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Gurrobat v. HTH Corp.

Supreme Court of Hawai'i

February 25, 2014

RAYMOND GURROBAT, individually and on behalf of all others similarly situated, Petitioner/Plaintiff-Appellee/Cross-Appellant,
v.
HTH CORPORATION; PACIFIC BEACH CORPORATION, Respondents/Defendants-Appellants/Cross-Appellees

Page 793

APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT. CAAP-12-0000764; CIV. NO. 08-1-2528-12.

James J. Bickerton, John F. Perkin, and Brandee J.K. Faria, for petitioner.

Paul Alston, Tina L. Colman and John Rhee, for respondent.

RECKTENWALD, C.J., NAKAYAMA, AND McKENNA, JJ., WITH ACOBA, J., CONCURRING AND DISSENTING, WITH WHOM POLLACK, J., JOINS.

OPINION

Page 794

[133 Hawai'i 3] McKENNA, J.

I. Introduction

This case arises from a class action lawsuit filed against HTH Corporation and Pacific Beach Corporation (collectively, " Defendants" ), in which Raymond Gurrobat (" Gurrobat" ), individually and on behalf of a class of similarly situated persons (" Plaintiff Class" ), asserted claims of unlawful withholding of wages under Hawai'i Revised Statutes (" HRS" ) § § 388-6 and 388-10, and unfair methods of competition (" UMOC" ) under HRS § § 480-2(e) and 480-13(a). Gurrobat's claims were based on alleged violations of Hawaii's hotel or restaurant service charge law, HRS § 481B-14 (2008). Pursuant to HRS § 602-58(b)(1) (Supp. 2011), we accepted a discretionary transfer of this case from the Intermediate Court of Appeals.

Gurrobat alleged that Defendants charged service charges to customers of the Pacific Beach Hotel and the Pagoda Hotel, but failed to distribute the entirety of those service charges to service employees and failed to disclose to customers its practice of retaining a portion of those charges. The Circuit Court of the First Circuit (" circuit court" )[1] granted summary judgment in favor of Gurrobat on the claim of unlawful withholding of wages, but in favor of Defendants on the UMOC claim.

Page 795

[133 Hawai'i 4] On appeal, Defendants argued that the circuit court erred in: (1) granting Gurrobat's motion for class certification because he never worked at the Pagoda Hotel and he failed to establish that he would be an adequate representative of the class under Hawai'i Rules of Civil Procedure (" HRCP" ) Rule 23; (2) granting summary judgment in favor of Gurrobat on the claim for unpaid wages under HRS § 388-6 because he failed to show that Defendants withheld wages " earned" by class members; (3) granting double damages and attorneys' fees/costs, and in concluding that the Plaintiff Class were entitled to those portions of the service charge income Defendants had paid to management employees; (4) imposing joint and several liability against Defendants; (5) granting final judgment in favor of Gurrobat because it was premised on a manifest error of fact concerning Defendants' status as an " employer" ; and (6) denying Defendants' motion for reconsideration on the basis of judicial and equitable estoppel with regard to joint and several liability because neither party requested the imposition of joint and several liability and it was only first mentioned in the Final Judgment.

On cross-appeal, Gurrobat argued that the circuit court erred in granting summary judgment to Defendants under HRS § 480-13(a) because: (1) it applied an erroneous legal standard imposing requirements of proof not required under Davis v. Four Seasons Hotel Ltd., 122 Hawai'i 423, 228 P.3d 303 (2010) or any other Hawai'i law; (2) Defendants did not carry their burden of showing that Gurrobat would be unable at trial to present evidence to establish the requisite injury under the applicable standard; and (3) the record presented genuine issues of material fact with respect to whether Gurrobat had the requisite injury for a HRS § 480-13(a) claim.

We hold that the circuit court did not err with respect to the issues of: class certification, Gurrobat's claim for unpaid wages under HRS Chapter 388, the award of double damages and attorneys' fees and costs, and Defendants' status as an " employer." However, we hold that the circuit court erred in imposing joint and several liability against the Defendants, and also erred in denying Defendants' motion for reconsideration on the basis of judicial and equitable estoppel with respect to the issue of joint and several liability.

Specifically, we hold the following on the issues raised by the Defendants: (1) Gurrobat established that he could fairly and adequately protect the interests of the class members; (2) a service charge is compensation " earned" as tip income under HRS Chapter 388; (3) the Plaintiff Class was entitled to the portion of the service charges that Defendants paid to " management employees," and to double damages and attorneys' fees/costs because there was no equitable justification for Defendants' service charge distribution practices; (4) HTH Corporation and Pacific Beach Corporation are not jointly and severally liable; (5) HTH Corporation is an " employer" ; and (6) judicial and equitable estoppel did not apply to Defendants' joint and several liability arguments in its motion for reconsideration.

As to Gurrobat's cross appeal, we hold that the circuit court erred in granting Defendants' motion for summary judgment on Gurrobat's UMOC claim because Gurrobat satisfied the " nature of the competition" requirements set forth in Davis by alleging and proving (1) how Defendants' HRS § 481B-14 violation negatively affected competition and (2) that the injury to his property flowed from Defendants' conduct that negatively affects competition.

II. Background

A. Factual Background

The instant case involves a class action lawsuit, alleging that Defendants withheld tip income from non-management employees who provided food and beverage services at the Pacific Beach Hotel and the Pagoda Hotel (sometimes collectively referred to as " Hotels" ). Defendants HTH Corporation and Pacific Beach Corporation together operate the Pacific Beach Hotel on O'ahu, Hawai'i; and Defendant HTH Corporation operates the Pagoda Hotel on O'ahu, Hawai'i. The certified Plaintiff Class consists of all non-management employees of the Hotels

Page 796

[133 Hawai'i 5] who provided services in connection with the sale of food and/or beverages on and after December 8, 2004, for which a service charge or gratuity was imposed by the Hotels, and not distributed one-hundred percent to those service employees.

Gurrobat was an employee at the Pacific Beach Hotel from February 1990 until December 2007. Between December 8, 2004 and December 2007, and at other times prior to that period, Gurrobat worked as a food and beverage server at numerous banquets and other functions at the Pacific Beach Hotel. Gurrobat did not at any point work at the Pagoda Hotel; he claimed, however, that " [s]imilar functions, served by other members of the Class, took place at the Pagoda Hotel during the Class Period."

According to Defendants, the practice for distributing service charges at the Pacific Beach Hotel was generally to distribute eighty-five percent (85%) of service charges to service employees and fifteen percent (15%) to managerial employees (e.g., catering coordinator and pastry chef); the practice at the Pagoda Hotel was generally to distribute eighty-two percent (82%) of service charges to service employees and eighteen percent (18%) to managerial employees.

B. Circuit Court Proceedings

1. Gurrobat's Complaint

On December 8, 2008, Gurrobat, individually and on behalf of the Plaintiff Class, filed suit against Defendants. Gurrobat alleged that, as operators of the Pacific Beach Hotel and the Pagoda Hotel, Defendants charged customers at the Hotels a " service charge" or " gratuity" that was calculated as a percentage of the total cost of food and beverage (typically, between seventeen and twenty percent), failed to distribute the entirety of these service charges to non-managerial employees who served the customers, and failed to clearly disclose to customers that portions of the service charges were not distributed to non-managerial employees. Gurrobat claimed that this practice violated HRS § 481B-14, that any violation of Chapter 481B was deemed to be an UMOC under HRS § 480-2; therefore, members of the proposed class were entitled to treble damages under HRS § 480-13(a). Gurrobat sought (1) a declaratory judgment that Defendants' practice of retaining a portion of the service charge without clearly disclosing so to customers was an UMOC, and (2) an injunction prohibiting Defendants from further engaging in this practice.

On March 29, 2010, this court issued its decision in Davis v. Four Seasons Hotel, holding in part, that the " nature of the competition" must be sufficiently alleged in a complaint to bring a claim for damages under HRS § § 480-2(e) and 480-13(a) for a violation of HRS § 481B-14. 122 Hawai'i at 425, 228 P.3d at 305.

Gurrobat then amended his complaint on May 24, 2010, supplementing his claim for damages under HRS § § 480-2(e) and 480-13(a) by adding the following allegations regarding the " nature of the competition" affected by Defendants' conduct:

18. The competition in which Defendants are engaged or participating is the competition with other providers of hotel, restaurant and banquet services. Defendants derive an unfair advantage over their law-abiding competitors by (a) lowering their overall costs through the means of retaining tip income due under law to Plaintiff and other Class members, (b) attracting customers by being able to offer seemingly lower " base" prices than law-compliant competitors through the retention of tip income, and (c) misleading customers into believing that the service charge will be paid as tip income and thereby obtaining the business of customers through an unfair and illegal business advantage over law-compliant hotels, restaurants and banquet service providers.
19. These unfair competitive advantages were gained by Defendants at the direct expense of Plaintiff and other members of the Class, and Plaintiff and the Class members were injured as a result of Defendants' unfair method of competition and the Defendants' unfair competitive behavior in the hotel food and beverage market.

On July 15, 2013, this court issued its decision in Villon v. Marriot Hotel Services, Inc., 130 Hawai'i 130, 306 P.3d 175,

Page 797

[133 Hawai'i 6] holding that when a hotel or restaurant applying a service charge for the sale of food or beverage services violates HRS § 481B-14 by failing to: (1) distribute the full service charge directly to its employees as " tip income" (in other words, as " wages and tips of employees" ), and (2) disclose this practice to the purchaser of the services, an employee may bring an action under HRS § § 388-6 (1993), -10 (1993 & Supp. 1999), and -11 (1993 & Supp. 1999) to enforce employees' rights and seek remedies. 130 Hawai'i at 132-33, 306 P.3d at 177-78.

Gurrobat then filed a Second Amended Complaint on August 31, 2010, also asserting that based on Defendants' violation of Hawaii's wage and hour laws under HRS § 388-6 by virtue of their violations of HRS § 481B-14, he was entitled to double damages under HRS § 388-10.

Defendants filed their Answer to the Second Amended Complaint on September 10, 2010 and asserted, inter alia, that the complaint failed to state a claim upon which relief could be granted and that Gurrobat lacked standing to bring some or all of his claims. Defendants, however, admitted that they (1) charged a service charge to customers at banquets and other functions held at the Hotels, (2) generally distributed eighty-five percent (85%) of the service charge income to service employees, and (3) generally distributed the remaining fifteen percent (15%) of said service charge income to Defendants' managerial employees.

2. Class Certification

On February 8, 2010, Gurrobat filed a motion for class certification and for approval of class notice and dissemination plan pursuant to HRCP Rule 23.[2] He stated:

All four of the requirements of HRCP Rule 23 are satisfied here. The Class consists of in excess of 157 employees and is therefore presumptively too numerous to make joinder practical. . . . Class counsel and Mr. Gurrobat will adequately represent the class, who has no conflict and understands his duties and responsibilities as a class representative. . . . All of the Claims of the class arise from a common nucleus of operative facts: the putative Class consists of Defendants' employees who served customers of the Pacific Beach and Pagoda Hotel who were charged a standardized " service charge" or " gratuity" as they sometimes call it, on top of the total cost of food and beverage, typically ranging between 17% and 20%. Rather than distribute all of the service charge as mandated by HRS § 481B-14, the Defendant retained some of it without providing any disclosure to the consumers.
Mr. Gurrobat's claims are not only typical, they are exactly the same as that of the entire class. The facts and law here are not only universally common as to every class member, they are identical, such that Plaintiffs anticipate the Court will find by way of dispositive motion that the Defendant (sic) violated HRS § 481B-14 as a matter of law. The only issue anticipated to remain for the jury will be how much each employee should be compensated for the monies improperly from them withheld over time. This is a quintessential class action.

Accordingly, Gurrobat sought certification for the class of all past and present non-management employees of the Pacific Beach Hotel and the Pagoda Hotel who provided services in connection with the sale of food

Page 798

[133 Hawai'i 7] and/or beverages on and after December 8, 2004, for which a service charge or gratuity charge was imposed by the Hotels and not distributed one-hundred percent to said non-management employees.

Defendants filed a memorandum in opposition to Gurrobat's motion for class certification on March 1, 2010. They contended that Gurrobat's proposed class incorrectly distinguished between managerial employees and non-managerial employees while the plain language of HRS § 481B-14 made no such distinction, and that the court should make an initial determination as to whether HRS § 481B-14 required service charges to be distributed only to " non-management employees." In addition, Defendants argued that Gurrobat failed to meet the requirements for class certification under HRCP Rule 23 because he provided no basis for his estimate of the class size or his assertion that the amounts in dispute were not of sufficient magnitude for employees to bring individual lawsuits. They also argued that Gurrobat was not a proper class representative because he was only employed as a food and beverage server at the Pacific Beach Hotel for a portion of the relevant period, from December 8, 2004 through December 2007.

In a reply memorandum dated March 4, 2010, Gurrobat asserted that HRS § 481B-14 could not be construed to include non-service managerial personnel because the legislative history of the statute revealed an intent to protect those employees who rendered the service for which customers believed they were tipping and payment of " tip income" could not, therefore, extend to salaried managers. In addition, he argued that he had provided a good-faith estimate of the class size, and Defendants failed to state a basis for believing that he would not adequately represent the interests of the certified class.

After hearing arguments from the parties on March 9, 2010, the circuit court entered an order granting Gurrobat's motion for class certification and approving the class notice and dissemination plan on March 25, 2010. The certified Plaintiff Class consisted of:

All past and present non-management employees of the Hotels who, on and after December 8, 2004, provided services in connection with the sales of food and/or beverage at the Hotels for which a service charge or gratuity charge was (a) imposed by the Hotels and (b) not distributed 100% to said non-management employees.

3. Defendants' Motion for Summary Judgment

Defendants filed a motion for summary judgment on October 4, 2010. They argued, among other things, that distributing a portion of the service charge to managerial employees was not a violation of HRS § 481B-14, because those employees were involved in providing banquet services, and the plain language of HRS § 481B-14 did not preclude managerial employees from receiving a portion of the service charge as tip income. Defendants also argued that Gurrobat failed to provide any evidence that Defendants' service charge distribution practices had a negative effect on competition, as required by Davis, 122 Hawai'i 423, 228 P.3d 303.[3] Finally, they argued that the legislative history of HRS § 481B-14 precluded Gurrobat from asserting a claim for unpaid wages because service charges were not " tips or gratuities of any kind," and Defendants had not retained any compensation " earned" by members of the Plaintiff Class.

Page 799

[133 Hawai'i 8] Gurrobat filed a memorandum in opposition to Defendants' motion for summary judgment on October 20, 2010. He argued that Defendants were not entitled to summary judgment because it was undisputed that a portion of the service charge was not distributed to either service employees or managers, as required by HRS § 481B-14 and, in any event, managerial employees were not entitled to share in the distribution of service charges. Gurrobat also argued that, even if he could not identify a law-compliant competitor who distributed the entire service charge to its service employees, he had satisfied the requirements of Davis, 122 Hawai'i 423, 228 P.3d 303, because his expert witnesses could identify the " nature of the competition" and the negative impact on competition caused by Defendants' practice of retaining a portion of the service charge.[4] Finally, he argued that neither the language nor the legislative history of HRS § 481B-14 precluded the use of HRS § 388-6 as a mechanism to enforce employees' right to receive tip income.

In a reply memorandum filed on October 25, 2010, Defendants reiterated that Gurrobat was required to prove that the Hotels' service charge distribution practices had an anticompetitive effect, that his expert witnesses were unaware of whether the Hotels had gained a competitive advantage as a result of these practices, and that these witnesses could not identify a single hotel that distributed the entire service charge to its service employees.

After hearing arguments on this motion on November 17, 2010, the court concluded that there were no genuine issues of material fact, and that Gurrobat failed to present evidence of an anticompetitive injury where the testimony of his two expert witnesses were not sufficiently based on facts. It explained:

The Court agrees with defendant's position here. The standards are provided in Davis v. Four Seasons. Basically the plaintiff must still allege and prove antitrust injury by alleging the nature of competition in order to ensure that the injury results from a competitive-reducing aspect or effect of defendant's behavior.
It's not that plaintiffs don't have a basis or a cause of action to raise. The Court is ruling basically on there being no material issue of fact with regard to the evidence that will be introduced to support the anticompetitive injury aspect of the case.
And specifically foundationally the Court believes that the expert or the plaintiff's two experts had to have at least a foundation in fact or evidence of one or the other of the following:
One, that there was another hotel that either did not require service charges or required service charges and then distributed 1009 [sic] percent of them to its service employees or disclosed the withholding to its customers. And basically the two experts had no knowledge of an existent market at all or the existence of any hotel that could provide either one of those two.
On that basis, the opinions were not minimally based on facts. And for that reason, the defendant's motion is granted.

On December 2, 2010, the court entered an order granting summary judgment in favor of Defendants on Gurrobat's UMOC claim under HRS § 480-2, but denying summary judgment on the claim for unpaid wages under HRS § 388-6.

4. Gurrobat's Motion for Partial Summary Judgment

Gurrobat filed a motion for partial summary judgment as to Defendants' violation of HRS Chapter 388 on October 4, 2010. He argued that he was entitled to judgment as a matter of law where, according to Defendants'

Page 800

[133 Hawai'i 9] own admissions, a portion of the service charge income was not distributed directly to service employees as required by HRS § 481B-14, and this practice was not clearly disclosed to customers paying the service charge.

Defendants filed a memorandum in opposition to Gurrobat's motion on October 20, 2010. They argued that HRS § 481B-14 provided the exclusive remedy for Gurrobat's claims, and that the legislative history revealed a decision not to permit such claims under HRS § 388-6. Defendants also argued that the service charge did not constitute " tips or gratuities of any kind" under HRS § 388-6, and that they did not retain any compensation " earned" by members of the Plaintiff Class. Finally, they argued that, even if Defendants had inadvertently withheld portions of the service charge, Gurrobat could not assert a claim for those amounts intended to be distributed to managerial employees rather than service employees.

In a reply memorandum filed on October 25, 2010, Gurrobat argued that neither the language nor the legislative history underlying HRS § 481B-14 precluded an independent claim under HRS § 388-6. He asserted that the " tip income" required to be paid to employees under HRS § 481B-14 constituted " compensation" under HRS Chapter 388, the term " employees" in HRS § 481B-14 referred to those employees who rendered the service for which the customers believed they were tipping, there was no genuine issue of material fact as to whether the service charge income withheld by Defendants was " earned" by members of the Plaintiff Class, and Defendants' practice of withholding a portion of this income for managerial employees violated HRS § 481B-14.

During the November 17, 2010 hearing on this motion, the circuit court concluded that HRS § 481B-14 should be read in pari materia with HRS § 388-6, that the legislative history of this statute indicated an intent to protect service employees rather than managerial employees, that service charges constituted " compensation" under HRS § 388-6, and that Gurrobat was entitled to partial summary judgment based on the undisputed facts of this case.

On December 6, 2010, the court entered an order granting Gurrobat's motion for partial summary judgment as to the claim for unpaid wages under HRS Chapter 388. In doing so, it adopted the reasons set forth during its November 17, 2010 hearing.

5. Gurrobat's Motion for Summary Judgment on Damages

On May 23, 2011, Gurrobat filed a motion for summary judgment as to damages, arguing that based on Defendants' admissions and the court's ruling as to liability, there were no genuine issues of material fact regarding damages. He argued that pursuant to HRS § 388-10, the Plaintiff Class was entitled to double the service charges wrongfully withheld by Defendants and interest at a rate of six percent per year from the date when the service charges should have been paid, as well as reasonable attorneys' fees and costs.[5]

Defendants filed a memorandum in opposition to the motion on July 26, 2011. They argued that both Gurrobat's motion and the accompanying report of Thomas A. Loudat should be stricken as untimely, and also, that there were genuine issues of material fact as to the amount of damages the Plaintiff Class was entitled to recover. In addition, Defendants argued that they had equitable justification for not distributing one-hundred percent of service charge income to service employees. In addition, Defendants argued that Plaintiffs were time-barred from recovering damages for service charges paid before December 8, 2006 because pursuant to HRS § 378-5, claims for back pay were subject to a two-year statute of limitations.

In a reply brief dated July 29, 2011, Gurrobat argued that (1) the motion was timely filed more than 50 days before the scheduled

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[133 Hawai'i 10] trial date, (2) there were no remaining issues of fact, (3) Defendants could not claim equitable justification for violating a statute of which they had full knowledge, and (4) his claims were not limited to a two-year statute of limitations because pursuant to HRS § 657-1(4) governing " Limitation of Actions" for " Personal Actions," [6] a six-year statute of limitations applied to Gurrobat's claim for damages.

After hearing arguments on this motion, the court entered an order on August 24, 2011, granting summary judgment as to damages and awarding $1,678,783.00 in damages to the Plaintiff Class.

6. The Court's Amended Final Judgment

On January 18, 2012, the court entered an order granting Gurrobat's Motion for (1) " Approval of the Plaintiff Class' Counsels' Fees and Costs to Be Paid by Defendant," (2) " Approval of the Class Representative Stipend," and (3) an " Entry of Final Judgment." The court then entered Final Judgment in favor of Gurrobat and against Defendants in the amount of $1,984,039.

7. Defendants' Motion for Reconsideration

Defendants filed a motion for reconsideration on January 31, 2012. They argued that Gurrobat was not entitled to summary judgment on his claim under HRS Chapter 388, because Defendants did not withhold wages " earned" by members of the Plaintiff Class; he was not entitled to double damages or fees and costs under HRS § 388-6 because Defendants were not liable under HRS § 388-10; he failed to establish his right to hold Defendants jointly and severally liable for the wages at both hotels, and his ability to represent class members who had only worked at the Pagoda Hotel; and he failed to prove that HTH Corporation was the " employer" of class members.

The court summarily denied Defendants' motion on February 7, 2012. The court concluded that Defendants had waived any arguments not previously raised insofar as they were " based on facts that were known well in advance of the hearing for summary judgment that disposed of this case." The court also concluded that, based on the totality of the circumstances, Defendants were equitably and judicially estopped from raising new arguments regarding joint and several liability.[7]

On August 7, 2012, the court entered an Amended Final Judgment,[8] dismissing Gurrobat's UMOC claim under HRS § 480-2, and entering judgment against Defendants in the amount of $1,984,039.40 on the claim for withheld wages under HRS § 388-6.[9]

C. Arguments on Appeal

1. Defendants' Appeal Re: HRS Chapter 388

Defendants argue on appeal that the circuit court's Amended Final Judgment was

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[133 Hawai'i 11] flawed for several reasons. First, they contend that the court erred in granting summary judgment on the issue of liability because a violation of HRS § 481B-14 cannot form the basis of a claim for unpaid wages under HRS § 388-6, which provides a remedy for the wrongful withholding of compensation " earned" by any employee.[10] Second, they argue that the court erred in certifying the Plaintiff Class because Gurrobat lacked standing to represent employees of the Pagoda Hotel and he failed to meet the requirements of HRCP Rule 23.[11] Third, Defendants argue that the court erred in imposing joint and several liability on HTH Corporation and Pacific Beach Corporation because there was no basis for holding Pacific Beach Corporation liable for alleged violations at the Pagoda Hotel.[12] Fourth, they argue that the court erred in granting summary judgment as to damages because the measure of damages should have taken into account the portion of service charge income distributed to both service employees and managerial employees, and the question of equitable justification involved a question of fact. Fifth, Defendants argue that the court's judgment was premised on a manifest error of fact because Gurrobat failed to present any evidence regarding HTH Corporation's status as an " employer" of class members who worked at the Pagoda Hotel.[13] Finally, they argue that the court abused its discretion in invoking judicial and equitable estoppel and denying Defendants' motion for reconsideration without addressing manifest defects in the final judgment.

In his Answering Brief, Gurrobat asserts that five of Defendants' six alleged points of errors were raised for the first time in their January 31, 2012 motion for reconsideration, and that the circuit court did not abuse its discretion in addressing these alleged errors. He argues that the court did not err in granting summary judgment on the issue of liability because " tip income" under HRS ...


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