Please Pass the Settlement: Second Circuit Widens Split Over Stipulated FLSA Dismissals
A recently filed petition for certiorari asks the U.S. Supreme Court to clarify the procedural requirements for ending private causes of action under the Fair Labor Standards Act (“FLSA”). Specifically, petitioner Dorian Cheeks is asking the Supreme Court to review a decision from the U.S. Court of Appeals for the Second Circuit holding that Federal Rule of Civil Procedure 41 (“FRCP 41”) prohibits the dismissal of FLSA claims through private, stipulated settlement agreements absent approval from either a federal district court or the U.S. Department of Labor (“DOL”).
The Second Circuit’s ruling in Cheeks v. Freeport Pancake House Inc., et al., 796 F.3d 199 (2d Cir. 2015), contributes to an existing circuit split concerning the role of the federal district courts in overseeing private FLSA settlements. In Lynn’s Food Stores, Inc. v. U.S. Dep’t of Labor, 679 F.2d 1350 (11th Cir. 1982), the Eleventh Circuit ruled that private stipulated settlements of FLSA wage actions must be scrutinized and approved by either the district court or the DOL. The Federal Circuit (O’Connor v. United States, 308 F.3d 1233 (Fed. Cir. 2002)) and the Fifth Circuit (Martin v. Spring Break ’83 Prods., L.L.C., 688 F.3d 247 (5th Cir. 2012)) have more recently gone the other way. Now that the Second Circuit has sided with a more-restrictive interpretation of the FLSA settlement process, the issue may be ripe for the High Court’s consideration.
An Attempted Settlement
Cheeks originally filed his lawsuit in the U.S. District Court for the Eastern District of New York in August 2012 to recover overtime wages, and “damages for wrongful termination under the FLSA.” Specifically, Cheeks alleged that “he was demoted, and ultimately fired, for complaining about Freeport Pancake House’s failure to pay him and other employees the required overtime wage.” After a full year of discovery and negotiations, the parties reached a settlement and filed a stipulation of dismissal under FRCP 41(a)(1)(ii).
However, the district court issued an order preventing the parties from dismissing the case without first submitting the settlement agreement to the court for review and approval. The court directed the parties to “file a copy of the settlement agreement on the public docket,” “show cause why the proposed settlement reflects a reasonable compromise of disputed issues” and provide the Court “with additional information in the form of affidavits or other documentary evidence explaining why the proposed settlement is fair and reasonable.”
Rather than disclose the terms of the settlement to the public and seek court approval, the parties asked the court to stay further proceedings and to certify the question of whether the FLSA qualifies as an “applicable federal statute” under FRCP 41(a)(1)(A), such that it is exempted from FRCP 41 (meaning that private parties cannot enter into stipulated dismissals without court approval).
On review, the Second Circuit affirmed the district court’s ruling, relying on guidance from the DOL that “the FLSA falls within the ‘applicable federal statute’ exception to Rule 41(a)(1)(A), such that the parties may not stipulate to the dismissal of FLSA claims with prejudice without the involvement of a court or the DOL.” The prior circuit split cases do not explicitly address the interpretation of FRCP 41. However, the Second Circuit cited the reasoning of the Eleventh Circuit in Lynn’s Food Stores favorably in its opinion, and attempted to distinguish the Fifth Circuit’s endorsement of private settlements in Martin as principally a matter of contract interpretation.
The case also required the Second Circuit to weigh conflicting caselaw from its own district courts, but its review indicated that “the majority of district courts in [the Second] Circuit continue to require approval of private FLSA settlements.” In particular, the Second Circuit reasoned that “[l]ow wage employees” are “more susceptible to coercion or more likely to accept unreasonable, discounted settlement offers quickly” because they “lack equal bargaining power.” The Second Circuit’s use of this language is telling, as it dovetails with the U.S. Supreme Court’s own language in Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945), a case in which the Court refused to certify a stipulated private FLSA settlement and specifically cited the “unequal bargaining power” that exists between low-wage employees and employers.
Based principally on this rationale, the Second Circuit affirmed the district court’s ruling, finding that “[r]equiring judicial or DOL approval of such settlements is consistent with… the FLSA’s underlying purpose” to “prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees.”
In his petition for a writ of certiorari, Cheeks argues that both the DOL and the Second Circuit have taken an overly paternalistic approach in their interpretation of the FLSA and FRCP 41. Cheeks primarily challenges the DOL’s determination that the FLSA is an exempted federal statute. Cheeks also points out that there has been push-back within the Second Circuit’s own district courts regarding the scope and rationale of its ruling on FRCP 41, and that the Second Circuit split with the Fifth and Federal Circuits when it determined that the “inequality of bargaining power” between employees and employers warrants unique scrutiny of individual FLSA settlements even where the plaintiff is represented by counsel.
Cheeks also points out the potentially disastrous effects of exempting the FLSA from FRCP 41’s carve-out. The ballooning number of FLSA cases filed annually—the 1,457 cases filed in 1993 more than quadrupled in 2014 to 8,126—would place an immense burden on the judiciary, if a district judge were required to review and approve every private settlement agreement reached in the FLSA context. And given what Cheeks calls a “caseload crisis” in the DOL, the federal and state judiciaries might not be able to rely upon the DOL to help carry the burden of these new required proceedings. Whether or not the Supreme Court grants this particular petition for review, the approval process for individual FLSA settlements will likely remain a focus of substantial litigation nationwide.