In a recent decision that will have a significant impact on employers litigating wage-and-hour disputes, the Second Circuit held in Yu v. Hasaki Restaurant, Inc., No. 17-3388-cv (2nd Cir. Dec. 6, 2019) that employers and employees do not need to obtain judicial or Department of Labor ("DOL") approval of settlement terms when resolving a Fair Labor Standards Act ("FLSA") claim if they settle through the "offer of judgment" process under Rule 68 of the Federal Rules of Civil Procedure. Under the Second Circuit's previous decision in Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015), employers and employees must obtain judicial or DOL approval of the settlement terms to enter stipulated dismissals in FLSA cases under Rule 41 of the Federal Rules of Civil Procedure. Now, the Yu decision presents a mechanism for resolving such cases without the need for a fairness review of the settlement terms. The prospect of an easier settlement option under Rule 68 for FLSA litigation is good news for employers and employees alike.

Background on Rule 68 and Mooting FLSA Collective Actions

Rule 68 "was intended to encourage settlements and avoid protracted litigation."1 Under Rule 68(a), a defendant may make an offer of judgment on specified terms to the plaintiff at least fourteen days before the date set for trial. If the plaintiff accepts the offer of judgment, Rule 68(a) provides that either party may file the offer and notice of acceptance with the court, and "[t]he clerk must then enter judgment" (emphasis added). The U.S. Supreme Court held in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1529 (2013) that in FLSA collective actions, in the absence of any opt-in plaintiffs, if the named plaintiffs' claims are mooted (which may occur, for example, by accepting Rule 68 offers of judgment), the collective allegations are likewise mooted. On the other hand, if the plaintiff refuses a Rule 68 offer and the final judgment entered in the litigation is equal to or less than the offer refused, then under Rule 68(d), the plaintiff must pay for the defendant's litigation costs incurred after the offer was made. The Supreme Court has held that an unaccepted offer of judgment does not moot a case even if the defendant offers full relief, effectively overruling the part of Genesis Healthcare that suggested that an unaccepted offer of judgment will moot putative class claims. See Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, 670 (2016), as revised (Feb. 9, 2016).

In Campbell-Ewald, the Supreme Court left open the question of whether depositing full relief in an account payable to the plaintiff and having the court enter judgment in that amount would moot a case. See id. at 672. At least one New York federal district court has addressed this issue in a putative collective action under the FLSA: In Malancea v. MZL Home Care Agency LLC, 2019 WL 1027926, at *6-8 (E.D.N.Y. Feb. 1, 2019), report and recommendation adopted, 2019 WL 1025226 (E.D.N.Y. Mar. 4, 2019), the court denied the defendant's motion to deposit funds with the court pursuant to Rule 67 of the Federal Rules of Civil Procedure because the plaintiff had not yet had an opportunity to argue for certification of the collective action. However, the Second Circuit has not decided whether depositing full relief with the plaintiff and having a court enter judgment moots a putative FLSA collective action.2 Other courts outside the Second Circuit are split regarding the circumstances in which payment of full relief to the plaintiff moots an action.3

Historical Development of Restrictions on Settling FLSA Claims

The FLSA provides employees a private right of action for unpaid wages, including violations of the minimum wage and overtime pay rules, and allows employees to recover liquidated damages equal to unpaid wages in certain circumstances. See 29 U.S.C. § 216(b).

Early in the FLSA's history, the Supreme Court expressed its concerns about protecting employees from employer's superior bargaining power in the context of FLSA settlements. In Brooklyn Savings Bank v. O'Neil, 324 U.S. 697, 704 (1945) and D.A. Schulte, Inc. v. Gangi, 328 U.S. 108, 116 (1946), respectively, the Supreme Court held that employees could not waive their rights to liquidated damages "in the absence of a bona fide dispute between the parties as to liability" and that even when parties have agreed to settle bona fide disputes under the FLSA, "neither wages nor the damages for withholding them are capable of reduction by compromise of controversies over coverage."

Since Brooklyn Savings Bank and Gangi, a general rule prohibiting private settlements in FLSA cases has emerged.4 The Eleventh Circuit in Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350, 1355 (11th Cir. 1982) first concluded that FLSA cases cannot be settled without judicial or DOL approval of the fairness of the settlement terms. Some federal district courts in the Eleventh Circuit have applied Lynn's Foods Stores, Inc. to conclude that judicial approval is required for Rule 68 stipulated judgments.5

More recently, in Bodle v. TXL Mortgage Corporation, 788 F.3d 159, 164-65 (5th Cir. 2015), the Fifth Circuit recognized that although settlements of FLSA claims are prohibited "in the absence of supervision by the Department of Labor or scrutiny from a court," an exception to that general rule exists for "unsupervised settlements that are reached due to a bona fide FLSA dispute over hours worked or compensation owed." That rule emerges from the Fifth Circuit's decision in Martin v. Spring Break '83 Productions, L.L.C., 688 F.3d 247, 255 (5th Cir. 2012), in which the court held that when an employee and employer dispute the number of hours of work for which the employer owes the employee pay, the parties' settlement agreement is not a compromise of substantive rights guaranteed by the FLSA, but rather, a "bona fide dispute about time worked." In concluding that settlement of such a dispute does not require judicial or DOL approval, the Fifth Circuit relied on the Supreme Court's comment in Gangi that the Supreme Court did not "consider [t]here the possibility of compromises in other situations which may arise, such as a dispute over the number of hours worked or the regular rate of employment."6

According to the Second Circuit, the general rule prohibiting unsupervised settlements developed in cases addressing "private FLSA settlement[s]" before litigation, rather than "private stipulated dismissal[s] of FLSA claims" after litigation commences.7 In Cheeks, the Second Circuit addressed the narrow context of stipulated dismissals with prejudice under Rule 41 of the Federal Rules of Civil Procedure and concluded, in line with Lynn's Foods Stores, Inc., that parties in FLSA cases must obtain judicial or DOL approval before such a stipulation of dismissal can be entered.8 Because Rule 41 allows parties to stipulate to dismissal of any action that is "subject to . . . any applicable federal statute" and because the Second Circuit concluded that the FLSA is "an applicable federal statute," the court held that the FLSA's restrictions on settlements apply to Rule 41 stipulated dismissals. The Second Circuit reasoned that "[r]equiring judicial or DOL approval of such settlements is consistent with what both the Supreme Court and our Court have long recognized as the FLSA's underlying purpose: 'to extend the frontiers of social progress by insuring to all our able-bodied working men and women a fair day's pay for a fair day's work.'"9

Cheeks, however, left open the question of whether another potential mechanism for dismissal of an FLSA action – a stipulated judgment pursuant to a Rule 68 offer of judgment – requires judicial approval before being entered. Following Cheeks, district courts within the Second Circuit issued inconsistent decisions on this issue. Some courts reasoned that Rule 68's mandatory language ("[t]he clerk must then enter judgment") compels the clerk of the court to enter judgment regardless of whether the parties have obtained judicial or DOL approval of the settlement terms, while other courts interpreted Cheeks as requiring judicial or DOL approval for entering judgment on an FLSA claim even following acceptance of a Rule 68 offer of judgment.10

The Second Circuit's Decision in Yu

On December 6, 2019, the Second Circuit resolved the district court split by holding in Yu that judicial approval of settlement is not required for Rule 68 offers of judgment settling FLSA claims. See Yu at 3. The court framed the issue as: "whether acceptance of a Rule 68(a) offer of judgment that disposes of an FLSA claim in litigation needs to be reviewed by a district court or the DOL for fairness before the clerk of the court can enter the judgment." Id. at 6. In reaching its conclusion, the Court found dispositive Rule 68(a)'s mandatory language – "[t]he clerk must then enter judgment" (emphasis added), because nothing in the FLSA's text exempts FLSA claims from Rule 68(a)'s mandatory language. See id. at 19, 25- 27. The court viewed Brooklyn Savings Bank and Gangi as limited, noting that the Supreme Court "expressly reserved the question of whether waiver or compromise of FLSA rights is permissible 'in . . . situations . . . such as a dispute over the number of hours worked or the regular rate of employment'" and, more importantly, Gangi's footnote indicates "that settlements in the context of ongoing FLSA litigation may be permissible." Id. at 16 (quoting Gangi, 328 U.S. at 114 n.8), 18-19; see Yu at 19 n.67. Moreover, according to the court, Cheeks' requirement for judicial or DOL approval is limited to dismissals under Rule 41, and other circuits have held "only that purely private settlements of FLSA claims, independent of any litigation, are prohibited without judicial approval or DOL supervision" rather than that judicial approval is required for Rule 68 judgments to be entered in the course of litigation. See id. at 19, 26-27.

Judge Calabresi wrote a sharply worded dissent, setting forth his position that entering Rule 68 offers of judgment in FLSA cases still requires judicial approval. Unlike the majority, he viewed Gangi's footnote as indicating that "court-supervised settlements" may be valid but not that all settlements reached during litigation are permissible, and read other courts' decisions as standing for the proposition that entering any settlements in the FLSA context without judicial or DOL approval is impermissible. Id. at 10 (Calabresi, dissenting); see id. at 19. However, in identifying three means for settling FLSA claims, he indicated his agreement with the majority that the Supreme Court left open the question of whether settlements of bona fide disputes over hours worked or rate of employment are permissible: "the FLSA . . . – at most – allows three forms of settlement agreements: (1) a settlement supervised by the Department of Labor; (2) a settlement subjected to judicial scrutiny; and (3) perhaps, a settlement negotiated pursuant to a bona fide dispute as to hours worked or the rate of employment." Id. at 14.

On January 7, 2020, the Public Citizen Litigation Group ("PCLG") filed a petition for rehearing en banc. The Second Circuit had invited the PCLG to participate as amicus curaie in the Yu case to defend the district court's ruling, as both the Plaintiff and the Defendant had taken the same position on appeal in opposing the district court's order requiring them to submit their settlement agreement to the court for a fairness review and judicial approval. Id. at 6. The PCLG argues that the Second Circuit's decision in Yu conflicts with Cheeks, Brooklyn Savings Bank, Gangi, and other Circuit Courts' decisions, and will enable employers to coerce employees into settlements. On January 17, 2020, Defendant Hasaki Restaurant filed its opposition to the PCLG's petition. As of the date of this article, the PCLG's petition for rehearing en banc remains pending.

Employer Takeaways

Employers and counsel should remember that Rule 68 can be a valuable tool for plaintiffs and defendants alike. In FLSA cases, employers may seek to use Rule 68 as a strategy to "pick off" named plaintiffs, thus preventing collective allegations from proceeding if the offers of judgment are accepted. And now, Rule 68 may be particularly useful in the FLSA context within the Second Circuit as a means to avoid the requirement of obtaining judicial or DOL approval of settlement terms' fairness. Accordingly, Rule 68 offers in the FLSA context may provide two cost-saving incentives: an accepted offer may (1) reduce litigation costs and (2) avoid the costs of judicial review of the settlement's terms (to which a voluntary dismissal under Rule 41 is still subject). An unaccepted offer also provides a cost-saving incentive: the possibility of reduced litigation costs, if the final judgment entered in the litigation is equal to or less than the amount of the offer that was refused. Of course, in considering whether to make an offer of judgment, employers should weigh the costs of proceeding with litigation and/or with a judicial review of settlement terms against the price of the offer of judgment. In weighing those factors and assessing a potential offer of judgment, employers should also consider the extent to which plaintiffs may also find savings (through both reduced litigation costs and avoiding the costs associated with judicial review of settlement terms) by resolving FLSA cases through Rule 68 offers of judgment, and thus, might be eager to proceed through that settlement mechanism.11

Footnotes

1. Toar v. Sushi Nomado of Manhattan, Inc., 2017 U.S. Dist. LEXIS 55162, at *9 (S.D.N.Y. Mar. 16, 2017) (quoting Wright & Miller, Federal Practice and Procedure § 3001).

2. In Leyse v. Lifetime Entertainment Services, LLC, 679 Fed. App'x 44, 47-48 (2d Cir. 2017), the Second Circuit concluded that depositing the full amount of a plaintiff's individual claim with the court and having the court enter judgment for the plaintiff after the court denied class certification moots an individual claim. And in Radha Geismann, M.D., P.C. v. ZocDoc, Inc., 909 F.3d 534, 542-43 (2d Cir. 2018), cert. denied sub nom. ZocDoc, Inc. v. Geismann, 139 S. Ct. 1605 (2019), the Second Circuit required that "the district court . . . resolve the pending motion for class certification before entering judgment and declaring an action moot based solely on relief provided to a plaintiff on an individual basis" through a deposit with the court pursuant to Rule 67. However, these cases did not address putative FLSA collective actions.

3. See, e.g., Boger v. Trinity Heating & Air, Inc., 2018 WL 6050886, at *3-5 (D. Md. Nov. 16, 2018) (analyzing on the one hand, cases reflecting "that allowing a class action defendant to use Rule 67 or other means of tender to moot a class action claim before the plaintiff has had an opportunity to seek class certification is contrary to the principles underlying Campbell-Ewald" and on the other hand, "district court decisions that have permitted a defendant to moot a would-be class representative's claim through a tender of payment"); Kuntze v. Josh Enterprises, Inc., 365 F. Supp. 3d 630, 640-42 (E.D. Va. 2019) (collecting cases and noting "[a]fter the decision in Campbell-Ewald, courts have split on whether actual payment of full relief moots an individual's claim, with multiple decisions turning on whether the case was a class action").

4. See, e.g., Cheeks, 796 F.3d at 203 n.4 (collecting cases); Taylor v. Progress Energy, Inc., 493 F.3d 454, 460 (4th Cir. 2007) ("[U]nder the FLSA, a labor standards law, there is a judicial prohibition against the unsupervised waiver or settlement of claims.").

5. See, e.g., Walker v. Vital Recovery Servs., 300 F.R.D. 599, 602 (N.D. Ga. 2014) (collecting cases).

6. Martin, 688 F.3d at 255 (quoting Gangi, 328 U.S. at 114-115).

7. Cheeks, 796 F.3d at 204.

8. See id., 796 F.3d at 201 ("The question of whether judicial approval of, and public access to, FLSA settlements is required is an open one in our Circuit."), 204, 206.

9. Id. at 206 (quoting A.H. Phillips, Inc. v. Walling, 324 U.S. 490, 493(1945)); see Cheeks, 796 F.3d at 201.

10. See, e.g., Yu v. Hasaki Rest., Inc., 319 F.R.D. 111, 116-17 (S.D.N.Y. 2017); Baba v. Beverly Hills Cemetery Corp., 2016 WL 2903597, at *1 (S.D.N.Y. May 9, 2016); cf. Yu, 319 F.R.D. at 117 ("And in light of the split among the district courts, resolution by the Second Circuit is plainly desirable, if not necessary.").

11. Employers and counsel should also keep their eyes out for further developments within the Second Circuit following the decision in Yu. The PCLG's motion for reconsideration en banc is pending, and some practitioners have opined that the Second Circuit may be open to reconsideration. Moreover, the comments in both the majority and the dissenting opinions in Yu about Brooklyn Savings Bank's and Gangi's limitations suggest that the Second Circuit may be open to the Fifth Circuit's rule that "in the absence of supervision by the Department of Labor or scrutiny from a court, a settlement of an FLSA claim is prohibited" except for "unsupervised settlements that are reached due to a bona fide FLSA dispute over hours worked or compensation owed." Bodle, 788 F.3d at 164-65.

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