Business Litigation Update: When Settlement Agreements Settle Nothing

In business, there is an absolute need for certainty. With the interminable uncertainty posed by the litigation process, businesses frequently “purchase” certainty by agreeing to settle a lawsuit, oftentimes at amounts which they may subjectively feel to be unjust. However, with such finality, a business is able to properly budget and forecast its financial needs, and hence make solid business decisions. But what happens when the certainty which was “purchased” remains uncertain?

In Nall v. Mal-Motels, Inc., a copy of which is available here, the Eleventh Circuit Court of Appeals opened the floodgates to uncertainty by reversing a settlement which was found to be, after an evidentiary hearing, “a fair and reasonable resolution of a bona fide dispute.” Before we pull all of the (remaining) hair from our heads, it must be noted that this case was decided under the limited confines of the Fair Labor Standards Act (“FLSA”). However, its implications are far-reaching.

Nall started as a routine overtime case. The plaintiff was coaxed by her employer to stop “punching the clock,” and instead was paid a “salary” equal to her hourly rate. There is no known exemption reported to apply. After a few years, the employee grew weary of not receiving any overtime, and quit. The employee, soon finding herself destitute and “homeless,” filed suit.

The employer, without counsel, reached out to the employee and explained that the lawsuit would “ruin his business,” and pleaded with her to quickly settle the case without lawyers. The employee met with the employer, without any counsel present, and at that meeting agreed to resolve the dispute, and signed a Notice of Dismissal With Prejudice along with a pre-prepared letter to her lawyer advising that the case had been settled. In return, the employee received a check and much-needed cash; however, the compensation was dramatically less than what she would have been entitled had she prevailed.

The Notice of Dismissal was filed; however, the trial court sua sponte rejected the Notice as it was not submitted by the employee’s lawyer. The employer then asked the court to enforce the settlement agreement, which the employee’s lawyer opposed. At the evidentiary hearing, the court found that a settlement had in fact been reached, and that the settlement agreement was “a fair and reasonable resolution of a bona fide dispute under the FLSA.” The court then dismissed the case with prejudice. The employee appealed.

The Eleventh Circuit, citing to Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), noted that there are only two ways for an FLSA case to be settled by compromise: (a) under the supervision of the Secretary of Labor, which did not apply to the case; or (2) through a lawsuit between the employee and employer, where the parties “present to the district court a proposed settlement” and “the district court may enter a stipulated judgment after scrutinizing the settlement for fairness.” In so scrutinizing the settlement’s fairness, the court must balance the “often great inequalities in bargaining power between employers and employees.” Indeed, in legislating FLSA, Congress intended “to protect certain groups of the population from substandard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce.” The FLSA encompasses built-in deterrents in the form of liquidated damages to ensure the employer’s compliance, and thus, permitting “an employer to secure a release from the worker who needs his wages promptly will tend to nullify the deterrent effect which Congress plainly intended that [the FLSA] should have.”

The question thus becomes, what constitutes a “stipulated judgment”? A stipulation requires an agreement by two parties. Here, however, even though the court found as a matter of fact, after an evidentiary hearing, that a settlement was reached by the parties, and that the settlement was “a fair and reasonable resolution,” the Eleventh Circuit found that because the employee through her counsel later objected to the enforcement of the settlement agreement, there was no stipulation. Because there was no “stipulated judgment,” there could be no resolution of the FLSA claim. The dismissal was thus reversed.

The Nall Court did leave room to find that the holding was limited to cases where the employee is without counsel by noting, “[s]ettlements may be permissible in the context of a suit brought by employees under the FLSA” because the employees are “likely to be represented by an attorney who can protect their rights under the statute” when the settlement is reached within the “adversarial context of a lawsuit.” However, the court went on to further note that it was not deciding the question of whether a settlement reached by the parties with counsels’ respective participation, but later objected to by employee’s counsel, would comport with the “stipulation” requirement, thus leaving open the very real potential for FLSA-plaintiffs’ counsel to abuse the system by demanding more money at the “stipulation hearing.” Moreover, in virtually every case settled by agreement, a party may suffer from a form of “buyer’s remorse,” which may pervade the very need for certainty at inception. In other words, settlements may become unrealistic in the context of FLSA cases if the Nall doctrine is expanded.

The implications of the case are potentially far-reaching and impactful to other types of claims. Indeed, the case is open to reliance for any claim brought where there are statutory remedies available “to deter misconduct.” It would not take a leap of logic to apply the Nall doctrine and argue that parties cannot settle cases involving statutory claims without the involvement of counsel. After all, to enforce such pro-se agreements would “tend to nullify the deterrent effect which Congress plainly intended.” The holding, if so broadly applied, would actually tend to result in less money available to plaintiffs, as there is an obvious economic cost to pay the lawyers on both sides to “ratify” the parties’ agreement. That is not and cannot be the intent of Congress. Unless, of course, the courts tell us it is.