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‘Cheeks v. Freeport Pancake House’: A Full Stack of Approval Decisions 18 Months In

March 22, 2017Articles New York Law Journal

When the U.S. Court of Appeals for the Second Circuit issued the Cheeks v. Freeport Pancake House1decision in August 2015, a new era emerged in settlements under the Fair Labor Standards Act (FLSA) in New York. In sum, Cheeks held that run-of-the-mill individual and multi-plaintiff wage and hour settlement agreements, even prior to class or collective action certification and after contested settlement negotiations, through counsel, must be court-approved2 prior to dismissal under Federal Rule of Civil Procedure (FRCP) 41(a)(1)(A). At that time, how Cheeks would affect day-to-day FLSA cases was a mystery. What was clear was that the lawyers and judges in the Second Circuit would soon be dealing with the growing pains of Cheeks.

Now, around 18 months later, we know more about navigating Cheeks and what settlement terms will generally pass muster. With wage and hour litigation comprising an ever-larger proportion of the federal docket,3 and the overwhelming majority of those settling, it is critical to know what settlement terms will and will not be approved.

Overview of 'Cheeks' Issues

Cheeks arose after an individual FLSA plaintiff settled with defendants and filed a stipulation seeking to dismiss all claims with prejudice under FRCP 41(a)(1)(A). The dismissal was rejected by the lower court, finding that all FLSA settlements had to be reviewed and court-approved. The plaintiff appealed, and was Cheeks affirmed. The Second Circuit extended two older U.S. Supreme Court decisions prohibiting out-of-court FLSA settlements,4 and found that the FLSA's strong public policy to "remedy the disparate bargaining power between employers and employees" warranted the court's review of all FLSA settlements to protect employees.5

Notably, Cheeks does not explicitly prohibit any specific settlement provision. It simply requires review and approval. Cheeks states vaguely that "the FLSA is a uniquely protective statute" and highlights some "troublesome" settlement terms—i.e., confidentiality, general releases, excessive attorneys' fees and restraints on counsel representing future claimants.6 Subsequently, lower court decisions have also reviewed non-publicity, non-disparagement, no reemployment and non-cooperation clauses, as well as the underlying settlement amounts themselves.

Prior to Cheeks, these settlement terms were routinely incorporated, and for good reason. General releases, restraints on future claims and no-reemployment provisions, often assured defendants that the plaintiff and plaintiff's counsel would not threaten a second settlement after reaching a resolution of the case. Other provisions, such as confidentiality, non-publicity, non-disparagement and non-cooperation clauses, encouraged settlement from defendants, who frequently disagree with the plaintiff's assertions but are faced with the prospect of costly litigation, and will compromise if the current settlement will not affect future claims. The lower courts have treated some of these provisions more harshly than others depending on the perceived unfairness of those terms.

Undoubtedly, there will be additional nuances that will arise in the future, but we now know what terms district courts will generally approve in light of Cheeks and we summarize the same below.

Confidentiality and Alternatives

Confidentiality has received the most hostile treatment of any settlement provision post-Cheeks. The lower court judges have found that a confidential settlement will not pass muster.7 Allegedly, these provisions thwart the government's interest in assuring the "employees' awareness of their FLSA rights and … pervasive implementation of the FLSA in the workplace."8

This negative treatment is particularly troublesome, as many defendants value confidentiality prior to settling contested FLSA claims. Many FLSA claims are based on common policies, which may affect other employees, and which are factually disputed by the employer. In many cases, defendants might be willing to settle with one employee to avoid the cost or uncertainties involved with litigation. However, without confidentiality, defendants are reluctant as other employees and attorneys can potentially exploit the knowledge obtained from viewing these public settlements when they file similar claims.

As a result, many FLSA litigants have crafted some creative confidentiality alternatives. The parties may agree not to publicize the settlement, disparage each other, or assist other future litigants. Although these settlements are not technically "confidential" and remain publically filed, most courts dismiss these attempts, even if the obligations are mutual, finding them to be essentially "gag" orders.9 Only non-disparagement provisions are typically approved, and only if they contain a carve-out for plaintiff's truthful statements about litigating the case and the underlying facts.10 Other than this narrow exception, confidentiality provisions, and their variations, are routinely rejected.

General Releases

While not treated quite as harshly as confidentiality, unilateral general release provisions that waive non-wage and hour claims have been regularly disallowed.11 Most courts require the release provision to pertain only to plaintiff's wage and hour claims.12

The inability to obtain a general release is particularly problematic for the wage and hour bar as defendants are reluctant to enter into settlements unless they are certain that all issues are resolved and the plaintiff will not sue again. This can preclude settlement altogether given the risks involved.

Usually the best alternative is to negotiate and attempt a mutual general release. While not always permitted, mutual general releases often are approved.13 Alternatively, litigants will occasionally enter into a separate and additional general release agreement that covers any other nonwage claims.

No Future Employment

Another often critical provision to a settling defendant is a restriction barring the plaintiff from seeking or obtaining re-employment (assuming the plaintiff is no longer working for the defendant). Similar to the general release, the defendant may worry that the plaintiff will seek re-employment once the settlement is paid, raising retaliation concerns when the plaintiff is not rehired or treated differently after rehire. Fortunately, most courts allow no-reemployment provisions, recognizing the potential retaliation risks and relatively minimal hindrance to the plaintiff's career.14

Failing to Justify the Settlement

One of the principal concerns raised in Cheeks was the possibility of fraud or collusion in settlement negotiations. As a result, a number of judges will reject threadbare settlement approval applications that fail to address plaintiff's claims and the parties' contentions, evidence, and damages methodologies.15 In order to avoid any hiccups in the Cheeks approval process, a best practice is to submit a detailed approval application that at least sets forth the claims of the parties, the evidence supporting and/or refuting those claims, and a calculation of the alleged damages.

Attorney Fees

On first glance, a defendant is not (directly) interested in whether or not a plaintiff's attorney receives any fee award. Once a settlement is reached, the defendant's total monetary obligation is typically fixed, and, from a business standpoint, the defendant is disinterested in how the money is distributed. However, defendants should not be blasé about settlement allocation as the requested fee award could affect whether the court will approve or reject the settlement agreement.

Most courts in New York "decline[] to award fees constituting more than one-third of the total settlement amount in an action brought under the FLSA,"16 finding that higher awards disserve the FLSA's public policy. However, on occasion, even fee requests of one-third have been rejected, especially where counsel's timekeeping submissions were threadbare.17 Only extreme or complicated facts, a complete recovery by the plaintiff, or a significant lodestar will justify the approval of fees that exceed one-third of the total recovery.18

This increased scrutiny of fee applications has also had a number of unintended consequences. Namely, plaintiff's attorneys on occasion will seemingly "churn" the case beyond a reasonable settlement point seemingly to raise their lodestar and justify their fees. Unfortunately, this does not promote economy for the parties or the court.

In sum, the best practice is to limit any fee application to one-third of the total recovery to avoid any issues in the Cheeks approval process.

Other Alternative Procedures

The wage and hour bar continues to grapple with how to best effectively and efficiently resolve wage and hour claims post-Cheeks, especially given the roadblocks discussed above. Indeed, some litigants have formulated clever ideas to avoid Cheeks altogether.

Some litigants have agreed to dismiss federal wage and hour lawsuits without prejudice, thereby avoiding Cheeks review. However, some judges have rejected such maneuvers to circumvent Cheeks.19 Moreover, defendants may be hesitant to use this method as any FLSA release is unenforceable.

Another scheme to avoid Cheeks has been to mutually agree to accept an offer of judgment under FRCP 68. Most district courts have found that the mandatory dismissal language within FRCP 68 precludes a fairness review under Cheeks.20 However, this method is not widespread, likely because a public judgment results against the defendants.

Finally, some attorneys have filed their wage and hour litigations in New York state court to avoid Cheeks altogether. There are indeed no published state court decisions yet citing to Cheeks, and this appears to be an increasingly popular method.

While these alternative methods are inventive, the vast majority of FLSA litigations will likely continue to proceed under Cheeks. The best practice for now is to avoid the common pitfalls outlined above when resolving wage and hour litigations.

Endnotes:

1. 796 F.3d 199 (2d Cir. 2015) cert. denied, 136 S. Ct. 824 (2016).

2. Alternatively, the U.S. Department of Labor may approve FLSA settlements. Id. at 200.

3. See Lydia DePillis, "Why Wage and Hour Litigation Is Skyrocketing," WASH. POST, Nov. 25, 2015, (observing that FLSA case filings have increased over "358 percent" since 2000).

4. See generally Brooklyn Savs. Bank v. O'Neil , 324 U.S. 697 (1945); D.A. Schulte v. Gangi , 328 U.S. 108 (1946).

5. Cheeks, 196 F.3d at 207.

6. Id. at 206-07 (citations omitted).

7. E.g., Figueroa v. Rovini Concrete, No. 15-CV-8058(RLE), 2017 WL 462310, at *1 (S.D.N.Y. Jan. 18, 2017).

8. Souza v. 65 St. Marks Bistro, No. 15-CV-327 (JLC), 2015 WL 7271747, at *4 (S.D.N.Y. Nov. 6, 2015).

9. Howard v. Don Coleman Ad., No. 16-CV-5060(JLC), 2017 WL 773695 (S.D.N.Y. Feb. 28, 2017) (finding "mutual non-publicity" and "mutual non-disparagement" inappropriate); Amaro v. Barbuto, No. 16-CV-1581 (AJN), 2017 WL 476730, at *3 (S.D.N.Y. Feb. 2, 2017) (same).

10. E.g., Martinez v. Gulluoglu, No. 15-CV-2727(PAE), 2016 WL 206474, at *1–2 (S.D.N.Y. Jan. 15, 2016).

11. Castagna v. Hampton Creek, No. 16-CV-760(SJF)(AYS), 2016 WL 7165975, at *1 (E.D.N.Y. Dec. 6, 2016) (finding general releases are "far too sweeping to be fair and reasonable"); see also Gurung v. White Way Threading, No. 16 CIV. 1795(PAE), 2016 WL 7177510, at *1 (S.D.N.Y. Dec. 8, 2016).

12. Cf. Panganiban v. Medex Diagnostic & Treatment Ctr., No. 15-CV-2588(AMD)(LB), 2016 WL 927183, at *3 (E.D.N.Y. March 7, 2016) (allowing general release where settlement is "substantial" and the complaint also alleged Title VII claims).

13. Souza, 2015 WL 7271747, at *5-7 (rejecting a general release provision unless it was made mutual "in all respects"). But see Flores-Mendieta v. Bitefood, No. 15 Civ. 4997(AJN), 2016 WL 1626630, at *2 (S.D.N.Y. April 21, 2016) (rejecting mutual general release because the mutuality favored the employer).

14. E.g., Flores v. Food Express Rego Park, No. 15-CV-1410(KAM)(SMG), 2016 WL 386042, at *2 (E.D.N.Y. Feb. 1, 2016).

15. Amaro, 2017 WL 476730, at *2; Banegas v. Mirador, No. 14-CV-8491 (AJN), 2016 WL 1451550, at *2 (S.D.N.Y. April 12, 2016).

16. Gurung, 2016 WL 7177510, at *2 (rejecting 57% fee award application where the parties "conducted little discovery and have litigated no motions"); see also Lazaro-Garcia v. Sengupta Food Services, No. 15-CV-4259(RA), 2015 WL 9162701, at *3 (S.D.N.Y. Dec. 15, 2015) (rejecting 39% fee request).

17. See Vasquez, 2016 WL 8290650, at *2 (rejecting one-third fee award where hourly rate and total amount of fees were omitted).

18. Amaro, 2017 WL 476730, at *4 (reducing requested award, but allowing 39 percent award given microscopic size of case and the significant hours plaintiff's counsel expended); Zamora v. One Fifty Fifty Seven, No. 14 CIV. 8043(AT), 2016 WL 1366653, at *2 (S.D.N.Y. April 1, 2016).

19. Lopez v. 41-06 Bell Blvd. Bakery, No. 15-CV-6953(SJ)(PK), 2016 WL 6156199, at *1 (E.D.N.Y. Oct. 3, 2016).

20. Anwar v. Stephens, No. 15-CV-4493(JS)(GRB), 2017 WL 455416, at *1 (E.D.N.Y. Feb. 2, 2017)

Reprinted with permission from the March 22 issue of the New York Law Journal. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.