The 4th Circuit Court of Appeals recently rejected a company's attempt to obtain an early exit from a collective action under the Fair Labor Standards Act (FLSA) through an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure. In Simmons v. United Mortgage & Loan Investment, LLC (4th Cir. Jan. 21, 2011), the court vacated a decision from the Western District of North Carolina dismissing an FLSA collective action for lack of subject matter jurisdiction after the named plaintiffs rejected United Mortgage's offer of judgment to pay them full relief.

Offer of Judgment Background

A defendant in an FLSA action wishing to make an offer of judgment pursuant to Rule 68 may serve on an opposing party an offer to allow judgment on specified terms. If the plaintiff serves written notice accepting the offer within 10 days after being served, either party may then file the offer and notice of acceptance, and the clerk will enter the judgment. If the plaintiff rejects the offer of judgment and the judgment that he or she finally obtains is not more favorable than the unaccepted offer, then the plaintiff must pay the litigation costs incurred by the defendant after the offer was made. An offer of judgment must provide all relief that the employee or group of employees would be entitled to receive under the FLSA, including back pay, liquidated damages, attorneys' fees and costs.

Companies have used Rule 68 offers of judgment as tools to obtain an early exit from potentially wide-reaching and expensive FLSA collective actions and cut off the plaintiffs' entitlement to attorneys' fees and costs. The FLSA is an "opt in" statute, which theoretically means that a plaintiff only represents his or her own interests until similarly situated employees opt in as party plaintiffs. Thus, federal courts are grappling with whether an offer of judgment to the named plaintiffs in an FLSA collective action before a class is certified moots the case. See, e.g., O'Brien v. Ed Donnelly Enters., 575 F.3d 567, 574 (6th Cir. 2009); Sandoz v. Cingular Wireless LLC, 553 F.3d 913, 922 (5th Cir. 2008).

Simmons Ruling

In Simmons, four former junior asset managers of United Mortgage filed a collective action alleging that the company improperly classified them as exempt and failed to pay them for overtime hours worked. Counsel for United Mortgage sent two settlement letters to plaintiffs' counsel and argued that they constituted an offer of judgment. After the plaintiffs failed to accept the offer, United Mortgage moved to dismiss the entire case for lack of subject matter jurisdiction, arguing that a live case or controversy no longer existed because the offer provided full relief to the plaintiffs.

The 4th Circuit disagreed, holding that the mortgage company's offer attached conditions the plaintiff employees were not required to accept and failed to satisfy Rule 68 for the following reasons:

  1. The offer did not offer full relief to the employees. Rather than making an unconditional offer on specified terms, it required the plaintiffs to submit affidavits explaining the dates when overtime was worked, the total number of hours worked each week, the total amount of back pay owed, and a statement explaining the plaintiffs' calculations. The court rejected this procedure as ambiguous and held that an offer of judgment "must specify a definite sum or other relief for which judgment may be entered and must be unconditional."
  2. The offer imposed conditions beyond the relief to which employers are entitled under Rule 68. Such conditions included: (a) a requirement that the plaintiffs sign a settlement agreement with a release; (b) a requirement that the plaintiffs keep the settlement and its terms confidential; and (c) a denial of liability by the defendants. Also, the offer did not allow the plaintiffs 10 days to accept as required under Rule 68.
  3. An offer of judgment, if accepted, leads to a judgment against the defendants, which differs from a settlement agreement whereby plaintiffs waive and release their claims. The court noted that judgments offer a substantial advantage to plaintiffs because courts have the inherent power to compel defendants to satisfy judgments entered against them but lack the power to enforce a settlement agreement absent jurisdiction over a breach of contract action for failure to comply with the settlement.
  4. A judgment is public, and an offer made pursuant to Rule 68 cannot require plaintiffs to keep the fact of settlement and its terms confidential.

Conclusion

As Simmons shows, whether an FLSA claim is moot after a Rule 68 offer of judgment is made depends on the factual circumstances, the jurisdiction in which the case is brought, and the procedural status of the claims at issue. If a company decides to make an offer of judgment as a litigation strategy, it must take care to avoid the infirmities in the offer rejected in Simmons and strictly follow the requirements of the rule.

This article is presented for informational purposes only and is not intended to constitute legal advice.