Petition for Writ of Certiorari — Microsoft Corp. v. Vizcaino

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wie 22 498 SEP 221999

Supreme Court of the nites Stacey eR

MICROSOF f CORPORATION, ef ai.

Petitioner,

DONNA VIZCAINO, ef al.

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

Margaret K. Pfeiffer

Joseph J. Matelis

SULLIVAN & CROMWELL

William H. Song

James D. Oswald

Michael P. Monaco

SONG OSWALD & MONDRESS

William H. Neukom

Thomas W. Burt

Linda K. Norman

Richard H. Sauer

MICROSOFT CORPORATION

Of Counsel

Theodore O. Rogers, Jr.

Counsel of Record

SULLIVAN & CROMWELL

125 Broad Street

New York, N.Y. 10004

(212) 558-4000

September 22, 1999

QUESTIONS PRESENTED

The district court issued orders clarifying the

scope of the mandatory, non-opt-out class it had certified

five years previously in this action, in order to ensure that

all class members continued to share “distinct

circumstances with the named plaintiffs.” The Ninth

Circuit thereafter granted a writ of mandamus

overturning the district court’s class clarification orders,

the effect of which was to expand the scope of the

potential class substantially beyond what the district court

stated it intended at the time of class certification.

The questions presented for review are:

Did the court of appeals’ mandamus order

contravene Rule 23’s grant of discretion to the district

courts to manage a class, as well as the district courts’

duty to ensure that a mandatory class is properly

constituted and represented throughout its pendency, as

confirmed most recently by this Court’s decision in Ortizv.

Fibreboard Corp., 119 S. Ct. 2295 (1999)?

Did the court of appeals significantly depart from

this Court’s decisions restricting mandamus _ to

extraordinary circumstances, when it issued a writ of

mandamus that forbade the district court from altering or

clarifying its own prior class certification order following a

remand, notwithstanding that the court of appeals’

mandate did not address the scope of the class and the

appellate decision was unaffected by the district court’s

clarification?

Did the court of appeals correctly conclude that an

individual employed by an employment agency can

simultaneously claim employee benefits from both the

employment agency and the agency’s client for which the

individual performs services?

LIST OF PARTIES AND RULE 29.6 STATEMENT

The parties to the proceedings before the United

States Court of Appeals for the Ninth Circuit were

petitioner Microsoft Corporation, respondents Donna

Vizeaino, Jon R. Waite, Mark Stout, Geoffrey Culbert,

Lesley Stuart, Thomas Morgan, Elizabeth Spokoiny and

Larry Spokoiny, and the United States District Court for

the Western District of Washington.

Petitioner Microsoft Corporation has no parent

corporation, and no publicly held company owns 10% or

more of Microsoft Corporation’s stock.

et a ee

TABLE OF CONTENTS

as seatdinsansenematsatentia

8 ee a ee

EES SE ae ee ee ee ee

EE ee a eee ee

The Decisions of the District Court

Subject to the Writ of Mandamus .......................

The Ninth Circuit’s Decision Granting

TEES Eee as Se gO a

Reasons For Granting The WTit.................0.ccccccccececeseceseeeee.

Il.

By Stripping the District Court of Its Power

to Modify a Class Certification Order As a

Case Progresses, the Ninth Circuit Has

Disregarded Rule 23 and Undermined the

Ability of District Courts to Manage Class

EER Se ae ee

The Ninth Circuit’s Misuse of the Writ of

Mandamus Substantially Undermines

District and Circuit Court Relations ..................

The Court of Appeals’ Conclusion That

Temporary Workers Could Receive

Benefits from Both Their Temporary

Agency Employer and the Client to Which

the Temporary Agency Assigns Them

Significantly Clouds The Law of Employee

ESSEC SERIO Ce OO I

EE ES Rr cee eT RCS Ce 26

ee eee ee ee ne ae

TABLE OF CITED AUTHORITIES

CASES

Abraham v. Exxon Corp., 85 F.3d 1126

CT SE encencttt cicada eked acecis 7

Allied Chem. Corp. v. Daiflon, Inc., 449 U.S. 33 .

GR PUIITE <arkasccssmnscrpnsch casiibe aaa dbiccasseenisciniandssildbastialamnsiek 21

Amchem Prods., Inc. v. Windsor, 521 U.S. 591 .

RRO ARCMESRONT NE crate ee ae SS 13, 14 |

In re Blake, 175 US. 114 (1899) ..ssccsecsscsscesssnssseee 21 |

Blake v. City of Los Angeles, 595 F.2d 1367 |

CU RE Fe tienen ici 18 )

Bronk v. Mountain States Tel. & Tel, Inc., !

140 F.3d 1335 (10th Cir. 1998)....................ccccseeeees 7

Capital Cities/ABC, Inc. v. Ratcliff, 141 F.3d 1405 )

(10th Cir.), cert. denied, 119 S. Ct. 173 (1998) ......7 |

Committee for Creative Non-Violence v. Reid,

SO Fe Ciao neeansescce 5, 25

In re Convergent Techs. Sec. Litig., 948 F.2d 507 |

COU CE: Te iain cotta an: 26

Coopers & Lybrand v. Livesay, 437 U.S. 463 |

CRI hesded hassel iaedntbee Rl adbtciniasientins 13

Dowden v. Blue Cross & Blue Shield, Inc., 126

eo i 3d Le ___; RRR eoR eRe rc meeeer 20

In re Earthmovers, Inc., 199 B.R. 62

(Bankr. M.D. Pie. 2660)... iii os... 24

FCC v. Pottsville Broad. Co., 309 U.S. 134

CORNY. Liseciininsiisnicinsinnicisisdcac heh sie APs tatics 22

Gardner v. Westinghouse Broad. Co., 437

OLE Gres Cre che iin? ae ae 16

General Atomic Co. v. Felter, 436 U.S. 493

ERE ATES ee Cee TDN eS 22

General Tel. Co. v. Falcon, 457 U.S. 147

NR NCE SE BORD Se EP OUT YPM a RIS en aN 13, 14

Hartman v. Duffey, 19 F.3d 1459

CAE, CO tah 8 ee i 18

Heckler v. Lopez, 469 U.S. 1082 (1984) .......c.ccccesescee. 17

International Bhd. of Teamsters v. United States,

ey : Re ee CRT ene 17

La Buy v. Howes Leather Co., 352 U.S. 249

COG icichncectieldee hela ni ae cig E 22

Marks v. San Francisco Real Estate Bd., 627

Fare Ge Ty TO a ccc cincessccccncatsnssecaniecnie, 18

Moses H. Cone Mem’ Hosp. v. Mercury Constr.

COR TIN io el & GI wcsiceerinieciacibiicisttins aca 13

Nationwide Mut. Ins. Co. v. Darden, 503

San A CRO eis ie 5, 24

Ortiz v. Fibreboard Corp., 119 S. Ct.

A I ertknncsiinisarinsinbiasaniacile Mc. ei aie passim

Phillips Petroleum Co. v. Shutts, 472

CED, FUG CI cca tecicciitthicinstctiidaiectnaiaciatiniittntabmenan 19

Rho Co. v. Department of Revenue, 782 P.2d

aT SEL 23

Roth v. American Hosp. Supply Corp.,

965 F.2d 862 (10th Cir. 1992)..................ccccecceesenees 23

Sibbald v. United States, 37 U.S. 488 (1838) ............. 21

Sprague v. Ticonic Nat’? Bank, 307 U.S. 161

CHDED cctsscinsiicncsinritipinailidiahbnciiandiadaaadiiaeial 4,21

Trombetta v. Cragin Fed. Bank for Sav. Employee

Stock Ownership Plan, 102 F.3d 1435

Ys ERE EP ae a ee 7

Ex parte Union Steamboat Co., 178 U.S. 317

CRUE <cctsssemiciasinmsestiensscaninsacieaiecammaas 18, 21

Vizcaino v. Microsoft Corp., 97 F.3d 1187

CUR GR SD eiktnciinctnicteeclnatenindnttnede passim

Vizcaino v. Microsoft Corp., 120 F.3d 1006

(9th Cir. 1997), cert. denied, 118

SD, CR a Ci anita ciisinciaiait ciliata passim

Vizcaino v. Microsoft Corp., 173 F.3d 713 &

1999 WL 588878 (9th Cir. 1999) ........0.0........ passim

Walker v. Herke, 147 P.2d 255

(Wath. 16RD iscsititicindiitibdies.. 20

Weil v. InvestmentU/Indicators, Research &

Management, Inc., 647 F.2d 18

Ls | re ae 18

_ Ke

vii

DOCKETED CASES

Caseyv. Atlantic Richfield Co., No. 99-06437

(C.D. Cal. filed June 24, 1999) 0000. 4

Herman v. Time Warner, No. 98 Civ. 7589

(S.D.N.Y. filed Oct. 26, 1998).................ccccscccccsessseses 4

STATUTORY PROVISIONS

8 ES Ener SC AOS 24

kg REARS ne 2

ey Nes Sint soentidathiceesihinssidetinaiitibaisdisetintamnnsclioaiecans 21

RULES, REGULATIONS, AND

ADMINISTRATIVE MATERIALS

SP Sar a, Oe I ccrcrsecsncncecsssstasenecacsonscsnscsntnans 6

es arts Sil alloessitieeacohiieeaenshanatintinnnionasouiescinaicic passim

I.R.S. Notice 87-19, 1987-1 C.B. 455 0. 24

Rev. Rul. 66-162, 1966-1 C.B. 234 ooo... ceceeeeeeee 24

Rev. Rul. 75-41, 1975-1 C.B. 323 oun... cceccscecescssesese 24

Rev. Rul. 87-41, 1987-1 C.B. 296 0... ceccccseseeeeee 24

MISCELLANEOUS

Alvin D. Lurie, Microsoft Re-re-redux: New

Twist of the Eternal Triangle, 84

Se I 4,24

viii

Miles J. Feldman, Toward a Clearer Standard

of Protectable Information: Trade Secrets

and the Employment Relationship, 9 High

pg ne oe 26

5 Herbert B. Newberg & Alba Conte, Newberg

on Class Actions §24.71 (3d ed. 1992).................. 17

7B Charles Alan Wright et al., Federa/ Practice

and Procedure § 1785, at 133-35 (2d ed. 1986) ... 17

INDEX TO APPENDIX

Order and Opinion of the United States

Court of Appeals for the Ninth Circuit,

EOE TIN nO Al

Order of the United States District Court

for the Western District of Washington,

Sn a I ai. consanenesnocin A25

Order of the United States District Court

for the Western District of Washington,

St aa A33

Opinion of the United States Court of Appeals

for the Ninth Circuit, Sitting En Banc,

I i TU tated ssdiceinaiatadsiskiptcceinisittsidasninbiisunisdasintiocns A47

Opinion of the United States Court of Appeals

for the Ninth Circuit, Dated October 3, 1996 ................. A86

IN THE

Supreme Court of the United States

MICROSOFT CORPORATION, ef al.

Petitioner,

DONNA VIZCAINO, ef ai.

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioner Microsoft Corporation respectfully

petitions for a writ of certiorari to review the judgment of

the United States Court of Appeals for the Ninth Circuit

entered in this case.

OPINIONS AND ORDER BELOW

The opinion of the court of appeals is reported at

173 F.3d 713, with a later amendment reported at 1999 WL

588878, both of which are reprinted in the attached

Appendix at pages Al through A24.1_ The Orders of the

The court of appeals filed its original opinion on May 12,

1999. On June 10, 1999, the court entered a first amended opinion,

which corrected typographical errors. That opinion is the opinion

reported at 173 F.3d 713. On June 24, 1999, the court of appeals

entered a second amended opinion, which included three additional

sentences responding to an argument made by Microsoft in its

petition for rehearing and rehearing en bane. The additional

sentences are reported at 1999 WL 588878, and are set forth on

page A15 of the Appendix, following the phrase “F.3d at 1200.”

District Court are unreported and are reprinted in the

Appendix at pages A25 through A32 and A33 through A46.

The court of appeals’ two opinions deciding the prior

appeal are reported at 120 F.3d 1006 and 97 F.3d 1187 and

are reprinted at pages A47 through A85 and A86 through

A125.

—

JURISDICTION

The judgment of the court of appeals was entered

on May 12, 1999, and Petitioner’s timely petition for

rehearing and suggestion for rehearing en banc was

denied on June 24, 1999. The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

Rule 23(c)(1), Federal Rules of Civil Procedure,

provides in pertinent part that the district court may enter

an order determining that an action may be maintained as

a class action, which order “may be conditional, and may

be altered or amended [by the district court] before the

decision on the merits.”

The All Writs Act, Section 1651(a) of Title 28,

United States Code, provides that “The Supreme Court

and all courts established by Act of Congress may issue all

writs necessary or appropriate in aid of their respective

jurisdictions and agreeable to the usages and principles of

law.”

STATEMENT OF THE CASE

Upon remand following appellate proceedings that

had consumed over three years, the district court issued

orders clarifying the scope of the mandatory class it had

originally certified five years earlier. The district court’s

stated purpose was to ensure that the class would

encompass only those who shared the “distinct

circumstances” of the named plaintiffs, as it had

envisioned and required at the time of certification, rather

than extending to tens of thousands of other individuals

who began providing services at Microsoft as employees of

temporary agencies or as independent contractors in the

years after certification, under circumstances different

from the class representatives’.

Without finding any abuse of discretion in the

district court’s orders clarifying the scope of the class, a

panel of the court of appeals granted mandamus

overturning those orders and expanding the temporal and

numerical scope of the potential class dramatically.

Vizcaino v. Microsoft Corp., 173 F.3d 713 & 1999 WL

588878 (9th Cir. 1999) (“Vizcainol/T’). The panel

premised its use of mandamus on its conclusion that the

district court’s class clarification orders had violated the

mandate in Vizcaino v. Microsoft Corp., 97 F.3d 1187

(9th Cir. 1996) (“Vizcaino I’) and Vizcaino v. Microsoft

Corp., 120 F.3d 1006 (9th Cir. 1997) (en banc) (“Vizcaino

IT’), cert. denied, 118 S.Ct. 899 (1998), even though the

Vizcaino J and J] mandate nowhere passed upon the scope

of the class and those appellate decisions would have been

the same regardless of the class scope.

The court of appeals’ rejection of the district

court’s order clarifying that the class encompassed only

those “who share distinct circumstances with the named

plaintiffs” (A28) enshrined a broad reading of the 1993

class order that was contrary to what the district court

said it intended at the time, and ignored the effect of the

passage of time on that order, including the over three

years during which the earlier appeal was sub judice. The

result is a class consisting predominantly of persons

whose circumstances are not like those of the named

plaintiffs. The ramifications of folding dissimilar

individuals into the class are particularly grave here,

because the class was certified as a mandatory class, ie.,

“(t]he legal rights of absent class members... are

resolved regardless .. . of their consent.” Ortiz, 119 S. Ct.

at 2315.

In addition to conflicting with this Court’s decisions

establishing the district court’s role in managing class

actions, the court of appeals’ use of the extraordinary

writ of mandamus to prevent the district court from

clarifying the scope of the class disrupts the orderly |

allocation of business between the district and circuit

courts. Departing from the normal rule that on remand

from an appeal district courts have discretion as to

matters not “disposed of” on appeal, Sprague v. Ticonic

Nat’ Bank, 307 U.S. 161, 168 (1939), the court of appeals

overturned the class clarification order on the ground that

its prior mandate “cannot be read as contemplating

redefinition of the class,” asserting that the class was a

“central premise” and “integral element” of the Vizcaino I/

decision. Vizcaino I// at 720, 721 (A14, A15).

Far from being “central,” this “premise” arose

merely from the facts that (i) plaintiffs brought the case as

a class action and (ii) the mandate referred to the

existence of a class. Under the court of appeals’

reasoning, any appeal in a class action can now be

portrayed as fixing in stone the class definition, no matter

how tentative the district court’s original decision.

Finally, the court of appeals’ decision has far-

reaching implications for the field of employment law. The

issue of the employment status of temporary workers is

being contested in actions throughout the nation and, as

commentators have noted, the court of appeals’

mandamus decision threatens to impede the orderly

resolution of those cases.”

. See, e.g. Alvin D. Lurie, Microsoft Re-re-redux: New Twist

of the Eternal Triangle, 84 Tax Notes 143 (1999); Casey v. Atlantic

Richfield Co., No. 99-06437 (C.D. Cal. filed June 24, 1999); Herman

v. Time Warner, No. 98 Civ. 7589 (S.D.N.Y. filed Oct. 26, 1998).

iii laa

The court of appeals, in a striking departure from

established benefits law, ruled that persons who received

employee benefits from the temporary agencies that

employed them were nevertheless presumptively entitled

to receive duplicate benefits from Microsoft — the client of

those agencies — based on a sole factor: the title of the

position the person filled while providing services for

Microsoft. Although acknowledging the multi-factor test

for common-law employee status of Nationwide Mutual

Insurance Co. v. Darden, 503 U.S. 318, 324 (1992) and

Committee for Creative Non-Violence v. Reid, 490 U.S. 730,

751-52 (1982), the court ignored the role of the agencies as

employers and treated the single factor of position title as

presumptively making plaintiffs common-law employees of

Microsoft, entitled to “double dip” benefits from both

Microsoft and their agency employers.

In addition to applying dual employment concepts

from other areas of the law to produce a novel result that

will affect workplaces throughout the country, this ruling

also distorts the established procedures under Rule 23, by

shifting to Microsoft the burden of proving that putative

class members are not in fact its common-law employees

but solely employees of the third-party employment

agencies.

A. Background

Microsoft develops computer software and other

computer products. Microsoft’s business is project driven,

and its need for workers fluctuates. Between 1987 and

1990, Microsoft supplemented its work force with

“freelancers” who were engaged as_ independent

contractors. The freelancers signed agreements

acknowledging that they would not be eligible for

Microsoft employee benefits, including the Employee Stock

Purchase Plan (“ESPP”), a benefits package governed by

state law that allows employees to purchase Microsoft

stock at a discount, and the Stock Purchase Plan (“SPP”),

a plan governed by the Employee Retirement Income

Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq.

The named plaintiffs worked for Microsoft between

1987 and 1990; they were classified and treated as

independent contractors by Microsoft, and performed a

variety of jobs. Throughout that period, instead of

providing freelancers with employee benefits, Microsoft

generally paid them a higher hourly wage than it paid its

regular employees doing similar work.

In 1990, after evaluating the work done by certain

freelancers, the IRS issued several letter rulings taking

the position that some of the freelancers were not

independent contractors, but rather Microsoft employees,

for federal employment tax purposes. These letter rulings

were based on the common-law factors prescribed in an

IRS regulation, 26 C.F.R. § 31.3401(c)-1(b). See Vizcaino IJ

at 1009 (A52). Microsoft resolved the matter with the IRS,

paying the employer’s portion of the Federal Insurance

Contribution Act tax for persons covered by the letter

rulings. /d. at 1008 (A50).

Microsoft also voluntarily changed its employee

classification practices. It hired as regular employees

many of the independent contractors who were the subject

of the IRS letter rulings. Consistent with the IRS’s

observation that use of temporary agencies, such as

employee leasing and technical service firms, provided an

acceptable option, some of the freelancers became

employees of temporary help agencies having contracts

with Microsoft and other companies and continued to

work at Microsoft. /d at 1009 (A50). The temporary

agency employees, the agencies, and Microsoft

acknowledged in writing their agreement that the

temporary agency employees were the employees of the

agencies, and would not receive benefits from Microsoft.

After the IRS issued its rulings concerning

common-law employment status for employment tax

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Od a alte AN NI ee

purposes, the eight named plaintiffs claimed the right to

receive employee benefits from Microsoft for the time they

worked at Microsoft, including the right to participate

retroactively in the ESPP. In 1992, they brought this class

action challenging Microsoft's refusal to provide them with

benefits. On the prior appeal in this action, the Ninth

Circuit en banc reversed the district court’s denial of

plaintiffs’ claim for ESPP benefits, and directed the

district court on remand to resolve “[aJny remaining

issues regarding the rights of a particular worker in the

ESPP and his available remedies.” See id. at 1015 (A66).°

B. The Decisions of the District Court Subject to

the Writ of Mandamus

Following the remand from Vizcaino / and J/,

plaintiffs argued to the district court that the class should

extend beyond the independent contractors whom the IRS

had determined to be common-law employees for tax

purposes. Rather than a class of a few hundred former

freelancers whose circumstances were analogous to those

of the named plaintiffs, plaintiffs asserted that the class

should now embrace all persons who performed services

at Microsoft as employees of temporary employment

. The decisions reversing the district court's dismissal of

this action were controversial. The Vizcaino // en banc decision

was by a divided court, as was the Vizcaino / panel decision.

Moreover, after Vizcaino /] was decided and after this Court denied

Microsoft's petition for writ of certiorari, the Tenth Circuit upheld

the denial of employee benefits to plaintiffs who asserted common

law status under closely analogous circumstances in a decision

that is in direct conflict with the Ninth Circuit's reasoning. Capita/

Cities/ABC, Ine. v. Ratcliff, 141 F.3d 1405 (10th Cir.), cert. denied,

119 S. Ct. 173 (1998). See also Bronk v. Mountain States Tel. &

Tel, Inc., 140 F.3d 1335 (10th Cir. 1998); Trombetta v. Cragin Fed.

Bank for Sav. Employee Stock Ownership Plan, 102 F.3d 1435 (7th

Cir. 1996); Abraham v. Exxon Corp., 85 F.3d 1126 (5th Cir. 1996).

agencies or as independent contractors, from 1987 to the

present, regardless of when they began their work and, in

the case of temporary agency employees, whether they

ever worked as independent contractors.

During the more than three years the case had

been pending in the court of appeals, Microsoft had

followed the IRS’s advice that it could avoid the problems

outlined in the letter rulings by using the services of

workers who were employees of temporary agencies.

Microsoft’s business also grew substantially during that

period. Accordingly, inclusion of all temporary agency

employees who have worked at Microsoft since 1987 would

result in a class exponentially larger than the one

envisioned by the district court when it accepted the class

definition proposed by plaintiffs, subject to the express

proviso that it might be later altered, as provided by

Rule 23.4

Confronted with plaintiffs’ request that the 1993

class definition be construed five years after its issuance

as embracing tens of thousands of additional people

whose experience was different from the named plaintiffs’,

the district court clarified its 1993 class certification

: The class was originally certified as: “[aJll persons

employed by Microsoft Corporation in the United States who are

denied employee benefits because they are considered independent

contractors or employees of third-party employment agencies, but

who meet the definition of employees of Microsoft Corporation

under the common law.” (7/21/93 Order at 15) Microsoft objected

that certain issues were inappropriate for class treatment, noting

that “the proposed class definition would require a legal

determination for each prospective class member as to common

law employee status.” (4/19/93 Resp. at 4) Plaintiffs, in reply,

noted that the court had the “authority under Rule 23 to separate

{individual] issues” (4/26/93 Reply at 6 n.4), and the court’s

certification order noted, “if at a later date it appears certain

questions should be decertified pursuant to 23(c)(4)(A), the court

can do so” (7/21/93 Order at 13).

order. In so doing, the court stressed that it was simply

making explicit the assumptions that underlay its original

order. It pointed out that, as it noted in the 1993 order,

each named plaintiff had been a freelancer on or before

1990, in a position reclassified by the IRS.° It concluded

that only those similarly situated, ie. freelancers

reclassified by the IRS or “converted” by Microsoft, had

claims suitable for class resolution in this action. Only

those persons shared “the unique circumstances” (A37)

and the “facts that characterized the named plaintiffs’

relationship with Microsoft” (A41), thus ensuring that the

named plaintiffs met Rule 23(a)’s requirements of

commonality, typicality, and adequacy of representation.

The class as clarified was limited to those who shared “an

important identity” with the named plaintiffs:

(i) independent contractors at Microsoft between 1987 and

1990 whose positions were reclassified by the IRS and

(ii) those who had not been reclassified by the IRS, but

whom Microsoft had voluntarily “converted” by

transferring them to temporary help agencies, which

assigned them to the same project at Microsoft. (A44)

The district court rejected plaintiffs’ assertion that

the class “potentially includes every contingent worker

who ever .. . worked at Microsoft” (A39), noting that there

was no factual basis to define the class so broadly because

“the legal conclusions the courts have reached regarding

the named plaintiffs can be assumed to apply to

Microsoft’s ‘temps’ only insofar as their circumstances

match those of the plaintiffs” (A43). There was no

rational basis for applying these assumptions “to other

: The district court, in its original class certification order

found the commonality prerequisite to be satisfied because “[t]he

Internal Revenue Service has a/ready made a determination that

[plaintiffs] are common law employees for tax purposes,” thus

confirming its focus on independent contractors. (7/21/93 Order

at 11) (emphasis added))

temps, whose circumstances may vary wildly, from each

other and from the named plaintiffs.” (A43)°

C. The Ninth Circuit’s Decision Granting

Mandamus

Plaintiffs filed a petition for mandamus, seeking an

order requiring the district court to include within the

1993 class the tens of thousands of temporary agency

employees who had been on assignment at Microsoft

thereafter. Although neither the district court, nor

Microsoft nor the IRS had ever addressed the common-law

employee status of temporary workers who had not

worked for Microsoft as independent contractors, the

panel assigned to hear the matter granted the petition.’

The Court of Appeals attempted to justify its use of

mandamus by taking the position that the district court's

clarification of the class certification was a violation of the

: On December 4, 1998, after plaintiffs’ counsel filed a

separate class action, with different named plaintiffs, on behalf of

independent contractors and persons assigned by temporary help

agencies to work at Microsoft after 1990, the district court allowed

workers who “claim to have been misclassified common law

employees of Microsoft within the statute of limitations tolled by

the filing of this case” to intervene individually and attempt to

prove their status as common-law employees, to prevent the

barring of claims by the statute of limitations. (12/4/98 Order at 5)

At the same time plaintiffs filed their petition for

mandamus, they moved to refer the petition to the Vizcaino / panel.

Plaintiffs’ motion was granted over Microsoft's opposition;

however, the panel that heard the petition was not the Vizcaino /

panel. Judge Trott, who had dissented from the decision in favor of

plaintiffs in Vizcaino /, was not included. Instead, Judge Hawkins,

who had participated in Vizcaino // and favored a judgment for

plaintiffs on all issues, was made the third panel member.

Microsoft's motion to conform the panel to the order directing that

the original Vizcaino / panelists participate was denied by the

hybrid panel assigned to rule on the petition.

Vizcaino J and JJ mandate. Yet the class definition had

been adverted to in the panel and en banc opinions in only

two contexts: one, to recite verbatim the district court's

definition, and the other- in the concurring and

dissenting opinion — to stress that “all we decide today is

whether the freelancers [i.e., the independent contractors]

should have been allowed to participate in the ESPP ...

during the period leading up to the 1989-90 conversion” of

workers to Microsoft employee or temporary agency

employee status.®

Having divested the district court of the discretion

that Rule 23 and this Court’s decisions confer on it, and

without the factual record that is also the province of the

district court to develop, the court of appeals held as a

matter of law that anyone who performed services in any

job that possesses a position title of the type filled by the

freelancers prior to 1990 was presumptively a Microsoft

common-law employee, and shifted the burden to

Microsoft to disprove every such person’s status for a

period extending well over a decade.

The court of appeals thus adopted a burden-

shifting presumption, based on the name of a position

For the sake of clarity, I note that all we decide today is

whether the freelancers [i.e., independent contractors]

should have been allowed to participate in the ESPP and

the SPP during the period leading up to the 1989-90

conversion. A// agree that those freelancers who were

converted into employees of outside employment agencies

have no valid claim for participation in the ESPP and SPP

after the date of their conversion.

Vizcaino IJ at 1018-19 (O’Scanniain, J., concurring and dissenting,

joined by Hall, J. and Nelson, J.) (emphasis added) (A75). No judge

on the Vizcaino J] en banc panel took issue with this statement of

the scope of the decision.

alone, that temporary agency employees and independent

contractors who have worked at Microsoft since 1990 have

worked under the same conditions as the independent

contractors found by the IRS, nearly ten years ago, to be

Microsoft employees for employment tax purposes. The

court of appeals ignored the disparity between the named

plaintiffs’ circumstances and those of the new class

members.

The circuit court also treated the existence of the

temporary agencies and the fact that they were the

employers of the workers as irrelevant to the issue of

whether those workers were also Microsoft’s common-law

employees. Its justification for doing so was the IRS letter

rulings analyzing work performed in certain positions

prior to 1990, which, the circuit court stated, “allow no

exception for individuals in these positions on the ground

that they may be on the payroll of employment agencies.”

Vizcaino IT] at 724 (A22). The court thus treated the IRS’s

ten-year old rulings, which addressed only whether

persons were independent contractors for purposes of

determining liability for employment taxes, as conclusive

of the current right of others to receive contract-based

employment benefits that are completely unrelated to such

taxes. It also ignored the IRS’s advice that Microsoft

could avoid a future problem by exercising the option of

using temporary agency employees.

The court bolstered its holdings by referring to

other contexts in which common-law employee status has

been found, without addressing either the pertinency of

these cases to the issue before it or the consequences of a

ruling that makes both employers liable for providing

benefits to such dual status “employees” although regular

employees are entitled to only a single group of benefits.

This novel dual-employment holding applies both to the

SPP’s ERISA benefits (controlled by federal law) and

ESPP benefits (governed by state law).

sinclair

sie il al at

REASONS FOR GRANTING THE WRIT

By Stripping the District Court of Its Power to Modify a

Class Certification Order As a Case Progresses, the Ninth

Circuit Has Disregarded Rule 23 and Undermined the

Ability of District Courts to Manage Class Actions

Effectively.

Rule 23(c)(1) requires that the trial court

determine whether an action is appropriate for class

treatment “[a]s soon as_ practicable after the

commencement of [the] action.” The need to make the

certification decision early in an action is balanced by the

broad authority Rule 23 gives the trial court to revisit its

initial certification decision as a case progresses, right up

to “the decision on the merits.” Fed. R. Civ. P. 23(c)(1).

Moses H. Cone Mem’ Hosp. v. Mercury Constr. Corp., 460

U.S. 1, 12 n.14 (1983) (“The rationale behind Rule 23(c)(1)

is that a certification decision should be made ‘as soon as

practicable,’ even though later events or discoveries may

mandate a different result.”).

This Court has repeatedly recognized the

importance to effective class action management of the

trial court’s ability “to adjust the class, informed by the

proceedings as they unfold.” Amchem Prods., Inc. v.

Windsor, 521 U.S. 591, 620 (1997). See also General Tel.

Co. v. Falcon, 457 U.S. 147, 160 (1982) (“Even after a

certification order is entered, the judge remains free to

modify it in the light of subsequent developments in the

litigation.”). In Coopers & Lybrand v. Livesay, 437 U.S.

463 (1978), the Court found that an order either refusing

to certify or decertifying a class is not immediately

appealable pursuant to the collateral-order exception to

the final judgment rule because, prior to the final,

appealable judgment, “such an order is subject to revision

in the District Court,” id at 469 (citing Fed. R. Civ.

P. 23(c)(1)).

In this case the trial court’s post-remand class

certification decisions were proper applications of its

plenary power, and its duty, to “modify [a certification

order] in the light of subsequent developments in the

litigation” in order to ensure “actual, not presumed,

conformance with Rule 23(a).” Falcon, 457 U.S. at 160.

The requirement that the trial court monitor a class’s

compliance with Rule 23’s prerequisites stems from the

rule’s purpose of “protect[ing] absentees by blocking

unwarranted or overbroad class definitions.” Amchem

Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).

The Ninth Circuit, employing a contorted reading of

the record, pronounced that Microsoft had waived its right

to contest the class certification. But even if Microsoft had

waived the matter - which it did not® — any such

concession would be irrelevant: the immediate parties to

a purported class action cannot waive the rights of absent

class members. That is the point of both Amchem

Products and Ortiz. Ortiz in particular makes clear that a

Although the court tried to justify its decision as resting on

a total concession of the class scope by Microsoft, no such

concession can be found in the record. The court’s reliance on its

assertion in Vizcaino /] that a Magistrate Judge found that

“Microsoft conceded the fact that the named plaintiffs and the

class they represent generally were common law employees’” is

erroneous. Vizcaino II/ at 720 (A14) (quoting Vizee/no /at 1193 n.4

(A96 n.4)). In fact, the Magistrate Judge’s finding was rejected by

the District Court prior to the appeal that resulted in the Vizcaino /

decision, and provides no support for any such concession having

been made. (See 6/20/94 Order; 7/6/94 Order) Furthermore,

Vizcaino I] made clear that Microsoft made no such concession.

The en banc panel recognized that the only “concessions” made by

Microsoft concerning common law employee status were “for

purposes of this appeal.” Vizcaino IJ at 1010 (emphasis added)

(A53).

court cannot uncritically adopt the parties’ views

regarding the scope of the class.

Just as it was error for the lower courts in Ortiz to

certify the class pursuant to Rule 23(b)(1) based on the

parties’ agreement that a limited fund existed, 119 S. Ct.

at 2316, so too it was error here to forbid the district court

from clarifying the scope of the class just because, at the

very outset of this action, the parties may have agreed to a

particular formula describing the class with respect to

limited issues. Rather, the District Court has the duty to

enforce “the constitutional requirement articulated in

Hansberry v. Lee, 311 U.S. 32 (1940), that ‘the named

plaintiff at all times adequately represent the interests of

absent class members.’” Ortiz, 119 S. Ct. at 2315 n.24

(quoting Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812

(1985)).

The district court properly excluded from the class

the new generation of temporary workers who had not

worked for Microsoft in an independent contractor

capacity during the pertinent time period, because the

named plaintiffs are not representative of such people.

Each of the named plaintiffs had been an independent

contractor, and the only evidence submitted by plaintiffs

in support of their motion for class certification came from

persons who had been independent contractors. In 1993,

just after the filing of the action, most of the temporary

workers at Microsoft were former independent

contractors.

Four years later, after remand, the situation was

far different. As the district court recognized, plaintiffs

were no longer pressing this case as one about the former

independent contractors, but instead were seeking to

transform it into one primarily about a new and far larger

group of temporary agency employees. Recognizing that,

as a result of the prolonged course of the litigation, the

language of its original certification order now arguably

covered thousands of people who had never worked as

independent contractors for Microsoft, the district court

entered a series of orders ensuring that the class would be

interpreted to cover only those it had originally intended

the class to encompass.

The district court’s original class certification

order found that Rule 23’s requirement of commonality

was Satisfied because the IRS already had determined

that each potential class member had been a common law

employee of Microsoft at some point between 1986 and

1990. In its clarification order, the district court explained

that “[c]learly, the court understood the proposed class to

consist only of the freelance workers that the IRS

determined were Microsoft employees in 1989.” (A38 n.3)

In keeping with its original understanding, the district

court thus explained that “the class represented by the

named plaintiffs is limited to the IRS-reclassified

independent contractors and any work by the same

workers in the same positions but as converted ‘temps,””

in part because the IRS’s rulings constituted “the facts

that characterized the named plaintiffs’ relationship with

Microsoft.” (A41)

Particularly in view of the four-year lapse between

certification and the issuance of the mandate, it is a

significant misapplication of Rule 23 to forbid the district

court from clarifying the scope of the class, a

misapplication that has serious implications for class

management in other cases. None of the purported

procedural barriers to the district court’s post-remand

classification orders cited by the court of appeals can

withstand examination.

First, the court ruled that a district court is barred

from changing a class after any decision on the merits.

This ruling contradicts the plain language of the Rule,

which permits alterations of a class before “the decision

on the merits,” i.e., final judgment. Fed. R. Civ. P. 23(c)(1)

(emphasis added). See Gardner v. Westinghouse Broad.

Co., 437 U.S. 478, 480 n.6 (1978) (“a decision on class-

eT ee ee

Ly OTT ee Ee eee et ee ee eT eS eT ae

action status may be conditional, subject to alteration or

amendment prior to fina/ judgment, F. R. Civ. P. 23(c)(1)”)

(emphasis added) (internal quotation marks omitted);

International Bhd. of Teamsters v. United States, 431 U.S.

324, 376 (1977) (remanding with instructions to make

appropriate changes in the scope of the class prior to final

judgment); Hecklerv. Lopez, 469 U.S. 1082 (1984) (same);

5 Herbert B. Newberg & Alba Conte, Newberg on Class

Actions §24.71, at 24-228 to 229 (3d ed. 1992)

(Rule 23(c)(1) permits alteration of class before “final

judgment”); 7B Charles Alan Wright et al, Federa/

Practice and Procedure § 1785, at 133-35 (2d ed. 1986)

(decertification can occur even after “the completion of

the trial on the merits”). The prior appeal, which granted

partial summary judgment to plaintiffs, indisputably did

not result in final judgment: rather, the case was

remanded to the trial court for further proceedings.

Second, the court of appeals declared that the

district court’s statement at the time of class certification

that it might later decertify certain questions, see supra

note 4, was not a reservation of the right to alter the class

definition, but only of a right to decertify “certain issues.”

Vizcaino IT at 721 (A15). This once again misconstrues

the district court’s rights and duties under Rule 23. A

district court need not explicitly reserve in its original

certification order the power to reconsider a class

certification decision to preserve such power. Rule

23(c)(1) grants district courts the power to revisit class

certification at any time before final judgment.

Third, in an unusual post-decision response to

Microsoft’s showing, in its petition for rehearing of the

mandamus decision, that it never had an opportunity to

challenge the original certification and thus the panel had

incorrectly found that Microsoft had a fair opportunity to

contest certification, the panel issued an amended

decision. See supra note 1. The amended decision stated

that Microsoft had waived its right to contest the 1993

class certification order by not taking a “contingent cross-

appeal” challenging the certification when plaintiffs filed

their appeal of the district court’s order granting

Microsoft’s motion for summary judgment and dismissing

the case. Vizcaino IIT, 1999 WL 588878 (A15).

As an initial matter, Ninth Circuit precedent prior

to Vizcaino II] \eaves no room for doubt that the court of

appeals would zot have entertained a contingent cross-

appeal of the class certification from a defendant like

Microsoft, which had prevailed on the merits before the

district court. Blakev. City of Los Angeles, 595 F.2d 1367,

1385-86 (9th Cir. 1979). See also Weil v. Investment/

Indicators, Research & Management, Inc., 647 F.2d 18,

25-27 (9th Cir. 1981); Marks v. San Francisco Real Estate

Bd., 627 F.2d 947, 952 (9th Cir. 1980) (Kennedy, J.,

concurring). More fundamentally, the notion that a

prevailing defendant in a class action suit must, on pain of

waiver, file a contingent cross-appeal raising the issue of

the original class certification whenever plaintiffs appeal

an order of dismissal, conflicts with views expressed

elsewhere and would pointlessly clog the appellate courts.

As the exhaustively researched concurring opinion of

Judge Wald in Hartman v. Duffey, 19 F.3d 1459,

1464-67 (D.C. Cir. 1994) demonstrates, even the most

aggressive application of contingent cross-appeal doctrine

(prior to Vizcaino I) merely held that a circuit court had

jurisdiction to entertain such a contingent cross-appeal.

No court had ever held that such an appeal must be taken.

The novel rule announced by the amended panel

opinion in Vizcainoll] was a result Judge Wald in

Hartman accurately deemed “unfair” in view of the case

law, 19 F.3d at 1467, as it needlessly proliferates appeal

issues and diminishes trial court flexibility. This Court

rejected the principle of contingent cross appeals in the

context of construing the law of the case nearly a century

ago. Ex parte Union Steamboat Co., 178 U.S. 317,

320 (1900).

In addition, in the present context this class

action — which as it now exists is predominately for money

damages — should not be certified as a mandatory class.

Inasmuch as the Ninth Circuit’s order purports to shield

the original class certification order from further

alteration, the result is a class action that runs completely

contrary to this Court’s rulings, including most recently

the Court’s explanation of the ambits of mandatory class

actions in Ortiz.

A class action that concerns claims “predominately

for money damages” must afford each absent class

member both notice of the pendency of the action and “an

opportunity to remove himself from the class by executing

and returning an ‘opt out’ or ‘request for exclusion’ form

to the court.” Phillips Petroleum Co. v. Shutts, 472 U.S.

797, 812 & n.3 (1985). Although it has now become clear

(as it was not at the outset) that this case is

predominately for money damages, no class member has

been given individual notice of the action or the

opportunity to opt out of the class. The district court’s

rulings hereafter on damages would bind all class

members without their having had the opportunity to

appear or object. This is just the sort of result this Court

has condemned. As this Court stated in Ortiz, “serious

constitutional concerns [are] raised by the mandatory

class resolution of individual legal claims.” 119 S. Ct. at

2313.

The fact that this is a mandatory class action

makes even more crucial the need for the named plaintiffs

to represent the class appropriately. The district court, by

clarifying that the class was limited to a “particular group

of Microsoft workers, who share distinct circumstances

with the named plaintiffs” (A28), was properly fulfilling its

responsibility to ensure that the class met what this Court

in Ortiz termed “the constitutional requirement... that

‘the named plaintiff at all times adequately represent the

interests of the absent class members.” 119 S. Ct. at 2315

n.24 (quoting Phillips Petroleum Co. v. Shutts, 472 US.

797, 812 (1985)) (citing Hansburyv. Lee, 311 U.S. 32, 42-43

(1940)).

As the Ortiz Court explained, the necessity for a

close fit between the class and its representatives is

heightened in “mandatory class actions aggregating

damage claims” because such cases “implicate the due

process ‘principle of general application in Anglo-

American jurisprudence that one is not bound by a

judgment in personam in a litigation in which he is not

designated as a party’...it being ‘our “deep-rooted

historic tradition that everyone should have his own day in

court.””” /d. at 2314-15 (citations omitted). Although there

is a recognized exception to this general rule, which

permits representation “by someone with the same

interests who is a party” and who “adequately

represent[s]” another, the conditions of the exception

must be scrupulously satisfied to justify departure from

this fundamental rule. /d at 2315 (emphasis added).

These dual concerns of constitutional dimension form the

basis of the district court’s duty to revisit the class scope

when it appears that the interests and circumstances of

the class and its representatives no longer converge.

Finally, the Ninth Circuit compounded its errors

when it shifted to Microsoft the burden of proving that

particular class members were not its common law

employees. Not only is this ruling contrary to normal

rules of burden allocation in class actions, where putative

class members must establish that they are indeed part of

the class, it is fundamental that a plaintiff in a breach of

contract case under Washington law, eg, Walker v.

Herke, 147 P.2d 255, 260 (Wash. 1944), and under ERISA,

e.g, Dowden v. Blue Cross & Blue Shield, Inc., 126 F.3d

641, 644 (5th Cir. 1997), bear the burden of proving an

entitlement to recovery.

ee ee

Il.

The Ninth Circuit’s Misuse of the Writ of Mandamus

Substantially Undermines District and Circuit Court

Relations.

The All Writs Act grants federal courts the power

to issue “all writs necessary or appropriate in aid of their

respective jurisdictions and agreeable to the usages and

principles of law.” 28 U.S.C. §1651. In order to ensure

that mandamus is used “only in extraordinary

circumstances,” this Court “require{s] that a party

seeking issuance have no other adequate means to attain

the relief he desires and that he satisfy the ‘burden of

showing that [his] right to issuance of the writ is “clear

and indisputable.”’” Allied Chem. Corp. v. Daiflon, Inc.,

449 U.S. 33, 35 (1980) (quoting Bankers Life & Cas. Co. v.

Holland, 346 U.S. 379, 384 (1953) (quoting United States v.

Duell, 172 U.S. 576, 582 (1899))) (citation omitted) (second

alteration in original).

A traditional office of mandamus is to enforce the

law of the case doctrine, Ja re Blake, 175 U.S. 114, 117

(1899), which requires a lower court to “carry... into

execution” a decree issued by a higher court in the same

case, Sibbald v. United States, 37 U.S. 488, 492 (1838).

But, “[w]hile a mandate is controlling as to matters within

its compass, on the remand a lower court is free as to

other issues.” Sprague v. Ticonic Nat? Bank, 307 US.

161, 168 (1939). A lower court “is justified in considering

and deciding any question left open by the mandate and

opinion of [a higher court], and its decision upon such

matter can only be reviewed upon a new appeal to the

proper court.” Ex parte Union Steamboat Co., 178 U.S.

317, 319 (1900).

Neither Vizcaino/ nor Vizcaino IJ commented on

the merits of the district court’s class certification order,

and neither opinion contains any statement limiting the

district court’s power to alter or clarify the original class

certification order. Indeed, neither opinion so much as

mentions Rule 23.

The court of appeals implicitly acknowledged that

the mandate lacked any direction as to the scope of the

class when it described the mandate as one that “cannot

be read as contemplating redefinition of the class.”

Vizcaino Ill at 721 (A15). This Court has confined the use

of mandamus to situations involving obvious disregard of

a higher court’s instruction, not such a nebulous post-hoc

interpretation. The court of appeals’ decision, if left

undisturbed, would encourage circuit courts to involve

themselves more often in interlocutory oversight of district

court case management, completely contrary to the

established structure of circuit and district court

relations.

In striking contrast to the situation here, the

instances in which this Court has affirmed the use of

mandamus to enforce a prior appellate mandate involved

the contravention of express directions. See General

Atomic Co. v. Felter, 436 U.S. 493, 496 (1978) (mandamus

appropriate to correct a lower court that “has again done

precisely what we held that it lacked the power to do”); La

Buy v. Howes Leather Co., 352 U.S. 249, 258 (1957)

(mandamus appropriate to correct a practice that the

court of appeals had “for years admonished the trial

judges of the [circuit]” to stop). Nothing remotely

comparable occurred here: instead, the district court took

great pains to attempt to follow the Ninth Circuit’s

mandate. The normal appeals process — not mandamus —

is the appropriate means to address any issues that may

remain.’®

7 This Court has acknowledged that a court of appeals’

construction of the scope of its own mandate is not “necessarily

conclusive” and does “noi . . . foreclose[ ]” this Court’s construction

of the earlier order. FCC v. Pottsville Broad. Co., 309 U.S. 134,

141 (1940).

ia sali .

Iii.

The Court of Appeals’ Conclusion That Temporary

Workers Could Receive Benefits from Both Their

Temporary Agency Employer and the Client to Which the

Temporary Agency Assigns Them Significantly Clouds

The Law of Employee Benefits.

Following remand, the district court devised an

orderly process for examining the common law employee

Status of former independent contractors who worked at

Microsoft as temporary agency employees. Following

fothv. American Hospital Supply Corp., 965 F 2d 862, 866-

68 (10th Cir. 1992), the trial court determined that the

pertinent inquiry regarding a temporary worker’s common

law employee status for both the ESPP, which is governed

by state law, and the SPP, which is governed by ERISA, is

whether he or she is either Microsoft’s or the temporary

agency's employee. Similarly, in Rho Co. v. Department of

Revenue, 782 P.2d 986 (Wash. 1989), the Supreme Court of

Washington held that temporary agency employees are

either common law employees of the temporary agency or

of the entity for whom they perform work under

Washington state law, which indisputably governs the

availability of ESPP benefits in this case.

Ignoring both ERISA precedent and controlling

Washington law, the court of appeals instead established a

Significant, and hitherto unrecognized, principle of dual

employment: that temporary workers may claim employee

benefits as common law employees from two sources

simultaneously with respect to the same, single set of

services. Vizcaino II at 722-25 (A18-23). Such a resuit is

unprecedented and, in the context of many other ongoing

controversies in this field, highly disruptive.

The court of appeals based its holding on

precedent — derived from contexts different from

employee benefits law, such as agency law and labor law,

where it may be necessary to assign responsibility to more

than one master — that an individual can be considered to

have two employers. None of those precedents, however,

holds that a temporary worker can claim duplicate

employee benefits, including ERISA benefits, as an

employee of a temporary agency and as a common law

employee of the agency’s client. Indeed, one of the few

cases cited by the court of appeals as support for its novel

holding, /n re Earthmovers, Inc., 199 B.R. 62, 64-65 (Bankr.

M.D. Fla. 1996), flatly rejects such a notion.

The court of appeals also relied upon inapposite

IRS precedent to support its dual-employer construct"

and ignored the provision of the Code that actually deals

with the issue of a temporary agency employee’s status

vis-a-vis the agency's client. Specifically, IR.C.

§ 414(n)(2) rejects the court of appeals’ dual-employment

principle in the context of temporary employees by

defining a temporary, or “leased,” employee as “any

person who is not an employee of the [temporary agency’s

client].”. See Alvin D. Lurie, Microsoft Re-re-redux: New

Twist of the Eternal Triangle, 84 Tax Notes 143, 146-

49 (1999).

The court of appeals’ analysis of common law

employee status is also contrary to decisions of the Court

and other circuits. Although the court cited Nationwide

Mutual Insurance Co. v. Darden, 503 U.S. 318, 322-23

5 Three of the IRS rulings cited concern the tax liability of

temporary agencies and do not reach the issue of the tax liability of

the temporary agency’s client. Rev. Rul. 87-41, 1987-1 C.B. 296;

1.R.S. Notice 87-19, 1987-1 C.B. 455 (reprinted at 14 Stand. Fed.

Tax Rep. (CCH) 9 33,538.65); Rev. Rul. 75-41, 1975-1 C.B. 323. A

fourth, though stating in dicta that clerks who worked in a

concessionaire located within, but operated separately from, a

department store were “employees of both” entities, actually deals

with the tax liability of only the concessionaire. Rev. Rul. 66-162,

1966-1 C.B. 234. Presumably, the IRS did not seek a second set of

employment taxes from the department store as well.

(1992), it reached a conclusion that does not square with

Darden. The nub of the court of appeals’ reasoning is

that, because the IRS determined that some freelancers

working in “specific positions” in the 1980s were

Microsoft's common-law employees for employment tax

purposes, any temporary agency employee working at a

position from 1990 to the present that has the same name

is presumptively also a common law employee of Microsoft

entitled to claim Microsoft benefits, because “[t]he IRS

determinations allow no exception for individuals in these

positions on the ground that they may be on the payroll of

employment agencies.” Vizcaino II] at 724 (A22).

The court of appeals did not apply the multi-factor

common law test and its considerations as required by

this Court, such as “the method of payment” (Microsoft

never paid the workers), “the provision of employee

benefits” (the temporary agencies provide their employees

with benefits), and “the tax treatment of the hired party”

(Microsoft, the temporary agencies, and the temporary

agency employees, not to mention all applicable

governments, treated the workers as employees of the

temporary help agencies). Community for Creative Non-

Violence v. Reid, 490 U.S. 730, 751-52 (1989). Other

factors, such as the methods by which the agencies assign

and recruit workers, the degree of the agencies’

involvement in worker training and assignment, and

record-keeping, are also relevant to the common law

employee analysis, yet were ignored by the court of

appeals. Thus, the court of appeals examined only the

common law factors that were useful to its conclusion and

ignored — without justification — those factors that showed

that the temporary workers were not Microsoft’s common

law employees. Each of the factors the court of appeals

ignored points to the conclusion that an individual can

claim benefits from his agency or the agency’s client, but

not both.

The court of appeals’ analysis also proceeded

without an adequate factual record, underscoring the

danger of a circuit court’s taking over the district court’s

role of class management. For example, the court of

appeals assumes that the conditions at Microsoft 12 years

ago that led the IRS to reclassify a position remain the

same today, despite Microsoft's growth, changes in the

industry, changes in personnel, and all of the changes that

normally take place over a lengthy period that has seen so

many different business cycles. See, e.g, In re Convergent

Techs. Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991) (noting

that the computer industry is “‘a field marked by rapid

technological advances’””) (quoting Jn re Seagate Tech. IT

Sec. Litig., 1989 Fed. Sec. L. Rep. (CCH) 9 94,502, at 93,202

(N.D. Cal. 1989)); Miles J. Feldman, Toward a Clearer

Standard of Protectable Information: Trade Secrets and

the Employment Relationship, 9 High Tech. L.J. 151, 157

(1994) (noting the “instability” of employment in the

computer industry “[bJecause the pace of change in the

computer business and computer applications is so

rapid”). The court of appeals offered no justification for

this incorrect factual assumption.

CONCLUSION

Within the last year, many actions have been

brought on behalf of individuals performing services as

temporary agency employees or independent contractors

and claiming benefits from the entity at which they

performed the services. The court of appeals’ decision

threatens not only to perpetuate but to multiply the error

of allowing temporary agency employees to reap benefits

double those available to regular employees. On issues of

class supervision, appellate interlocutory intervention,

benefits and burden of proof, the court of appeals’ decision

is seriously flawed, and contrary to this Court’s and other

courts’ decisions. This Court should grant certiorari in

the interests of (1) protecting the appropriate use of Rule

23 class actions, the significance of which was most

recently confirmed by this Court in Ortiz, (2) protecting

the traditional standards of circuit and district court

relations and (3) restoring order to the law of employee

benefits.

Dated: September 22, 1999

Respectfully submitted,

Margaret K. Pfeiffer Theodore O. Rogers, Jr.

Joseph J. Matelis Counsel of Record

SULLIVAN & CROMWELL SULLIVAN & CROMWELL

125 Broad Street

William H. Song New York, N.Y. 10004

James D. Oswald (212) 558-4000

Michael P. Monaco

SONG OSWALD & MONDRESS

William H. Neukom

Thomas W. Burt

Linda K. Norman

Richard H. Sauer

MICROSOFT CORPORATION

Of Counsel

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In Re DONNA VizcaINo; JOHN R.

WAITE; MARK STOUT: GEOFFREY

CULBERT; LESLEY STUART; THOMAS

MORGAN; ELIZABETH SPOKOINY and

LARRY SPOKOINY; and the class

they represent,

Plaintiffs-Petitioners,

No. 98-71388

CV-93-09178-CRD

United States District Court for

the Western District of

Washington,

Respondent,

)

vV. ) D.C. No.

)

Microsoft Corporation and its

pension and welfare benefits plans, )

Defendants-)

Real Parties in Interest.)

)

Petition for Writ of Mandamus to the

United States District Court

for the Western District of Washington

)

DONNA VIZCAINO; JOHN R. WAITE; Ds

MARK STOUT; GEOFFREY CULBERT; ) No. 99-35013

LESLEY STUART; THOMAS MORGAN; )

ELIZABETH SPOKOINY; LARRY ) D.C. No.

SPOKOINY, ) CV-93-00178-C

)

Plaintiffs-Appellants, ) ORDER

v. ) AMENDING

) OPINION AND

MICROSOFT CORPORATION, andits ) DENYING

health and benefits plans: Health ) PETITION FOR

Benefit Plan, Life Insurance Plan, ) REHEARING EN

Short-term and Long-term ) BANC AND

Disability Plans, and Savings ) AMENDED

(401K) Plan, ) OPINION

Defendants-Appellees. )

)

Appeal from the United States District Court

for the Western District of Washington

John C. Coughenour, District Judge, Presiding

Order Issued by Carolyn D. Dimmick, District Judge.

Submitted May 12, 1999"

San Francisco, California

Filed May 12, 1999

Amended June 10, 1999

Second Amendment June 24, 1999

* The panel unanimously finds this case suitable for

decision without oral argument. Fed. R. App. P. 34(a) and 9th Cir.

R. 34-4(a)(2).

Before: Stephen Reinhardt and Michael Daly Hawkins,

Circuit Judges, and William W. Schwarzer,”

Senior District Judge.

COUNSEL

Stephen K. Strong and David F. Stobaugh, Bendich,

Stobaugh & Strong, Seattle, Washington, for the

appellants-petitioners-plaintiffs.

Michael P. Monaco, Song Oswald & Mondress, Seattle,

Washington, for the appellee-real party in interest.

ORDER

The opinion filed on May 12, 1999, is amended as

follows: On slip opinion page 6081, line 17, please insert

the following text immediately following “F.3d at 1200.”:

Blake v. City of Los Angeles, 595 F.2d

1367, 1385-86 (Sth Cir. 1979), on which

Microsoft relies, is inapposite, first,

because the court of appeals did not

adjudicate the merits of the claims of the

individual class members and, second,

because the defendant had contested the

class certification and taken a cross-

appeal. Microsoft chose not to contest the

class certification in the district court (as

the district court found, “[tJhe only

question is whether the class should be

certified for all issues in the case, or just a

few of the issues.”). Had it done so and

lost, it could have taken a contingent

‘ The Honorable William W. Schwarzer, Senior United

States District Judge for the Northern District of California, sitting

by designation.

cross-appeal and, had it prevailed, the

district court could have modified the class

on remand.

The panel has voted to deny defendant/

appellee/real party in interest’s petition for rehearing and

to reject the suggestion for rehearing en banc.

The full court has been advised of the suggestion

for rehearing en banc and no active judge has requested a

vote on whether to rehear the matter en banc. Fed. R. App.

P. 35.

The petition for rehearing is DENIED and the

suggestion for rehearing en banc is REJECTED.

OPINION

SCHWARZER, Senior District Judge:

In our prior opinions in this litigation, we held that,

as common law employees, the members of a class

certified by the district court were entitled to participate

in Microsoft’s tax qualified Employee Stock Purchase Plan

(“ESPP”) even though they had been told when hired that

they were ineligible for such benefits and had signed

contracts disclaiming them. See Vizcaino v. Microsoft

Corp., 97 F.3d 1187 (9th Cir. 1995) (“Vizcaino!”), affd, 120

F.3d 1006 (9th Cir. 1997) (en banc) (“Vizcainoll”). The

certified class had been defined by the district court to

include “[a]l) persons employed by Microsoft Corporation .

. . who are denied employee benefits because they are

considered independent contractors or employees of third-

party employment agencies, but who meet the definition of

employees of Microsoft Corporation under the common

law.” Vizcainol, 97 F.3d at 1190 n.1. We reversed the

district court’s judgment for Microsoft and remanded for

determination of “[a]Jny remaining issues regarding the

rights of a particular worker.” Vizcainoll, 120 F.3d at

ee a a

a, — »

nina

1015. On remand, the district court revised its prior class

definition to limit the class to workers who worked for

Microsoft as independent contractors between 1987 and

1990 either in positions that the Internal Revenue Service

(IRS) had reclassified as in fact being common law

employee positions, or in positions that Microsoft

contemporaneously had voluntarily converted to

temporary agency employees. It held those workers to be

eligible for employee benefits for work done while

independent contractors and for work subsequently per-

formed by them in the same position as temporary

employees hired through a temporary employment agency.

The district court’s revised class definition excludes (1) all

other temporary employees hired into a position

subsequent to its reclassification or conversion, and (2) all

other persons who worked for Microsoft as common law

employees. We must decide whether the Judge Dimmick’s

order fails to carry out this court’s mandate.

I. FACTUAL AND PROCEDURAL BACKGROUND

The relevant facts are set forth in detail in our

prior opinions. We summarize them here only to the

extent necessary for this disposition.

Microsoft, in addition to having regular employees,

has utilized the services of other workers whom it

Classified as independent contractors (sometimes called

freelancers) or temporary agency employees (also called

temps). Following a federal employment tax examination

in 1990, the IRS determined that Microsoft had

misclassified workers in various positions occupied by

independent contractors and that services performed by

workers in the specified positions constituted an

employer-employee relationship. In response to the IRS

ruling, Microsoft offered some of the workers in reclassi-

fied positions jobs as regular employees. Most of the

workers, however, were given the option to “convert” to

temps or lose their working relationship with Microsoft. In

addition, Microsoft voluntarily “converted” independent

contractors in other positions to temps. The temporary

employment agency “payrolled” these workers but in

other respects the workers’ relationship with Microsoft

remained essentially unchanged. In the years following

the reclassification and conversion, Microsoft utilized the

services of numerous temps.

Plaintiffs, who were formerly independent

contractors, brought this action on behalf of a class of

persons employed by Microsoft who met the definition of

employees under the common law but who were denied

employment benefits because Microsoft considered them

independent contractors or employees of third-party

employment agencies. Of the various employee benefits

sought by plaintiffs, only the ESPP remains at issue.

Microsoft denied liability because each of the workers—

though conceded to be common law employees—had

signed an Independent Contractor Agreement which

expressly provided that each independent contractor was

responsible for his or her own benefits. The district court

granted Microsoft’s motion for summary judgment on two

grounds: First, because the terms of the agreement barred

the claim, and, second, because the terms of the ESPP had

not been communicated to the workers and therefore

could not have become a part of their contract.

We reversed, holding that through its express

incorporation of § 423 of the Internal Revenue Code, see

26 U.S.C. § 423 (1994), which requires that qualifying

stock purchase plans permit all common law employees to

participate, Microsoft’s ESPP extended eligibility to all

common law employees. See Vizcainol, 97 F.3d at 1197.

The plaintiff class was therefore afforded the same

options to acquire stock as all other employees. See id. We

remanded for “the determination of any questions of

individual eligibility for benefits that may remain following

issuance of this opinion and for calculation of the damages

lat i

or benefits due the various class members.” /d. at 1200;

see also Vizcainoll, 120 F.3d at 1015 (“Any remaining

issues regarding the rights of a particular worker in the

ESPP and his available remedies must be decided by the

district court upon remand.”).

On remand, the district court, on February 13,

1998, issued its “Order Regarding Scope of Remand.” It

denied Microsoft's motion for clarification of the

composition of the class, rejecting its contention that the

class definition excluded those plaintiffs who were temps

and whose claims arose post-conversion (some but not all

of whom had worked as independent contractors pre-

conversion). The court concluded that “the plaintiff class

will remain as defined in its original certification order [of

July 21, 1993] until the issue of whether post-conversion

plaintiffs are common law employees is presented.”

Following the February 13 order, Microsoft

renewed its motion to amend the class certification,

asking the court to “certify subclasses for the question of

who is a common law employee.” By order of July 15, 1998,

the district court denied Microsoft’s motion but “clarified”

the class definition, limiting the class to

all Microsoft workers who, like all the

named plaintiffs, worked as independent

contractors between 1987 and 1990 and

whose positions were reclassified as

employee positions after the IRS reviewed

them. This . . . includes the claims brought

by the same workers for their work after

1990, when many of them, including four

named plaintiffs, were transferred to

temporary employment agencies. This is

the scope of the plaintiff class.

The court explained that the class had to be clarified

because it could only include “the named plaintiffs and

those similarly situated, both before and after conversion

to temporary employment.” The new definition excluded

from the class other groups of potential claimants who

were not reclassified by the IRS or converted by Microsoft,

ie., temps hired post-conversion into reclassified or

converted positions, and all other common law employees

not treated as such by Microsoft.

The July order also granted partial summary

judgment for plaintiffs (it is unclear whether the order

included only named plaintiffs or also the members of the

redefined class). Based on Microsoft's concession, the

court found these plaintiffs to have been common law

employees while working as independent contractors in

positions later reclassified by the IRS. In addition, it found

that most plaintiffs who had subsequently been converted

into temps were also common law employees entitled to

ESPP participation during their time as temps. The court

reasoned that the issue is “not whether a worker is an

employee or an independent contractor; the question is

which company is the workers’ employer (Microsoft or a

temporary agency).” Using a five-factor test it had devised

(considering recruitment, training, duration of

employment, right to assign additional work, and control

over the relationship between worker and agency) the

court found that Microsoft, not the temporary agency,

employed these workers.

Following plaintiffs’ motion for reconsideration, the

district court on October 26, 1998, issued a further “Order

Regarding Motion to Revise,” granting the motion in part

and denying it in part. The court rejected plaintiffs’

contention that it lacked authority under Rule 23 of the

Federal Rules of Civil Procedure to modify the class at this

stage in the litigation, citing the existence of “unusual

circumstances.” It went on to reject plaintiffs’ contention

that class membership should include all workers who

ever worked in a position that was held by an independent

contractor and then reclassified by the IRS or

contemporaneously converted by Microsoft. The court

found that “[p]laintiffs are mistaken to focus on the .. .

positions. A worker's position is not dispositive, and in

most cases irrelevant, to the legal question presented,”

which the court defined as whether the worker is a

common law employee of Microsoft or of a temporary

agency. On that basis, plaintiffs’ motion for summary

judgment in favor of any employees who worked in a

converted position was denied. In rejecting plaintiffs’

motion, the court reaffirmed its July ruling limiting the

class “to the IRS-reclassified independent contractors and

any work by the same workers in the same position as

converted ‘temps’.” The court did, however, include in the

class workers who were independent contractors before

becoming temps and were converted to temporary

agencies voluntarily by Microsoft, ie., who were not

reclassified by the IRS but were contemporaneously

converted by Microsoft.

The court acknowledged that the effect of its

modification of the class, limiting membership to “a

particular group of Microsoft workers, who share distinct

circumstances with the named plaintiffs,” was to

drastically reduce it to “only a sliver of Microsoft’s

contingent (or non-employee) workforce.” By order of

December 9, 1998, the court denied plaintiffs’ motion to

add named plaintiffs as class representatives but allowed

“workers who claim to have been misclassified common

law employees of Microsoft, and to have been wrongly

excluded from benefits, [to] intervene in this action.” Each

of those workers would, however, have to demonstrate

that he or she was a common law employee of Microsoft.

Plaintiffs then moved for a permanent injunction

requiring Microsoft to immediately allow all common law

employees to participate in the ESPP. The district court

denied the motion by order of December 22, 1998, on two

grounds: (1) With respect to those workers who had been

excluded from the class, plaintiffs had failed to

A10

demonstrate “actual success on the merits,” and (2) with

respect to the named plaintiffs and those they represent,

their legal remedies are adequate. Plaintiffs have taken an

interlocutory appeal from this order, which is also pending

before this panel.

Plaintiffs now petition for mandamus under the All

Writs Act, 28 U.S.C. § 1651 (1994), to enforce this court’s

mandate in Vizcaino! and II. PB 15-20. They ask that the

district court’s orders of July 15 and October 26, 1998,

reducing the plaintiff class be vacated and the original

class definition reinstated. We hold that we have

jurisdiction and grant the petition.

I. EXERCISE OF MANDAMUS JURISDICTION

The All Writs Act provides that “[t]he Supreme

Court and all courts established by Act of Congress may

issue all writs necessary or appropriate in aid of their

respective jurisdictions and agreeable to the usages and

principles of law.” 28 U.S.C. § 165i(a) (1994). The

traditional office of the writ of mandamus is to “confine

an inferior court to a lawful exercise of its prescribed

jurisdiction or to compel it to exercise its authority when

it is its duty to do so.” Will v. United States, 389 U.S. 90,

95 (1967) (quoting Roche v. Evaporated Milk Ass'n, 319

U.S. 21, 26 (1943)). Thus, when a lower court obstructs the

mandate of an appellate court, mandamus is the

appropriate remedy. See United States v. United States

Dist. Ct., 334 U.S. 258, 263-64 (1948). The justification for

mandamus in such circumstances is two-fold. First,

inferior courts’ disregard of appellate mandates “would

severely jeopardize the supervisory role of the courts of

appeals within the federal judicial system.” Jz re

Chambers Dev. Co., 148 F.3d 214, 224 (3d Cir. 1998); see

also Citibank, N_A. v. Fullam, 580 F.2d 82, 87 (3d Cir.

1978). Second, as a policy matter, litigants who have

proceeded to judgment in higher courts “should not be

All

required to go through that entire process again to obtain

execution of the judgment.” General Atomic Co. v. Felter,

436 U.S. 493, 497 (1978).

Mandamus to compel an inferior court to follow an

appellate mandate is closely related to the doctrine of law

of the case. The Supreme Court long ago emphasized that

when acting under an appellate court’s mandate, an

inferior court “is bound by the decree as the law of the

case; and must carry it into execution, according to the

mandate. That court cannot vary it, or examine it for any

other purpose than execution.” Jn re Sandford Fork & Tool

Co., 160 U.S. 247, 255 (1895); see also Cowgill v. Raymark

Indus., Inc., 832 F.2d 798, 802 (3d Cir. 1987) (law of the

mandate, also called law of the case, embodies the

principle that on remand “litigants should not be

permitted to relitigate issues that they have already had a

fair opportunity to contest”); Firth v. United States, 554

F.2d 990, 993 (9th Cir. 1977) (“When a case has been

decided by an appellate court and remanded, the court to

which it is remanded must proceed in accordance with the

mandate and such law of the case as was established by

the appellate court.”). On remand, a trial court can only

consider “any issue not expressly or impliedly disposed of

on appeal.” Firth, 554 F.2d at 993: see also Nguyen v.

United States, 792 F.2d 1500, 1502 (9th Cir. 1986). District

courts “must implement both ‘the letter and the spirit of

the mandate, taking into account the appellate court’s

opinion and the circumstances it embraces.” Delgrosso v.

Spang & Co., 903 F.2d 234, 240 (3d Cir. 1990) (quoting

Bankers Trust Co. v. Bethlehem Steel Corp., 761 F.2d 943,

949 (8rd Cir. 1985)).

Microsoft’s reliance on the so-called Bauman

factors is misplaced. See Bauman v. United States Dist

Ct., 557 F.2d 650, 654-55 (9th Cir. 1977). 3auman does not

apply when mandamus is sought on the ground that the

district court failed to follow the appellate court’s

mandate. In at least two cases decided after Bauman, this

A12

court granted a writ to compel district court compliance

with a prior appellate mandate without reference to

Bauman. See Brown v. Baden, 815 F.2d 575, 576 (9th Cir.

1987) (mandamus issued to compel district court to

comply with prior appellate order to reassign case); ATSA

of Cal, Inc. v. Continental Ins. Co., 754 F.2d 1394, 1396

(9th Cir. 1985) (mandamus issued to compel district court

to comply with prior appellate mandate that arbitrator

should determine the applicable law in commercial

dispute).

Pointing out that the issuance of a writ is

discretionary, see Kerrv. United States Dist. Ct., 426 U.S.

394, 403 (1976); Lusardi v. Lechner, 855 F.2d 1062, 1070

(3d Cir. 1988), Microsoft contends that this discretion

should not be exercised here because mandamus is a

“drastic” remedy for “extraordinary circumstances,” Kerr,

426 U.S. at 402-03, and not appropriate unless the right to

it is “clear and indisputable.” Allied Chemical Corp. v.

Daificn, Inc., 449 U.S. 33, 35 (1980). Microsoft argues that

plaintiffs cannot make that showing because the orders at

issue involved class certification, a matter committed to

the discretion of the district court and not now appealable.

The question here, however, is whether the district court’s

order revising the class definition on remand conflicted

with the appellate mandate. Moreover, mandamus may be

appropriate even concerning traditionally discretionary

matters. See, e.g, Brown, 815 F.2d at 576.

Microsoft’s other argument, that issuance of the

writ will frustrate the policy against piecemeal litigation,

is inapposite. See, e.g, Kerr, 426 U.S. at 403; Zusardi, 855

F.2d at 1069; Montiv. Department of Indus. Relations, 582

F.2d 1226, 1228 (9th Cir. 1978). That policy has no

relevance where mandamus is sought to compel the

district court to follow the appellate mandate and avoid

relitigation of final judgments. See General Atomic, 436

US. at 497 (“A litigant who...has_ obtained

judgment. . .after a lengthy process of litigation . . . should

Al13

not be required to go through that entire process again to

obtain execution of the judgment .. . .”).

Accordingly, if the district court disregarded this

court’s mandate, as plaintiffs contend, mandamus is the

appropriate remedy.

Il. | THE SCOPE OF THIS COURT’S MANDATE

The appeal before us in Vizeainol and II was taken

from a judgment on the merits denying relief to plaintiffs

and the members of the class certified by the district

court. Because that class included “[aJll persons

employed by Microsoft...who are denied employee

benefits because they are considered independent

contractors or employees of third party employment

agencies, but who meet the definition of employees of

Microsoft Corporation under the common law,” that

judgment would be res judicata with respect to the claims

not only of the plaintiffs and other workers who had

worked as independent contractors in positions

reclassified by the IRS or voluntarily converted by

Microsoft (included in the revised class) but also of all

other common law employees of Microsoft (now excluded).

In other words, had the judgment not been reversed, it

would have been preclusive as to all the workers now

excluded from the class under the district court’s revised

class certification. Were the case before us now in that

posture—i.e., had this court affirmed rather than

reversed—there is little doubt what Microsoft’s position

would be as to who is included in the class. Microsoft’s

argument that the scope of the class was not material to

the issue on appeal is not tenable for that reason alone—

substantial rights were at issue for all the members of the

certified class.

Although the discussion in the prior opinions

focused on the plaintiffs in their Capacity as independent

contractors rather than as temps, this was a natural

Al4

consequence of the legal posture of the case presented,

not a tacit limitation on the class’ claims. The class

certification is a central premise of both opinions. Thus, in

Vizcainol, the panel relied on the Magistrate Judge’s

finding that “Microsoft conceded the fact that the named

plaintiffs and the class they represent generally were

common law employees” and that Microsoft “reserved only

the right to object to the employment status of particular

plaintiffs during certain periods of their tenure with

Microsoft.” 97 F.3d at 1193 n.4. It went on to “hold that the

named plaintiffs and the class they represent are covered

by the specific provisions of the ESPP.” /d. at 1197. In

Vizcaino Il, the en banc court states that “the ESPP must,

essentially, be made available to all employees” and “[t]he

ESPP was created and offered to all employees.” 120 F.3d

at 1011, 1014. And the class is an integral element of the

mandate which remanded “for the determination of any

questions of individual eligibility for benefits that may

remain following issuance of this opinion and for

calculation of the damages or benefits due the various

class members.” Vizcainol, 97 F.3d at 1200; see also

Vizeainoll, 120 F.3d at 1015 (“Any remaining issues

regarding the rights of a particular worker in the ESPP

and his available remedies must be decided by the district

court upon remand.”). Thus, the district court’s statement

that this case is about a particular group of Microsoft

employees who share “distinct circumstances” is

unfounded.

Microsoft’s basic contention is that the district

court properly exercised its discretion to modify the scope

of the class. Its brief takes a scatter-gun approach, laying

down heavy fire but consisting largely of blanks.

Microsoft’s major point seems to be that the

certification order was only “provisional” and hence

subject to alteration at a later point. Under Federal Rule

of Civil Procedure 23(c)(1) a class certification order “may

be conditional,” but the district court’s order was not

Al5

conditional, much less provisional (a concept for which

Microsoft cites no authority). Over Microsoft’s objection,

the court “certified [the class] as plaintiffs request for all

issues remaining in the case,” the only qualification being

that “[ijf at a later date it appears certain questions

should be decertified pursuant to 23(c)(4)(A), the Court

can do so.” We do not interpret the statement referring to

the possible withdrawal of certain issues from class

treatment as a reservation of the right to substantially

narrow the membership of the class at some future date.

Certainly, our mandate (which runs to all common law

employees of Microsoft) cannot be read as contemplating

redefinition of the class; our direction to the district court

to determine questions of “individual eligibility”

presupposed the existence of the certified class.

Vizeainol, 97 F.3d at 1200. Blake v. City of Los Angeles,

595 F.2d 1367, 1385-86 (9th Cir. 1979), on which Microsoft

relies, is inapposite, first, because the court of appeals did

not adjudicate the merits of the claims of the individual

class members and, second, because the defendant had

contested the class certification and taken a cross-appeal.

Microsoft chose not to contest the class certification in the

district court (as the district court found, “[t]he only

question is whether the class should be certified for all

issues in the case, or just a few of the issues.”). Had it

done so and lost, it could have taken a contingent cross-

appeal and, had it prevailed, the district court could have

modified the class on remand.

Rule 23, moreover, does not provide authority for

the modification. Rule 23(c)(1) permits a certification

order to be altered or amended “before the decision on the

merits,” not afterward. See Scott v. City of Anniston, 682

F.2d 1353, 1357 (11th Cir. 1982) (ruling that appellate

decision finding evidence sufficient to make prima facie

case and insufficient to sustain proffered defense and

remanding for further proceedings as to individual class

members’ damages was a “decision on the merits”

A16

precluding subsequent class modification under Rule

23(c)(1)); Jimenez v. Weinberger, 523 F.2d 689, 697 (7th

Cir. 1975) (holding that Rule 23(c)(1)’s “explicit permis-

sion to alter or amend a certification order before decision

on the merits plainly implies disapproval of such

alteration or amendment thereafter”). This court’s prior

decision adjudicates the merits of the plaintiff class’ claim,

leaving only “questions of individual eligibility for benefits

that may remain...and calculation of the damages or

benefits due the various class members.” Vizcaino I,

97 F.3d at 1200.

Nor is there merit to Microsoft’s claim that the

modification was required to comply with Rule 23. In its

1993 order certifying the class under both Rules

23(b)(1)(A) and 23(b)(2), the district court found that

“(pjiaintiffs and defendants agree that plaintiffs’ class

meets the requirements of numerosity, commonality,

typicality, and adequacy imposed under Fed. R. Civ. P.

23(a).” It is too late now—after a decision on the merits—

to argue that commonality and typicality are lacking.

The district court’s position that “unusual circum-

stances” permit redefinition of the class after decision on

the merits lacks legal support and is erroneous. We are

aware of no authorities defining what “unusual

circumstances” allow a district court to circumvent the

restriction imposed by Rule 23(c)(1). That the class could

now comprise several thousand members rather than the

“several hundred members” contemplated in the

certification ruling, does not strike us as justifying a

revision that wipes out the right of numerous class

members to share in the benefits of the class adjudication.

The “unusual circumstances” rather seem to arise from

the district court’s perception that the class it previously

certified is “circular,” ie., that it relies on a legal

conclusion to define membership in the class. According to

the court, “common law employees are plaintiffs, and

plaintiffs are common law employees.” But the court’s

A17

reading reflects a misconception. It is implicit in the

definition of the class that its members are persons who

claim to have been (or to be) common law employees who

were denied ESPP benefits. That under this definition

ultimate success may turn on resolution of a disputed

legal issue does not make it circular. In Forbush v. J. C

Penney Co., 994 F.2d 1101(5th Cir. 1993), the court,

dealing with an analogous situation, said:

Penney asserts that this definition is

hopelessly “circular,” as the court must

first determine whether an employee’s

pension benefits were improperly reduced

before that person may be said to be a

member of the class. This argument is

meritless and, if accepted, would preclude

certification of just about any class of

persons alleging injury from a particular

action. These persons are linked by this

common complaint, and the possibility

that some may fail to prevail on their

individual claims will not defeat class

membership.

/d. at 1105. Defining a class of employees as linked by

their common claim to have been denied benefits to which

they were entitled as common law employees is no more

circular than defining a class of employees by their

common claim to have been injured by their employer’s

unlawful actions. See, e.g, Vaszlavik v. Storage Tech.

Corp., 183 F.R.D. 264, 267 (D. Colo. 1998) (certifying

plaintiffs’ class defined by description of plaintiffs’ legal

claim).

We conclude that the district court’s orders did not

conform to the mandate.

Al18

IV. EXECUTION OF THE MANDATE

This court’s mandate therefore left the district

court no room to revise the class definition, but it charged

the court with “the determination of any questions of

individual eligibility for benefits.” Vizcainol, 97 F.3d at

1200. Plaintiffs contend that they are entitled to a class-

wide judgment, encompassing not only workers in IRS-

reclassified positions but also workers voluntarily

converted and temps hired subsequent to conversion.

Microsoft’s position appears to be that, while it conceded

in the district court that the named plaintiffs and the

members of the class were common law employees, see id.

at 1193 n.4, their common law employee status is now

open for reexamination.

To the extent the district court granted summary

judgment for plaintiffs, we agree. The named plaintiffs and

others similarly situated—which to the court meant

independent contractors who worked in positions

reclassified by the IRS or who were voluntarily converted

by Microsoft—were entitled to participate in the ESPP

both before and after their conversion to temporary

employees in essentially the same job _ positions.

Microsoft’s argument at this point, that its earlier

concession regarding the common law employee status of

the members of the class was merely arguendo, is without

merit. Not only did Microsoft stand by this concession

throughout the litigation but the district court also found it

supported by the facts and ruled that Microsoft continued

to be bound by it. We agree with the district court that this

group of past and present employees is entitled to partial

summary judgment, leaving for further determination only

the issue of past damages. Their right to participate being

clearly established, we also see no reason why those

workers in this group who are currently employed by

Microsoft should not now participate on an ongoing basis

A19

in the ESPP, and entry of an order to that effect is now

appropriate.

The district court further ruled, however, that its

conclusion with respect to the above group could apply to

temps “only insofar as their circumstances match those of

the named plaintiffs (conversion to same position).” We

are at a loss to understand the full import of that

Statement, particularly the parenthetical comment. We

assume that the court meant to restrict eligibility to temps

who had previously been independent contractors and had

then been converted to temps in the same position. We

make that assumption because the district court rejected

plaintiffs’ contention that workers who occupy positions

reclassified as common law employees are for that reason

eligible for ESPP benefits. The district court reasoned that

the question presented by the temps’ claim was “not

whether a worker is an employee or an independent

contractor ...[{but] which company is the worker’s

employer (Microsoft or the temporary agency).” The

answer to that question, it said, lies in an assessment of

the common law factors articulated in Nationwide Mutual

Ins. Co. v. Darden, 503 U.S. 318, 323-24 (1992), although

the court singied out five factors as determinative:

recruitment, training, duration, right to assign additional

work, and control over the relationship between worker

and agency.

We agree that the assessment of the triangular

relationship between worker, temporary employment

agency and client is not wholly congruent with the two-

party relationship involving independent contractors. In

posing the question as the district court did, however, it

set up a false dichotomy. Even if for some purposes a

worker is considered an employee of the agency, that

would not preclude his status of common law employee of

Microsoft. The two are not mutually exclusive. “[In the]

determination of whether a person is an employee . . .

{courts look to] the usual common law factors.”

A20

Vizcainoll, 120 F.3d 1009-10 (citing Darden, 503 U.S. at

322). Darden observed that “we construe the term

[employee] to incorporate ‘the general common law of

agency.” 503 U.S. at 323 n3. At common law, “a

servant... permitted by his master to perform services

for another may become the servant of such other in

performing the services.” Restatement (Second) of Agency

§ 227 (1958). “Starting with a relation of servant to one

[employer], he can become the servant of another

femployer] only if there are the same elements in his

relation to the other as would constitute him a servant of

the other were he not originally the servant of the first.”

Id. § 227 cmt. a. “Many of the factors stated in Section 220

[setting out ten traditional agency factors which are cited

in Darden, 503 U.S. at 324] are also useful in determining

whether the lent servant has become the servant of the

borrowing employer.” /d. cmt. c; see also id. § 226 (“A per-

son may be the servant of two masters, not joint

employers, at one time as to one act, if the service to one

does not involve abandonment of the service to the

other.”); Kelley v. Southern Pac. Co., 419 U.S. 318, 324

(1974) (under common law, plaintiff can establish

employment by rail carrier while nominally employed by

another as borrowed servant, as servant of two masters,

or as subservant); Williamson v. Consolidated Rail Corp.,

926 F.2d 1344, 1348-49 (3d Cir. 1991) (following Kelley);

Nyman v. MacRae Bros. Constr. Co., 418 P.2d 253, 254

(Wash. 1966) (noting that there are three possibilities for

a worker’s status in a tort suit: servant of the general

master; servant of the borrowing master; servant of both);

In re Earth-movers, Inc., 199 B.R. 62, 67 (Bankr. M.D. Fla.

1996) (finding agency and recipient of services to be “de

facto ‘coemployers’ of [the] workers”). While this court

has not heretofore addressed the specific issue, our

decision in Burrey v. Pacific Gas and Elec. Co., 159 F.3d

388 (9th Cir. 1998), is based on the premise that workers

leased from an employment agency could be the common

tens

A21

law employees of the recipient of their services; their

status with respect to the latter must be determined using

the Darden factors. See id. at 394-395.

Finally, the IRS has repeatedly looked to common

law principles in the determination of common law

employee status in three-party employment situations.

See, e.g, Rev. Rul. 87-41, 1987-1 C.B. 296 (applying twenty

traditional common law factors to hypothetical situations

to determine whether technical service workers were

employees of employment agency, without ruling whether

workers were employees of client); Rev. Ru!. 75-41, 1975-1

C.B. 323 (applying common law test derived from Treasury

regulations to determine whether workers providing

services to medical professionals pursuant to contract

with a third-party professional service corporation were

employees of the corporation); Rev. Rul. 66-162, 1966-1

C.B. 234 (applying Restatement (Second) of Agency § 226

(1958) in ruling that sales clerks of concessionaire in

department store were employees of both concessionaire

and store); 14 Standard Federal Tax Reporter (CCH) 1

33,538.64 at 60,589 (Jan. 28, 1999) (suggesting that tradi-

tional common law factors apply to the determination of

whether technical service personnel are employees of the

client they serve pursuant to a contract with a third party

(e.g., employment agency)).

We conclude, therefore, that the determination of

whether temps were Microsoft’s common law employees

turns not on whether they were also employees of an

agency but rather on application of the Darden factors to

their relationship with Microsoft. That, however, need not

entangle the district court and the parties in interminable

proceedings resolving the issue on a worker-by-worker

basis. As the Supreme Court pointed out in Darden,

“application [of the factors] generally turns on factual

variables within an employer's knowledge, thus permitting

categorical judgments about the ‘employee’ status of

A22

claimants with similar job descriptions.” 503 U.S. at 327

(emphasis added).

The facts of this case confirm the validity of the

Court’s observation in Darden. The IRS made its

determination of employee status with reference to

specific positions. In a series of letters, the IRS advised

Microsoft that “we have determined that services

performed for Microsoft by an individual in the position

commonly referred to as [here followed the titles of

various positions such as computer based training, proof

reader, formatter, etc.] constitutes an employer-employee

relationship . . . It is our conclusion that Microsoft either

exercised, or retained the right to exercise, direction over

the services performed. This control establishes an

employer-employee relationship.” Vizcainol, 97 F.3d at

1190 n.2. The IRS determinations allow no exception for

individuals in these positions on the ground that they may

be on the payroll of employment agencies. Presumptively,

therefore, any individual occupying an IRS reclassified

position and otherwise qualified under the ESPP is an

eligible common law employee—regardless of whether he

or she had been personally converted from independent

contractor to temp as a result of the IRS determination.

The plan, by its terms, excludes short-term workers who

work less than five months per year or less than half-time.

There may, of course, be special circumstances affecting

the rights of particular workers. The relevant facts would

be within Microsoft's knowledge. The burden should

therefore be on Microsoft to show why any particular

worker serving in a reclassified position who meets the

ESPP service requirements is not entitled to participate.

We reach the same conclusion with respect to

workers in positions voluntarily converted by Microsoft.

The district court found that workers who had previously

been independent contractors but were voluntarily

converted by Microsoft to temporary § agencies

contemporaneous with the IRS reclassification should also

A23

be considered common law employees. The record does

not disclose whether the voluntary conversions were of

positions, in a fashion analogous to the IRS

reclassification, i.e., whether Microsoft determined with

reference to particular positions that services performed

constitute an employer-employee relationship. If that is

the case, the conclusion would be the same as in the case

of the IRS reclassifications: Presumptively, any individual

occupying a converted position and otherwise qualified

under the ESPP is an eligible common law employee—

regardless of whether he or she had been personally

converted from independent contractor to temp as a result

of Microsoft’s conversion. If, on the other hand, Microsoft

merely changed the treatment of particular individuals

qua individuals, that would not inure to the benefit of

other individuals hired as temps. We assume that the

evidence illuminating the nature and effect of these con-

versions is readily available from Microsoft and will

enable the district court to make the appropriate

determination.

The record does not disclose whether there are in

addition workers who served neither in reclassified nor

converted positions but who may nevertheless be common

law employees eligible to participate in the ESPP but

denied benefits. The determination whether a worker was

or is a Microsoft common law employee will be governed

by the Darden factors. We leave it to the district court to

determine the appropriate procedure for dealing with any

such claims.

\ CONCLUSION

We held in Vizcaino! and II that all common law

employees of Microsoft are entitled to participate in

Microsoft's ESPP, subject to the exceptions specified in

the plan. The members of the certified class share a

common claim to past and, in certain cases, current and

3 :

A24

future participation. They are entitled to press their claim

in this action under the procedure we have outlined.

The petition is GRANTED and the matter is

REMANDED to the district court for further proceedings

consistent with this opinion. Because our opinion also

disposes of the issues raised in plaintiffs’ appeal from the

denial of a permanent injunction, we DISMISS that appeal

without prejudice.

Tw ee

A25

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

DONNA VIZCAINO, et al., ) No. C93-178D

)

Plaintiffs, ) ORDER DENYING MOTION

v. ) TO AMEND CLASS

CERTIFICATION AND

MICROSOFT, et al., GRANTING PARTIAL

SUMMARY JUDGMENT

)

Defendants. )

)

THIS MATTER comes before the Court on

plaintiffs’ motion for partial summary judgment on

common-law-employee status and Microsoft’s motion to

amend class certification. Plaintiffs move for “a ruling

that they were common-law employees during all their

service for Microsoft.” Microsoft opposes this by arguing

that the named plaintiffs are not representative of other

potential class members, and therefore, the Court should

certify subclasses for the question of who is a common law

employee. The Court has carefully considered the briefs,

declarations, and exhibits filed by the parties, and the

record as a whole.’ Microsoft’s motion is denied, although

the Court herein clarifies the class definition in this case.

Plaintiff's motion is granted as described below.

' The Court finds oral argument unnecessary to decide the

present motions.

A26

In _1989-90 the Internal Revenue Service (IRS)

investigated the work of several classes of “freelance”

workers at Microsoft and found that several hundred of

them, working in nine job positions, were improperly

classified as independent contractors. Microsoft

retroactively classified them as employees and paid their

overtime and back taxes. Then Microsoft hired a few as

permanent employees, but transferred most of them to

temporary employment agencies. They became

“employees” of these agencies and worked at Microsoft in

the positions they had previously held. The workers

sought retroactive retirement benefits, health benefits,

and stock options. Microsoft refused, and the workers

sued.

In 1993, the Court certified a class to be

represented by eight named plaintiffs, all of whom worked

as independent contractors at Microsoft until the IRS re-

classified them in 1990. The class was defined as follows:

All persons employed by the Microsoft

Corporation in the United States who are

denied employee benefits because they are

considered independent contractors or

employees of third-party employment

agencies, but who meet the definition of

employees of Microsoft Corporation under

the common law....

Doc. 47 at 13. In essence, the class is defined as anyone

who has worked at Microsoft who should have heen a

Microsoft employee but was wrongly classified otherwise.

The current set of motions reveals a problem: _ the

definition of the class—all workers who are actually

common law employees—relies on a legal conclusion to

identify its members. Plaintiffs’ motion asks that the

Re Mer eel

A27

Court find they are common law employees, which would

amount to a finding that anyone who should be a common

law employee is a common law employee (and anyone who

should be a plaintiff is a plaintiff). It would not resolve

anything.

While plaintiffs’ arguments and evidence suggests

a narrower concept of the plaintiff class—the IRS-defined

group of people, pre- and post-conversion—NMicrosoft

argues that there are many other groups of potential

plaintiffs, who should not be represented by the named

plaintiffs. For example, there are independent

contractors whose positions were not revised by the IRS in

1989-90, and there are temporary agency employees who

were never independent contractors.

Relying on these problems, Microsoft insists that

the class must be divided into subclasses to determine

which workers are commoa law employees of Microsoft.

These subclasses would include (1) work done by

“independent contractors” prior to the March 1990

conversion in positions the IRS found to be employee

positions; and (2) work done by the same workers after

their conversion to temporary employment agencies, for

as long as they worked in the same positions as before

conversion.* Microsoft proposes dividing the latter

subclass into three additional subclasses based upon the

different “temporary personnel agreements” (TPAs) they

signed in 1990, 1991, and 1994, respectively.®

* Curiously, none of the proposed subclasses includes any

worker that was not, like the named plaintiffs, reclassified by the

IRS. This despite the fact that Microsoft draws out the specter of

non-reclassified independent contractors and non-converted

“temps” to illustrate how different the potential plaintiffs are from

the named plaintiffs.

* Microsoft amended the TPA each time to express more

clearly and boldly the worker’s waiver of any right to compensation

or benefits from Microsoft.

A28

II.

An open-ended class definition, as interpreted by

the parties, is unacceptable. This case has always been

about a particular group of Microsoft workers, who share

distinct circumstances with the named plaintiffs. The

group consists of all Microsoft workers who, like all the

named plaintiffs, worked as independent contractors

between 1987 and 1990 and whose positions were

reclassified as employee positions after the IRS reviewed

them. This case, as the Court found in its order on the

scope of the remand in February, includes the claims

brought by the same workers for their work after 1990,

when many of them, including four named plaintiffs, were

transferred to temporary employment agencies. This is

the scope of the plaintiff class.

Other groups of potential claimants, those who

have worked for Microsoft in a non-employee capacity, but

were not reclassified by the IRS or converted by Microsoft,

have never, as a practical matter, been involved in this

case. At this time, they remain outside the plaintiff class.

Il.

With the class definition clarified, the Court can

proceed with plaintiffs’ motion. Microsoft has long

conceded, at the very least, that the independent

contractors whom the IRS reclassified in 1990 were

actually common law employees of Microsoft. Thus,

plaintiffs’ motion presents this question: When Microsoft

transferred these workers from independent contractor

status to temporary employment agencies, did those

workers remain common law employees of Microsoft?

Microsoft appears to concede that they did.* In examining

the law on the matter, the Court agrees.

* Inexplicably, Microsoft takes the position that only the

named plaintiffs were “converted” in 1990 (and thus concedes only

ceeerinniiaiiaiasiiaiiiiiiiiiiiiiiiaiiiiiel

A29

The employee right at issue here, participation in

Microsoft’s Employee Stock Purchase Plan, arises from

Internal Revenue Code § 423, which requires such

programs to be available to all employees. In determining

the meaning of “employee” in a statute that does not

define the term, it is customary to refer to the test

developed from the common law doctrine of agency. See

Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 322-23

(1992). This “common law employee” test relies upon a

non-exhaustive list of between ten and twenty factors. /d.

at 323-24; Hollingberyv. Dunn, 68 Wn.2d 75, 80-81 (1966).

However, the question presented here is not

whether a worker is an employee or an independent

contractor; the question is which company is the worker’s

employer (Microsoft or a temporary agency). Some of the

traditional factors simply cannot be used in the present

analysis. For example, the location of the work, the

source of the instrumentalities and tools, and the skill

required in the work cannot be used to distinguish a

Microsoft employee from a temporary employee. The

courts that have addressed this problem appear to have

simply selected applicable factors from the standard test.

See Roth 1. American Hospital Supply Corp., 965 F.2d 862,

866-67 (10th Cir. 1992),° see also Rev. Rul. 87-41, 1987-1

C.B. 296.

that the named plaintiffs remained common law employees after

conversion). Def. Opp. (#376) at 3.14. This is clearly belied by

Microsoft records, which show scores, if not hundreds, of

employees that went from independent contracts to temporary

agencies in early 1990. Bernard Dec. (#377), Ex. E. The IRS

admittedly reclassified some 7-9 job categories as employee

positions in late 1989; anyone who held one of these positions at

the time and became a “temp” without changing jobs is obviously in

the same situation as the named plaintiffs.

° Professional & Executive Leasing, Inc. v. Commissioner,

862 F.2d 751, 753 (9th Cir. 1988), analyzed whether certain

professional workers were employees of a temporary agency, but

did not compare the workers’ relationships with two different

A30

Plaintiffs ignore this problem and argue that the

most important factor in the test is the degree of control

the hiring company has over the worker.° Employer

control is not always an appropriate basis for

distinguishing a temporary and a regular employee.

Traditionally, bona fide temporary workers work at client

companies either for a specific project or for a limited

time. In the project-based assignment, the client’s

authority to assign tasks outside or beyond the project

would indicate an employer relationship, but daily

supervision within the project would not. In the time-

limited assignment, client control of the worker would be

expected to the same degree as with comparable

employees of the client.

In the Court’s judgment, the factors to consider in

determining whether a “temporary employee” is a

common law employee of the client company include

(1) whether the client or the agency recruited the worker,

(2) the extent of the training that the client provides to the

worker, (3) the duration of the worker’s relationship with

the client company, (4) the client company’s right to

assign additional projects to the worker, and (5) whether

employers. See a/so Rev. Rul. 75-41, 1975-2 C.B. 323. Daughtreyv.

Honeywell, Inc., 3 F.3d 1488, 1492-93 (11th Cir. 1993) addressed a

claim to employee benefits by a worker who was classified both as

an independent contractor and as an agency employee, but the

court did not analyze the difference.

® On its own motion to amend the class certification,

Microsoft argues IRS regulations provide a distinct standard in

their definition of “employer.” See 26 C.F.R. 31.3401(d)-1. It

suggesis that whoever controls the payment of wages is the

employer. However, cases interpreting this have held that it does

not mean the common law employer can simply contract away its

obligations to an employee leasing company. See, e.g, /n re

Earthmovers, Inc., 199 B.R. 62, 66-67 (Bankr. M.D. Fla. 1996). The

argument is also inconsistent with another Microsc’ makes, that

transfer from the client’s payroll to the temporary agency’s payroll

is the key factor.

ii i i

A31

the client company may influence the relationship between

the worker and the agency. As with the distinction

between an independent contractor and an employee, “all

of the incidents of the relationship must be assessed and

weighed with no one factor being decisive.” Darden, 503

U.S. at 324 (quoting NLRB v. United Ins. Co. of America,

390 U.S. 254, 258 (1968)).

Of the eight named plaintiffs, five worked for

Microsoft not only as independent contractors but later as

temporary agency employees. Four of these plaintiffs

(Mark Stout, Thomas Morgan, and Elizabeth and Larry

Spokoiny) were “converted” from one status to the other

in around March 1990.’ All of them claim they had no

contact with their respective temporary agencies except to

receive paychecks and W-2 forms. All of them claim to

have signed agreements with or involving a temporary

agency at Microsoft’s command, at Microsoft’s workplace.

(One, Thomas Morgan, nominally worked for three

temporary agencies at one time, but performed ail his

work for Microsoft.) They claim to have worked on

various projects both before and after “conversion,” and

their work relationship with Microsoft appears to have

been indefinite. On the evidence submitted, there is no

genuine issue of material fact that these four plaintiffs

were common law employees of Microsoft during their

work there as “temporary personnel.” The Court

therefore grants partial summary judgment to plaintiffs

that they were common law employees of Microsoft, both

before and after conversion.

’ The fifth, Jon Waite, was terminated as an independent

contractor prior to conversion and rehired as temporary personnel

after conversion. Therefore, he was not “converted,” although he

was recruited directly by Microsoft. On the evidence submitted, he

presents several indicia of being a Microsoft employee. For the

time being, however, the Court declines to determine whether he

was a common law employee of Microsoft when he worked for

temporary employment agencies.

A32

IV.

In sum, the Court finds that the class definition

needs clarification to include only the named piaintiffs and

those similarly situated, both before and after conversion

to temporary employment. As such, they have shown they

were common law employees of Microsoft during both

periods of employment.

THEREFORE, defendant’s motion to amend class

certification is DENIED, and plaintiffs’ motion for partial

summary judgment is GRANTED.

The Clerk of the Court is directed to send copies of

this order to all counsel of record.

DATED this 15th day of July, 1998.

Carolyn R. Dimmick

United States District Judge

A33

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT SEATTLE

DONNA VIZCAINO, et al., ) No.C93-178D

)

Plaintiffs, ) ORDER REGARDING

) MOTION TO REVISE

MICROSOFT, et al.,

i a a

Defendants.

THIS MATTER comes before the Court on

plaintiffs’ motion for a revision or clarification of the

Court’s order of July 15, 1998 and for partial summary

judgment accordingly. The Court grants the motion

insofar as it clarifies the issues disputed and finds all

“converted” workers are members of the plaintiff class.’

The remainder of the motion is denied.

Plaintiffs’ motion is a motion for reconsideration,

yet does not follow the rules for such a motion, Local Rule

CR 7(e). As such, it could, and for many reason should, be

summarily denied. However, both parties have displayed

a penchant for re-arguing issues already decided by this

Court, indicating a great need for clarification. Moreover,

one group of workers who could potentially participate in

this case has been identified and addressed for the first

' As discussed in section II.C. below, this includes not only

the independent contractors Microsoft converted to temporary

agency employees because the Internal Revenue Service (IRS)

found their positions were improperly classified, but also those

workers whom Microsoft voluntarily converted.

A34

time on this motion, and the Court finds they belong in the

plaintiff class.

This case was originally brought in 1993 by

contingent workers at defendant Microsoft Corporation,

people who had served at Microsoft as independent

contractors or temporary employees or both, to recover

employee benefits denied to them because they were not

“regular” employees. It began with a 1989 investigation by

the IRS of several job positions that Microsoft was filling

with independent contractors, referred to by Microsoft as

“freelance workers.” The IRS determined that workers in

some positions should be Microsoft employees for federal

tax purposes. Shortly thereafter, Microsoft began

“converting” these workers. To some it offered permanent

employee positions, but most had to sign up with one of

several temporary employment agencies or leave

Microsoft altogether. Microsoft apparently converted not

only those independent contractors whose positions were

reclassified by the IRS, but also many other independent

contractors.

Some workers demanded employee benefits.

Microsoft refused, and eight of them filed this suit. On

July 21, 1993, the Court certified a class of plaintiffs

defined as

All persons employed by Microsoft

Corporation in the United States who are

denied employee benefits because they are

considered independent contractors or

employees of third-party employment

agencies but who meet tue definition of

employees of Microsoft Corporation under

the common law. This definition includes

A35

all such persons so employed within the

applicable statute of limitations.

Doc. 47 at 13. This definition is the source of today’s

problems.

In early 1994, United States Magistrate Judge

David E. Wilson heard cross-motions for summary

judgment in this case regarding each of several Microsoft

employee benefits. In April 1994, Judge Wilson

recommended granting partial summary judgment in favor

of Microsoft and partial summary judgment in favor of

plaintiffs. Regarding plaintiffs’ claims for benefits under

State law, Judge Wilson found plaintiffs had no

contractual right to any of them except one, the Employee

Stock Purchase Plan (ESPP), because that plan evinces an

intent to comply with Internal Revenue Code (IRC) § 423,

which requires that it be available to all employees. Doc.

No. 187 at 25-26, 34. Microsoft did not argue plaintiffs

were not its common law employees. /d. at 34.

Regarding plaintiffs’ claims to benefits governed by

the Employee Retirement Income Security Act (ERISA),

Judge Wilson would have rejected plaintiffs’ claims to

health and life insurance benefits, but granted their claims

to Microsoft’s Savings Plus Plan (SPP), a retirement

program under IRC § 401(k). Doc. No. 191 at 9, 12-13. He

found that while the other plans employed clear

restrictions upon eligibility, the SPP did not, and should be

available to all of Microsoft’s common law employees. See

id. at 13-14. Again, Microsoft did not contend the plaintiffs

were not its employees.

This Court adopted Judge Wilson’s

recommendations only insofar as they favored Microsoft.

As to the ESPP, the Court found that defendant’s intent to

comply with IRC § 423 did not give plaintiffs a personal

right to participate in the plan, and the Court found a clear

restriction in the SPP that excluded plaintiffs. See Doc.

Nos. 223 & 225. The Court found that plaintiffs’

A36

contractual agreements excluding them from employee

benefits precluded their claims, regardless of their

employee status.

Plaintiffs appealed the Court’s conclusions

regarding the ESPP and the SPP, and the Ninth Circuit

reversed. First, it held that since defendant conceded

plaintiffs’ status as common law employees, the Plan

Administrator's decision that they were ineligible for SPP

benefits was wrong.” Vizcainov. Microsoft Corp., 120 F.3d

1006, 1013 (9th Cir. 1997). Second, it held that the

plaintiffs’ written agreements with defendant, which

stated that they would not receive employee benefits, was

mistaken and therefore did not have the effect of depriving

plaintiffs of ESPP participation, j¢ at 1012, and that

defendant's offer of ESPP participation was made to all

employees, including plaintiffs, who accepted it by virtue

of their labor. /d at 1014-15. The court remanded the

remaining issues under the ESPP to this Court, and under

the SPP to the Plan Administrator.

Since that time, the parties have vigorously

disputed two issues: who is in the class of plaintiffs and

how much should they recover. This motion relates to who

is in the plaintiff class. In February 1998, the Court

denied Microsoft's motion to limit the class and its claims

to the benefits plaintiffs lost as independent contractors,

before conversion to temporary agencies. Doc. No. 307.

The Court held, however, that Microsoft could challenge

the right of temporary agency employees to participate in

* The SPP’s terms require it be offered to employees on

Microsoft's United States payroll. Judge Wilson found this

ambiguous and construed it against Microsoft. Doc. No. 191 at 20.

This Court found the language clearly excludes plaintiffs, who were

not paid through the payroll department. Doc. No. 225 at 3. The

Ninth Circuit found that since the Plan Administrator did not

consider this language, the question should be remanded to the

Plan Administrator for that purpose. Vizcaino v. Microsoft Corp.,

120 F.3d 1006, 1013 (9th Cir. 1997).

A37

the ESPP by demonstrating that they were not its common

law employees. See id. at 8. In other words, the Court in

February limited Microsoft’s concession about plaintiffs’

status to the people who worked as_ independent

contractors, when they worked as_ independent

contractors.

In July 1998, the Court granted plaintiffs’ motion

for an order finding they were common law employees of

Microsoft during all of their service for the company.

First, however, it had to better define who plaintiffs were,

and who they were not. It had become increasingly clear

that the named plaintiffs, all of who had, like several

hundred others, worked as independent contractors and

been reclassified by the IRS (and most of whom had then

become temps), represented only a sliver of Microsoft's

contingent workforce.

The Court decided that the named plaintiffs could

represent only those who shared with them the unique

circumstances they had presented throughout this case:

They had been reclassified in 1989 by the IRS. Microsoft’s

concession (and the IRS investigation, though not binding

on the Court) had established that these people were its

employees. Since plaintiffs had demonstrated that they

remained common law employees of Microsoft after being

“converted” to temporary agencies, the class could claim

lost benefits both before and after conversion.

Plaintiffs now move to have the Court “revise or

clarify” this order to allow several groups of excluded

workers to participate in this case, and for summary

judgment that the Court’s findings to date apply to those

workers.

II. °

The July 15, 1998 order attempted to resolve the

problems inherent in the original class definition. By

purporting to include all misclassified common law

employees of Microsoft, the definition relies upon a legal

conclusion to identify its members. When the parties

avoided addressing that legal issue by stipulation, they

created a circular class mechanism: Common law

employees are plaintiffs, and plaintiffs are common law

employees.*

Plaintiffs refuse to recognize this problem.‘ They

claim that since the contingent fact, whether one is a

common law employee of Microsoft, is discernable by

reference to objective standards, there is no circularity

problem. This ignores the issue at hand—identifying the

members of the class. If one wanted award stock to all

Clearly, the Court understood the proposed class to

consist only of the freelance workers that the IRS determined were

Microsoft employees in 1989. See id. at 11 (“There are clearly

common issues for a// potential class members .... The Internal

Revenue Service has already made a determination that ‘hey are

common law employees for tax purposes.” (emphasis added)). It

said the class “could have up to several hundred members.” Doc.

No. 47 at 10. (This was plaintiffs’ estimate of the size of the class

as well, see Doc. No. 8 at 5.) The number of contingent workers at

Microsoft, which plaintiffs now seek to include in the class, is

probably currently over 5,000.

‘ Plaintiffs’ arguments that the Court cannot redefine the

class at this stage are trumped by the practical need to do so

(which the Court already ruled), and are not persuasive. See, e.g,

Scott v. City of Anniston, 682 F.2d 1353, 1357 (11th Cir. 1982)

(Federal Rule of Civil Procedure 23(c)(1) “does not appear to

permit a court, absent unusua/ circumstances, to amend the class

after a decision on the merits” (emphasis added). Plaintiffs ignore

and omit the highlighted clause, which could not be more aptly

invoked than in this case.).

————Eo

A39

Microsoft employees with type O negative blood, one

would have an objective criterion, and yet would not know

which employees had O negative blood. (The ones in the

set. Which ones are in the set? The ones with O negative

blood.)

Nor can Microsoft’s concession that “plaintiffs” are

generally common law employees of the company serve as

the anchor in defining the class. The concession is merely

a truism. Of course plaintiffs are common law employees

of Microsoft. That is what the definition itself says.

Plaintiffs claim that anyone who is a misclassified

common law employee of Microsoft is a plaintiff, and

anyone who is a plaintiff is a misclassified common law

employee of Microsoft. This is not a tenable approach to

resolving this case.

Plaintiffs actually argue that the class potentially

includes every contingent worker who ever (within the

Statute of limitations) worked at Microsoft. They argue

that a very large group of these workers have already

been found to be common law employees of Microsoft, and

are thus class members. And they propose that the Court

“establish a procedure” for identifying all of the other

misclassified contingent workers since 1987.

According to plaintiffs, the class should presently

include all workers who ever worked in a position at

Microsoft that was ever held by an independent contractor

and then reclassified by the IRS or Microsoft to an

employee position. Most of these have been excluded by

the Court’s July 15 order. Plaintiffs identify these

excluded workers as belonging to one of several discrete

groups.” They do not argue that any of these discrete

° These include: (1) IRS-reclassified workers who were

not converted; (2) workers converted from “freelancer” to “temp”

voluntarily by Microsoft; (3) workers who had been in iRS-

A40

groups are entitled to be called common law employees of

Microsoft because of the nature of their relationship with

Microsoft. Instead, they argue that this has already been

established by the prior litigation of this case, including

the Ninth Circuit’s mandate on remand. They say “no

material distinction exists” between the named plaintiffs

and these others. Apparently, this is based upon their

having held a position once reclassified by the IRS or

Microsoft.

Plaintiffs are mistaken to focus on the reclassified

positions. A worker's position is not dispositive, and is in

most cases irrelevant, to the legal question presented.

Almost of all of the work these excluded workers did, they

did as “temps” (the exception is discussed below). The

Court's July order held that whether a temp is a common

law employee of the client is a different question than

whether an independent contractor is an employee of the

hiring party. The IRS determination about independent

contractors is not dispositive as to temps. Azy position at

Microsoft could lawfully be filled by a temporary agency

employee if the employee’s relationship with Microsoft

were temporary. Therefore, the excluded workers should

not automatically be class members (and considered

common law employees of Microsoft) because of their

positions.

Ironically, plaintiffs’ position recognizes a fact they

overtly resist: Some attribute of the named plaintiffs must

have implied a limitation upon the origina! class definition.

Plaintiffs contend that anyone related by position to the

named plaintiffs (or to voluntarily converted workers)

should be a member of the class and held to have been a

common law employee of Microsoft. But this position-

limitation appears nowhere in the original class definition.

It comes from the way this case has been litigated. Until

reclassified positions, left Microsoft and returned as temps; and (4)

temps hired after conversion.

Adi

remand, the courts and the parties had focused their

analyses almost exclusively upon the 1987-90 independent

contractors whose positions were reclassified by the IRS.

That is why this Court, in July, ordered the class limited to

those workers. Plaintiffs prefer that it be limited to those

positions. Thus, while they say any modification is wrong,

what they really want is simply a more favorable

modification.

The Court’s modification—that the class

represented by the named plaintiffs is limited to the IRS-

reclassified independent contractors and any work by the

same workers in the same positions but as converted

“temps”—is based upon the facts that characterized the

named plaintiffs’ relationship with Microsoft.’ Clearly, the

named plaintiffs have established their status as common

law employees during the 1987-90 period, by virtue of

Microsoft’s admission.’ See, e.g, 2/13/98 Order at 7. This

Court further found that these same workers remained

common law employees of Microsoft after they were

converted to temporary employees. 7/15/98 Order at 8.

The Court did this by finding an appropriate set of factors

® This relationship corresponds with the “common law

employee” limitation in the original class definition.

’ This should clarify one apparent point of uncertainty

with plaintiffs, that certain workers who never became temps (e.g.

Donna Vizcaino) are members and entitled to summary judgment

regarding their status. See Plifs’ Brief (Doc. No. 441) at 5 & n. 13.

Plaintiffs present new information regarding named

plaintiff Thomas Morgan, that he was converted in 1988 (although

his original declaration indicates he was converted in 1989).

Morgan’s claims as a freelancer is established, since his position

was reclassified by the IRS. The Court specifically found that his

work as a temp was similarly mislabeled. 7/15/98 Order at 7-8. It

appears he is entitled to that ruling whether he was converted in

1988 or 1989.

A42

and applying them to the named plaintiffs.° The reason

this holding (and the class itself) was limited to these

workers in these positions is because those two factors

help to establish the workers’ post-conversion status. We

know, for example, that named plaintiff Mark Stout was a

common law employee of Microsoft in February 1990,

working as a production editor, when he became a

temporary agency employee, working as a production

editor. It is clear from this alone (and Microsoft's

acquiescence) that there was no temporal limitation

(explicit or otherwise) upon Stout’s post-conversion work

at Microsoft, that Microsoft “recruited” Stout, and that

Stout’s relationship with his agency employer was created

by Microsoft. These facts, in the Court’s analysis,

established that Stout was a common law employee of

Microsoft during his work as a temp from February 1990

to March 1991. See Stout Dec. (Doc. No. 14), & Exh. 1.

Had Stout switched positions upon conversion, or left

Microsoft prior to conversion and then returned later, it

would not be so clear that he did not become a short-term

project employee, ie., a bona fide temp.®

® Those factors include:

(1) whether the client or the agency recruited the worker,

(2) the extent of the training that the client provides to the

worker, (3) the duration of the worker’s relationship with

the client company, (4) the client company’s right to assign

additional projects to the worker, and (5) whether the

client company may influence the relationship between the

worker and the agency.

10/15/98 Order at 7.

* One named plaintiff, Jon Waite, did leave his IRS-

reclassified position prior to conversion, and returned later to

another such position as a temp. When the Court held that the

named plaintiffs were Microsoft employees during their post-

conversion work as temps, it withheld a decision as to Waite’s post-

A43

To put this another way, the legal conclusions the

courts have reached regarding the named plaintiffs can be

assumed to apply to Microsoft’s “temps” only insofar as

their circumstances match those of the named plaintiffs

(conversion to same position), just as the Court ordered.

The Court will not apply those conclusions to other temps,

whose circumstances may vary wildly, from each other

and from the named plaintiffs.

There is one group of workers plaintiffs claim have

been improperly excluded from this action which consists

of workers who were independent contractors before

becoming temps. These are the workers who were

independent contractors at Microsoft between 1987-90 and

who were thereafter “converted” to temporary agencies

voluntarily by Microsoft. That is the IRS did not reclassify

these workers,’® but Microsoft saw fit to change their

formal status along with the reclassified workers.

Plaintiffs contend there is no material difference

these “voluntary converts” and the named plaintiffs,

suggesting that Microsoft conducted its own investigation

of freelancers and found these additional workers were

also misclassified. They say the voluntary conversion,

moreover, is an “admission” that the workers were

company employees. Microsoft claims no investigation

conversion work, because of the uncertainty described here. Both

sides have filed motions for summary judgment on this point.

that Microsoft converted voluntarily. This emphasis is wrong

because, as independent contractors, they have rights to benefits, if

at all, by wirtue of the conversion and admission, and as temps, by

demonstrating that their relationship with Microsoft was not

“temporary.” Both of these sources depend upon individual worker

circumstamces, not positions. In this discussion, the Court

considers workers converted in early 1990 only.

A44

took place, and it merely instituted a policy that all

independent contractors had to submit an IRS-approved

SS-8 form (qualifying them as independent contractors),

or they would be reclassified as temps, or perhaps in some

cases regular employees. Microsoft also claims that some

of the freelancer positions it converted voluntarily were

actually approved by the IRS as independent contractor

positions."

The Court finds there is good reason to include the

voluntary converts in the class as presently represented.

First is Microsoft's admissions in this litigation that

“plaintiffs” are its common law employees (which it did

throughout dismissal and appeal, see 2/13/98 Order at 6-

7). Although the Court has said that Microsoft's

concession in this case should not mean that it admits all

its contingent workers were and are misclassified common

law employees of the company, the concession should be

limited only as reasonably necessary. Unlike the other

excluded workers, there is an important identity between

the named plaintiffs and the voluntary converts. At the

point when Microsoft’s freelance practices were under

attack by the IRS, it converted these workers. Thus, the

voluntary converts appears in the narrative of this case.

Second, just as there is actual evidence that the

workers reclassified by the IRS were common law

employees (the IRS’s analysis), the same can be said of

the voluntary converts. This is because it is most unlikely

that a bona fide independent contractor could be

'' In support of this it cites evidence of people/positions

converted, but not of whether they were found to be independent

contractors. The only evidence the Court finds is a letter from the

IRS agent saying “We agreed that for 1986 and 1987 we would

treat” certain positions as independent contractors. Stobaugh Dec.

(Doc. No. 444) Ex. B at 004291. This does not mean the IRS found

they were proper/y independent contractors in 1989-90.

AE Ieee ee

lit in ay sik a ar

A45

converted to a temporary employee. An independent

contractor usually exhibits some of the following

attributes: exerts control over details of his work; is

engaged in a distinct line of work; receives little

supervision; supplies his own tools; is paid by the job; and

performs work outside the regular business of the

employer. See Hollingberry v. Dunn, 68 Wn.2d 75, 80-81

(1966). A temporary worker is an employee of a third-

party agency, and we know that in the case of the

voluntary converts, those agencies were selected by

Microsoft. A temporary worker may be recruited or

trained by his agency, and may work for several clients,

on assignment by the agency. Each assignment will be

limited in duration or scope, and the worker’s relationship

with the agency should exist independent of his

relationship with a client. See 7/15/98 Order at 7. It

hardly seems possible that a bona fide independent

contractor could be converted by the “client” into a bona

fide temporary agency employee.

While these reasons are not sufficient to compel

the conclusion that the 1990 voluntary converts were

common law employees of Microsoft, they support a

presumption in their favor. Microsoft has failed to

demonstrate that any of these workers was not its

common law employee, and therefore the Court so finds.

On the present record, the Court finds that those

workers who served Microsoft as independent contractors

or “freelancers” between 1987 and 1990 and were

voluntarily converted to temporary employees _ by

Microsoft in 1989-90 are members of the class represented

by named plaintiffs, and entitled to the benefits of all

judgments rendered in plaintiffs’ favor.

Finally, plaintiffs also describe a fifth “excluded”

group of workers, the “all others” category. Plaintiffs

A46

provide no basis upon which to conclude that this

completely amorphous group belongs in the plaintiff class.

Il.

THEREFORE, plaintiffs’ motion to revise or clarify

the Court’s July 15, 1998 order IS DENIED IN PART and

GRANTED IN PART.

The Clerk of the Court is directed to send copies of

this order to all counsel of record.

DATED this 26th day of October, 1998.

Carolyn R. Dimmick

United States District Judge

ve a a re Bieta he “s a eee ee ae ee Pee es ee Se ee

A47

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

DONNA VIZCAINO; JON R. WAITE;

MARK STOUT; GEOFFREY CULBERT;

LESLEY STUART; THOMAS MORGAN;

ELIZABETH SPOKOINY; LARRY

SPOKOINY, No. 94-3577 0

Plaintiffs-Appellants, D.C. No.

CV-93-00178-CRD

v. OPINION

MICROSOFT CORPORATION, and its

pension and welfare benefit plans,

et al.,

Defendants-Appellees.

ee ee ee ee

Appeal from the United States District Court

for the Western District of Washington

Carolyn R. Dimmick, District Judge, Presiding

Argued and Submitted

March 27, 1997

Decided July 24, 1997

Before: HUG, Chief Judge, and Browning, Fletcher,

Pregerson, Hall, O’Scannlain, Fernandez, T.G. Nelson,

Hawkins, Tashima, and Thomas, Circuit Judges

A48

Opinion by Judge Fernandez; Partial Concurrence ind

Partial Dissent by Judge Fletcher; Partial Concurrence

and Partial Dissent by Judge O’Scanniain

COUNSEL

Stephen K. Strong, David F. Stobaugh, Bendich,

Stobaugh & Strong, Seattle, WA, and Charles K. Wiggins,

Bainbridge Island, WA, for plaintiffs-appellants.

James D. Oswald and Timothy St. Clair Smith, Davies,

Roberts & Reid, Seattle, WA, for defendants-appellees.

Ethan Lipsig, Paul, Hastings, Janofsky & Walker, Los

Angeles, CA, for amici curiae American Electronics

Association, California Chamber of Commerce, California

Employment Law Council, and The Employers Group.

Steven Cherensky, Weil, Gotshal & Manges, Menlo Park,

CA, for amici curiae American Payroll Association,

Association of Private Pension and Welfare Plans.

Linda J. Dunn, Office of the Attorney General, Seattle,

- WA, for amicus Washington State Department of Labor and

Industries.

OPINION

FERNANDEZ, Circuit Judge.

Donna Vizcaino, Jon R. Waite, Mark Stout, Geoffrey

Culbert, Lesley Stuart, Thomas Morgan, ElizabethSpokoiny,

and Larry Spokoiny brought this action on behalf of

ee Re Ae) ee ere Bie eae

A49

themselves and a court-certified class (all are hereafter

collectively referred to as “the Workers”). They sued

Microsoft Corporation and its various pension and welfare

plans, including its Savings Plus Plan (SPP), and sought a

determination that they were entitled to participate in the

plan benefits because those benefits were available to

Microsoft’s common law employees. The district court

granted summary judgment against the Workers, and they

appealed the determinations that they were not entitled to

participate in the SPP or in the Employee Stock Purchase

Plan (ESPP). We reversed the district court because we

decided that the Workers were common law employees who

were not properly excluded from participation in those

plans. See Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th

Cir.1996) ( Vizcaino J). However, we then decided to rehear

the matter en banc, and we now agree with much of the

panel’s conclusion and reverse the district court.

BACKGROUND

At various times before 1990, Microsoft hired the

Workers to perform services for it. They did perform those

services over a continuous period, often exceeding two

years. They were hired to work on specific projects and

performed a number of different functions, such as

production editing, proofreading, formatting, indexing, and

testing. “Microsoft fully integrated [the Workers] into its

workforce: they often worked on teams along with regular

employees, sharing the same supervisors, performing

identical functions, and working the same core hours.

Because Microsoft required that they work on site, they

received admittance card keys, office equipment and

supplies from the company.” /d. at 1190. However, they were

not paid for their services through the payroll department,

A50

but rather submitted invoices to and were paid through the

accounts payable department.

Microsoft did not withhold income or Federal Insurance

Contribution Act taxes from the Workers’ wages, and did not

pay the employer's share of the FICA taxes. Moreover,

Microsoft did not allow the Workers to participate in the SPP

or the ESPP. The Workers did not complain about those

arrangements at that time.

However, in 1989 and 1990 the Internal Revenue Service

examined Microsoft's records and decided that it should

have been withholding and paying over taxes because, as a

matter of law, the Workers were employees rather than

independent contractors. It made that determination by

applying common law principles. Microsoft agreed with the

IRS and made the necessary corrections for the past by

issuing W-2 forms to the Workers and by paying the

employer's share of FICA taxes to the government.

Microsoft also realized that, because the Workers were

employees, at least for tax purposes, it had to change its

system. It made no sense to have employees paid through

the accounts payable department, so those who remained in

essentially the same relationship as before were tendered

offers to become acknowledged employees. Others had to

discontinue working for Microsoft, but did have the

opportunity to go to work for a temporary employment

agency, which could then supply temporary Workers to

Microsoft on an as-needed basis. Some took advantage of

that opportunity, some—like Vizcaino—did not.

The Workers then asserted that they were employees of

Microsoft and should have had the opportunity of

Fala

ASi

participating in the SPP and the ESPP because those plans

were available to all employees who met certain other

participation qualifications, which are not relevant to the

issues before us. Microsoft disagreed, and the Workers

asked the SPP plan administrator to exercise his authority

to declare that they were eligible for the benefits. A panel

was convened; it ruled that the Workers were not entitled to

any benefits from ERISA plans’ —for example, the SPP—or,

for that matter, from non-ERISA plans—for example, the

ESPP. That, the administrative panel seemed to say, was

because the Workers had agreed that they were

independent contractors and because they had waived the

right to participate in benefit plans. This action followed.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 29 U.S.C.

§ 1132(e)(1) and 28 U.S.C. §§ 1331 and 1367(a). We have

jurisdiction pursuant to 28 U.S.C. § 1291.

We review the district court’s grant of summary

judgment de novo. See Bagdadi v. Nazar, 84 F.3d 1194, 1197

(9th Cir.1996). However, when reviewing the decision of a

plan administrator who has discretion, “the exercise of that

discretion is reviewed under the arbitrary or capricious

standard, or for abuse of discretion, which comes to the

same thing.” Snow v. Standard Ins. Co.,87 F.3d 327, 330 (9th

Cir.1996); see also Safile v. Sierra Pac. Power Co. Bargaining

Unit Long Term Disability Income Plan, 85 F 3d 455, 458 (9th

Cir.1996).

' SeeEmployee Retirement Income Security Act of 1974, Pub. L. No.

93-406, 88 Stat. 829 (1974).

A52

DISCUSSION

Although the Workers challenge both their exclusion

from the SPP and their exclusion from the ESPP, the two

plans are subject to rather different legal regimes. The

former is a 26 U.S.C. § 401(k) plan, which is governed by

ERISA; the latter is a 26 U.S.C. § 423 plan, which is not

governed by ERISA. It, instead, is governed, at least in large

part, by principles arising out of the law of the State of

Washington. Nevertheless, certain issues, perhaps the most

critical ones, cut across both regimes, and we will address

them first.

I. GENERAL CONSIDERATIONS.

A. The Workers’ Status.

It is important to recognize that there is no longer any

question that the Workers were employees of Microsoft, and

not independent contractors. The IRS clearly determined

that they were. In theory one could argue that what the IRS

said was fine for withholding and FICA purposes, but that is

as far as it goes.

However, the IRS made its determination based upon

the list of factors which is generally used to decide whether

a person is an independent contractor or an employee. See

26 C.F.R. § 31.340(c)-1(b). The same essential definition is

used for § 401(k) plans, see 26 C.F.R. § 1.4010(b)-9, and for

§ 423 plans, see 26 C.F.R. §§ 1.423-2(e)(2), 1.421-7(h). That

there should be a congruence of approaches is not

surprising. As the Supreme Court has pointed out, when

Congress uses the work “employee,” courts “‘must infer,

unless the statute otherwise dictates, that Congress means

A53

to incorporate the established meaning” of that word.

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 112

S.Ct. 1344, 1348, 117 L.Ed.2d 581 (1992). The Court then

went on to scrutinize the various typical factors that go into

a determination of whether a person is an employee. See id.

at 323-24, 112 S.Ct. at 1348. Those were the usual common

law factors. But, again, we recognize that one could still

question the IRS’s application of those factors in a particular

case.

That question is obviated here for, perhaps more to the

purpose, both Microsoft and the SPP have conceded for

purposes of this appeal that the Workers were common law

employees. In fact, they have asserted that the Workers’

status is a “nonissue” because they concede that the

Workers were common law employees. That is to say, they

were employees of Microsoft.

B. The Employment Agreements.

The concession that the Workers were employees

would, at first blush, appear to dispose of this case. It means

that for legal purposes they, along with the other employees

of Microsoft, were subject to Microsoft’s control as to both

“the manner and means” of accomplishing their job, that

they worked for a substantial period, that they were

furnished a workplace and equipment, that they were

subject to discharge, and the like. See id.; see also26 C.F.R.

§ 31.3401(c)-1(b). If that were all, this would be an

exceedingly easy case. Of course, it is not all.

Microsoft also entered into special agreements with the

Workers, and it is those which complicate matters to some

extent. Each of the Workers and Microsoft signed

A5d4

agreements which stated, among other things not relevant

here, that the worker was “an Independent Contractor for

[Microsoft],” and nothing in the agreement should be

construedas creating an “employer-employee relationship.”

As a result, the worker agreed “to be responsible for all of

[his] federal and state taxes, withholding, social security,

insurance, and other benefits.” At the same time, Microsoft

had the Workers sign an information form, which explained:

“[A]s an Independent Contractor to Microsoft, you are self

employed and are responsible to pay all your own insurance

and benefits. . . Microsoft . . . will not subject your payments

to any withholding. . . . You are not either an employee of

Microsoft, or a temporary employee of Microsoft.” We now

know beyond peradventure that most of this was not, in fact,

true because the Workers actually were employees rather

than independent contractors. What are we to make of that?

We now know that as a matter of law Microsoft hired

the Workers to perform their services as employees and that

the Workers performed those services. Yet we are also

obligated to construe the agreements. See Republic of

Nicaragua v. Standard Fruit Co., 937 F.2d 469, 474 (9th

Cir.1991); Swanson v. Liquid Air Corp., 118 Wash.2d 512,

521, 826 P.2d 664, 669 (1992). In doing so, we could take

either a negative or a positive view of Microsoft’s intent and

motives. We could decide that Microsoft knew that the

Workers were employees, but chose to paste the

independent contractor label upon them after making a

rather amazing series of decisions to violate the law. Or we

could decide that Microsoft mistakenly thought that the

Workers were independent contractors and that all else

simply seemed to flow from that status.

tin iin by a ach land ha!

i is Maid St a aE ES ch a bat ata

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ee ay ee ee eT

A55

Were we to take the former approach, we would have te—

determine that Microsoft, with the knowledge that the

Workers were #*..ly a group of employees, decided to

engage in the ‘-li,«ing maneuvers:

(1) Despite the requirements of federal law that

amounts be withheld from employee wages, Microsoft

decided it would not withhold. See 26 U.S.C.§§ 3102,

3401-3406.

(2) Despite the fact that the SPP states that “employee”

means “any common law employee . . . who is on the United

States payroll of the employer,” Microsoft decided to

manipulate the availability of that benefit by routing the

wages of these employees through the accounts payable

department, so that it could argue that they were not on the

United States payroll. Beyond that, it also determined that

it would tell the IRS in its “Application for Determination for

Defined Contribution Plan,” that Microsoft did, indeed,

basically include all employees, a category that it knew

included the Workers, even thought it had contrived to

exclude them. Beyond even that, Microsoft excluded these

employees when it filed its tax returns for the SPP, even

though it knew better.

(3) Despite the fact that the ESPP must, essentially, be

made available to all employees, Microsoft excluded these

employees and thereby intentionally risked the possibility

that the plan would not qualify for favorable tax treatment.

It did that, even though the plan itself stated that it covered

all regular employees and that it was to be construed to

comply with 26 U.S.C. § 423, a law which basically requires

that all employees be covered. The officers of Microsoft also

decided to eliminate one group of common law employees

A56

from the benefits, even though the board of directors and the

shareholders had already made ‘he benefits of the ESPP

available to those employees. In doing that, the officers

intentionally violated the corporate law of Delaware, to

which Microsoft was subject, because the terms of coverage

of stock option plans are not in the hands of corporate

officers; they are in the hands of the board itself. See Del.

Code Ann. tit. 8 § 157; see also Michelson v. Duncan, 386

A.2d 1144, 1150-51 (Del.Ch.1978), affd in part and rev'd in

part on other grounds, 407 A.2d 211 (Del.1979).

On the other hand, in construing the agreements we can

view the label as a simple mistake. That is, Microsoft

honestly thought that the Workers were independent

contractors and took its various actions and inactions based

upon that misapprehension. Its actions and the conclusions

conveyed to the Workers in the agreements and in the

explanation in the information form, which accompanied the

agreements, were simply an explication of what the effect of

independentcontractor status would be and had no separate

purpose or effect aside from that explanatory function. That

is to say, of course there could neither be withholding from

wages nor participation in the benefit plans because those

keyed on common law employment status. If the Workers

were independent contractors, those would be the inevitable

results, even if nothing were said about them in the

agreement or the information form. Explaining the meaning

of independent contractor status was simply a helpful

disclosure.

Absent evidence that the officers of Microsoft used their

daedalian talents to follow the first route we have just

outlined, we must decide that the second route is a more

accurate portrayal of what occurred here. In other words,

alas hs gs a Wel

A57

we should, and we do, consider what the parties did in the

best light. In so doing, we do not believe that we are being

pangiossian; we are merely acting in accordance with the

ancient maxim which assumes that “the law has been

obeyed.” See, e.g, Cal. Civ.Code § 3548.

The evidence does not undercut our approach; it

supports it. As soon as Microsoft realized that the IRS, at

least, thought that the Workers were employees, it took

steps to correct its error. It put some of them on its United

States payroll forthwith. It also gave the Workers

retroactive pay for overtime hours. If Microsoft had been

withholding taxes while failing to provide benefits, that

would have suggested that it knew that the Workers were a

species of employee. However, its failure to withhold

indicates that it did not think that the Workers were a

special breed of employee; it simply thought that they were

not employees at all. That was underscored when Microsoft

told its managers about the status of the Workers. See

Microsoft Manager’s Handbook 4.7-4.8 (1988). It

distinguished the Workers from other employees, both

regular full-time and temporary. If did not say that the

Workers were employees in some special category; rather,

it said that they were not employees at all. See id.

But they were employees, which returns us to the

contracts themselves. Viewed in the proper light, it can be

seen that the Workers were indeed hired by Microsoft to

perform services for it. We know that their services were

rendered in their capacities as employees. The contracts

indicate, however, that they are independent contractors,

which they were not. The other terms of the contracts do not

add or subtract from their status or, indeed, impose

separate agreements upon them. In effect, the other terms

A58

merely warn the Workers about what happens to them if

they are independent contractors. Again, those are simply

results which hinge on the status determination itself; they

are not separate freestanding agreements. Therefore, the

Workers were employees, who did not give up or waive their

rights to be treated like all other employees under the plans.

The Workers performed services for Microsoft under

conditions which made them employees. They did sign

agreements, which declared that they were independent

contractors, but at best that declaration was due toa mutual

mistake, and we know that even Microsoft does not now seek

to assert that the label made them independent contractors.

On the contrary, Microsoft intended that the Workers

perform services under the conditions in question, and they

agreed to do so. The parties’ intentions were in perfect

accord in that respect, and the independent contractor label

was a mere error. We see no reason to embrace and

perpetuate that error. It could be argued that we would

have to reform the contracts in order to elide the mutual

mistake. Reformation is a concept available under the law of

Washington, as it is elsewhere. See Wilson v. Westinghouse

Elec. Corp., 85 Wash.2d 78, 84-85, 530 P.2d 298, 301-02

(1975); Denny’s Restaurants, Inc. v. Security Union Title Ins.

Co., 71 Wash.App. 194, 212, 859 P.2d 619, 629-30 (1993); cf

Scott v. Petett, 63 Wash.App. 50, 57-58, 816 P.2d 1229,

1234-35 (1991). But Microsoft saved us and the Workers the

trouble of applying reformation doctrine when it agreed that

the Workers were, in fact, not independent contractors.

Thus, the label became meaningless, as did the explication

of what would follow from that label—no withholding, no

benefits.

Pe ee ee ee et

Oe ee Oe ee eee

A59

A similar case from the Eleventh Circuit lends support

to our conclusion. See Daughtrey v. Honeywell, Inc., 3 F.3d

1488 (11th Cir. 1993). In Daughtrey, t

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