United States: Res Judicata Applied To FLSA Plaintiffs Based On Prior Opt-Out Class Action Settlement

Case:    Richardson, et al. v. Wells Fargo Bank, N.A.
             United States Fifth Circuit
             No. 15-20711, (5th Cir. Oct. 28, 2016)

On October 14, 2016, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment dismissal of FLSA claims. The Fifth Circuit held that a class action settlement using an opt-out procedure, even if based on state-law claims, may bar later-filed FLSA claims. The Fifth Circuit further held that applying res judicata to bar the later-filed FLSA claims based on the settlement from an opt-out class action was not inconsistent with the FLSA's opt-in requirement.

Wells Fargo Bank N.A., et al, allegedly violated the FLSA by misclassifying home mortgage consultants ("HMCs") as exempt workers and failing to make appropriate overtime payments. The purported class filed suit in the U.S. District Court, Southern District of Texas. After the district court conditionally certified two collective actions, the majority of those who opted in to this class action settled their claims in a court-approved agreement. The settlement, however, excluded 1,516 plaintiffs who opted into the instant action but were members of a previously settled opt-out class action in the Superior Court of California, County of San Francisco: Lofton et al. v. Wells Fargo, San Francisco Superior Court Case No. CGC-11-509502 ("Lofton"). The Fifth Circuit referred to these plaintiffs as the "California Plaintiffs."

The Lofton plaintiffs alleged that Wells Fargo misclassified HMCs as exempt employees and failed to pay appropriate overtime. Lofton involved alleged violations of the FLSA as grounds for California state law wage claims. On April 27, 2011, the Lofton court granted preliminary approval of a settlement for $19 million. To receive a portion of the settlement, class members had to fill out and return the exclusion form. The Lofton settlement contained a release of certain claims whereby class members would "fully and finally release and discharge Wells from any and all applicable state and federal law wage-and-hour claims...including any existing under the Fair Labor Standards Act of 1938."

The Lofton court granted final approval of the settlement on July 27, 2011. Then, on September 2, 2014, in the Texas FLSA action, Wells Fargo moved for summary judgment arguing that res judicata barred the California Plaintiffs' FLSA claims in Texas because none of the California Plaintiffs opted out of the Lofton case and the Lofton release's language included FLSA claims. Of the 1,516 California Plaintiffs, 1,283 filed claim forms in Lofton while 233 did not file claim forms (and therefore did not receive any settlement payment).

On November 4, 2015, the district court granted Wells Fargo's motion for summary judgment on res judicata grounds. First, the district court held that waiver of FLSA claims as part of the Lofton settlement had res judicata effect even though it was accomplished through an opt-out class action. Second, the district court held there was no due process violation that would preclude the application of res judicata because the interests of the Lofton class representative and class counsel were always aligned with the interests of the California Plaintiffs. The district court further found no issues with the notice used in the Lofton settlement. Finally, the district court held that the Lofton settlement was a final judgment for res judicata purposes. While appellate issues did remain in Lofton, the Fifth Circuit held that these issues did not make the judgment any less final. The district court applied California law in deciding whether the Lofton settlement precluded the California Plaintiffs' Texas claims. The California Plaintiffs appealed.

On appeal, the California Plaintiffs argued that FLSA claims released as part of an opt-out class action settlement could never be given preclusive effect against absent class members (unless they opt in) because they are not parties, or in privity with a party, with respect to the release of FLSA claims. The California Plaintiffs' reasoned that, because an FLSA collective action requires that a party opt in under 29 U.S.C. § 216(b) in order to be bound by the collective action, they never became parties to the release of their FLSA claims because they never opted in to the Lofton claims. The California Plaintiffs argued that FLSA claims, due to their opt-in requirement, present an exception to the preclusive effect of a state claim's opt-out class action. In other words, California's opt-out procedure was inconsistent with the FLSA's opt-in rule.

The Fifth Circuit disagreed, holding that the FLSA does not create a special limitation to the extent California law applied its preclusion rules in opt-out class actions, such as Lofton. While FLSA claims cannot be asserted using an opt-out class action procedure, the Fifth Circuit noted that this case was different because a state court already supervised and approved an opt-out class action settlement that expressly released FLSA claims. The Fifth Circuit recognized the FLSA did not create a special exception to the enforceability of judicially approved settlement agreements, such as the Lofton settlement. The Fifth Circuit further held that the FLSA did not create an exception to the Full Faith and Credit Act. The judicially approved settlement in California carried a preclusive effect in Texas federal court. 

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