Never Darken My Door Clause Stricken by Federal Court

            On January 6, 2016, U.S. District Court Judge Lorna G. Schofield of the Southern District of New York rejected a proposed FLSA settlement agreement which contained a no-rehire clause.  Reyes v. HIP at Murray Street, LLC, S.D.N.Y. Jan. 6, 2016 (unreported online; copy attached tothis blog). 

            The Court found that the clause precluding future employment was “a highly restrictive provision in strong tension with the remedial purposes of the Fair Labor Standards Act (‘FLSA’)…”  In so holding, the Court relied on Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015), cert. denied No. 15-605, 2016 U.S. LEXIS 356 (Jan. 11, 2016).  See Jessica Perry, Kathryn Mantoan, and Clayton Flaherty, “Please Pass the Settlement”, Employment Law and Litigation Blog (Dec. 7, 2015) (available at: http://blogs.orrick.com/employment/2015/12/07/please-pass-the-settlement-second-circuit-widens-split-over-stipulated-flsa-dismissals/).

            Cheeks described various other cases that had found various clauses of proposed FLSA settlements to be offensive.  For example, in Lopez v. Nights of Cabiria, LLC, a proposed FLSA settlement included a confidentiality provision, a global release, and a clause establishing that the plaintiff’s attorney would receive between 40% and 43.6% of the total settlement payment without adequate documentation to support such a fee award. 96 F. Supp. 3d 170 (S.D.N.Y. March 30, 2015) (Kaplan, J.).  In Lopez, Judge Lewis A. Kaplan disapproved the settlement.  The Court similarly found that the “highly restrictive confidentiality provisions…are in strong tension with the remedial purposes of the FLSA.”  Id. at 177.  While criticizing many aspects of the confidentiality provisions, the Court took particular aim at those provisions which would “bar plaintiffs from openly discussing their experiences litigating this wage-and-hour case.”  Id.  While recognizing the parties’ interest in confidentiality to encourage settlement, the Court nonetheless concluded “the congressional purposes underlying the FLSA change the calculus in cases like these.  The FLSA evinces ‘Congress’ intent…both to advance employees’ awareness of their FLSA rights and to ensure pervasive implementation of the FLSA[.]’”  Id. at 179-180.

The Court in Nights of Cabiria further held that global releases were inappropriate in the context of FLSA settlements, remonstrating that “[t]he Court will not countenance employers using FLSA settlements to erase all liability whatsoever in exchange for partial payment of wages allegedly required by statute.”  Id. at 181.  As to the attorneys’ fees, Judge Kaplan explained that “[i]t may be that counsel’s fee request is entirely commensurate with the amount of time that the lawyers spent on this case.  But such determinations require evidence, and plaintiff’s counsel has provided none.  The fee request therefore cannot be approved.”  Id. at 182.

            In Guareno v. Vincent Perito, Inc., Judge William H. Pauley of the United States District Court for the Southern District of New York also rejected a proposed FLSA settlement.  No. 14-cv-01635, 2014 U.S. Dist. LEXIS 144038 (S.D.N.Y. Sept. 26, 2014).  In Guareno, the Court listed numerous concerns with the proposed settlement agreement, but appeared particularly concerned about the presence of an unethical agreement that the plaintiff’s attorney would not represent, in the future, any person bringing similar claims against the defendant.  Id. at *3-*4.  Finding that such a restriction “contravenes the FLSA’s intent to permit plaintiffs to bring suit on behalf of themselves and ‘other employees similarly situated[,]’” the Court noted that “[s]uch a provision raises the specter of defendants settling FLSA claims with plaintiffs, perhaps at a premium, in order to avoid a collective action….from other employees whose rights have been similarly violated.”  Id. at *4. 

            In Nall v. Mal-Motels, Inc., the Court first determined that the principle in Lynn’s Food applied to settlements involving former employees, in addition to those involving current employees.  723 F.3d 1304, 1306-07 (11th Cir. 2013).  The Court went on to reject the settlement, focusing on concerns regarding inequalities in bargaining power between current or former employees and employers.  Id.  In Nall the settlement was reached between the defendant and the plaintiff, apparently without the “knowledge or participation” of plaintiff’s counsel.  Id. at 1308.  In rejecting the settlement, the Court reasoned that the FLSA’s protections were “mandatory” and “not subject to negotiation or bargaining between employers and employees.”  Id. at 1307 quoting Lynn’s Food, 679 F.2d at 1352.  Finally, the Court reasoned that “[a]llowing the employer to escape liquidated damages by simply giving an employee the wages she was entitled to earn in the first place – or in some cases, less than that – would undermine the deterrent effect of the statutory provisions.”  Id.

            In Walker v. Vital Recovery Servs., the Court declined to accept offers of judgment because “the record [was] presently insufficient to perform the judicial review required by Lynn’s Food.  300 F.R.D. 599 at 604 (M.D. Ga. 2014).  The Court also noted that the offers of judgment were, for the most part, of $100.00, compensated plaintiffs for only one of several of their theories of recovery, and that many of the accepting plaintiffs “are unemployed and desperate for any money they can find.”  Id.

            In most cases, the Plaintiff is free to voluntarily dismiss his suit, without court order, by “entering a stipulation of dismissal signed by all parties who have appeared.”  Fed. R. Civ. P. 41(a)(1)(A)(ii).  This avenue has long been unavailable to FLSA plaintiffs.  See Lynn’s Food, 679 F.2d at 1353 (citing D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 n.8 (1944)).  The issue in Cheeks was whether, and when, the courts or the U.S. Department of Labor must review and approve FLSA settlements and attendant stipulated dismissals of FLSA claims.  In Cheeks, the parties attempted to settle their FLSA claims by filing a stipulation of dismissal with prejudice pursuant to Rule 41(a)(1)(A)(ii).  In so doing, they argued that FLSA actions may be settled by stipulation without court review.  The Rule provides that actions may be dismissed without a court order “[s]ubject to…any applicable federal statute”.  In other words, Rule 41 recognizes that some actions (those subject to an “applicable federal statute”) may not be dismissed by stipulation without a court order.  The Court in Cheeks solicited the view of the Department of Labor and it opined that the Fair Labor Standards Act falls within the “applicable federal statute” exception.  In Cheeks, Judge Pooler joined by Judges Parker and Wesley, found that the FLSA is an “applicable federal statute” within the meaning of Rule 41, and that, therefore, the settlement needed to be reviewed and approved by the district court.  Other courts have similarly so held.  Lynn’s Food Stores, Inc. v. United States Dept. of Labor, 679 F.2d 1350, 1354-55 (11th Cir. 1982); Copeland v. ABB, Inc., 521 F.3d 1010, 1014 (8th Cir. 2008); Taylor v. Progress Energy, Inc., 415 F.3d 364, 374 (4th Cir. 2005) aff’d 493 F.3d 454, 460 (4th Cir. 2007) superceded by regulation on other grounds as stated in Whiting v. Johns Hopkins Hosp., 416 Fed. Appx. 312 (4th Cir. 2011); Walton v. United Consumers Club, Inc., 786 F.2d 303, 306 (7th Cir. 1986).

            This area has remained unaddressed by the Supreme Court for decades.  The Court has noted, for example, that:

Our decision of the issues raised [in liquidated damages waiver cases] has not necessitated a determination of what limitation, if any Section 216(b) of the Act places on the validity of agreements between an employer and employee to settle claims arising under the Act if the settlement is made as the result of a bona fide dispute between the two parties, in consideration of a bona fide compromise and settlement.

Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 714 (1945).  See also D.A. Schulte, Inc. v. Gangi, 328 U.S. 108, 113 n.8, 116 (1946) (holding that “neither wages nor the damages for withholding them are capable of reduction by compromise of controversies over coverage,” but drawing a distinction in dicta between a settlement agreement and a stipulated judgment entered in the adversarial context of an employee’s suit for FLSA wages). 

Although courts are generally agreed that settlement is permissible when there is a bona fide dispute over liability, there is disagreement over whether, and when, the settlement must be reviewed by a court to make that determination.  See, e.g., Jarrard v. Se. Shipbuilding Corp., 163 F.2d 960, 961 (5th Cir. 1947) (holding that the Supreme Court’s decisions in O’Neil and Schulte regarding settlements did not prohibit approval of a “solemn and binding stipulated judgment entered upon disputed issues of both law and fact” in an FLSA suit brought by employees); Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350, 1353 (11th Cir. 1982) (“When employees bring a private action for back wages under the FLSA, and present to the district court a proposed settlement, the district court may enter a stipulated judgment after scrutinizing the settlement for fairness.”) (citing Schulte, 328 U.S. at 113 n.8; Jarrard, 163 F.2d at 961).

The Fifth Circuit stands in conflict on this issue with most other courts to have considered this question.  In Martin v. Spring Break ’83 Prods., LLC, the Fifth Circuit held that private settlement of FLSA claims is permissible when either the settlement “gave employees everything to which they are entitled under the FLSA at the time the agreement is reached[,]” or, more significantly, when “there exists a bona fide dispute as to liability.”  688 F.3d 247, 255 (5th Cir. 2012) quoting Martinez v. Bohls Equip. Co., 361 F. Supp. 2d 608, 633-34 (W.D. Tex. 2005) (bona fide dispute) and Thomas v. Louisiana, 534 F.2d 613, 615 (5th Cir. 1976) (full relief).  In Martin, the Court approved a private settlement agreement containing a release of FLSA claims which had not been submitted for review and approval by the district court or the Department of Labor, and found that the employees had effectively waived their rights.  Martin, 688 F.3d at 255.

Furthermore, even in cases where courts have required court review and approval of FLSA settlements, it is not entirely clear what standard should be followed in conducting such a review.  Some courts have held that District Courts may enter a stipulated judgment approving the settlement of FLSA claims only after the court has scrutinized the settlement for fairness and reasonableness, and has expressly approved the settlement as fair and reasonable.   See, e.g., Lynn’s Food Stores, 679 F.2d at 1353-55 (“When employees bring a private action for back wages under the FLSA, and present to the district court a proposed settlement, the district court may enter a stipulated judgment after scrutinizing the settlement for fairness.”) (citing Schulte, 328 U.S. at 113 n.8; Jarrard, 163 F.2d at 961).  See also Mosquera v. Masada Auto Sales, Ltd., No. 09-CV-4925 (NGG), 2011 U.S. Dist. LEXIS 7476, at *2-*3 (E.D.N.Y. Jan 25, 2011) (requiring an evaluation of FLSA settlements for fairness and reasonableness); Lee v. Timberland Co., No. C 07-2367 JF, 2008 U.S. Dist. LEXIS 108098, at *4-*5 (N.D. Cal. June 19, 2008) (same); Boone v. City of Suffolk, 79 F. Supp. 2d 603, 605 n.2 (E.D. Va. 1999) (“Because the FLSA was enacted to protect workers from sub-standard wages or oppressive working conditions, employees cannot waive their right to overtime wages unless such a settlement is overseen by the Department of Labor or approved for fairness and reasonableness by a district court.”) (citing Lynn’s Food Stores, 679 F.2d at 1355).

Some courts have further defined this fairness test by setting forth a list of factors that courts should consider.  For example, the United States District Court for the Eastern District of Virginia has held that:

To determine whether a proposed settlement is fair and reasonable under the FLSA, courts should consider: “(1) the extent of discovery that has taken place; (2) the stage of the proceedings, including the complexity, expense and likely duration of the litigation; (3) the absence of fraud or collusion in the settlement; (4) the experience of counsel who have represented the plaintiffs; . . . and ([5]) the probability of plaintiffs’ success on the merits and the amount of the settlement in relation to the potential recovery.”

Belcher v. CHA Cos., Inc., No. 3:10cv420, 2011 U.S. Dist. LEXIS 39063, at *2 (E.D. Va. Mar. 16, 2011) (quoting Lomascolo v. Parsons Brinckerhoff, Inc., No. I:08cv1310 (AJT/JFA), 2009 U.S. Dist. LEXIS 89129, at *10 (E.D. Va. Sept. 28, 2009)).

Until the Supreme Court might rule otherwise – unless you are in the Fifth Circuit – counsel should assume the following:

·         A private FLSA settlement agreement must be approved by a district court or the Department of Labor. 

·         After Reyes, assume that a no-rehire clause, colloquially known as a “do not darken my door again” clause, will be increasingly subject to attack.

·         Attorneys’ fees in any such settlement must be justified.  In the District of Columbia, after the Circuit’s recent opinion in Eley v. District of Columbia, the District’s bench is increasingly requiring substantial justification of hourly rates.  See 793 F.3d 97 (D.C. Cir. 2015) (Laffey matrix and affidavit that counsel’s rates charged clients were within the Laffey matrix found to be insufficient evidence to demonstrate that the requested rates were the rates prevailing in the community for similar services); see also Collins v. District of Columbia, No. 15-cv-00136, 2015 U.S. Dist. LEXIS 159890 (D.D.C. Nov. 30, 2015) (Judge Jackson adopts MJ Kay’s report and recommendations regarding Fee Award in the wake of Eley); Devore on behalf of A.M. v. District of Columbia, 89 F. Supp. 3d 113 (D.D.C. 2015) (plaintiff could have done more to meet her burden to establish the reasonableness of rates); Briggs v. District of Columbia, 73 F. Supp. 3d 59 (D.D.C. 2014) (Laffey rates are presumptive maximum rates for complex federal litigation); Robinson v. District of Columbia, 61 F. Supp. 3d 54 (D.D.C. 2014) (Laffey-matrix is appropriate starting point for the “case by case analysis”); Brighthaupt v. District of Columbia, 36 F. Supp. 3d 1 (D.D.C. 2014) (Laffey rate can be used as “an appropriate starting point for determining rates of reimbursement for attorneys…” but Court declines to award Laffey rates because plaintiff failed to demonstrate that such rates are the prevailing market rate); McAllister v. District of Columbia, 21 F. Supp. 3d 94 (D.D.C. 2014) (affidavits did not provide sufficient information for the Court to determine whether the Laffey rates represented the market rate).

·         Confidentiality clauses may well be stricken.  See Weismantle v. Jali, No. 2:13-cv-01187, 2015 U.S. Dist. LEXIS 53435 (W.D. Pa. April 23, 2015) (“What can be gleaned from this prevailing, if not overwhelming, caselaw trend is that, absent something very special in a very specific case which generates a very good reason above and beyond the desire of the parties to keep the terms of an FLSA settlement out of the public’s view, if the parties want the Court to approve the substance of an FLSA settlement agreement, it cannot be filed under seal”); Baker v. Dolgencorp, Inc., 818 F. Supp. 2d 940 (E.D. Va. 2011) (Judge Henry Coke Morgan, Jr.).

·         Certainly, not only FLSA settlements, but no settlement, should ever have a restriction on counsel’s availability to represent future clients against the defendant.  See, e.g., D.C. R. Prof. C. 5.6(b) (A lawyer shall not participate in offering or making…[a]n agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy between parties.”)