Authored by Holger G. Besch 

Perhaps signaling the importance of the issue for American businesses and jurisprudence, the U.S. Supreme Court‎ chose the first day of its term beginning in October as the date to set oral arguments in three petitions for certiorari asking whether employees can be required to waive their rights via arbitration agreements to file class and collective actions against their employers. The arguments in Ernst & Young LLP v. Morris; Epic Systems Corp. v. Lewis; and NLRB v. Murphy Oil USA Inc., will all be heard on October 2nd, so mark your calendars.

The cases before the Supreme Court originated either before the National Labor Relations Board, which had ruled that such agreements violate workers’ rights under the National Labor Relations Act to take collective action to ameliorate their working conditions, or with district courts that had used the NLRB’s ruling to reject employers’ motions to compel bilateral arbitration of putative collective and class actions.

SCOTUS will be resolving the resulting Circuit split, in which the Ninth and Seventh Circuits backed the NLRB’s position when they ruled against Ernst & Young and Epic Systems, respectively, and the Fifth Circuit ruled in favor of Murphy Oil. Opening briefs are already on file and address, at bottom, whether the Federal Arbitration Act or the NLRA should take precedence.

Co-authored by Kristin McGurn and Kevin Young

Seyfarth Synopsis: At a time when the Massachusetts meal break landscape is increasingly friendly to employees, a federal judge in the state recently denied class certification in a meal break case, Romulus, et al. v. CVS Pharmacy, Inc. At issue were store policies, common in retail, that called for in-store key-holder coverage whenever the store was occupied. This decision represents both a victory and a roadmap for employers, and particularly retailers, facing meal break claims under Massachusetts law.

The plaintiffs in Romulus alleged that as Shift Supervisors, they were required to remain in the store during certain of their unpaid meal breaks, particularly during times when no other managers were present in the store. Further, the plaintiffs alleged, such breaks were often interrupted due to work. Based on these allegations, the plaintiffs sought certification of two classes of Shift Supervisors under Rule 23 of the Federal Rules of Civil Procedure.

On Wednesday, Judge Rya W. Zobel of the District of Massachusetts entered an order denying the plaintiffs’ bid for class certification. Relying on the Massachusetts Supreme Judicial Court’s recent decision in DeVito v. Longwood Security Services, which set a strict standard for being “relieved of all duties” in order for meal breaks to be unpaid under state law, Judge Zobel assumed for purposes of her decision that remaining on-premises during a break is compensable “work.” Even under that assumption, Judge Zobel found class certification improper due to the plaintiffs’ inability to satisfy Rule 23’s “commonality” and “predominance” requirements.

With respect to commonality, Judge Zobel relied on the U.S. Supreme Court’s monumental decision Dukes, et al. v. Wal-Mart Stores, Inc. in searching for a “common contention” that might produce the same injury to all class members. The judge found that resolving plaintiffs’ claims depended on the answers to two questions: (1) were putative class members required to remain in the store during meal breaks; and (2) if so, were they required to clock out (and thus be unpaid). She ruled that plaintiffs’ reliance on CVS’s policy and handbook statements were insufficient to resolve these critical questions on a class-wide level.

Specifically, Judge Zobel rejected the contention that policy statements relating to supervisor presence in the store when it was occupied by customers, taken together with a policy providing unpaid meal breaks, equated to common proof of an illegal practice capable of resolving all class members’ claims. The plaintiffs did not contend that the policies were facially unlawful, but rather challenged their implementation. Siding with CVS, Judge Zobel noted that the policy language did not necessitate that a Shift Supervisor remain in-store during meal breaks or take a meal break when no other manager was present. The judge also noted CVS policy language providing for the reporting and payment of in-store breaks. Accordingly, Judge Zobel found that—even assuming a policy requiring Shift Supervisors to remain in the store during certain meal breaks—resolving whether class members were required to clock out and go without pay for such breaks could not be resolved through common proof.

Judge Zobel also found that Rule 23’s more demanding predominance factor was unmet. That is, even if the law required CVS to compensate Shift Supervisors for meal breaks when they were required to remain on premises, the questions of whether supervisors were in fact required to do so, and whether they were then compensated, remained both unanswered and individualized. Denying certification, Judge Zobel ruled that the proposed classes were not “sufficiently cohesive to warrant adjudication by representation.”

The Romulus decision represents a major win for employers in the battle to avoid class certification, which is particularly notable on the heels of the stringent standard for unpaid meal breaks established in DeVito. The decision also provides a strategic roadmap for employers seeking to avoid certification where break-by-break implementation of facially lawful meal break policies is challenged.

Co-authored by Noah Finkel and Andrew Scroggins

Employers have faced questions about the enforceability of arbitration agreements with class and collective action waivers since the NLRB’s highly controversial D.R. Horton decision in 2012, which held that the waivers violate employees’ right to engage in protected concerted activity. The Fifth Circuit refused to enforce the decision, and other courts followed, but the NLRB refused to change course. In 2016, the Seventh and Ninth Circuits also adopted the NLRB’s view, as has the Sixth Circuit in 2017.

In January 2017, the U.S. Supreme Court agreed to hear the issue, consolidating cases from the Fifth, Seventh, and Ninth Circuits. Oral argument is scheduled to take place during its Fall 2017 term.

The tea leaves at the Supreme Court give many reason to believe that the NLRB’s position will be struck down. Newly-appointed Justice Neal Gorsuch is considered by many observers to be likely to follow the pro-arbitration stance of his predecessor, Justice Scalia. The Office of the Solicitor General recently reversed its position, filing an amicus brief in support of the employers that details the flaws it sees in the NLRB’s position and leaving the NLRB on its own to argue the case before the Court. And the appointment of new Board members and the end of the NLRB General Counsel Richard Griffin’s term in November 2017 raise the possibility the agency may revisit its position, thus eliminating any argument that courts should defer to the NLRB’s current position on the legality of class waivers.

Some, from both sides of the bar, speculate that if the Supreme Court rejects the D.R. Horton theory nearly all well-advised employers seeking to minimize their risks will adopt mandatory arbitration programs with class waivers, and that wage-hour litigation as we know it will be over. That hope/fear, however, may be overstated.

This post is the first of several that will consider what the future may hold if employers find themselves confident that they will be able to issue enforceable, mandatory arbitration programs containing class and collective waivers. To what extent will the wage-hour class and collective action landscape change?

A recent Sixth Circuit decision, Taylor v. Pilot Corporation, et al., provides a glimpse into one part of the future. The employer had in place an arbitration agreement with a collective action waiver that applied to most, but not all, of its 50,000 hourly employees. One of the employees who was not bound by the agreement filed an FLSA collective action alleging that she had not been paid for all of her overtime hours. She asked the court to authorize sending notice of conditional certification to those “similarly situated” to her, which she contended included all 50,000 hourly employees.

The employer protested that the plaintiff was not similarly situated to the tens of thousands of employees bound by the arbitration agreement. After all, even if those employees opted in to the suit, the court would lack subject matter jurisdiction, and their claims would be dismissed and sent to arbitration. The district court disagreed, reasoning that it would determine whether the arbitration agreements were enforceable only after learning who had opted-in to the litigation. Notice to all 50,000 hourly employees was approved. The decision was affirmed on appeal, with the Sixth Circuit concluding it did not have jurisdiction to consider questions about the enforceability of the arbitration agreement at this stage.

The decision illustrates how even carefully prepared arbitration agreements can have unintended consequences if not carefully rolled out. Suppose that notice to 50,000 employees results in just 1,000 opt-in plaintiffs, and all of them have signed enforceable arbitration agreements with a collective action waiver. While those employees ultimately may not be able to participate in the collective action for which they received notice, they nonetheless have now been in touch with a lawyer or group of lawyers who can file individual arbitration demands on behalf of all 1,000 employees who had filed consents to join the lawsuit for which they received a collective action notice after conditional certification.

And it gets worse. Consider that most third-party arbitration services require that the employer pay an initial fee when the employee’s claim is filed. The American Arbitration Association, for example, imposes a non-refundable fee of at least $1,500 on the employer for cases filed by an employee. Continuing with the example from above, the employer could be hit with $1,500,000 in costs just as the price to play. Costs begin to rise exponentially when it comes time to mount a defense and arbitrator and hearing fees begin.

In other words, employers should not expect that a Supreme Court endorsement of arbitration agreements with class and collective action waivers will act as a complete bar to collective claims. After all, to adopt a famous movie phrase, plaintiffs’ lawyers “find a way.” The Taylor decision shows the potential power of finding the “unicorn” plaintiff who is not bound by the same agreement as her co-workers, and shows that employers will have to ensure that each and every one of their employees will have to be bound by an arbitration program to maximize a class waiver’s protection. But even then, the unicorn for a plaintiff’s lawyer may merely be someone who had been employed by the defendant-employer within the last three years (the longest of the FLSA’s potential limitations periods), but whose employment had ended before the arbitration program had been enacted. Other novel workarounds are sure to arise if new rules about arbitration force plaintiffs to get more creative.

iStock-513046321Authored by John P. Phillips

Seyfarth Synopsis: Recently the Ninth Circuit doubled down on its decision that service advisers at car dealerships are not exempt from the FLSA, despite being overturned once by the U.S. Supreme Court. This case gives the Supreme Court an excellent opportunity to address the proper construction of FLSA exemptions and allow the plain and common sense reading of the statute to govern.

A pending petition for writ of certiorari gives the U.S. Supreme Court a second opportunity to establish two important Fair Labor Standards Act issues: first, administrative agencies and courts should not lightly disregard decades of established practice when interpreting the FLSA, and second, the old canard that “exemptions should be narrowly construed against employers” should finally be put to bed. Employers across the country are hoping that the Supreme Court takes up Navarro, et al. v. Encino Motorcars, LLC  for the second time. And with the addition of Justice Gorsuch to the Court, the time may be ripe to address these issues.

Just as this case gives the Supreme Court a second chance to resolve important FLSA-related issues, this is our second opportunity to write about this case. In early 2016, we explained how the Supreme Court had the chance to address far-reaching implications on the interpretation of FLSA exemptions. Unfortunately, the Supreme Court did not do so, instead deciding only that the Ninth Circuit had improperly relied on faulty Department of Labor regulations, and remanding the case to the Ninth Circuit.

Case Background

In Navarro, et al. v. Encino Motorcars, LLC, a group of current and former car dealership employees who worked as service advisors brought a collective action under the FLSA in the Central District of California alleging that their dealership employer unlawfully failed to pay them overtime wages. As service advisors, the plaintiffs would meet and greet car owners as they entered the service area; evaluate customers’ service and repair needs; suggest services to be performed on the vehicle to address the customers’ complaints; solicit supplemental services to be performed (such as preventive maintenance); prepare price estimates for repairs and services; and inform the owner about the status of the vehicle. Service advisors did not receive an hourly wage or a salary but were instead paid by commission based on the services sold.

The district court dismissed the overtime claim and agreed with an unbroken line of authority from federal and state courts across the country. But the Ninth Circuit reversed, deferring to a DOL regulatory definition while acknowledging that its holding conflicted with every other court to have considered the question, and citing to the “rule” that FLSA “exemptions are narrowly construed against employers.”

The Supreme Court granted the dealership’s petition for a writ of certiorari and agreed to answer the question of “whether ‘service advisors’ at car dealerships are exempt.” Unfortunately, the Supreme Court did not answer the question. Instead, the Court analyzed the DOL regulations, found them to have been issued without a reasoned or adequate explanation and, accordingly, ruled that the Ninth Circuit should not have relied upon them. Having decided this, the Supreme Court remanded the case to the Ninth Circuit rather than answer the ultimate question of whether the service advisers were exempt.

Predictably, the Ninth Circuit doubled down on its earlier opinion, ruling that the service advisers were not exempt under the FLSA. In its ruling, the Ninth Circuit admitted that service advisers fit in the “literal” reading of the statute, but decided that the literal reading was not what Congress intended. In addition, the Ninth Circuit again cited to the “longstanding rule” that FLSA exemptions “are to be narrowly construed against the employers seeking to assert them.”

Recently, Encino Motorcars appealed the Ninth Circuit’s ruling, filing a petition for writ of certiorari asking the Supreme Court to hear the case again. The Supreme Court has not yet decided whether it will take the case, but employers and attorneys (not to mention car dealerships) around the country are hoping the Court takes this opportunity to address the important FLSA issues at stake in this case.

Potential Implications for FLSA Collective Actions

First, this case demonstrates the willingness of federal agencies and some courts to upend years of established industry practice. Here, car dealerships have relied on settled precedent and practice to treat service advisors as exempt since the 1970s. Every court to have examined the issue had found that service advisors were properly exempt from the FLSA. However, the DOL first departed from this precedent in 2011, and the Ninth Circuit followed suit.

In recent years, the Supreme Court has taken legal theories that would upend years of long-settled industry practice with a large grain of salt. As the Court recently noted, “while it may be ‘possible for an entire industry to be in violation of the [FLSA] for a long time without the Labor Department noticing,’ the ‘more plausible hypothesis’ is that the Department did not think the industry’s practice was unlawful.” Encino Motorcars pointed this out in their petition for writ of certiorari, and hopefully the Supreme Court will provide succinct guidance to agencies and courts that long-standing industry practice should be considered before any ruling that upends such reliance.

Second, the Ninth Circuit—in both of its opinions—relied on the doctrine that the FLSA’s exemptions should be narrowly construed against employers. This maxim has been increasingly questioned by the Supreme Court. In its petition, Encino Motorcars highlighted the late-Justice Scalia’s words, where he stated that the goal of a court interpreting a statute “should be neither liberally to expand nor strictly to constrict its meaning, but rather to get the meaning precisely right.” In fact, Justice Thomas, joined by Justice Alito, even referred to it as a “made-up canon” in the Supreme Court’s decision, and stated that it rests on an “elemental misunderstanding of the legislative process.” Nor are Justices Thomas and Alito likely to be alone. Although it is still a little early to speculate on Justice Gorsuch’s views, the justice once famously stated that “when the statute is plain it simply isn’t our business to appeal to legislative intentions.”

If the Supreme Court accepts the case, it would provide the Court an excellent opportunity to address repeat problems in FLSA jurisprudence and help support a more just and statute-based approach to interpreting FLSA exemptions.

Co-authored by Julie Yap and Michael Cross

Seyfarth Synopsis:  The California Court of Appeal affirmed a denial of class certification on the ground that the plaintiff’s expert report failed to establish claims could be determined on common evidence. The ruling highlights that trial courts are permitted to weigh conflicting evidence related to whether common or individual issues predominate. While expert reports often inform merits questions relating to damages, when those reports are the main source of support for certification, they equally inform issues of liability.

Plaintiff, a former Oracle technical analyst, filed suit alleging that Oracle’s employment practices violated various state wage and hour laws and constituted unfair business practices. Plaintiff’s case, both in the trial and appellate courts, turned largely on the reliability of his expert’s report.

Plaintiff’s expert’s opinion was based on a comparison of Oracle’s (1) payroll records, (2) internal time records, and (3) time cards. In comparing those data sets, Plaintiff’s expert purported to find a discrepancy between the number of overtime hours technical analysts worked and the number of overtime hours for which Oracle had paid them. In addition, by reviewing the time cards, the expert purported to uncover that many analysts took shortened or late meal breaks, or missed them altogether. Plaintiff moved to certify a class relying on a handful of putative class member declarations, but, in large part, through reference to a concurrently-filed expert report, arguing that his claims were subject to common proof through the expert’s comparison and analysis of Oracle’s records.

Oracle opposed Plaintiff’s motion to certify, relying on its own expert’s report and 42 declarations, 22 of which were from putative class members. Oracle’s rebuttal expert identified significant flaws in the methodology and care used by the Plaintiff’s expert. Among other flaws, Plaintiff’s expert included on-call, non-worked, and sick time in his time card numbers, which created significant discrepancies between the purported time worked and the time paid. In addition, the Plaintiff’s expert misread Oracle’s spreadsheets and ignored a $21 million overtime payment that Oracle had made. Finally, the expert made a number of assumptions about the data he analyzed, but failed to disclose those assumptions in his report.

The Trial Court’s Denies Certification

In denying Plaintiff’s motion for certification, the Court concluded that Plaintiff’s expert report was unreliable based largely on the reasons set forth in Oracle’s opposition. Specifically, the court found that because Plaintiff relied on his expert’s report to establish that three of his claims could be determined by common proof, and because that report was unreliable, he could not establish commonality for those claims.

The Appellate Court Affirms The Denial of Certification

Plaintiff appealed the trial court ruling on two main grounds. He first argued that whether or not his expert’s calculations were accurate should not have been considered on his motion for certification. Accuracy of expert reports, he argued, is a merits question. Second, Plaintiff argued that the trial court improperly weighed the competing declarations submitted by the parties.

In evaluating the first question, the Court of Appeal noted that whether or not common issues predominate over individual ones is often closely tied to the ultimate merits of a claim. But the Court did not stop there. The Court rejected Plaintiff’s argument that Plaintiff’s expert’s opinion went only to the merits of alleged damaged in the case, holding that when a party’s expert report serves as its sole support for establishing that common questions predominate, the party has transformed that report into evidence of liability, not damages. As the Court explained:

Plaintiff’s only evidence that uncompensated overtime and missed, late, or short meal breaks could be established classwide with common proof was [his expert’s] declaration and his comparison of [two of Oracle’s] databases. The issue here is whether Plaintiff can establish that class members worked overtime for which they were not paid or had late, short, or missed meal breaks on a classwide basis, and this is a question of entitlement to damages, not damages themselves.

The Court also found it was within the lower court’s discretion to weigh competing declarations from the parties in order to determine whether the requirements for class certification were satisfied, and that doing so was not an improper evaluation of the merits.

Employers defending against class certification motions that rely on expert opinions to establish liability can, and should, offer contrary evidence, and make clear to the court that they are arguing certification and liability issues, not simply damages issues.

Co-authored by Kyle A. Petersen and Molly C. Mooney

Seyfarth Synopsis:  The Second Circuit recently upheld a district court order denying a bid for class certification by personal bankers claiming their managers refused to approve timesheets with overtime hours, shaved reported overtime hours, and pressured them to work off the clock. Because the company’s policy governing (and limiting) overtime work was lawful on its face, the bankers’ claims hinged on the exercise of managerial discretion in applying those policies. The district court concluded that the plaintiffs failed to demonstrate sufficient uniformity in the exercise of managerial discretion, and the Second Circuit affirmed.

As noted earlier, the trial court’s decision reflects reluctance by some trial courts to certify nationwide class actions based on local or even regionalized evidence of rogue managers deviating from company policy. The Court of Appeals has now given its seal of approval to that approach.

In Ruiz v. Citibank, N.A., personal bankers from several states alleged that Citibank had a strict policy limiting overtime hours while also setting rigorous sales goals and quotas for the bankers that could not be achieved in a forty-hour workweek. The bankers also alleged that branch managers refused to approve timesheets with overtime hours, or shaved overtime hours off of the bankers’ timesheets.

The bankers sought certification of a class consisting of bankers with claims under New York, Illinois, and District of Columbia law. Their attempt to establish commonality — primarily through anecdotal evidence of pressure to work off the clock and a not uncommon and entirely legal goal of reducing overtime work — fell short and was rebutted by putative class member testimony of variations across branches. For example, putative class members testified that individual branch managers had differing management styles for incentivizing and motivating employees to meet their sales goals — some plaintiffs were rewarded for positive sales performance, with no reference to overtime hours they worked in doing so, while others failed to achieve sales goals with no admonition. This, said the court, showed that the pressure to work off the clock was not uniformly felt and precluded the case from proceeding as a class. On appeal, the Second Circuit wholeheartedly agreed with the district court’s “lucid and accurate analysis” and affirmed denial of class certification.

While not a game changer, this decision reaffirms the need for plaintiffs to come up with more than anecdotal evidence of allegedly systemic problems, and highlights how employers can use class member depositions to defeat class certification.

Co-authored by Gerald L. Maatman, Jr.Tiffany Tran, and Julie Yap

Seyfarth Synopsis: Seyfarth Shaw submitted comments and oral testimony to the Federal Advisory Committee on Civil Rules regarding needed reform and guidance to Rule 23, the rule that governs class action litigation in federal courts. While the proposed amendments address important issues, our workplace class action group proposed four additional areas for consideration that are not currently addressed by the pending proposed rule amendments.

Rule 23 Changes

As some employers may be aware, changes are coming to Rule 23 class action requirements. What exactly those changes will be, and when those changes will go into effect, however, are still to be determined.

The Advisory Committee on Civil Rules (the “Committee”) for the Federal Courts, which is responsible for recommending amendments to Rule 23, has been contemplating possible changes for years now — we previously blogged about the potential changes here. The Committee recently proposed specific rule changes that address important issues such as settlement class procedures and electronic notice to class members.

Various parties and groups submitted written comments to the Committee, including academics, worker and consumer advocacy groups, and corporate groups.

Seyfarth’s written submission is here. Seyfarth’s comments were prepared by the team of Thomas Ahlering, Kate Birenbaum, Matthew Gagnon, Gerald L. Maatman, Jr., Hilary Massey, Jennifer Riley, Tiffany Tran, Julie Yap, and Kevin Young.

Seyfarth’s submission identified four additional areas that remain in need of reform and guidance to address the practical difficulties regularly encountered in class action litigation

Testimony To The Committee

The Committee also selected 11 individuals to testify before the Committee.

The Committee selected Gerald L. Maatman, Jr. (“Jerry”) co-chair of our class action defense group, to testify. Jerry gave testimony to the Committee on February 16. Seyfath was the only law firm representing employers to be selected to testify.

Other individuals who testified included Theodore Frank of the Competitive Enterprise Institute; Eric Issacson, of the Issacson Law Office; Peter Martin of State Farm Mutual Insurance Co.; Patrick Paul of Snell & Wilmer; Timothy Pratt of Boston Scientific Corp.; Michael Pennington of Bradley, Arant, Boult & Cummings; Professor Judith Resnik of Yale Law School; Richard Simmons of Analytics LLC; Ariana Tadler of Milberg LLP; and Steven Weisbrot of Angeion Group.

Consistent with Seyfarth’s written submission, Jerry testified that class action litigation would be aided by an express requirement that a party seeking class certification must submit a viable trial plan. This change makes sense from both a legal and practical perspective as it would help prevent unmanageable class actions from proceeding past the class certification stage to trial. Indeed, this amendment conforms to the California Supreme Court’s decision in Duran v. U.S. Bank National Association, 59 Cal. 4th 1 (2014), which requires adequately developed trial plans at the class certification stage.

Jerry also advocated for a revision to Rule 23(f) to allow for an immediate right to appeal orders to certify, modify, or decertify a class. Jerry testified that an amendment to the current approach would ensure meaningful review of and guidance regarding class certification.

In addition, Jerry suggested that the Committee revisit the standards relating to class certification in the context of a settlement. This would amend Rule 23 to acknowledge and address the unique and practical considerations and impacts of certification in the two very different contexts of actual litigation versus settlement.

Finally, Jerry recommended that the Committee provide additional, specific guidance regarding Rule 26’s “proportionality” requirement and its application to pre-certification class discovery. Jerry shared Seyfarth’s collective experience in representing employers who face requests for discovery on class lists, contact information, and other information about potential class members. Rule 26 requires that discovery be “proportional to the needs of the case,” which directly affects pre-certification class discovery. Nonetheless, federal courts have taken varying approaches to resolving these discovery disputes. Jerry advocated the position that the Committee’s further guidance is needed to ensure a standard approach that fully considers the burden class discovery places on employers.

Implications For Employers

The Rule 23 amendments will have a significant impact on class action litigation and far-reaching consequences for employers.

Stay tuned for more updates regarding the proposed Rule 23 amendments as we continue to monitor developments on this important issue.

Authored by Rachel M. Hoffer

It’s a common business model in the fast-food industry: a massive restaurant company provides the menu, the marketing—including catchy slogans and a universally recognized logo—and the basic operational standards for the restaurant,
and a franchisee provides the rest—including hiring, training, and firing restaurant employees. Unfortunately for the fast-food giants (the notorious FFGs, if you will), it’s also common for disgruntled employees to name them in lawsuits—particularly super-sized class-action lawsuits—against the franchisee.

In March 2014, three fast-food workers from Oakland did just that—they sued the family-owned company that operates 8 franchise restaurants in Northern California, and they brought the FFG along for the ride under a joint employment theory, serving up a complaint chock full of California Labor Code, Private Attorneys General Act (PAGA), and negligence claims. Last August, a federal judge in California dismissed the negligence claim on summary judgment and rejected the workers’ theory that the franchisee acted as the FFG’s actual agent. But the judge didn’t toss out the workers’ claims completely, finding the plaintiffs had presented enough evidence of ostensible agency to have their day in court with the FFG.

Determined to have it their way, right away, the plaintiffs settled their claims against the franchisee but moved to certify a class of more than 1,200 hourly workers who had worked at the franchisee’s eight restaurants. Unwilling to pick up the franchisee’s remaining tab, the FFG moved to deny class certification and to strike the representative PAGA claim. And the FFG did what Giants tend to do in San Francisco—it won. Last week, the judge found that the workers’ ostensible agency theory required too many individualized inquiries to be decided on a class basis.

Under an ostensible agency theory, the FFG is on the hook for the franchisee’s actions if the worker can prove: (1) in dealing with the franchisee, the worker reasonably believed the franchisee had the authority to act on the FFG’s behalf; (2) the worker’s belief was caused by something the FFG did or failed to do; and (3) the worker wasn’t negligent in relying on the franchisee’s apparent authority.

The workers argued that the questions of law or fact common to potential class members outweighed the questions that affected only individual members, and that a class action was the best way to fairly and efficiently decide their claims. In support of this argument, the workers asserted that the “belief” prong of the first requirement—that the potential class members believed the franchisee had the authority to act for the FFG—could be inferred from the circumstances. The judge wasn’t convinced that the law allows such an inference, nor was he convinced that the evidence supported such an inference. Instead, the evidence showed that class members received different information about the franchisee’s authority, and some actually understood that the FFG was not their employer. So, the question of belief had to be decided on an individual basis.

The judge also found that there was no way to determine, on a class basis, whether such a belief was reasonable and not negligent. Rather, what each worker knew (or should have known) varied depending on the circumstances. Some workers, for example, were told during orientation that the franchisee was their employer and the FFG was not. Some workers received and read documents informing them that the franchisee, not the FFG, was their employer; others either did not receive or did not read that paperwork. In other words, whether a belief was reasonable and not negligent depended on the information available to each worker.

Likewise, the judge found that reliance can’t be determined on a class-wide basis. The workers—pointing to out-of-context case law—argued that courts often presume reliance when there is no evidence that the plaintiff knew or should have known that the purported agent was not an agent of the principal. But even if that case law applies in the franchise context, the workers’ argument begged the question; the presumption couldn’t apply on a class-wide basis because, as the judge had already explained, the knew-or-should-have-known question couldn’t be answered on a class-wide basis. The order: individualized inquiries, all the way.

The workers also argued that the court should certify a class because they were seeking injunctive relief on a class-wide basis. But the judge didn’t see how an injunction against the FFG could help the franchisee’s employees, when he had found in his summary-judgment opinion that the FFG didn’t control the aspects of their employment at issue in the case. Simply put, where’s the beef?

The workers’ PAGA claim fared no better; the judge found that a representative PAGA action wouldn’t be manageable because it relied on the ostensible agency theory, which could only be established through individualized inquiries. So, while the three plaintiffs can still pursue their individual claims against the FFG on an ostensible agency theory, those are small fries compared to the representative claims they had hoped to bring on behalf of more than 1,200 other workers.

The take-home for the notorious FFGs who franchise independent restaurant owners, of course, is to stay out of the kitchen when it comes to the relationship between the franchisee and its employees. And, for the FFGs’ sake, franchisees should make sure employees know where their bread is buttered.

Authored by Michael Kopp

With all the drama of a get-away chase, the Third Circuit recently brought to a screeching halt plaintiffs’ counsel’s elaborate maneuvers to end run repeated decertification of their FLSA actions, and held as a matter of first impression in Halle v. West Penn Allegheny Health System, Inc. that opt-in plaintiffs have no right to appeal decertification. The decision is important for three reasons. First, it offers a road block against the use of opt-in plaintiffs to appeal a decertification order, including where the named plaintiffs’ claims have been mooted. Second, it offers instruction on how to structure class notices to foreclose potential opt-in appeals. Third, it underscores the heightened strategic value of Rule 68 offers to named plaintiffs in FLSA actions after decertification to block appeals.

In a long and winding procedural path, plaintiffs’ counsel employed a “whack a mole” strategy to keep the possibility of a collective action alive after successive certification defeats. Counsel originally filed two separate FLSA collective actions, asserting claims that two hospitals and their affiliates failed to compensate work performed during unpaid meal period times. After conditional certification of the separate actions, over 3,000 and 800 individuals respectively opted into the two actions. In a happier moment in this narrative, the district court judges decertified the actions, due to differences in practices for reversing the 30-minute automatic deduction for meal periods, and differences in job duties and supervision that would impact whether work was performed during meal periods.

Plaintiffs’ first escape maneuver was a voluntary dismissal of their claims with prejudice, in the hopes of prompt appellate review of the interlocutory decertification orders. Instead, the Third Circuit rejected this “procedural slight-of-hand,” and held that by dismissing their claims, the named plaintiffs had mooted their claims (along with any right to challenge decertification). The appeals were dismissed for lack of jurisdiction.

Not to be deterred, plaintiffs’ counsel filed two new class actions against the same hospital defendants, with only slight modifications to the proposed class. The district courts promptly slammed the brakes, struck the collective allegations, and held that issue preclusion barred the named plaintiffs (who were opt ins in the prior actions), from re-litigating the prior decertification decision. In what appeared to be the end of the road, the employers then mooted the named plaintiffs’ claims by extending Rule 68 offers which were all accepted.

Not willing to give up the chase, plaintiff’s counsel deployed opt-in plaintiffs to appeal the order striking the collective allegations, claiming the opt-ins were “party plaintiffs” with full rights to appeal. The Third Circuit rejected these “procedural gymnastics,” finding that (1) the order striking the collective allegations effectively dismissed the opt-ins as parties to the action, and they therefore could not appeal the subsequent judgments, and (2) the opt-ins had signed consent forms ceding the individual authority to litigate, including the right to appeal. The Third Circuit recognized the claimed “unfairness” of leaving the opt-in plaintiffs without an opportunity to appeal where the employer “picked off” the named plaintiffs. Nonetheless, the court found that the “potential for unfairness” cannot trump an absence of jurisdiction.

Halle is, accordingly, important guidance in structuring class notices, and highlights the continuing strategic value of Rule 68 offers later in the action, including to moot claims and thereby potentially obtain expedited finality for a decertification order.

Authored by Rob Whitman

Seyfarth Synopsis: Unpaid interns for Hearst magazines have been rebuffed again in their effort to be declared eligible to receive wages under the FLSA and the New York Labor Law.

In an August 24, 2016 ruling, Judge J. Paul Oetken of the Southern District of New York held that six interns, who worked for Marie Claire, Seventeen, Cosmopolitan, Esquire, and Harper’s Bazaar, were not employees as a matter of law and granted summary judgment to Hearst. After reviewing each of their circumstances individually, the court held:

These interns worked at Hearst magazines for academic credit, around academic schedules if they had them, with the understanding that they would be unpaid and were not guaranteed an offer of paid employment at the end of the internships. They learned practical skills and gained the benefit of job references, hands-on training, and exposure to the inner workings of industries in which they had each expressed an interest.

The six named plaintiffs were the only ones remaining after the Second Circuit, in July 2015, denied their bid for class and collective certification. The court in that decision also articulated a new set of factors for determining whether unpaid interns at for-profit companies are “trainees” (who are not entitled to compensation) or “employees” (who must receive minimum wage and overtime premiums).

The Second Circuit’s decision adopted the “primary beneficiary” test to determine internship status—i.e., whether the “tangible and intangible benefits provided to the intern are greater than the intern’s contribution to the employer’s operation.” Applying that test to the Hearst interns, Judge Oetken concluded, “[w]hile [the six plaintiffs’] internships involved varying amounts of rote work and could have been more ideally structured to maximize their educational potential, each Plaintiff benefited in tangible and intangible ways from his or her internship, and some continue to do so today as they seek jobs in fashion and publishing.”

Among the factors he relied on: the relatively brief duration of the internships, typically limited to college semesters or summer breaks; the interns’ opportunities for observation and learning, such as “Cosmo U,” a program in which senior editors spoke about their career paths; and the receipt of or opportunity for academic credit.

Aside from its detailed discussion of the facts of the plaintiffs’ internships, the court’s decision, Wang v. The Hearst Corporation, is notable for two reasons:

  1. It shows the practical impact of a denial of class and collective certification. Although the court addressed the six named plaintiffs’ claims in a single opinion, it was effectively a series of rulings on each intern’s individualized circumstances. As the court noted, some of the factors—such as the receipt of college credit for the internships—weighed differently for the different plaintiffs. But in the end, the result for each of them, given the “totality of the circumstances” in their particular cases, was the same.
  2. The court’s decision applied equally to the plaintiffs’ claims under the FLSA and the NY Labor Law. This issue was left somewhat unsettled after the Second Circuit’s 2015 decision, which noted the similarities in the definitions of “employee” under the two statutes but did not explicitly say that the ruling pertained to both. Judge Oetken, following the earlier lead of a Southern District colleague, held that his ruling decided the claims under federal and NY law.

The Hearst decision is not the first to grant summary judgment under the Second Circuit’s factors. In March 2016, a Southern District Judge found that an intern for the now-late Gawker website was properly treated as such and was not entitled to wages. Despite the positive trend, these cases are highly fact-driven and do not foreclose the possibility that interns will be deemed to be employees, nor should they make for-profit employers complacent about not paying interns. But they signal that, where interns have a bona fide learning experience in coordination with their academic pursuits, they need not be paid as a matter of law.