Fourth Circuit: NLRB ALJs May Rule on Claims of Privilege, but Only an Article III Court Can Require Production

In a recent Fourth Circuit opinion written by Judge Niemeyer, NLRB v. Interbake Foods, LLC, 637 F.3d 492 (4th Cir. 2011), the Court held that an administrative law judge (“ALJ”) had authority to receive and evaluate evidence under the Federal Rules of Evidence and to rule on claims of privilege made with respect to that evidence. In so ruling, the Court overruled the District Court’s holding by Judge Bennett that “only an Article III court may determine whether subpoenaed documents are protected by the attorney-client or attorney work-product privileges…” NLRB v. Interbake Foods, LLC, No. RDB 09-2081, 2009 U.S. Dist. LEXIS 86826, 2009 WL 3103819 at *4 (D. Md. Sept. 22, 2009).

The dispute revolved around an order requested by the NLRB directing Interbake to produce three subpoenaed documents to the ALJ in order for the ALJ to determine whether the documents were protected by a privilege.

As a preliminary matter, it is worth noting that the Fourth Circuit upheld the the District Court’s decision not to conduct an in camera inspection of the documents at issue because “‘Interbake ha[d] met its burden of establishing that the documents [were] privileged… and the NLRB ha[d] not articulated a good faith basis for doubting Interbake’s claim of privilege.’” NLRB v. Interbake Foods, LLC, 637 F.3d at 494 (quoting NLRB v. Interbake Foods, LLC, No. RDB 09-2081, 2009 U.S. Dist. LEXIS 86826, 2009 WL 3103819 at *4 n.1.)  The Fourth Circuit explained that, once a prima facie showing of privilege is made, the opposing party must have a “factual basis sufficient to support a reasonable, good faith belief that in camera inspection may reveal evidence that information in the materials is not privileged” before becoming entitled to such review.  Interbake Foods, 637 F.3d at 494 (quoting In re Grand Jury Investigation, 974 F.2d 1068, 1074 (9th Cir. 1992)).  Other courts have reached similar conclusions, holding, for example, that challenges to privilege must have a “cogent basis” to justify in camera review.  See G.D. v. Monarch Plastic Surgery, 239 F.R.D. 641, 650 (D. Kan. 2007).

Returning to the Fourth Circuit’s discussion of the authority of the ALJ, although the Court held that the ALJ could decide matters of privilege, it also held that an ALJ’s order ruling on evidence could only be enforced by an Article III court. Interbake Foods, 637 F.3d at 499 (“[T]he ALJ has no power to require the production of documents for in camera review or for admission into evidence when a person or party refuses to produce them. That would require Article III power, which the ALJ does not have.”) (emphasis in original). The Court noted the “line of division” between administrative bodies and Article III courts, quoting Interstate Commerce Comm’n v. Brimson, 154 U.S. 447, 485 (1984) (abrogated on other grounds by Bloom v. Illinois, 391 U.S. 194, 198-200 (1968)) as follows:

The inquiry whether a witness before [an agency] is bound to answer a particular question propounded to him, or to produce books, papers, etc., in his possession and called for by that body, is one that cannot be committed to a subordinate administrative or executive tribunal for final determination. Such a body could not, under our system of government, and consistently with due process of law, be invested with authority to compel obedience to its orders by a judgment of fine or imprisonment.

The Fourth Circuit noted that this limitation on the NLRB’s authority emanated from “the Constitution’s separation of powers and due process requirements.” Interbake Foods, 637 F.3d at 497-98. Further, the Fourth Circuit explained that a district court  could not “delegate its task of conducting an in camera review to an ALJ.” Id. at 498. The district court can rule on the basis of the privilege log, but “what it cannot do is order production of documents to the ALJ to conduct an in camera review. Rather, the district court must satisfy itself whether, under appropriate legal standards, it should enforce the subpoena and thus overrule [the] claim of privilege.” Id. at 500 (emphasis in original).

This limitation of power is intended to protect against abuse of the subpoena power, in part by guaranteeing a party an opportunity to present defenses against a subpoena. Where an administrative agency seeks enforcement of a subpoena in court, “the respondent is guaranteed an opportunity to contest the subpoena’s validity through any appropriate defense.” Id. at 499 (citing Penfield CO. v. SEC, 330 U.S. 585, 604 (1947) (“‘[a]n administrative subpoena may be contested’”); NLRB v. Cable Car Advertisers, Inc., 319 F. Supp. 2d 991, 996 (N.D. Cal. 2004) (“‘[A] party [to]… a subpoena enforcement proceeding may raise appropriate defenses once in district court.’”)). Further, the right to raise defenses before a district court “includes the right to vindicate claims that a subpoena improperly calls for records protected by the attorney-client or work-product privileges.” Interbake Foods, 637 F.3d at 499. Along those lines, the Fourth Circuit cited NLRB v. Int’l Medication Sys., Ltd., 640 F.2d 1110, 1115-16 (9th Cir. 1981), in which “the district court was required to conduct ‘a full evidentiary hearing’ before enforcing a Board subpoena challenged on privilege grounds.”

As noted by the Fourth Circuit, privilege rulings by an ALJ typically are not enforced by district courts because the parties either comply voluntarily (see e.g. Patrick Cudahy, Inc., 288 N.L.R.B. 968, 968-69 (1988); see also Horizon Corp. v. FTC, No. 76-2031, 1976 U.S. Dist. LEXIS 12222, *2-7 (D.D.C. Nov. 18, 1976)) or because “the ALJ’s rulings are made without the need for inspection of the underlying documents.” Interbake Foods, 637 F.3d at 498 (citing Taylor Lumber and Treating, Inc., 326 N.L.R.B. 1298, 1299-1300 (1998)). However, if enforcement becomes necessary, only the district court can do so. Id.

Finally the Fourth Circuit noted that federal courts would not rubber stamp the enforcement of subpoenas, quoting Justice Frankfurter’s dissent in Penfield, supra:

Instead of authorizing agencies to enforce their subpoenas, Congress has required them to resort to the courts for enforcement. In the discharge of that duty courts act as courts and not as administrative adjuncts. The power of Congress to impose on courts the duty of enforcing obedience to an administrative subpoena was sustained precisely because courts were not to be automata in carrying out the wishes of the administrative. They were discharging judicial power with all of the implications of the judicial function in our constitutional scheme.

Penfield, 330 U.S. at 604. 

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Title VII Damages Cap Is Based On the Number Of Employees at the Time of the Alleged Violation

In Hernandez-Miranda v. Empresas Diaz Masso, Inc., No. 10-1639, 2011 U.S. App. LEXIS 13259 (1st Cir. June 29, 2011), the First Circuit held that, for the purposes of counting the employer’s number of employees to establish the damages bracket under Title VII, 42 U.S.C. § 1981a(b)(3), Congress intended the relevant time period to be the time during which the alleged discrimination occurred. The Fourth, Fifth, and Seventh Circuits concur.  See DePaoli v. Vacation Sales Assocs., L.L.C., 489 F.3d 615 (4th Cir. 2007); Vance v. Planters Corp., 209 F.3d 438 (5th Cir. 2000); Hennessy v. Penril Datacomm Networks, Inc., 69 F.3d 1344 (7th Cir. 1995).

The relevant portion of § 1981a(b)(3) provides: 

The sum of the amount of compensatory damages awarded under this section for future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses, and the amount of punitive damages awarded under this section, shall not exceed, for each complaining party --

(A) in the case of a respondent who has more than 14 and fewer than 101 employees in each of 20 or more calendar weeks in the current or preceding calendar year, $ 50,000;

(B) in the case of a respondent who has more than 100 and fewer than 201 employees in each of 20 or more calendar weeks in the current or preceding calendar year, $ 100,000; and

(C) in the case of a respondent who has more than 200 and fewer than 501 employees in each of 20 or more calendar weeks in the current or preceding calendar year, $ 200,000 . . . .

42 U.S.C. § 1981a(b)(3) (emphasis added).

In Depaoli v. Vacation Sales Associates, LLC, supra, Judge Niemeyer, writing for a panel of the Fourth Circuit, held that current year is not the year in which the damages are awarded, but rather to the year in which the Title VII violation occurred. The Fourth Circuit, like other courts that have addressed this question, focused on the fact that the word “current” also appears in § 2000e(b) of Title VII which defines an “employer” as “a person… who has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year…” (emphasis supplied). As § 2000e(b) has been interpreted to refer to the year of the discrimination (Walters v. Metro. Educ. Enter. Inc., 519 U.S. 202, 205 & n.*(1997)), the Court applied the rule of statutory construction that “identical words used in different parts of the same act are intended to have the same meaning.” Dept. of Revenue of Or. v. ACF Indus., 510 U.S. 332, 342 (1994). 

Several circuit courts have interpreted § 2000e(b) to define “current year” as being the year of the discrimination. See e.g. Komorowski v. Townline Mini-Mart and Rest., 162 F.3d 962 (7th Cir. 1998); Vera-Lozano v. Int’l Broad., 50 F.3d 67, 69 (1st Cir. 1995); Rogers v. Sugar Tree Prods., Inc., 7 F.3d 577, 579 (7th Cir. 1993); McGraw v. Warren Cnty. Oil Co., 707 F.2d 990, 991 (8^th Cir. 1983) (per curiam); Dumas v. Town of Mt. Vernon, Ala., 612 F.2d 974, 979 n.4 (5^th Cir. 1980); Slack v. Havens, 522 F.2d 1091, 1093 (9th Cir. 1975). 

While a bright-line rule defining the year in which one counts employees for the purpose of determining the cap on certain damages would certainly be preferable, I am struck by the fact that, apparently, none of the circuit courts that have addressed this question have spoken to the fact that the statutory language is not simply “the current year”, but rather the current year or the preceding year. Assume, hypothetically, that in the year of the discrimination the defendant has more than 100 but less than 201 employees, and in the preceding year had more than 200 and less than 501 employees. Is the cap $100,000.00 or is it $200,000.00? I am confident that there is some simple response to my contrariness, but at first neither the statute nor the case law address this conundrum. 

Another wrinkle that occurs to me is harassment cases which, under the Supreme Court’s holding in Nat’l R.R. Passenger Corp. v. Morgan, 536 U.S. 101 (2002), that a hostile work environment claim is a cumulative claim and that the continuing violation doctrine applies to such a claim. In harassment cases, after Morgan, so long as the plaintiff alleges that a single act of harassment occurred within 300 days of the EEOC charge-filing, the plaintiff can go back in time beyond the 300^th day as far as the cumulative chain of events leads, so long as the defense cannot establish a “break” in the chain, typically a discrete act. So, in such a case, is the plaintiff permitted to “cherry pick” the best year in that chain for purposes of maximizing damages. Again, a hypothetical—assume a chain of events over 3 years that cumulates into an actionable hostile work environment, and assume that in year 1 of that chain, the employer has more than 200 employees and less than 200 in the ensuing 2 years. Can plaintiff go to the maximum damages permissible under the statute or is plaintiff limited to a lower capped amount? 

Another oddity that I note is § 1981a(b)(3)(c), which refers to employers of more than 200 and fewer than 501 employees. Does that mean that, for employers of 501 or more employees, there is no cap? A textual analysis would seem to suggest that there is no cap. 

The “takeaways” on these issues would seem to be the following:

1. Plaintiff should take discovery to establish the number of employees during the year or years of the alleged discrimination. 
2. In light of Judge Evans’ unwillingness in Hennessy v. Penril Datacomm Networks, Inc., supra, to take judicial notice of the SEC 10-K form under Rule 201 of the Federal Rules of Evidence, plaintiff should be scrupulous to have admissible evidence regarding the number of employees.
3. If plaintiff is within touching distance of a higher damage cap, plaintiff should be scrupulous in discovery regarding how the defense has classified certain individuals. See e.g. Thurber v. Jack Reilly’s Inc., 717 F.2d 633, 634 (1st Cir. 1983) (court concluded that defendant was an employer under § 2000e(b), finding that the relevant employees were not only those who were physically present at work each day, but all those who had an ongoing employment relationship with the employer during the requisite 20 weeks during the relevant calendar year). A unanimous Supreme Court, Justice Scalia writing, in Walters v. Metropolitan Educational Enterprises, Inc., supra, adopted the payroll method of counting employees, citing Thurber with approval.
4. Counsel should be familiar with the case law on independent contractors (Zimmerman v. N. Am. Signal Co., 704 F.2d 347, 352 n.4 (7th Cir. 1983) (disapproved of in Walters v. Metro. Educ. Enters., 519 U.S. 202 (1977) on other grounds) (“We caution that employers cannot avoid having employees counted toward the jurisdictional threshold by denominating them as directors, independent contractors, or other designations besides ‘employee.’ The issue is whether an employer-employee relationship exists, not what title a worker holds.”)), part time employees (Hornick v. Borough of Duryea, 507 F. Supp. 1091, 1098 (M.D. Pa. 1980) (a number of courts have held that “part-time workers are to be counted in ascertaining whether a ‘person’ is an ‘employer’ and therefore subject to… Title VII”)), volunteers (Hall v. Del. Council on Crime & Justice, 780 F. Supp. 241, 244 (D. Del. 1992) (reimbursement for work-related expenses is not sufficient to cause volunteers to be counted as employees), aff’d mem., 975 F.2d 1549 (3d Cir. 1992); City of Ft. Calhoun v. Collins, 500 N.W.2d 822, 826 (Neb. 1993) (a volunteer fire department is not an employer within the meaning of the state fair employment practices act); but see Haavistola v. Cmty. Fire Co., 6 F.3d 211, 222 (4th Cir. 1993) (volunteer firefighters may sue under Title VII)), shareholders (EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177, 1178 (7th Cir. 1984) (abrogated on other grounds in Clackamas Gastroenterology Assoc., P.C. v. Wells, 538 U.S. 440 (2003) as noted in Ruiz v. Trustees of Purdue Univ., 2008 U.S. Dist. LEXIS 118835 (N.D. Ind. Feb. 20, 2008)) (law firm “shareholders” are not counted)), directors and officers (EEOC v. First Catholic Slovak Ladies Ass’n, 694 F.2d 1068, 1070 (6th Cir. 1982) (corporate directors who drew salaries as employees and who had duties as employees in addition to those of directors are counted as employees); but see Zimmerman, supra at 352 (“We do not believe Congress intended the term ‘employee’ to include persons who are no more than directors of a corporation or unpaid, inactive officers.”); McGraw v. Warren County Oil Co., 707 F.2d 990, 991 (8th Cir. 1983) (per curiam) (affirming dismissal on the ground that corporate directors should not be counted as employees); Schoenbaum v. Orang County Ctr. For the Performing Arts, 677 F. Supp. 1036, 1038 (C.D. Cal. 1987) (“Congress did not intend the term ‘employee’ in the ADEA to include the defendant trustees and directors by virtue of the functions they performed for the Orange County Center.”) (quoting Zimmerman, supra)).
5. Counsel may want to explore whether the employees of one entity can be aggregated with another under the “single employer”/single enterprise (e.g. EEOC v. McLemore Food Stores, Inc., 25 FEP 1356, 1358, 1977 U.S. Dist. LEXIS 13741 (W.D. Tenn. Sept. 29, 1977) (since three defendants might be held to constitute a single enterprise, a charge against one might meet the jurisdictional prerequisite of a timely charge with respect to all three); Eskridge v. Coates, 57 FEP 589, 591, 1991 U.S. Dist. LEXIS 19914 (N.D. Ind. 1991) (the defendant corporations had interrelated operations, common ownership, and common management, with one specific individual in charge of hiring and firing for all of the corporate defendants); compare McKenzie v. Davenport-Harris Funeral Home, 834 F.2d 930, 933-34 (11th Cir. 1987) (demonstration of common ownership, management, personnel, and administrative functions raised a genuine issue of material fact) and EEOC v. Christie Lodge Assocs., 51 FEP 916, 920, 1989 U.S. Dist. LEXIS 14469 (N.D. Ill. 1989) (no summary judgment for parent company where disputed issues existed regarding centralized control of labor relations and other issues) with Morgan v. Safeway Stores, 884 F.2d 1211, 1213-14 (9th Cir. 1989) (no genuine issue of material fact raised where common management, control of labor relations, and ownership were not shown between employer and credit union))  or “joint employer” theories (e.g. EEOC v. Sage Realty Corp., 87 F.R.D. 365, 368-69, 1980 U.S. Dist. LEXIS 12404 (S.D.N.Y. 1980) (denying the defendant’s summary judgment motion; the contractor, who paid the plaintiff, and the building management company, which hired the contractor, may be joint employers; evidence showed that the latter hired, trained, and supervised the plaintiff, then ordered her fired when she refused to wear a revealing costume); Compare Evans v. McDonald’s Corp., EEOC Dec. 71-708, 3 FEP 141, 141 (1970) (franchisor and franchisee were joint employers where franchisor controlled the hours of work, work assignments, and products used, and was a named insured on policies covering store property) and Guerra v. Tishman E. Realty, 52 FEP 286, 288, 1989 U.S. Dis. LEXIS 6744 (S.D.N.Y. 1989) (summary judgment is inappropriate where the business relationship between the building owner and those who managed its buildings might be considered to be that of joint employers)).

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Severance Payments To Which an Employee Becomes Entitled Within 180 Days of Bankruptcy Filing Receive Priority Treatment

In Matson v. Alarcon, No. 10-2352, 2011U.S. App. LEXIS 13729 (4th Cir. July 6, 2011), the Fourth Circuit addressed the treatment of an employer’s liability under a severance benefits plan in bankruptcy.  The employer had established a severance benefits plan which entitled employees who were terminated without cause to compensation calculated based on the terminated employee’s length of service.  Simply stated, employees became “participants” in the plan, and thus entitled to compensation under it, upon being terminated without cause, and signing a severance agreement and release. Id. at *2-*3.  The size of the benefit to which a participant was entitled depended on the duration of his service to the employer.  Id.

The employer terminated approximately 125 employees within 180 days of filing its bankruptcy petition.  Id. at *4.  In the subsequent bankruptcy proceedings, the terminated employees asserted that their claims for severance were entitled to priority treatment up to the maximum amount provided under 11 U.S.C. § 507(a)(4).  Id. at *5.  The trustee argued that the former employees “earned” an entitlement to severance pay throughout the course of their employment, and were therefore only entitled to priority treatment for that portion of the severance that was “earned” within the 180 day pre-petition time period.  Id.  The Bankruptcy Court overruled the trustee’s objections to priority treatment, and the trustee’s appeal was certified to the Court of Appeals.  Id. at *6.

            The Fourth Circuit affirmed the Bankruptcy Court, holding that the former employees “earned” the full amount of their severance within the meaning of § 507(a)(4)(A) on the date they became entitled to receive such compensation.  Id. at *13-*14.  Although the amounts of compensation were based on length of service, the Court found that the employees did not “earn” severance compensation over the entire course of their employment.  Id. at *11-*12.  Rather, the Court, examining the “plain and ordinary meaning” of the terms in § 507(a)(4), found that employees do not “earn” severance pay as compensation for services rendered, but instead “earn” severance pay when they become entitled to receive it.  Id. at *9-*10.  Since the employees became entitled to receive severance pay only upon their termination, which was within the 180 day statutory window, priority treatment of the claims up to the statutory maximum was appropriate.  Id. at *10.

In so holding, the Fourth Circuit recognized the existence of potentially inconsistent decisions in the Third, First, and Ninth Circuits.  Id. at *12-*13, (citing In re Roth Am., Inc., 975 F.2d 949 (3d Cir. 1992); In re Mammoth Mart, Inc., 536 F.2d 950 (1st Cir. 1976); In re Health Main. Found., 680 F.2d 619 (9th Cir. 1982)).  Those Courts had held that severance compensation calculated based on length of employment has priority as an administrative expense of the bankruptcy estate “only to the extent that the compensation is based on services provided to the bankruptcy estate after the debtor files for bankruptcy.”  Matson, 2011 U.S. App. LEXIS 13729 at *12-*13.  The Fourth Circuit distinguished the decisions of the First, Third, and Ninth Circuits, explaining that those decisions interpreted 11 U.S.C. § 503(b)(1)(A), which was materially different from 11 U.S.C. § 507(a)(4).  Id. at *13.  Specifically, § 503(b)(1)(A) does not use the word “earned”, does not specifically include “severance pay” as a form of wages, and requires a calculation of the value of the “services rendered” during the relevant time period.  Id.

State Courts Split Over Adoption of Twombly/Iqbal Pleading Standards

On July 21, 2011, the Tennessee Supreme Court, sitting en banc in Webb v. Nashville Area Habitat for Humanity, 2011 Tenn. LEXIS 623 (Tenn. July 21, 2011), unanimously declined to embrace the Supreme Court’s new Rule 8 pleading standards articulated in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). Judge Sharon Lee, writing for the court, stated:

“In summary, it must be remembered that we are addressing the standard in assessing the sufficiency of a single document filed at the very beginning of a case – the complaint. Our motion-to-dismiss jurisprudence reflects the principle that this stage of the proceeding is particularly ill-suited for an evaluation of the likelihood of success on the merits or of the weight of the facts pleaded, or as a docket-clearing mechanism… We decline to reinterpret Rule 8 to require a pleader demonstrate ‘plausibility’ and continue to adhere to the well established standards [set forth in Tennessee jurisprudence which follows a liberal notice pleading standard].”

2011 Tenn. LEXIS 623 at *40-41. In rejecting the Supreme Court’s new pleading standards, the Tennessee Supreme Court relied upon a similar decision from the Washington State Supreme Court in McCurry v. Chevy Chase Bank, FSB, 169 Wn.2d 96, 233 P.3d 861 (Wash. 2010) (en banc) where that court also rejected the Supreme Court’s plausibility standard. In McCurry, the court stated as follows:

“The Supreme Court's plausibility standard is predicated on policy determinations specific to the federal trial courts. The Twombly Court concluded: federal trial courts are incapable of adequately preventing discovery abuses, weak claims cannot be effectively weeded out early in the discovery process, and this makes discovery expensive and encourages defendants to settle ‘largely groundless’ claims. See 550 U.S. at 557-58, 559, 127 S. Ct. 1955. Neither party has shown these policy determinations hold sufficiently true in the Washington trial courts to warrant such a drastic change in court procedure.

Nor has either party here addressed countervailing policy considerations. For example, do current discovery expenses justify plaintiffs' loss of access to that discovery and general access to the courts, particularly in cases where evidence is almost exclusively in the possession of defendants? Could runaway discovery expenses be addressed by better means — perhaps involving more court oversight of the discovery process or a change in the discovery rules?”

Id. at 102-103. The Supreme Court of Delaware in Cent. Mrtg. Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 2011 Del. LEXIS 439 (Del. Sup. Ct. August 18, 2011) (en banc), “decline[d] to use this case as the vehicle to address whether the Twombly-Iqbal holdings affect our governing standard… Instead, we emphasize that, until this Court decides otherwise or a change is duly effected through the Civil Rules process, the governing pleading standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’” The Delaware “conceivability” standard is “more akin to ‘possibility,’ while the federal ‘plausibility’ standard falls somewhere between mere ‘possibility’ but short of ‘probability.’” Id. at *14-15, n.13.

In contrast to the outright rejections of Twombly/Iqbal pleading standards by the Tennessee and Washington Supreme Courts, several state supreme courts have embraced the new standards. See, e.g. Doe v. Bd. Of Regents of Univ. of Neb., 280 Neb. 492, 788 N.W.2d 264, 274-78 (Neb. 2010) (adopting the Twombly/Iqbal standard); Iannacchino v. Ford Motor Co., 451 Mass. 623, 888 N.E.2d 879, 890 (Mass. 2008) (adopting the Twombly standard in a pre-Iqbal decision); Sisney v. Best Inc., 2008 SD 70, 754 N.W.2d 804, 807-09 (S.D. 2008) (adopting the Twombly standard in a pre-Iqbal decision).

Most recently, on September 15, 2011, the District of Columbia Court of Appeals in Potomac Development Corp. v. District of Columbia, No. 10-CV-632, 2011 D.C. App. LEXIS 552 (D.C. September 15, 2011), reinstated the court’s earlier adoption of the plausibility standard. In Mazza v. House Craft, LLC, 18 A.3d 786 (D.C. 2011), vacated as moot, 22 A.3d 820 (D.C. 2011) (per curiam), the court, Judge Blackburne-Rigsby writing for the panel, adopted the standard, but that opinion was subsequently vacated as moot and thus not of precedential value. See also Grayson v. AT&T Corp., 15 A.3d 219, 229 n.16 (D.C. 2011) (en banc); Oh v. National Capital Revitalization Corp., 7 A.3d 997, 1005 n.10 (D.C. 2010); Solers, Inc. v. Doe, 977 A.2d 941, 948 n.5 (D.C. 2009).

As mentioned in a recent note by a law student at UC Berkley, the rejections of the new federal plausibility pleading standards raise some interesting Erie issues. For example, if a state claim under the state law of Tennessee or Washington were litigated in federal district court under that court’s diversity jurisdiction, the federal court would not be required to adopt state pleading standards. See Hanna v. Plumer, 380 U.S. 460 (1965). Under reverse-Erie analysis, the state courts hearing federal subject-matter claims normally use state procedures unless federal procedural rights are a “basic and fundamental” part of the federal right at issue. Felder v. Casey, 487 U.S. 131, 151 (1988) (“[f]ederal law takes state courts as it finds them only insofar as those courts employ rules that do not impose unnecessary burdens upon rights of recovery authorized by federal laws”). In Brown v. W. Ry. of Ala., 338 U.S. 294 (1949), the Court held that pleading standards can be integral to the enforcement of federal rights, holding that states may not apply more stringent pleading standards than would be applied to the case had it been brought in federal court. Id. at 296. The Supreme Court has never addressed whether states may apply less stringent pleading standards to federal claims. The author of the note suggests that Western Railway was predicated on the protection of federal rights in state courts, and argues that less stringent pleading standards do not threaten the enforcement of federal rights and thus may pass muster under currently existing reverse-Erie jurisprudence. See Roger M. Michalski, Tremors of Things to Come: The Great Split Between Federal and State Pleading Standards, 120 Yale L. J. 109 (2010).

So, the practice tips would seem to be the following:

1. Counsel should be aware of the latest articulation of pleading standards from the applicable state supreme court or the intermediate courts if the issue has not yet filtered up to the supreme court.
2. Where a pleading standard less stringent than Twombly/Iqbal has been adopted like in Tennessee, Washington and Delaware, counsel for plaintiff should consider whether the case is more appropriately filed in state court.
3. If the pleading standard remains uncertain in the applicable state, counsel might consider filing in state court and arguing for a rejection of the new federal standard.
4. Where plaintiff has filed in state court, the defense should consider the argument that under Western Railway, the new federal standard should be applied to any federal claim asserted in state court.
5. The defense, where state claims are brought in federal court, should emphasize to the district judge that whatever the state standard might be, the new federal plausibility standard must be applied.

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Section 1981 Retaliation Claims Governed By Federal Catch-All 4-Year Statute of Limitations

Three Circuits, most recently the Ninth in Johnson v. Lucent Techs., Inc., No. 09-55203, 2011 U.S. App. LEXIS 16100 (9th Cir. Aug. 4, 2011), have held that retaliation claims under 42 U.S.C. § 1981 are subject to the 4-year statute of limitations set forth in 28 U.S.C. § 1658.  In Johnson, the Ninth Circuit recognized that retaliation claims were no longer viable under § 1981 after the Supreme Court’s 1989 decision in Patterson v. McLean Credit  Union, 491 U.S. 164 (1989) until they were resuscitated by the enactment of the Civil Rights Act of 1991. The Ninth Circuit held: “Because they arise under a post-December 1, 1990 act of Congress, section 1981 retaliation claims are governed” by section 1658.  Previously, the Eleventh and Seventh Circuits had so held.  See Baker v. Birmingham Bd. of Educ., 531 F.3d 1336 (11th Cir. 2008); Dandy v. United Parcel Serv., Inc., 388 F.3d 263 (7th Cir. 2004).  

To understand this issue, one needs to be familiar with some employment law history. Prior to the Supreme Court’s 1989 decision in Patterson, some courts had held that § 1981 encompassed retaliation claims. See, e.g. Sherpell v. Humnoke Sch. Dist. No. 5, 874 F.2d 530, 536 (8th Cir. 1989); Goff v. Continental Oil Co., 678 F.2d 593, 597-98 (5th Cir. 1982). Then, with Justice Kennedy writing for a five Justice majority, the Supreme Court issued its decision in Patterson  which held that § 1981 only covered claims regarding the “formation” of a contract.[1] In the wake of Patterson, most courts held that § 1981 did not cover retaliation claims. Williams v. First Union Nat’l Bank, 920 F.2d 232, 234 (4th Cir. 1990) (collecting cases); McCarthy v. Kemper Life Ins. Co., 924 F.2d 683, 688 (7th Cir. 1991); but see McKnight v. Gen. Motors Corp., 908 F.2d 104-112 (7th Cir. 1990) (Judge Posner, with Senior Circuit Judge Fairchild dissenting, suggests that maybe retaliation remained actionable under § 1981, provided that the retaliation had a racial motivation. In Dandy v. United Parcel Svcs., supra, the panel seemingly put this issue to rest, without any reference to Judge Posner’s opinion in McKnight). Indeed, the courts held that so called “post-formation” claims were no longer encompassed by § 1981. However, those “formation” claims that  Patterson recognized as cognizable under § 1981 continued to be filed, and the courts continued to be asked to determine the statute of limitations applicable to such claims. As the courts had done before Patterson, the post-Patterson courts held that, as § 1981 contains no statute of limitations, the federal district courts must determine the most appropriate state statute of limitations and apply that to a “formation” claim. See e.g. McKnight v. Gen. Motors Corp., 908 F.2d 104-112 (7th Cir. 1990). As a result, the statute of limitations on a “formation” claim varied from jurisdiction to jurisdiction. 

When Congress enacted the 1991 Civil Rights Act, it “overruled” the Supreme Court’s holding in Patterson, and rewrote § 1981 by adding § 1981a which defines the term “make and enforce contracts” to include the “making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.” Thereafter, the courts again began to hold that retaliation claims, in light of this amendment, were encompassed by the revised § 1981. The statute of limitations problem remained, however, and federal district courts continued to apply the most analogous state statue of limitations.  

On December 1, 1990, the Congress had enacted 28 U.S.C. § 1658, a catchall 4-year statute of limitations for actions “arising under an Act of Congress enacted after the date of the enactment of this section” where Congress had not included a statute of limitations. 28 U.S.C. § 1658(a). In 2004, the Supreme Court in Jones v. R.R. Donnelley’ & Sons Co., 541 U.S. 369 (2004), rev’g 305 F.3d 717 (7th Cir. 2002) was presented with the question of whether § 1981 hostile work environment, wrongful termination, and failure-to-transfer claims were governed by Congress’ 4-year catchall statute of limitations (28 U.S.C. § 1658), or by the most analogous state statute of limitations. The Court, in an opinion authored by Justice Stevens, held that § 1658 applies to any claim “arising under” an act of Congress which was enacted after December 1, 1990, and that “a cause of action ‘aris[es] under an Act of Congress enacted’ after December 1, 1990 – and therefore is governed by § 1658’s 4-year statute of limitations – if the plaintiff’s claim against the defendant was made possible by a post-1999 enactment.” Id. at 382. 

In light of this history, the Ninth Circuit, with Judge Betty Fletcher writing for the panel in Johnson v. Lucent Technologies held that § 1658’s 4-year statute of limitations now applies to a § 1981 retaliation claim. 

In 2008, Judge Dubina writing for a panel of the Eleventh Circuit in Baker v. Birmingham Bd. of Educ., supra, held that plaintiff’s claims were made possible by the 1991 amendments to § 1981 and that, accordingly, those claims arise under a post-1991 enactment, bringing the 4-year catchall statute of limitations into play. Interestingly, in Baker, the court was confronted with a § 1983 claim (a 2-year Alabama limitations period would apply to a § 1983 claim) against a state actor, and one question before the court was whether the state statute applicable to § 1983 claims applied (Wilson v. Garcia 471 U.S. 261, 275-76 (1985) (Court held that the statute of limitations for a § 1983 claim is generally the applicable state-law statute of limitations for personal-injury torts)) or whether it should be the § 1981 statute of limitations. Section 1983 does not provide a cause of action against state actors, and claims against state actors of § 1981 violations must be brought pursuant to § 1983 (Jett v. Dallas Indep. Sch. Dist. 491 U.S. 701, 735 (1989) (holding that § 1983 “provides the exclusive federal damages remedy for the violation of the rights guaranteed by § 1981 when the claim is pressed against a state actor.”)), hence, the question as to whether the § 1983 or § 1981 statute of limitations applied. In light of the holding in Jones, the Eleventh Circuit concluded that plaintiff’s claim was made possible by the 1991 Civil Rights Act, a post-1990 enactment, and that, therefore, the four-year catchall statute of limitations applied. See also City of Rancho Palos Verdes, Cal. v. Abrams, 544 U.S. 113, 123 n.5 (2005) (Justice Scalia writing for the Court in a case brought under the Federal Telecommunications Act, states that while the statute of limitations for a § 1983 claim is generally the applicable state-law period for personal injury torts, here, since the claim rests upon violation of a post-1990 congressional enactment, § 1658 would seem to apply). Other courts have decided this issue differently, and held that the plaintiff’s cause of action arises under § 1983, not § 1981, since § 1983 is the exclusive remedy against state actors for violations of § 1981, and thus have applied the most analogous state personal injury statute of limitations. See AUI, LLC v. DeKalb Cnty., 2006 U.S. Dist. LEXIS 89828 (N.D. Ga. August 28, 2006); Marshall v. Daleville City Bd. Of Educ., 2006 U.S. Dist. LEXIS 50543 (M.D. Al. July 24, 2006). 

In 2004, in Dandy v. United Parcel Service, supra, the Seventh Circuit, Judge Williams writing for the panel, held that plaintiff’s claims, including (1) hostile work environment; (2) failure to promote; (3) disparate treatment in terms of compensation; and (4) retaliation were subject to § 1658’s catchall statute of limitations because they were made possible by the 1991 Civil Rights Act. Judge Williams wrote for the panel in that case. See also White v. BFI Waste Servs., 375 F.3d 288, 291-92 (4th Cir. 2004) (finding disparate treatment in compensation claims stated under §1981 are covered by § 1658).

To summarize the practice pointers: 

1.      A failure to hire claim under § 1981 is governed by the most analogous state statute of limitations.

2.      In a failure to promote claim where the promotion would create a new and distinct employment relationship, the most analogous state statute of limitations applies. Otherwise, the 4-year § 1658 statute of limitations applies.

3.      In § 1983 claims for violations of § 1981, there is a significant debate as to whether the most analogous state personal injury statute of limitations applies or the 4-year catchall.

4.      All circuits that have addressed the issue have held that retaliation claims under § 1981 are governed by the § 1658 4-year catchall.

5.      Compensation claims under § 1981 would appear to be governed by the 4-year catchall. In perusing such claims, take into account the Lilly Ledbetter Fair Pay Act provisions.

6.      Racial harassment and hostile work environment claims under § 1981 appear to be governed by the 4-year catchall statute of limitations.

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[1] Subsequent to Patterson, some courts found, after a fact specific inquiry, that a promotion claim constituted a “formation” claim where the promotion would create “a qualitatively different relation between the employer and the employee, for example, a move from factory worker to foreman, foreman to foreman supervisor, or manager to officer, likely would create a new and distinct relation giving rise to a § 1981 action under Patterson.” Butts v. City of NY Dept. of Housing, 990 F.2d 1397, 1412 (2d Cir. 1993). However, some cases held that the denied promotion would not have satisfied the Patterson “new and distinct relationship” test. See e.g. Revis v. Slocomb Indus., Inc., 814 F. Supp. 1209 (D. Del. 1993); Johnson v. Indopco, Inc., 834 F. Supp. 1039 (N.D. Ill. 1993)

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