Labor & Employment Alert: Second Circuit Holds Rule 68 Obviates District Court Review Of FLSA Settlements

by | Dec 17, 2019 | Labor & Employment | 0 comments

By Valerie K. Ferrier and Edward E. Warnke

In 2015, the Second Circuit Court of Appeals (the appellate jurisdiction that includes New York) held that settlements of federal wage and hour claims under the Fair Labor Standards Act (“FLSA”) required the District Court’s review and approval pursuant to Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199. District Courts judges, however, were split as to whether such review was necessary in cases settled by acceptance of an Offer of Judgment pursuant to Federal Rule of Civil Procedure 68. Finally, on December 6, 2019, a divided panel of the Second Circuit held that acceptance of an Offer of Judgment negates the need for District Court approval. The result is that in many cases, it may now be faster, easier, and less expensive to settle federal wage and overtime lawsuits.

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Rule 68
A Rule 68 Offer of Judgment is a litigation tool meant to incentivize early settlement. Under the rule, at least 14 days before trial, a defendant may make an offer to settle on terms they specify. If a plaintiff rejects the offer, and does not ultimately obtain a more favorable result at trial, the plaintiff must pay the defendant’s post-offer costs for things like transcript fees. In FLSA cases, a plaintiff ’s attorney may be incentivized to delay settlement discussions, knowing that if they prevail on any claim, in any amount, the FLSA’s fee-shifting provision will be triggered, and the defendant will have to pay plaintiff ’s attorney’s fees, in addition to any judgment obtained by the plaintiff. But if a defendant makes a Rule 68 offer, and if the offer is more generous than the eventual judgment after trial, the
plaintiff ’s attorney is not entitled to any fees for any work done after the offer was made. A Rule 68 offer means that the plaintiff ’s attorney, as well as the plaintiff, must think hard about whether to gamble on a more favorable outcome at trial.

Cheeks
But the Second Circuit muddied the waters with its decision in Cheeks, holding that “settling FLSA claims with prejudice require[s] the approval of the district court or the [Department of Labor].” This was based on a desire to give effect to the FLSA’s goal to “prevent abuses by unscrupulous employer[s], and remedy the disparate bargaining power between employers and employees.” The court in Cheeks expressed concerned that employers would take advantage of the power imbalance to force employees to settle claims for less than they were worth. The decision sought to address this concern by mandating judicial review of the settlement terms, and having a judge ensure that plaintiffs understood the agreement they made.

The Effect Of Cheeks On A Rule 68 Offer
If a plaintiff accepts a Rule 68 offer, the rule mandates that the court clerk “must” enter judgment in the amount of the offer. Based on the rule’s plain language, parties began to use Rule 68 in an effort to resolve FLSA claims, thereby circumventing court intervention in settlements. But after Cheeks, whether acceptance of a Rule 68 offer in an FLSA case settled the matter, or was first subject to a court’s approval, was up for interpretation, and judges ruled both ways. For example, in Yu v. Hasaki Rest., Inc., 319 F.R.D. 111, the Southern District of New York held that December 17, 2019 Second Circuit Holds Rule 68 Obviates District Court Review Of FLSA Settlements “Rule 68 does not override the need for judicial … approval of a settlement claim under the FLSA.” Some judges reached the same conclusion. In Sanchez v. Burgers & Cupcakes LLC, 2017 WL 2171870, the court chastised the parties for “seeking to end-run judicial oversight” and held that “[a]n FLSA plaintiff may not validly ‘accept’ a Rule 68 offer without Department or Court approval under Cheeks.”

But other judges deferred to Rule 68 in the FLSA context, including in Baba v. Beverly Hills Cemetery Corp. Inc., 2016 WL 2903597; Anwar v. Stephens, 2017 WL 455416; and Pest v. Express Contr. Corp. of Great Neck, 219 F. Supp.3d 360. The judges on that side of the debate were generally of the opinion that “it is up to the legislature to create an exception to Rule 68 for FLSA actions, if it deems it appropriate.”

Earlier this month, the Second Circuit, reviewing Yu, resolved the split. The two judge majority held that “[a]ppeals to the broad remedial goals and uniquely protective qualities of the FLSA do not authorize us to write a judicial approval requirement into the FLSA, and thereby into Rule 68(a), when the text of both provisions is silent as to such a requirement.” The Court also addressed the potential for increased litigation costs resulting from mandatory Cheeks review, noting that “no fewer than nine factors” are evaluated during such review. Applying Cheeks to a Rule 68 offer, especially early in the litigation, may force parties to engage in unwanted discovery against their wishes, simply to ensure that they have sufficient information to support a court’s approval of an eventual settlement.

Conclusion
Early settlement is often best for both parties to a lawsuit, and many FLSA defendants have been frustrated by plaintiffs’ attorneys who seem intent on litigating simply for the sake of driving up their attorney’s fees. Making a Rule 68 offer early in a case has the potential
to save a defendant money by cutting off a plaintiff ’s attorney’s fees. With mandatory Cheeks review of the settlement no longer required, FLSA litigants should have an easier path to early resolution of their cases.

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Martin Clearwater & Bell, LLP is here to answer your employment questions. Please contact:

Valerie K. Ferrier, head of the Firm’s Labor & Employment Practice Group, at valerie.ferrier@mcblaw.com
or 212-916-0920.