On January 11, 2016, the U.S. Supreme Court denied a petition for writ of certiorari in Cheeks v. Freeport Pancake House, Inc., et al., declining to address whether the parties in a non-collective lawsuit brought under the Fair Labor Standards Act (“FLSA”) may stipulate, without court approval, to dismiss the case with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1). The denial leaves intact the decision of the U.S. Court of Appeals for the Second Circuit, in which the court held that the settlement and stipulated dismissal of such cases require court approval or Department of Labor (“DOL”) supervision.
Petitioner-plaintiff, Dorian Cheeks, filed suit against his employer, Freeport Pancake House, in August 2012, seeking to recover unpaid overtime wages, liquidated damages and attorneys’ fees under the FLSA and New York Labor Law. Cheeks also sought damages for unlawful retaliation, claiming that he had been demoted and then fired for complaining about his employer’s failure to pay him and other employees overtime pay.
Following a period of discovery, the parties entered into a written settlement agreement and filed a joint stipulation of dismissal with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii). However, the U.S. District Court for the Eastern District of New York declined to accept the stipulation of dismissal, holding that Cheeks could not agree to settle his FLSA claims without either the approval of the court or the supervision of the DOL. The district court directed the parties to file a copy of the settlement agreement with the court and ordered the parties to “show cause by providing the Court with additional information in the form of affidavits or other documentary evidence explaining why the proposed settlement is fair and reasonable.”
The parties opted not to disclose the terms of their settlement, and instead filed an interlocutory appeal with the Second Circuit. The question presented before the Second Circuit was whether FLSA actions constitute an exception to Rule 41(a)(1)(A)(ii)’s general provision that parties may stipulate to the dismissal of an action without the involvement of the court. The Second Circuit answered this question in the affirmative, holding that “Rule 41(a)(1)(A)(ii) stipulated dismissals settling FLSA claims with prejudice require the approval of the district court or the DOL to take effect.” The court reasoned that requiring judicial or DOL approval is consistent with the FLSA’s primary remedial purpose, namely, to “prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees.” In support of its decision, the Second Circuit examined “the basis on which district courts recently rejected several proposed FLSA settlements” and identified examples of settlement provisions that highlighted “the potential for abuse in such settlements.” Such provisions included:
Highly restrictive confidentiality provisions;
A release that required the waiver of “practically any possible claim against the defendants, including unknown claims and claims that have no relationship whatsoever to wage‐and‐hour issues”;
A fee provision that awarded a plaintiff’s attorney between 40.0% and 43.6% of the settlement payment, “without adequate documentation to support such a fee award”; and
An agreement by a plaintiff’s attorney not to represent “any person bringing similar claims against Defendants.”
What does this mean for employers? The Second Circuit’s holding in Cheeks further limits the ability of employers to settle FLSA cases pursuant to stipulations of dismissal with prejudice. Employers should consider the potential impact of Cheeks when attempting to resolve FLSA litigation. Moreover, employers that attempt to settle such cases should avoid the types of settlement provisions identified by the Second Circuit to the extent practicable.