FLSA Claims Barred by Settlement of Opt-Out Class Action in California State Court: Fifth Circuit | Practical Law

FLSA Claims Barred by Settlement of Opt-Out Class Action in California State Court: Fifth Circuit | Practical Law

In Richardson v. Wells Fargo Bank, N.A., the US Court of Appeals for the Fifth Circuit held that an overtime action brought under Fair Labor Standards Act (FLSA) in US district court by home mortgage consultants was precluded by a previously settled action brought in California state court.

FLSA Claims Barred by Settlement of Opt-Out Class Action in California State Court: Fifth Circuit

by Practical Law Labor & Employment
Published on 24 Oct 2016 • USA (National/Federal)
In Richardson v. Wells Fargo Bank, N.A., the US Court of Appeals for the Fifth Circuit held that an overtime action brought under Fair Labor Standards Act (FLSA) in US district court by home mortgage consultants was precluded by a previously settled action brought in California state court.
On October 14, 2016, in Richardson v. Wells Fargo Bank, N.A., the US Court of Appeals for the Fifth Circuit held that an opt-in class action for unpaid overtime brought under the Fair Labor Standards Act (FLSA) in US district court by misclassified home mortgage consultants was precluded by a previously settled opt-out class action brought in California state court. The Fifth Circuit acknowledged that although FLSA claims cannot be brought as an opt-out class action, the FLSA does not prohibit state courts from overseeing and approving an opt-out class action settlement that includes a release of FLSA claims. The Fifth Circuit also held that:
  • The settlement of the previously settled action did not violate due process requirements.
  • The FLSA does not create an exception to:
    • how California's state preclusion law treats enforcement of an opt-out class action settlement; and
    • the federal Full Faith and Credit Act's requirement that judicial proceedings in a state be given the same full faith and credit in federal courts as in the courts of the state in which those proceedings took place.
( (5th Cir. Oct. 14, 2016).)

Background

Home mortgage consultants (HMCs) working for Wells Fargo and other banks brought FLSA claims in US district court (the pending federal action) alleging that they had been misclassified as exempt and were due unpaid overtime. After the district court conditionally certified two collective actions, most of the opt-in plaintiffs settled their claims and the district court approved the settlement. The settlement did not include over 1,500 plaintiffs (the California HMCs) who had opted into the pending federal action but who were also part of an earlier opt-out settlement in Lofton v. Wells Fargo, a 2005 action brought by HMCs against Wells Fargo in a California state court (see Lofton et al. v. Wells Fargo, San Francisco Superior Court Case No. CGC-11-509502 ("Lofton").
The Lofton settlement was approved by the California state court in 2011. Lofton class members received a notice of the proposed settlement (along with a claim form and an exclusion form) and were given the option of either:
  • Receiving a portion of the settlement by filling out and returning the claim form.
  • Opting out of the settlement by returning the exclusion form.
The Lofton settlement:
  • Included a release of certain claims against Wells Fargo, including claims under both California law and the FLSA.
  • Provided that class members who had not opted out of the settlement were bound by the release.
  • Gave the California court "continuing jurisdiction over the construction, interpretation, implementation, and enforcement" of the settlement.
In 2014, the district court in the pending federal action granted Wells Fargo's motion for summary judgment, holding that:
  • The release of FLSA claims in the Lofton settlement had a res judicata effect for the California HMCs even though Lofton was an opt-out class action.
  • The California HMCs' due process rights were not violated because the interests of the California HMCs were always aligned with those of the Lofton class representatives.
  • The Lofton settlement was a final judgment for res judicata purposes.
The California HMCs appealed.

Outcome

The Fifth Circuit:
  • Affirmed the district court's grant of summary judgment to Wells Fargo.
  • Held that the Lofton settlement:
    • precluded the California HMCs' FLSA claims in the pending federal action;
    • satisfied due process; and
    • was a final judgment for res judicata purposes.
  • Further held that the FLSA does not create an exception to:
    • how California's preclusion law treats enforcement of an opt-out class action settlement; or
    • Section 1738 of the federal Full Faith and Credit Act.
The Fifth Circuit noted that:
  • Res judicata is an affirmative defense that a defendant must establish (Taylor v. Sturgell, 553 U.S. 880, 907 (2008)).
  • Section 1738 of the federal Full Faith and Credit Act provides that a state's judicial proceedings have the same full faith and credit in every US court as in the state court they were held (see 28 U.S.C. § 1738; Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996)).
  • Based on Section 1738, a federal court must "give state court judgments the same preclusive effect they would have in another court of the same state" (In re Lease Oil Antitrust Litig. (No. II), 200 F.3d 317, 320 (5th Cir. 2000)).
  • A prior settlement of an FLSA claim can have a preclusive effect under Section 1738 if:
    • state law indicates that the claim would be barred from litigation in that state's courts; and
    • the FLSA creates an express or implied exception to Section 1738 so that the state court's judgment should not have a preclusive effect.
    (Matsushita, 516 U.S. at 375.)
  • California law would apply res judicata and preclude the California HMCs' FLSA claims because in Lofton:
    • the case proceeded under California rules which allow opt out class actions;
    • the California HMCs received a notice indicating the terms of the pending settlement including a clear release of FLSA claims;
    • the notice informed the class members that if they did not opt out of the settlement, they would be bound by its terms;
    • the California HMCs did not opt out; and
    • the court approved the settlement and found that the distribution of the notice of settlement, claim form, and exclusion form satisfied due process requirements.
The California HMCs argued that the FLSA claims released in the Lofton opt-out class action settlement cannot be given preclusive (or res judicata) effect against absent class members (unless those class members opted in) because:
  • The FLSA creates a special limitation on California applying its preclusion rules to opt-out class actions.
  • They never became parties to the release of their FLSA claims because they did not opt in to the Lofton settlement, as FLSA collective actions require that a party opts in under FLSA Section 216(b) in order to be bound by the collective action.
  • The Lofton settlement was not a final judgment because there were pending appeals.
  • HMCs who did not submit claim forms in Lofton cannot have their claims precluded because they received no settlement money as consideration for their release.
The Fifth Circuit rejected the California HMCs' argument that the FLSA creates an exception to how California preclusion law would treat the enforcement of an opt out class action settlement (the first inquiry under Matsushita), noting that:
  • The California HMCs became parties to the Lofton action and settlement, including to the release of their FLSA claims, because Lofton was an opt-out class action and they did not opt out. Had Lofton been an FLSA collective action, the California HMCs would not have been parties without opting in.
  • There is no authority establishing that the FLSA creates an exception to how California's preclusion rules should apply.
  • Although FLSA claims cannot be brought as an opt-out class action, the FLSA does not prohibit state courts from overseeing and approving an opt-out class action settlement that includes a release of FLSA claims.
  • The Lofton settlement was a final judgment for res judicata purposes, becoming a final judgment when the 2011 final judgment approving the settlement was not appealed and the time to appeal expired. An action to vacate or affect that judgment does not change the fact that it is a final judgment.
  • California HMCs who did not file claims forms and therefore did not receive a portion of the settlement cannot avoid the settlement's preclusive effect.
The Fifth Circuit also rejected the California HMCs' argument that the FLSA creates an exception to Section 1738 (the second inquiry under Matsushita), noting that:
  • The FLSA does not contain any express language about:
    • the Full Faith and Credit Act; or
    • state court proceedings having a preclusive effect on the FLSA.
  • The FLSA does not create an implied exception to Section 1738, as there is no inherent conflict between allowing a class action that released FLSA claims to have a preclusive effect and the FLSA's requirement that FLSA claims cannot be asserted in an opt-out class action.
Finally, the Fifth Circuit determined that the Lofton settlement did not violate due process and therefore did not prevent applying res judicata to the California HMCs because:

Practical Implications

The Fifth Circuit's decision in Richardson holds that a prior settlement in a California state court opt-out class action that included a release of FLSA claims precludes FLSA claims in a pending federal opt-in FLSA class action. This decision provides inroads to employers to obtain summary judgment on class-wide FLSA claims that were brought and released in a prior state court action.