Separating Claim Recovery and Lawsuit Fees: 2nd Circuit Paves Way for Better Negotiations in FLSA Claims

In Fair Labor and Standards Act (FLSA) lawsuits, recovering damages for claims is typically only one part of the discussion when negotiating settlements. Employers engaged in FLSA lawsuits and settlement negotiations with employees and their representative counsel, can quickly become aware that lawsuit costs and plaintiff’s attorney fees are a factor in the overall bargaining process. On February 4, 2020, the Second Circuit, in Fisher v. SD Protection Inc., 2020 WL 550470 (2d Cir. 2020) held that attorneys’ fee awards in FLSA claim settlements are not limited by the principle of “proportionality” in that such fees are not limited or subject to a 1/3 cap based on the amount of the overall settlement.

In the Second Circuit, settlements in FLSA lawsuits were typically subject to strict court scrutiny court review to ensure that the agreed upon terms, including the amount of attorneys’ fees, were fair and reasonable. Thus, many of the district courts within the Second Circuit applied the rule of “proportionality” and refused to approve fee amounts greater than an amount 1/3 of the total settlement.

In Fisher, however, the Second Circuit held that such a rule is at odds with the purpose of the FLSA and has the potential to discourage competent lawyers from taking on cases for low-wage workers due to such limitations on collecting attorneys’ fees. The issue in Fisher arose from a wage dispute brought by an hourly employee, which is a normal cause of action under FLSA lawsuits. The employee sued under the FLSA based on the employer’s alleged failure to pay overtime and provide mandatory accurate wage statements.

The parties reached a settlement before a class was certified, with the total settlement amount at $25,000, including fees and costs. In submitting approval for the settlement from the district court, the parties disclosed that the plaintiff would be paid only $2,000 of that amount, with the remaining $23,000 going to the employee’s attorney. The district court judge disagreed with the terms and reduced the attorneys’ fee to only $8,250, or 1/3 of the total settlement amount as a matter of general policy.

The plaintiff appealed the district judge’s actions to the Second Circuit, and in a detailed decision, the Court reversed and remanded, disapproving of the district court’s requirement of “proportionality” between the amount of the settlement and the size of the fee award. The Second Circuit held that such a rule is not mandated by either the text or the purpose of the FLSA statute. While acknowledging that the proposed split of $23,000 to the plaintiff’s attorney and $2,000 to the plaintiff “understandably gave the district court pause,” the Court rejected an “explicit percentage cap” on fee awards. The Second Circuit justified this decision as in most FLSA wage dispute cases, the plaintiffs are generally hourly workers, and favorable settlement outcomes result in limited recovery. Limiting attorney fees can dissuade competent attorneys from taking on FLSA cases when fee recovery would be proportional to only 1/3 of total recovery. The Second Circuit also criticized the district court judge for rewriting the settlement agreement instead of just simply rejecting the agreement and having the parties revise it. The Second Circuit concluded that in rewriting the agreement, the district court judge exceeded his authority.

The ruling in Fisher is good news for employers in the negotiation process of FLSA lawsuits. In practice it should allow for more free negotiating of settlements, without limitations imposed on fee awards. This ruling will hopefully foster settlements and drive down costs for all parties involved.

VW Contributor: Ryan J. Coufal
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Seventh Circuit Follows Fifth Circuit in Holding FLSA Collective Action Opt-In Notices Should Not be Sent to Employees with Valid Arbitration Agreements

On January 24, 2020 in the case of Bigger v. Facebook, Inc., the Seventh Circuit held that a federal district trial court should not authorize notice of a Fair Labor and Standards Act (FLSA) collective action suit to employees of the defendant company who are ineligible to join the suit because they entered into agreements to resolve disputes exclusively via arbitration. The Seventh Circuit warned that without such limitations, FLSA collective actions run the risk of abuse for being too broad to opt-in and cause unfair harm to employers.

The appellate decision stems from FLSA collective action claims. Typically, early on in these types of litigation cases, plaintiffs will request that courts authorize written notice to potential plaintiffs of the opportunity to join in the collective action suit, in order to certify the collective class. These notices are generally sent to current or previous employees of a defendant employer, allowing them the opportunity to “opt-in” as another plaintiff in the suit.

In Bigger v. Facebook, Inc., a former Client Solutions Manager claimed that Facebook misclassified her as an overtime-exempt employee in violation of the FLSA. Plaintiff Bigger asked the United States District Court for the Northern District of Illinois to conditionally certify a collective action class and to authorize opt-in notice to a national collective of fellow Facebook Client Solutions Managers. In opposition to the request for notice, Facebook argued that most of the employees Bigger proposed to notify had previously entered into arbitration agreements. Facebook asserted these employees should not be classified as potential opt-in plaintiffs due to being limited to resolving disputes with Facebook through arbitration. Thus, Facebook asserted these employees should not receive any notice. The District Court held it was too early to make merits determinations at the conditional certification stage of an FLSA collective action and therefore authorized notice to the entire group plaintiff proposed, regardless of whether they had signed arbitration agreements or not.

Upon appeal, the Seventh Circuit held that the District Court should have allowed Facebook to prove that a large number of its employees had entered into arbitration agreements. The Seventh Circuit noted that the ruling is to protect employers from unfair or “dangerous” harm by stating, “notice giving, in certain circumstances, may become indistinguishable from the solicitation of claims . . . .” The Seventh Circuit thus concluded that district courts must give employers a chance to show that potential notice recipients have valid arbitration agreements.

The Seventh Circuit’s decision in Bigger followed the similar Fifth Circuit ruling last year of In re JPMorgan Chase and Company, 916 F.3d 494 (5th Cir. 2019). The rulings in these cases present a number of considerations for employers. On one hand, these rulings can make it harder for plaintiff’s counsel to use opt-in notices to identify potential plaintiffs for FLSA claims. While on the other hand, employers could run the risk of bearing the cost of arbitration for hundreds of potential FLSA claims upfront if such an issue were to arise, but be limited to arbitration.

VW Contributor: Ryan Coufal
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Consumer Financial Protection Bureau Prohibits Certain Arbitration Clauses

The Consumer Financial Protection Bureau (“CFPB”) released a final rule that prohibits certain financial service companies from blocking class action lawsuits with pre-dispute arbitration clauses and class action waiver clauses in consumer financial services contracts. The final rule requires arbitration clauses to contain a provision that explains that the arbitration clause cannot be invoked in a class action proceeding and requires parties to submit certain arbitration records to the CFPB whenever an arbitration claim is filed in relation to a consumer that entered a pre-dispute arbitration agreement after the rule’s compliance date.

 

The rule is a consequence of the Dodd-Frank Act of 2010, in which Congress authorized the CFPB to issues regulations that limit or prohibit the use of arbitration agreements in the financial industry.  However, it is unclear whether the broad scope may adversely impact smaller entities that cannot afford to defend themselves against a class action lawsuit.

 

The rule is set to become effective on September 17, 2017 and applies to consumer financial services contracts that are entered into 180 days after September 17, 2017.  Thus, the rule does not affect existing contracts, except when a new financial services entity becomes a party to an older contract. Institutions should prepare to review and update their contract provisions to comply with the final rule.

 

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Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

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