Beneath the Radar: The Seventh Circuit Quietly Overhauls FLSA Collective Action Litigation

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Beneath the Radar: The Seventh Circuit Quietly Overhauls FLSA Collective Action Litigation

With a few casual sentences, the Seventh Circuit Court of Appeals has called into question the standards used by most district courts for the past three decades to certify collective actions under the Fair Labor Standards Act (FLSA). The case is Espenscheid v. DirectSAT USA, LLC, No. 12-1943 (7th Cir. Feb. 4, 2013), and the court’s opinion, if it means what it appears to mean, may turn out to have great practical significance for employers.

Background

Over the past 15 years, one of the biggest threats employers have come to face in employment litigation is the FLSA collective action. The dramatic increase in such litigation is due in part to the way district courts treat FLSA collective actions differently than other types of class actions.

Most class actions in federal court are governed by Rule 23 of the Federal Rules of Civil Procedure, which provides detailed requirements for certifying a class action and sets a relatively high bar for wannabe class action plaintiffs.

The FLSA, however, is an elderly statute that predates the modern version of Rule 23 by several decades. That statute, which governs minimum wages and overtime pay, includes its own provision (29 U.S.C. § 216(b)) allowing employees to pursue claims collectively. Many courts have concluded that Rule 23’s rigorous certification standards therefore do not apply to FLSA collective actions (or to collective actions under the Age Discrimination in Employment Act, which incorporates the FLSA’s collective action provision). For examples, see Grayson v. K Mart Corp., 79 F.3d 1086, 1096 n.12 (11th Cir. 1996) and LaChapelle v. Owens Illinois, Inc., 513 F.2d 286, 289 (5th Cir.1975).

In place of Rule 23’s requirements, district courts have developed their own “ad hoc” procedures for certifying FLSA collective actions. The most widely used procedure now is a two-step process. At the first step, a plaintiff moves early in a case for the court to certify a “conditional” collective action. Upon conditional certification, the plaintiff is allowed to send court-approved notice of the case to other current and former employees inviting them to join the case as opt-in plaintiffs. This is followed by a period of discovery focused on the class (or, more accurately, the “collective”). Such class discovery can be extensive depending on how many current and former employees have joined the conditional collective action.

At the second step, the defendant moves the court to de-certify the collective action based on the class discovery completed. At this stage, the plaintiff and opt-ins must carry a somewhat higher burden to show all the members of the class are actually similarly situated, meaning they have basically the same claims under the FLSA.

The explosion of FLSA collective action litigation

These seemingly arcane procedural matters have had real world consequences for employers, namely, a great deal of litigation.

The exact standards district courts use to grant conditional certification in FLSA cases vary from district to district, but the burden placed on plaintiffs is universally low. As a result, conditional certification in FLSA cases is often granted. A single plaintiff (or, more properly, his or her attorney) can thus easily turn a one-person lawsuit into a massive case involving dozens, hundreds, or even thousands of opt-ins and imposing substantial burdens on a defendant. And defendants, faced with exorbitant discovery costs and risks in such cases, often feel tremendous pressure to settle rather than fight on.

These facts have not been lost on plaintiffs’ attorneys. Thanks in part to the lenient standards district courts use for conditionally certifying collective actions, litigation under the FLSA has exploded. Between 1997 and 1998, the number of FLSA collective actions filed in federal courts doubled from a mere 31 to 60. By 2011, federal courts saw more than 2,500 such actions filed.

Complicating matters is the surprising dearth of guidance from federal appellate courts on whether the lenient standards applied by district courts are correct. The courts of appeals have so far taken a hands-off approach. Indeed, several have ruled that a district court’s decision to conditionally certify an FLSA collective action at the first stage is unreviewable on appeal because it’s only a provisional decision and the district court can still decertify the collective action at the second stage. For examples, see, McElmurry v. U.S. Bank Nat’l Ass’n, 495 F.3d 1136, 1142 (9th Cir. 2007), Comer v. Wal-Mart Stores, Inc., 454 F.3d 544, 549 (6th Cir. 2006), and Baldridge v. SBC Commc’ns, Inc., 404 F.3d 930, 931-33 (5th Cir. 2005).

Of course, most FLSA collective actions never get to the second stage because defendants often settle following conditional certification, meaning collective actions seldom reach the courts of appeals. As a result, district courts are routinely certifying conditional collective actions under the FLSA—some of which are massive—with virtually no appellate case law reviewing and refining the standards for such certification.

The Seventh Circuit’s new decision

The Seventh Circuit’s new decision, Espenscheid, is one of those rare cases in which a court of appeals has commented on the standards for certifying an FLSA collective action.

In Espenscheid, the Seventh Circuit reviewed a district court’s decision to decertify both an FLSA collective action and a Rule 23 class action within the same case. The plaintiffs were technicians employed to install and repair home satellite dishes. Three named plaintiffs sued alleging claims under the FLSA and various state wage laws claiming that they and other employees were owed additional overtime pay and minimum wages. The district court initially certified the case as an FLSA collective action and as a Rule 23 class action with respect to the state wage law claims. The classes included 2,341 members. After discovery and as the case neared trial, the district court decertified the classes, and the case reverted back to a three-plaintiff suit.

On appeal, the sole issue was whether the district court correctly decertified the classes. In addressing this question, the Seventh Circuit took great pains to point out that it believed there was no relevant difference between the FLSA collective action and the Rule 23 class action. The court declared that despite the different procedures under the FLSA and Rule 23, “there isn’t a good reason to have different standards for the certification of the two different types of action.”  The court further observed “the provisions of Rule 23 are intended to promote efficiency” and “in that regard are as relevant to collective actions as to class actions.”

The Seventh Circuit then affirmed the district court’s decision to decertify the classes on the ground the plaintiffs failed to present a feasible plan for trying the 2,341 class members’ claims. Although the plaintiffs proposed presenting testimony from 42 “representative” plaintiffs, the Seventh Circuit found there was no showing these 42 plaintiffs were actually representative of other class members. To the contrary, the plaintiffs’ allegations showed that liability and damages, if any, would vary from class member to class member based on the particular facts of his or her employment.

The court concluded that the plaintiffs, lacking any realistic plan for conducting a collective trial, “must think that like most class action suits this one would not be tried—that if we ordered a class or classes certified, [the defendant] would settle.” But the court made clear that such an approach cannot be tolerated. “[C]lass counsel cannot be permitted to force settlement by refusing to agree to a reasonable method of trial should settlement negotiations fail.”

Practical Impact

In Espenscheid, the Seventh Circuit powerfully highlights the fact that district courts face the same challenges in adjudicating claims in class cases regardless whether they are certified under the FLSA or Rule 23. The court concludes that if the practical challenges at the end of the certification process are the same, then the standards for certifying FLSA collective actions and Rule 23 class actions should be the same as well. Although the Seventh Circuit does not expressly reject the “ad hoc” standards most district courts now use to certify FLSA collective actions, the court’s commonsense reasoning certainly calls those standards into question. Employers will now have significant new authority to argue district courts should require plaintiffs to carry a much heavier burden to win and maintain FLSA collective action certification akin to their burden under Rule 23 for other class certification.

In a related development, the Fifth Circuit appears set to consider similar issues In re Wells Fargo Wage and Hour Employment Practices Litigation (No. III), No. 12-20605, which is currently being briefed and will be argued later this year. In that case, an employer is directly challenging the district court’s use of the two-step “ad hoc” certification procedure. Unlike Espenscheid, the Wells Fargo case has already drawn significant attention with numerous outside interests filing amicus briefs, including the U.S. Chamber of Commerce and the U.S. Department of Labor.

Watch here for further developments.

Christopher C. Murray is a shareholder in the Indianapolis office of Ogletree Deakins.

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With a few casual sentences, the Seventh Circuit Court of Appeals has called into question the standards used by most district courts for the past three decades to certify collective actions under the Fair Labor Standards Act (FLSA). The case is Espenscheid v. DirectSAT USA, LLC, No. 12-1943 (7th Cir. Feb. 4, 2013), and the court’s opinion, if it means what it appears to mean, may turn out to have great practical significance for employers.

Background

Over the past 15 years, one of the biggest threats employers have come to face in employment litigation is the FLSA collective action. The dramatic increase in such litigation is due in part to the way district courts treat FLSA collective actions differently than other types of class actions.

Most class actions in federal court are governed by Rule 23 of the Federal Rules of Civil Procedure, which provides detailed requirements for certifying a class action and sets a relatively high bar for wannabe class action plaintiffs.

The FLSA, however, is an elderly statute that predates the modern version of Rule 23 by several decades. That statute, which governs minimum wages and overtime pay, includes its own provision (29 U.S.C. § 216(b)) allowing employees to pursue claims collectively. Many courts have concluded that Rule 23’s rigorous certification standards therefore do not apply to FLSA collective actions (or to collective actions under the Age Discrimination in Employment Act, which incorporates the FLSA’s collective action provision). For examples, see Grayson v. K Mart Corp., 79 F.3d 1086, 1096 n.12 (11th Cir. 1996) and LaChapelle v. Owens Illinois, Inc., 513 F.2d 286, 289 (5th Cir.1975).

In place of Rule 23’s requirements, district courts have developed their own “ad hoc” procedures for certifying FLSA collective actions. The most widely used procedure now is a two-step process. At the first step, a plaintiff moves early in a case for the court to certify a “conditional” collective action. Upon conditional certification, the plaintiff is allowed to send court-approved notice of the case to other current and former employees inviting them to join the case as opt-in plaintiffs. This is followed by a period of discovery focused on the class (or, more accurately, the “collective”). Such class discovery can be extensive depending on how many current and former employees have joined the conditional collective action.

At the second step, the defendant moves the court to de-certify the collective action based on the class discovery completed. At this stage, the plaintiff and opt-ins must carry a somewhat higher burden to show all the members of the class are actually similarly situated, meaning they have basically the same claims under the FLSA.

The explosion of FLSA collective action litigation

These seemingly arcane procedural matters have had real world consequences for employers, namely, a great deal of litigation.

The exact standards district courts use to grant conditional certification in FLSA cases vary from district to district, but the burden placed on plaintiffs is universally low. As a result, conditional certification in FLSA cases is often granted. A single plaintiff (or, more properly, his or her attorney) can thus easily turn a one-person lawsuit into a massive case involving dozens, hundreds, or even thousands of opt-ins and imposing substantial burdens on a defendant. And defendants, faced with exorbitant discovery costs and risks in such cases, often feel tremendous pressure to settle rather than fight on.

These facts have not been lost on plaintiffs’ attorneys. Thanks in part to the lenient standards district courts use for conditionally certifying collective actions, litigation under the FLSA has exploded. Between 1997 and 1998, the number of FLSA collective actions filed in federal courts doubled from a mere 31 to 60. By 2011, federal courts saw more than 2,500 such actions filed.

Complicating matters is the surprising dearth of guidance from federal appellate courts on whether the lenient standards applied by district courts are correct. The courts of appeals have so far taken a hands-off approach. Indeed, several have ruled that a district court’s decision to conditionally certify an FLSA collective action at the first stage is unreviewable on appeal because it’s only a provisional decision and the district court can still decertify the collective action at the second stage. For examples, see, McElmurry v. U.S. Bank Nat’l Ass’n, 495 F.3d 1136, 1142 (9th Cir. 2007), Comer v. Wal-Mart Stores, Inc., 454 F.3d 544, 549 (6th Cir. 2006), and Baldridge v. SBC Commc’ns, Inc., 404 F.3d 930, 931-33 (5th Cir. 2005).

Of course, most FLSA collective actions never get to the second stage because defendants often settle following conditional certification, meaning collective actions seldom reach the courts of appeals. As a result, district courts are routinely certifying conditional collective actions under the FLSA—some of which are massive—with virtually no appellate case law reviewing and refining the standards for such certification.

The Seventh Circuit’s new decision

The Seventh Circuit’s new decision, Espenscheid, is one of those rare cases in which a court of appeals has commented on the standards for certifying an FLSA collective action.

In Espenscheid, the Seventh Circuit reviewed a district court’s decision to decertify both an FLSA collective action and a Rule 23 class action within the same case. The plaintiffs were technicians employed to install and repair home satellite dishes. Three named plaintiffs sued alleging claims under the FLSA and various state wage laws claiming that they and other employees were owed additional overtime pay and minimum wages. The district court initially certified the case as an FLSA collective action and as a Rule 23 class action with respect to the state wage law claims. The classes included 2,341 members. After discovery and as the case neared trial, the district court decertified the classes, and the case reverted back to a three-plaintiff suit.

On appeal, the sole issue was whether the district court correctly decertified the classes. In addressing this question, the Seventh Circuit took great pains to point out that it believed there was no relevant difference between the FLSA collective action and the Rule 23 class action. The court declared that despite the different procedures under the FLSA and Rule 23, “there isn’t a good reason to have different standards for the certification of the two different types of action.”  The court further observed “the provisions of Rule 23 are intended to promote efficiency” and “in that regard are as relevant to collective actions as to class actions.”

The Seventh Circuit then affirmed the district court’s decision to decertify the classes on the ground the plaintiffs failed to present a feasible plan for trying the 2,341 class members’ claims. Although the plaintiffs proposed presenting testimony from 42 “representative” plaintiffs, the Seventh Circuit found there was no showing these 42 plaintiffs were actually representative of other class members. To the contrary, the plaintiffs’ allegations showed that liability and damages, if any, would vary from class member to class member based on the particular facts of his or her employment.

The court concluded that the plaintiffs, lacking any realistic plan for conducting a collective trial, “must think that like most class action suits this one would not be tried—that if we ordered a class or classes certified, [the defendant] would settle.” But the court made clear that such an approach cannot be tolerated. “[C]lass counsel cannot be permitted to force settlement by refusing to agree to a reasonable method of trial should settlement negotiations fail.”

Practical Impact

In Espenscheid, the Seventh Circuit powerfully highlights the fact that district courts face the same challenges in adjudicating claims in class cases regardless whether they are certified under the FLSA or Rule 23. The court concludes that if the practical challenges at the end of the certification process are the same, then the standards for certifying FLSA collective actions and Rule 23 class actions should be the same as well. Although the Seventh Circuit does not expressly reject the “ad hoc” standards most district courts now use to certify FLSA collective actions, the court’s commonsense reasoning certainly calls those standards into question. Employers will now have significant new authority to argue district courts should require plaintiffs to carry a much heavier burden to win and maintain FLSA collective action certification akin to their burden under Rule 23 for other class certification.

In a related development, the Fifth Circuit appears set to consider similar issues In re Wells Fargo Wage and Hour Employment Practices Litigation (No. III), No. 12-20605, which is currently being briefed and will be argued later this year. In that case, an employer is directly challenging the district court’s use of the two-step “ad hoc” certification procedure. Unlike Espenscheid, the Wells Fargo case has already drawn significant attention with numerous outside interests filing amicus briefs, including the U.S. Chamber of Commerce and the U.S. Department of Labor.

Watch here for further developments.