations until January 1, 2029, and was to be composed of 10 members to be appointed by the Governor, the Speaker of the Assembly, and the Senate Rules Committee, and would prescribe its powers.

In response to this Act, California small business owners, restaurateurs, franchisees, employees, consumers, and community-based organizations announced the formation of a coalition to refer the FAST Act back to voters and suspend its implementation until they have a say in November 2024.

The coalition’s effort was co-chaired jointly by the National Restaurant Association, the U.S. Chamber of Commerce and the International Franchise Association.

On December 5, the coalition announced it submitted to county elections officials over one million signatures from Californians in order to prevent AB 257 from taking effect until voters have their say on the November 2024 ballot. However, Katrina S. Hagen Director, California Department of Industrial Relations, sent the coalition a letter on December 27, 2022 stating that it intends to implement AB 257 on January 1, 2023.

The Local Restaurants coalition therefore filed a lawsuit on December 29, 2022, claiming that the state’s Constitution dictates that, as part of the referendum process, laws cannot go into effect until voters have an opportunity to exercise their voice and vote on the proposed legislation.

The judge issued a temporary restraining order blocking the state from implementing the law while a lawsuit challenging its constitutionality is pending.

However, the resurrection of the Industrial Welfare Commission by provisions of the newly approved budget may have opened a new front in this political battle. The Governor will now have to evaluate candidates and make appointments to members of the IWC. All five will be the subject of confirmation hearings in the California Senate. And staff members will be recruited and hired under the Civil Service Ace.

The resurrection process will therefore take substantial time to fully make the IWC operational. Nonetheless, employers should expect efforts to increase wages statewide in the coming years from various legal and political fronts.

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Pain Clinic Chain to Pay $11.4 Million to Resolve False Claims Act

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The California Attorney General in partnership with the U.S. Department of Justice, announced a settlement with the owner of one of California’s largest chains of pain management clinics over allegations that he defrauded Medi-Cal and Medicare of millions of dollars.

Dr. Francis Lagattuta and his business, Lags Spine & Sportscare Medical Centers Inc (Lags Medical Clinics), which ran more than 20 facilities in California’s Central Valley and Central Coast, carried out medically unnecessary tests and procedures on thousands of patients, and billed Medi-Cal and Medicare for these services over the course of more than five years.

The settlement totals nearly $11.4 million. The funds were allocated in proportion to losses faced due to the alleged fraud scheme. The United States will receive around $8.5 million, California will receive over $2.7 million, and Oregon will receive over $130,000. Dr. Lagattuta will also be barred for five years from serving any Medi-Cal beneficiaries, billing for services to any Medi-Cal beneficiary, or receiving reimbursement for any services provided to any Medi-Cal beneficiary.

The settlement amount of $11,388,887 is based on Lagattuta’s and Lags Medical’s ability to pay and includes proceeds from Lagattuta’s sale of a remotely operated underwater vehicle.

The settlement resolves allegations that, from 2018 to 2021, Lagattuta and Lags Medical performed medically unnecessary surgeries to implant spinal cord stimulators, which is an invasive surgery of last resort for the treatment of chronic pain. Lagattuta paid a psychiatrist to state to Medicare and Medicaid insurers that the psychiatrist had performed a necessary psychological evaluation on each patient prior to receiving the surgery and that the patient did not have any preexisting psychological or active substance abuse disorders that would adversely affect their response to the surgery. But Lagattuta and Lags Medical knew that the psychiatrist did not perform in-person psychological evaluations of any patients and ignored indications that many patients suffered from psychological or substance use disorders before receiving spinal cord stimulation surgery.

Lagattuta and Lags Medical also allegedly performed medically unnecessary skin biopsies to test patients for small fiber neuropathy. As part of the settlement, Lagattuta and Lags Medical acknowledged that Lagattuta created what he named an “Artificial Intelligence Team” of non-provider staff who were required to order at least 150 skin biopsies per week for patients without the consent of the patients’ treating providers at Lags Medical. Each biopsy order stated that the patient had identical symptoms of small fiber neuropathy, yet those symptoms were generally inconsistent with those patients’ actual symptoms. Lagattuta and Lags Medical also acknowledged as part of this settlement that, if a patient refused a skin biopsy, Lags Medical told the patient that they would reduce their opioid medication and instructed the patient’s provider to immediately taper the patient’s medication

Finally, the settlement resolves allegations that Lagattuta and Lags Medical performed medically unnecessary definitive urine drug testing, which identifies the concentration of specific medications, illicit substances, and metabolites in urine samples. Blanket orders of urine drug testing – identical orders for all patients without regtard to each patient’s individualized medical necessity for the test – are not covered by Medicare. Lagattuta and Lags Medical acknowledged that they made identical orders of urine drug tests for all patients to be tested every four months and ordered the maximum number of drug panels for each patient, using Healthcare Common Procedure Coding System Code G0483. Lags Medical’s CEO stated to Lagattuta that performing urine drug tests on all their patients “[s]hould be a big money maker” and called it “Operation GO483!” When a new consultant for Lags Medical told Lagattuta that it was “medically unnecessary but also wasteful” to order the maximum number of drug panels for each patient, Lagattuta directed a Lags Medical executive not to contact the consultant “because she might report us. For anything.”

The civil settlement includes the resolution of claims brought under the qui tam or whistleblower provisions of the False Claims Act by Steven Capeder, Lags Medical’s former operations director and marketing director. Under those provisions, a private party can file an action on behalf of the United States and receive a portion of any recovery. The qui tam case is captioned United States and California ex rel. Steven Capeder v. Francis P. Lagattuta, M.D., Lagz Corporation, Spine & Pain Treatment Medical Center of Santa Barbara, Inc., and LAGS Spine & Sportscare Medical Centers, Inc., No. 2:18-cv-2928 KJM KJN (E.D. Cal.).

As part of the settlement Capeder will receive approximately $2.1 million whistleblower fee.

On May 19, 2021, he California Department of Health Care Services (DHCS) temporarily suspended select Lags Medical Centers locations from participation in the Medi-Cal program because of an ongoing investigation by the California Department of Justice (DOJ), Division of Medi-Cal Fraud and Elder Abuse, involving allegations of fraudulent billing and potential patient harm.

On May 25, 2021, DHCS learned that Lags Medical Centers voluntarily closed 29 California locations even though DHCS only suspended seven National Provider Identifier numbers associated with up to 17 locations, potentially impacting about 20,000 beneficiaries access to pain management care.

The Los Angeles Times published a comprehensive report on the abrupt closure of the Lags Clinics.

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Court Clears PAGA Action Over Non-Payment of Employee At-Home Expenses

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Paul Thai was a direct employee of International Business Machines (IBM). To accomplish his duties, he required, among other things, internet access, telephone service, a telephone headset, and a computer and accessories that IBM provided to its employees in its offices.

On March 19, 2020, Governor Newsom signed an Executive Order that instructed all California residents to stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors and any other additional sectors later designated as critical. (E.O. N-33-20.)

As a result, IBM directed Mr. Thai and several thousand of his coworkers to continue performing their regular job duties from home. Mr. Thai and his coworkers personally paid for the services and equipment necessary to do their jobs while working from home. IBM never reimbursed its employees for these expenses, despite knowing that its employees incurred them.

IBM was joined as a defendant in a PAGA action complaint which alleged IBM failed to reimburse employees for work-from-home expenses that were incurred. IBM demurred to the second amended complaint and the trial court sustained the demurrer.

The plaintiffs appealed contending that the trial court’s ruling is contrary to the plain language of Labor Code section 2802(a) which requires that “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, …”

The Court of Appeal agreed with the plaintiffs, and reversed and remanded in the published case of Thai v International Business Machines -A165390 (July 2023).

“Section 2802 is designed to protect workers from bearing the costs of business expenses that are incurred by workers doing their jobs in service of an employer.” (Gallano v. Burlington Coat Factory of California, LLC (2021) 67 Cal.App.5th 953, 963 (Gallano); see also Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 952 (Edwards) [section 2802 codifies ” ‘strong public policy that favors’ ” reimbursement of employees]; Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 74, fn. 24 [section 2802 “shows a legislative intent that duty-related losses ultimately fall on the business enterprise, not on the individual employee”]; Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59-60 [the purpose of section 2802 is “to protect employees from suffering expenses in direct consequence of doing their jobs”].)

In Gattuso v. Harte-Hanks Shoppers, Inc. (2007) 42 Cal.4th 554 at page 562, the California Supreme Court observed, “At the time of the 2000 amendment of section 2802, legislative committee analyses identified the purpose of that provision: ‘The author [of the amending legislation] states that Section 2802 is designed to prevent employers from passing their operating expenses on to their employees.’ “

“In light of the remedial purpose of statutes that regulate ‘wages, hours and working conditions for the protection and benefit of employees, the statutory provisions are to be liberally construed with an eye to promoting such protection . . .’ ” (Gallano, supra, 67 Cal.App.5th at p. 963 [applying liberal construction rule to section 2802].)

The trial court concluded the March 2020 order was an “intervening cause precluding direct causation by IBM.” The court and IBM read the statute as if it requires reimbursement only for expenses directly caused by the employer.

The Court of Appeal disagreed with IBM and the trial court since “that inserts into the analysis a tort-like causation inquiry that is not rooted in the statutory language. (See Akins v. County of Sonoma (1967) 67 Cal.2d 185, 199 [discussing the ‘intervening cause’ concept in the context of determining proximate cause in a negligence action].) Instead, the plain language of section 2802(a) flatly requires the employer to reimburse an employee for all expenses that are a ‘direct consequence of the discharge of [the employee’s] duties.’ “

Under the statutory language, the obligation does not turn on whether the employer’s order was the proximate cause of the expenses; it turns on whether the expenses were actually due to performance of the employee’s duties.

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