Workplace Class Action Blog

Fourth Circuit Deals Body Blow To EEOC Hiring Check Enforcement Litigation

Posted in EEOC Litigation

fourth circuitBy Gerald L. Maatman, Jr., Pamela Q. Devata, and Jason Englund

Today the U.S. Court of Appeals for the Fourth Circuit dealt a lethal blow to the EEOC’s hiring check enforcement litigation in EEOC v. Freeman, No.13-2365 (4th Cir. Feb. 20, 2015). The decision affirms a summary judgment ruling by Judge Roger Titus of the U.S. District Court for the District of Maryland last August (discussed here), which dismissed the EEOC’s nationwide pattern or practice lawsuit due to the EEOC’s reliance on “laughable” and “unreliable” expert analysis.  The EEOC had alleged that Freeman, Inc., a service provider for corporate events, unlawfully relied upon credit and criminal background checks that caused a disparate impact against African-American, Hispanic, and male job applicants. In today’s ruling, the Fourth Circuit unanimously affirmed Judge Titus’ rejection of the “utterly unreliable analysis” of the EEOC’s expert, while a concurring judge went out of his way to chide the EEOC at length for its litigation tactics across this line of systemic background check cases.

The ruling is a stunner. It is well worth a read by any corporate counsel or business executive dealing with EEOC enforcement litigation.

The Fourth Circuit’s Opinion

The Fourth Circuit’s opinion centers on a series of “expert” reports prepared by the EEOC’s statistical expert, Dr. Kevin R. Murphy, which the District Court excluded due to a “plethora of errors and analytical fallacies.” The Fourth Circuit reviewed the exclusion of the report for “abuse of discretion,” but roundly ratified the District Court’s reasoning, agreeing that the alarming number of errors and analytical fallacies” in Dr. Murphy’s report made it “impossible to rely on any of his conclusions.”

In rejecting Dr. Murphy’s report, the Fourth Circuit catalogued the “mind-boggling number of errors and unexplained discrepancies” identified by Judge Titus, including missing data, basic mathematical errors, and incorrect coding of race and background check results.  The Fourth Circuit placed particular emphasis on the highly selective sample, which analyzed only a limited number of background checks and excluded the data pertaining to “hundreds, if not thousands, of applicants” that were available for the relevant time period.  The Fourth Circuit concluded that the “sheer number of mistakes and omissions in Murphy’s analysis renders it outside the range where experts might reasonably differ.” Finding that the expert’s report was properly excluded, the Fourth Circuit affirmed summary judgment for Freeman.

This ruling is the latest in a string of defeats to the EEOC in its campaign to challenge employer’s use of background checks in hiring decisions.  The Fourth Circuit decision is particularly noteworthy for a blistering concurrence by Judge Steven Agee.  Judge Agee agreed with the decision of the panel, noting that it “was not a close question,” but wrote separately to excoriate the EEOC for its questionable litigation tactics in the Freeman case and across this line of cases generally.  The concurrence details at length the “record of slipshod work” by the EEOC’s expert in other similar cases, including EEOC v. Kaplan Higher Education Corp., a similar ruling by the Sixth Circuit last year.  Judge Agee outlined a scathing critique of the “slapdash nature of Murphy’s work,” concluding that Murphy “undeniably cherry-picked” and perhaps even “fully intended to skew the results.”

In words that burn upon reading the, the concurrence then turned the criticism to the EEOC directly, noting that “the Commission’s conduct in this case suggests that its exercise of vigilance has been lacking. It would serve the agency well in the future to reconsider how it might better discharge the responsibilities delegated to it or face the consequences for failing to do so.”


The Fourth Circuit’s decision is yet another stinging rebuke to the EEOC’s questionable use of statistics in challenging an employer’s use of background checks, and the opinion is another arrow in the quiver for employers defending against the EEOC in systemic litigation.

Showdown At The Fifth Circuit Continues: Texas Gets The Last Word On Its Challenge To The EEOC’s Criminal Background Guidance

Posted in EEOC Litigation

By Gerald L. Maatman Jr. and Howard M. Wexler

Last year the U.S. District Court for the Northern District of Texas dismissed a high profile lawsuit brought by the State of Texas against the EEOC regarding the its “Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Under Title VII.” The District Court held that Texas lacked standing to maintain its suit because it did not allege that any enforcement action had been taken against it in relation to the EEOC’s guidance.

Texas filed an appeal with the U.S. Court of Appeals for the Fifth Circuit seeking to overturn the dismissal of its novel lawsuit. On January 8, 2015 the EEOC filed its opposition brief  and now Texas has filed its reply brief and it is a “must read” for all employers caught in the crosshairs of the EEOC’s aggressive litigation approach concerning its criminal background guidance.

Case Background

In April 2012, the EEOC issued guidance urging businesses to avoid a blanket rule against hiring individuals with criminal convictions, reasoning that such rules could violate Title VII if they create a disparate impact on particular races or national origins. Like various other states, Texas has enacted statutes prohibiting the hiring of felons in certain job categories. In November 2013, Texas sued the EEOC, seeking to enjoin the enforcement of this guidance, which Texas has nicknamed the “Felon Hiring Rule.”

The District Court dismissed Texas’ lawsuit entirely on a lack of subject matter jurisdiction. Because Texas did not allege that any enforcement action had been taken against it by the Department of Justice (as the EEOC cannot bring enforcement actions against states) in relation to the Guidance, the District Court held that there was not a “substantial likelihood” that Texas would face future Title VII enforcement proceedings from the Department of Justice arising from the Guidance. As standing to bring suit cannot be premised on mere speculation, the District Court held that Texas lacked the necessary standing to maintain its suit against the EEOC.

Texas’ Reply Brief

Texas followed up on the arguments it set forth in its opening brief as to why the District Court incorrectly dismissed its suit for a lack of subject matter jurisdiction. Specifically, Texas asserts:

  • The guidance document is reviewable as a final agency action because unlike a mere general statement of policy, the guidance document binds the EEOC (and its staff) to the position that race-neutral refusals to hire felons can constitute unlawful employment practices.
  • The guidance document constitutes final agency action (and is thus reviewable) because it has material consequences for regulated entities, including that it:
    • purports to preempt state laws that are inconsistent with the EEOC’s understanding of Title VII;
    • erects an elaborate compliance regime for employers whenever a candidate is screen out due to a conviction and exposes employers to potential liability unless they create an intricate compliance apparatus” as a result; and
    • threatens employers with Title VII liability if they do not follow the mandates of the guidance document.

Id. at 6-17.

Implications For Employers

Now that the briefing is concluded, stay tuned for oral arguments on this appeal. This case remains “one to watch,” especially since the EEOC has repeatedly asserted that the guidance “has no legal consequences, nor does it impose any obligations on Texas, its-state agencies, or other employers” in trying to fend off Texas’ appeal. Stay tuned!

Readers can also find this post on our EEOC Countdown blog here.

Sixth Circuit Denies Petition To Appeal Class Certification In A Purported $1.7 Billion Compensation Suppression Antitrust Case

Posted in Class Certification

By Timothy F. Haley

The U.S. Court of Appeal for the Sixth Circuit recently rejected the Defendant’s petition in In Re VHS of Michigan, Inc., dba Detroit Medical Center, No. 14-0107, 2015 U.S. App. LEXIS 1816 (6th Cir. Feb. 3, 2015), to appeal the order to certify a class estimated to exceed 20,000 registered nurses in a compensation suppression antitrust case. We have previously blogged on this case here, here, here, and here. Although short and not recommended for full-text publication, the opinion raises important issues related to the development of class certification law following the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013), and the extent to which class representatives may forgo potential damages available to the class in order to achieve class certification.

The District Court Proceedings

Plaintiffs brought a two count complaint alleging that eight hospitals in the Detroit Metropolitan Area unlawfully suppressed registered nurse compensation in violation of federal antitrust laws. In count one, Plaintiffs alleged that the hospitals unlawfully fixed registered nurse compensation in per se violation of Section 1 of the Sherman Act. In count two, Plaintiffs alleged that Defendants violated the Sherman Act under the rule of reason by exchanging wage and benefits information in a way that “softened” competition for registered nurse compensation. The District Court awarded Defendants summary judgment on the per se claim, but denied it on the rule of reason claim. It then granted the Plaintiffs’ motion for class certification. Thereafter, the Sixth Circuit ordered the District Court to reconsider its certification decision in light of Comcast. The District Court did so and concluded that Comcast did not call into question its prior certification decision. Id. at *3.

The Sixth Circuit’s Decision

Considering the petition, the Sixth Circuit rejected the Defendant’s argument that the District Court’s application of Comcast was an abuse of discretion. According to the Sixth Circuit, “Comcast applies where multiple theories of liability exist, those theories create separable anticompetitive effects, and the combined effects can result in aggregated damages.  … Where there is no chance of aggregated damages attributable to rejected liability theories, the Supreme Court’s concerns do not apply.” Id. at *5 (internal citations omitted). The Sixth Circuit agreed with the District Court that in this case the two theories of liability (per se and rule of reason) were mutually exclusive. The Court reasoned that if compensation had been fixed by the hospitals, then there was no wage and benefit competition to be “softened.”  Moreover, in the Sixth Circuit’s view the Plaintiffs’ expert’s damages calculation applied to either theory of liability and damages were not improperly aggregated. Thus, the concerns raised by Comcast did not apply. Id.

The Sixth Circuit went on to acknowledge that “after Comcast [a] class must be able to show that their damages stemmed from the defendant’s actions that created the legal liability.” Id. (internal quotation marks and citations omitted).  And it concluded that in this case the Plaintiffs had produced “sufficient evidence” that the damages stemmed from the information sharing that created the “softened” competition. It also agreed with the District Court that the expert’s damage model was adequate even though it understated the total damages from the “softened” competition. Id. at *6.

Based on this analysis, the Sixth Circuit held that the Defendant failed to show that it was likely to succeed in making the requisite “strong showing” that the District Court abused its discretion. It also concluded that none of the other factors that the Sixth Circuit considers when analyzing petitions to appeal weighed in favor of permitting the appeal in this case. Accordingly, it denied Defendant’s petition. Id. at *7.

Implications for Employers

Although not a detailed or lengthy opinion, there are several aspects of the decision that are potentially troubling. The Sixth Circuit clearly states that the Plaintiffs must “show” that the claimed damages were caused by the Defendant’s conduct that created the legal liability, and that Plaintiffs in this case had produced “sufficient evidence” on that issue.  But there is no discussion of what that evidence was or what constitutes “sufficient evidence” of causation at the class certification stage. In its decision reinstating class certification, the District Court expressly noted that Plaintiffs’ expert made “no attempt to marshal any evidence to demonstrate that either of the two antitrust violations alleged by Plaintiffs actually caused or contributed to the harm measured in his benchmark analysis[.]” It further noted that this absence of expert testimony left Plaintiffs with “thorny issues of proof” in establishing the requisite causal link between the alleged antitrust violations and the injury suffered by the plaintiff class. Cason-Merenda v. VHS of Michigan, Inc., Case No. 06-15601, 2014 U.S. Dist LEXIS 29447, at *20 n.5 (E.D. Mich. Mar. 7, 2014). Yet, according to both the District Court and the Sixth Circuit, the causation showing was adequate.

Second, the Sixth Circuit was untroubled by the fact that the damage model understated the total damages from the “softened” competition. Indeed, in the District Court’s decision initially certifying the class, it noted that the expert admitted that his damage model disfavored experienced nurses more than less experienced nurses. Cason-Merenda v. VHS of Michigan, Inc., Case No. 06-15601, 2013 U.S. Dist. LEXIS 131006, at *48 (E.D. Sept. 13, 2013). Yet, there were no questions raised about the amount of the understatement or whether utilizing such a damage model violated the class representatives’ fiduciary duty to the class. See Back Doctors Ltd. v. Metropolitan Property, 637 F.3d 827, 830 (7th Cir. 2011) (“Second, Back Doctors has a fiduciary duty to its fellow class members. A representative can’t throw away what could be a major component of the class’s recovery.”)

Finally, in denying the petition, the Sixth Circuit made no mention of the Defendant’s argument that the request for review should be accepted because the $1.7 billion potential damage figure would put extraordinary pressure on the Defendant to settle regardless of the merits of the case. Certainly, that is a lot of money to be ignored in this context.

EEOC Charge Filings Down And Monetary Rewards To Victims Through Investigations And Litigation Plummet

Posted in EEOC Litigation

By Gerald L. Maatman, Jr., Christopher J. DeGroff, and Paul H. Kehoe

Shortly after publishing its FY2016 budget justification (here) asking for an additional $8.6 million and authorization to hire hundreds of additional employees (over FY2014 levels), the EEOC released its FY2014 charge and litigation statistics (here and here).  Charge receipts, while still historically high, fell to 88,778, down from a high of 99,922 in FY 2010 at the height of the last recession.  The EEOC’s rate of finding reasonable cause was down, as was its effectiveness in successfully conciliating those charges.  Indeed, the monetary benefits secured through its investigations plummeted by over $75 million, or roughly 20%.  The EEOC’s litigation program filed 133 merits suits, down roughly 50% from FY2011 and down 65% over FY2005 levels.  In addition, the litigation program secured only $22.5 million for alleged victims of discrimination, down from a high of $168.6 million in FY2004.

A more in depth look at the numbers is below.

The EEOC’s Private Sector Investigations Program

Retaliation claims remain the number one allegation in EEOC charges with 37,955 (42.8%).  Race, sex, and disability discriminations charges were the top three alleged substantive violations. Claims under the Equal Pay Act and the Genetic Nondiscrimination Act were the least alleged violations.


On a state-by-state basis, Texas, Florida, and California led the way with 8,035, 7,528, and 6,363 charges, respectively.  Wake Island was the only U.S. Territory without an EEOC charge on file.

The EEOC resolved 87,442 charges under investigation in FY2014.  The agency only found reasonable cause in 2,745 (3.1%) cases.  Between FY2010 and FY2013, the EEOC made reasonable cause determinations ranging from 3,515 and 4,981 cases annually, which represented 3.6% to 4.7% of its charges filed.

By statute, the EEOC must attempt to conciliate all of its reasonable cause findings before initiating litigation.  In FY2014, the EEOC reported that it successfully conciliated 1,031 of its reasonable cause findings.  This represents a significant drop from FY2012 and FY2013, when the EEOC successfully conciliated 1,437 and 1,591 cases, respectfully.

On the whole, the EEOC’s private sector investigation program secured $296.1M for alleged victims of discrimination, down from $372.1M in FY2013 and approximately $365M in both FY2011 and FY2012.

The EEOC’s Litigation Program

The EEOC filed 133 merits cases in FY2013.  While on par with the most recent two fiscal years, this represents a decrease in filings of roughly 50% compared to FY2011 and over 65% compared to FY2005.  The EEOC filed 76 Title VII suits, 49 ADA suits, 12 ADEA suits, 2 Equal Pay suits, 2 GINA suits and 7 suits alleging violations of multiple statutes.

The EEOC’s litigation program secured $22.5 million in monetary benefits for alleged victims of discrimination, down from $38.6 million in FY2013, $91 million in FY2011, and a high of $168.6 million in FY2005.

Implications For Employers

At a time when the EEOC was seeking an expanded budget, as it has in each of the years during the current Administration (here), the EEOC’s performance and recoveries for alleged victims of discriminations were something of a fizzle in FY2014 when compared to its historical results.  With focus on systemic litigation, it appears as that other potentially meritorious claims have received less, if any, attention.  While the President’s request for additional funds is dead on arrival for lack of even Democratic support, it remains to be seen what, if any, increase in appropriated funds will make its way to the EEOC for FY2016.  Regardless, the EEOC is likely feeling significant pressure to post big wins with its budget on the line.  Employers take note:  this may translate to even more aggressive agency enforcement tactics.

Readers can also find this post on our EEOC Countdown blog here.

Take Me To Court: The EEOC Is Allowed To Continue Pursuit Of Individual Prayer Break Religious Discrimination Claims

Posted in EEOC Litigation

By Gerald L. Maatman, Jr. and Jennifer A. Riley

After issuing the EEOC a series of defeats on its pattern or practice claims, on January 28, 2015, Judge Laurie Smith Camp of the U.S. District Court for the District of Nebraska found in EEOC v. JBS USA, LLC, No. 8:10-CV-318 (D. Neb. Jan. 28, 2015), that those rulings do not bar the EEOC’s from pursuing individual claims for religious discrimination and retaliation for prayer break requests.

The EEOC suffered a series of defeats in its Phase I pattern or practice claims. First, the Court granted summary judgment as to the EEOC’s pattern or practice claims for unlawful termination and retaliation, finding that a single mass termination of 80 Muslim employees did not constitute a “pattern or practice.” (Read more here.) Second, after a bench trial, the Court dismissed the EEOC’s pattern or practice claims for failure to accommodate, finding that JBS established that accommodating claimants’ prayer requests would have imposed an “undue hardship” on the company. (Read more here.)

The first round of Phase II, however, went to the EEOC when the Court ruled that its earlier findings did not necessarily preclude the EEOC from pursuing individual claims for religious discrimination or retaliation. The Court refused to apply the doctrine of issue preclusion because the Court’s findings on issues other than undue hardship were not “necessary” to its Phase I rulings.

The Court’s opinions are a useful road map for any employer defending an EEOC pattern or practice lawsuit.

Factual Background

The EEOC filed two lawsuits alleging that JBS USA, LLC, which does business as meat packing company JBS Swift & Company, discriminated against a class of Somali Muslim employees at its facilities in Greeley, Colorado and Grand Island, Nebraska.

In the Nebraska suit, the EEOC alleged that JBS Swift engaged in a pattern or practice of religious discrimination when it failed to reasonably accommodate at least 153 Muslim employees by allowing them prayer breaks. The EEOC also alleged that the company: (1) harassed and retaliated against employees who requested that the company move their evening breaks; and (2) improperly terminated about 80 Muslim employees who “walked out” of the facility in protest of JBS’s refusal to change their evening breaks to accommodate prayer during Ramadan.

On April 15, 2011, the parties agreed to bifurcate discovery and trial into two phases. They agreed to address the EEOC’s pattern or practice claims in Phase I and to address all individual claims for relief, as well as any claims for which no pattern or practice was found, in Phase II. Id. at 4.

From May 7, 2013 through May 13, 2013, the Court held a trial on the EEOC’s pattern or practice claims.

The Court found that: (a) JBS did not discipline or discharge any of its Muslim employees for praying; (b) that JBS terminated Somali-Muslim employees who “walked out” of the plant for withholding work and violating the Collective Bargaining Agreement; and (c) that Individual Plaintiffs’ requested religious accommodations would impose an undue hardship on JBS. Id. at 5-6.

JBS then moved for partial summary judgment on two grounds. First, it argued that the Court’s findings in Phase I precluded the Individual Plaintiffs from pursuing claims of religious discrimination and retaliation in Phase II.  Second, it argued that the EEOC failed to meet preconditions for bringing its Phase II claims.

The Court’s Opinion

The Court granted in part JBS’s motion for summary judgment with respect to issue preclusion and denied without prejudice JBS’s motion with respect to preconditions to suit.

JBS claimed that the Court’s findings establish that its reason for termination was legitimate and nondiscriminatory and preclude Individual Plaintiffs from arguing that JBS terminated or otherwise retaliated against them for requesting religious accommodation. Id. at 6.

The Court noted that a party asserting issue preclusion must demonstrate several elements. It must show that the non-moving party was in privity with a party to the original lawsuit, that the issue it seeks to preclude is the same as an issue actually litigated in the prior action, was determined by a valid and final judgment, and was essential to the prior judgment. Id.

First, the Court found privity between the EEOC and the Individual Plaintiffs because, even though the EEOC could not seek damages for the Individual Plaintiffs in Phase I, the interests of the EEOC and those of the Individual Plaintiffs did not diverge. Id. at 7-8.

Second, the Court found identity of issues because the underlying facts supporting the EEOC’s pattern or practice claims in Phase I form the basis for the Individual Plaintiffs’ claims. As the EEOC previously had asserted, the claims “are closely related and stem from essentially the same factual allegations.” Id. at 9.

Third, the Court found that the parties fully litigated JBS’s undue hardship defense and that its findings with respect to such issue were essential to the Phase I judgment. Id. at 11.

Fourth, however, the Court determined that its other findings with respect to the Plaintiffs’ remaining individual claims were not essential to its Phase I judgment. Id. at 12. Although the Court found that Somali-Muslim employees were not disciplined for praying, and their terminations were due to their violation of the CBA, “the Court did not need to address all the EEOC’s claims because JBS proved its undue hardship defense.” Id. at 13.

JBS also moved for summary judgment on the ground that the EEOC failed adequately to conciliate each individual’s claim prior to bringing suit. The Court refused to resolve the issue because the U.S. Supreme Court currently is considering in Mach Mining, LLC v. EEOC whether and to what extent a court may enforce the EEOC’s duty to conciliate. Id. at 18. The Court held that it would not preclude JBS from reasserting its position following the Supreme Court’s ruling.

Implications For Employers

The Court’s opinions in EEOC v. JBS are a useful roadmap for employers litigating a pattern or practice case against the EEOC. During any bifurcated case proceeding along the Teamsters method of proof, issues decided during Phase I might be determinative of claims set for litigation in Phase II. Although the Court in JBS allowed the EEOC to pursue individual claims in Phase II, and did not find her earlier opinions binding, the Judge’s rulings provide a useful guidepost for predicting the outcome of the remainder of the case.

Readers can also find this post on our EEOC Countdown blog here.

Seventh Circuit Holds that EEOC Can Pursue Employers’ Other Businesses For Violations Of Federal Employment Law By Dissolved Entities

Posted in EEOC Litigation

By Christopher M. Cascino and Gerald L. Maatman, Jr.

In EEOC v. Northern Star Hospitality, Inc., No. 14-1660, 2015 WL 353997 (7th Cir. Jan. 29, 2015), the U.S. Court of Appeals for the Seventh Circuit held that companies under common ownership can be liable as successor entities to companies that are incapable of paying judgments in federal employment actions if there is continuity between the operations and workforce of the entity that is incapable of paying the judgment and another of the employer’s businesses. Employers need to be aware that the EEOC and the plaintiff’s bar can use this theory to try to reach other corporations that the employers own, even if the EEOC and these plaintiffs cannot pierce the corporate veil to reach those corporations.

Case Background

Dion Miller, an African-American, was a cook for Northern Star Hospitality, Inc. d/b/a Sparx Restaurant (“Sparx” or “Hospitality”). On October 1, 2010, when Miller arrived at Sparx to begin his shift, a co-worker told him to look in the kitchen cooler. In the cooler was a one-dollar bill with a noose drawn around President Washington’s neck and a sketch of a hooded Klansman on horseback with “KKK” written on the hood. Also in the cooler was a picture of the late Gary Coleman.

Miller had a co-worker take a photograph of the display in the cooler and lodged a complaint with the restaurant’s general manager. The general manager learned that two of Miller’s superiors – the kitchen manager and kitchen supervisor – admitted that they were responsible for the display. As a result of the complaint, the kitchen supervisor was given a warning, with the kitchen manager receiving no discipline at all.

After Miller’s complaint, the kitchen manager and supervisor began to criticize Miller’s performance. Miller was then terminated less than one month after the display was put up.

On March 27, 2012, the EEOC filed suit against Hospitality on Miller’s behalf, claiming that he was the victim of racial harassment and that he was wrongfully terminated for opposing that harassment. On September 7, 2012, the EEOC amended its complaint to add Northern Star Properties, LLC (“Properties”) and North Broadway Holdings, Inc. (“Holdings”) and claimed that they also were liable for this conduct. By this time, Sparx had closed and Hospitality had dissolved. Sparx was replaced by a Denny’s Restaurant franchise owned by Holdings, while Properties owned the building where Sparx and the Denny’s Restaurant were located. Hospitality, Properties, and Holdings were all owned by the same individual.

After trial, the jury awarded Miller $15,000 in compensatory damages for wrongful termination while denying him punitive damages. The EEOC petitioned the district court to award Miller front and back pay, as well as a tax award to off-set income tax liability on the back pay award.  The district court granted the EEOC’s request for back pay and awarded Miller an additional $43,300.50, plus $6,495 to off-set his resulting tax liability. Because Hospitality no longer existed and thus could not pay these damages, the EEOC sought to have Properties and Holdings pay these damages either on a successor liability theory or via a pierce of Hospitality’s corporate veil. The district court granted the EEOC’s request under both theories. The defendants appealed.

The Seventh Circuit’s Ruling

The Seventh Circuit began its analysis by noting that “successor liability is ‘the default rule . . . to enforce federal labor or employment laws.’” Northern Star Hospitality, 2015 WL 363997 at *3 (quoting Teed v. Thomas & Betts Power Solutions, LLC, 711 F.3d 763, 769 (7th Cir. 2013)). This is because “[w]ithout [successor liability], ‘the victim of the illegal employment practice is helpless to protect his rights against an employer’s change in the business.’” Northern Star Hospitality, 2015 WL 363997 at *3 (quoting Musikiwamba v. ESSI, Inc., 760 F.2d 740, 746 (7th Cir. 1985)).

The Seventh Circuit laid out “a five-factor test for successor liability in the federal employment-law context: (1) whether the successor had notice of the pending lawsuit; (2) whether the predecessor could have provided the relief sought before the sale or dissolution; (3) whether the predecessor could have provided relief after the sale or dissolution; (4) whether the successor can provide the relief sought; and (5) whether there is continuity between the operations and work force of the predecessor and successor.” Northern Star Hospitality, 2015 WL 363997 at *3.

The Seventh Circuit found that the first factor was satisfied, reasoning that Holdings had notice of the lawsuit because both Holdings and Hospitality were owned by the same individual. Id. With respect to the second factor, the Seventh Circuit determined that, because Hospitality paid a number of its bills before its dissolution, as well as several bills that would benefit Holdings, it could have paid the judgment prior to its dissolution. Id. at *4. It held that, since Hospitality no longer existed, Hospitality could no longer pay the judgment, thus satisfying the third factor. Id. It found that the fourth factor was satisfied since Holdings was a going concern and thus could pay the judgment entered in favor of Miller. Id.

With respect to the fifth factor, the Seventh Circuit ruled that there was a continuity between the operations and workforce of Hospitality and Holdings because “[Holdings] moved into a building prepared for it by Hospitality to the specifications of the Denny’s Corporation, hired more than half of the employees previously employed by Hospitality, hired Hospitality’s management team, the members of which had been trained by Denny’s at Hospitality’s expense, and used the same work rules for the employees that Hospitality had used at Sparx. In other words, Holdings carried on the restaurant business at 1827 North Broadway, albeit with a different name and theme.” Id. Having concluded that all the factors were satisfied, the Seventh Circuit held that Holdings was liable as a successor to Hospitality. Id. It held this even though Holdings did not exist at the time of the alleged wrongful conduct. Id.

Having decided that Holdings was liable as a successor to Hospitality, the Seventh Circuit declined to review whether the district court was correct when it decided to pierce the corporate veil of Hospitality to reach Properties and Holdings. Id. at *5. It further declined to consider whether Properties was also a successor entity of Hospitality. Id. at *4.

Implications For Employers

Employers need to be aware that, under the holding of EEOC v. Northern Star Hospitality, liability under federal employment laws can follow them even if the company that purportedly violated those laws no longer exists or has assets. This is true even without a piercing of the corporate veil.

Employers who are concerned about federal discrimination or wage and hour liability in a dissolving or otherwise expiring company should take steps to make sure that they establish that there is no continuity between the operations and workforce of the dissolving entity and any of the employer’s other businesses. Employers should make sure that the dissolving entity does not pay for anything that will be used by a successor entity or the employer’s other businesses. Employers should further establish new work rules for successor entities. Finally, employers should also consider not hiring the employees of the dissolving entity to work for the successor entity or the employers’ other businesses. Whether one or some combination of these proposed steps would, as a matter of law, prevent successor liability will need to be determined in future litigation. Stay tuned.

Readers can also find this post on our EEOC Countdown blog here.

Court Holds Punitive Damages Are Available In Trafficking Victim Protection Act Class Actions

Posted in Class Action Litigation

By Christopher M. Cascino and Gerald L. Maatman, Jr.

In a recent ruling in David v. Signal Int’l, LLC, No. 2:08-CV-01220 (E.D. La. Jan. 28, 2015), Judge Susie Morgan of the U.S. District Court for the Eastern District of Louisiana held that punitive damages could be awarded in actions brought under the Trafficking Victim Protection Act (“TVPA”) even though the TVPA does not explicitly provide for such damages. Judge Morgan further held that defendants in TVPA actions cannot raise the in pari delicto doctrine as a defense.

As the plaintiffs’ bar is increasingly turning to novel claims – like those asserted here under the TVPA – in workplace class actions involving foreign-based workers, the ruling in David is important for employers.

Case Background

Signal International, LLC (“Signal”) provides shipbuilding, ship and rig repair, and offshore services to businesses from its facilities along the Gulf of Mexico. In 2006, after Hurricane Katrina and Hurricane Rita caused devastating damage to the Gulf of Mexico, Signal was not able to meet the demand for oil rig and ship repair that resulted from the hurricanes using local workers alone. Because of this, Signal retained two recruiting agencies to recruit workers from India to meet this demand.

These recruiting agencies asked workers in India to pay as much as $25,000 in recruiting fees in exchange for jobs at Signal. Many of the workers took out loans to pay this fee. The recruiting agencies also promised the workers green cards so that they could remain in the United States permanently.

The workers were brought in under “guest worker” H2B visas, and were thus not eligible for green cards. Moreover, workers on H2B visas cannot work for any employer other than the one that petitioned for the visa. The plaintiffs claimed that Signal and the recruiters lied to them, and that they charged this exorbitant fee and brought them in under H2B visas to force them to continue to work for Signal even if they no longer wanted to do so.

Signal asserted that its attorney and the recruiting agencies misled Signal by telling Signal that the workers were going to be granted green cards. In addition, Signal claimed that the recruiters told Signal that the workers would pay recruiting fees of between $3,000 and $4,000 and that, when it heard about the much larger recruiting fees these firms were actually charging, it tried unsuccessfully to convince the recruiters to return money to the workers.

After the workers arrived in the United States, they needed to live in housing provided by Signal because there was a lack of housing in the wake of Hurricane Katrina. The plaintiffs contended that the housing was intolerably poor, that the workers were charged exorbitant amounts for the housing, and that they were not allowed to come and go as they pleased. Signal asserted that it strived to provide quality housing for the workers, that its housing fees were more than reasonable, and that the workers were free to come and go as they pleased.

The plaintiffs further claimed that they were paid less than Signal’s non-Indian workers. While Signal denies that this is true, the Equal Employment Opportunity Commission (“EEOC”) filed suit against Signal on April 20, 2011, claiming that Signal discriminated against the Indian workers. This is not surprising, since the EEOC has a long and tortured history of pursuing what it calls “human trafficking discrimination” claims.

Trial began in the David matter on January 12, 2015. On January 22, 2015, the Court asked both parties to brief whether punitive damages can be awarded in TVPA actions. On January 28, 2015, the Court issued its decision.

The Court’s Ruling

The Court began its analysis by stating that, though “[t]he TVPA does not explicitly allow punitive damages in civil cases. . . . every court to consider the issue has held that punitive damages are available.” Id. at 2. Based on that alone, the Court held that punitive damages were available. See id. (citing Ditullio v. Boehm, 662 F.3d 1091, 1098 (9th Cir. 2011); Francisvo v. Susano, 525 F. App’x 828, 835 (10th Cir. 2013); Carazani v. Zegarra, 972 F. Supp. 2d 1, 26 (D.D.C. 2012); Doe v. Howard, No. 1:11-CV-1105, 2012 WL 3834867, at *4 (E.D. Va. Sept. 24, 2012)).

The Court also broke new ground in deciding that an in pari delicto defense is not available in TVPA actions. The in pari delicto defense provides that, when both parties in a lawsuit are at fault, neither party can recover against the other. Signal argued that the defense should be available because “[o]ne Plaintiff has conceded lying knowingly to embassy officials to leave the country without interference from the visa office. Others were prepared to do the same. They testified that they were given ample notice of quite significant reason to suspect that there was much amiss concerning their basis for leaving India for the purposes of employment in the United States.” David, at 8. The Court disagreed, finding that, since the purpose of the TVPA is to punish traffickers, allowing an in pari delicto defense would be contrary to the goal of the statute. Id. at 3-4.

Implications For Employers

As an initial matter, employers that recruit workers from oversees using outside recruiters should make sure that they know exactly what the foreign workers are being told and what the foreign workers and recruiters are agreeing to before starting their jobs. They should also independently verify that what they are being told by their recruiters is true to ensure that they are not unwillingly dragged into a TVPA suit based on the actions of their outside recruiters.

For the time being, this case also gives additional leverage to plaintiffs’ counsel in TVPA actions. This case also may be used by the EEOC as leverage in related “human trafficking discrimination” cases.  As we recently reported here, the EEOC received its largest judgment of 2014 in a “human trafficking discrimination” case that, despite being almost certainly unenforceable, will likely be used by the EEOC as leverage in settlement discussions. This case may also be used by the EEOC to claim that large damage awards are appropriate in “human trafficking discrimination” cases.

If punitive damages are awarded in David, we expect an appeal and de novo review of the issue in the Fifth Circuit. Moreover, if Signal is found liable in the case, we expect a de novo review of the applicability of the in pari delicto defense in TVPA cases by the Fifth Circuit, which will be the first federal circuit court to address the question. Stay tuned.

Another Message To The EEOC On Wellness Plans: Targeting Incentives Is Inconsistent With The Affordable Care Act

Posted in EEOC Litigation

By Paul H. Kehoe

On January 29, 2015, the U.S. Senate Committee on Health, Education, Labor & Pensions held a hearing on employer wellness plans. While bipartisan sentiment may be difficult to find in Washington, it is clear that both Republican and Democrat Senators view wellness plans favorably, recognize the crucial role that wellness plans play in lowering health care costs, and are concerned with the Equal Employment Opportunity Commission’s litigation challenging wellness plans, especially in the absence of an articulated policy by the EEOC.

The issue is fairly straightforward. Under the Affordable Care Act (“ACA”), and its implementing regulations issued by the Departments of Labor, Treasury and Health and Human Services, employers may offer financial incentives to employees up to 30% of their health care premiums for participating in and/or reaching certain health outcomes in a wellness plan (and up to 50% for smoking cessation programs). Read more here. Under the Americans With Disabilities Act (“ADA”), medical examinations and/inquiries (including biometric screening) are not permitted unless such inquiries are either job related and consistent with business necessity or voluntary.

Late last year, the EEOC filed litigation against Honeywell International seeking a preliminary injunction to stop it from implementing its wellness plan, which required employees to undergo biometric testing. Employees who chose not to participate forfeited a contribution to a health savings account of up to $1,500, were assessed a $500 surcharge, and were potentially subjected to a $1,000 nicotine surcharge. Ultimately, the EEOC’s theory was that Honeywell’s incentives offered through its wellness program made participation non-voluntary under the ADA even if the incentives complied with the ACA and its implementing regulations.  The EEOC lost the first round of motions in the case (here is our post on that litigation). Given the seemingly inconsistent position between the ACA, regulations issued by three Cabinet-level agencies, and the EEOC’s litigation position, some employers have limited their wellness programs and related incentives, or have even chosen not to offer them.

From both sides of the aisle, the tenor of the hearing was clear – Congress permitted incentives for wellness plans that now the EEOC is litigating against. Senator Alexander (R-TN) remarked (link here) that “EEOC is sending a confusing message to employers – reliance on Obamacare’s authorization of wellness programs does not mean you won’t be sued.” Ranking Member Murray (D-WA) said “[I]t has been exciting to see businesses nationwide to respond to incentives included in the [ACA].” In addition, Sen. Mikulski (D-MD) noted that she was “very frustrated to hear that we are now arguing over the EEOC giving regs and rules… [G]iven the uncertainty of the law, the wellness programs are going to pull back.”

These sentiments follow a clear articulation by the White House on December 3, 2014 that the EEOC’s position “could be inconsistent with what we know about wellness programs and the fact that we know that wellness programs are good for both employers and employees.”

Implications For Employers

The Senate HELP Committee clearly expects the EEOC to issue regulations on the issue. Indeed, such regulations have been included on the EEOC’s most recent Regulatory Agenda. However, all stakeholders like to ask for clarity unless the clarity they receive is not the clarity that they want. As such, when proposed regulations are published, it will be critical for employers interested in offering wellness plans to consider submitting comments to reflect their support of wellness plan incentives up to the limits authorized by Congress. We will keep you updated on any additional developments regarding wellness plans and forthcoming EEOC proposed regulations.

Readers can also find this post on our EEOC Countdown blog here.

Iowa Appellate Court Provides Leverage To Employers In Class Action Settlement Negotiations

Posted in Settlement Issues

By Christopher M. Cascino and Jennifer Riley

On January 14, 2015, in Kragnes v. Schroeder, No. 13-2065 (Iowa App. Ct. Jan. 14, 2015), the Iowa Appellate Court upheld the district court’s decision to cut the fees of plaintiffs’ counsel in a successful class action from a requested $15 million to $7 million. Though not a workplace class action, the decision in Kragnes is a case study for the grounds to challenge fee awards in class actions.

Case Background

In 1960, the City of Des Moines, Iowa, entered into franchise agreements with its electricity and natural gas providers, providing that each provider would pay Des Moines a percentage of its gross receipts for their sales into Des Moines.  Kragnes v. City of Des Moines, 714 N.W.2d 632, 633 (Iowa 2006). These agreements were then made into ordinances. Id.

On May 6, 2004, then-Iowa Governor Tom Vilsack signed a law phasing out sales and use tax for the sale of gas and electricity for residential use. Id. at 634. Facing budget shortfalls, Des Moines responded by entering into updated franchise agreements with its electric and gas providers that increased the franchise fee. Id. at 635. Lisa Kragnes then filed a class action on behalf of herself and those similarly situated, arguing that the increased franchise fees were illegal taxes. Id. at 636.

Ultimately, the Iowa courts determined that the increased fees were illegal taxes, and that Des Moines had to refund approximately $40 million to its taxpayers. Shroeder at 2. The $40 million was placed into a fund so that it could be remitted to the Des Moines taxpayers after class counsels’ fees were removed.

Class counsel requested $15 million in fees, or approximately 37% of the $40 million fund. Id. The district court determined that this amount was “not fair to the class members” and that an award of $7 million in fees, or approximately 18% of the fund, was appropriate. Id. at 3. Class counsel appealed the award, claiming it was “unreasonably low.” Id.

The Appellate Court’s Decision

The Iowa Appellate Court first considered whether the district court erred in considering criteria other than those laid out in the Iowa Rules of Civil Procedure and Rules of Professional Conduct in deciding to reduce class counsel’s fee award. Specifically, the Appellate Court considered whether the district court’s decision to consider the fact that “[t]he money used to pay the attorneys’ fees and expenses will come from the very residents who have already been wronged in the illegal extraction of franchise fees” was an abuse of discretion. Id. at 6 (emphasis omitted). The Appellate Court held that the district court properly considered this a factor, since the applicable rules do not preclude consideration of additional factors in fixing a fee award. Id.

The Appellate Court further rejected class counsel’s argument that it was entitled to the 37% fee because that was the amount stated in its contingency fee agreement with the class representative and published to the class. Id. at 7. The Appellate Court pointed out that judges are not bound by fee agreements between class counsel and the class representative, and upheld the district court’s decision that the award could be reduced in spite of the agreed and published fee arrangement. Id. at 7-8.

Finally, the Appellate Court held that an award of 18% of the $40 million fund was not unreasonable. The Appellate Court reasoned that, given the large size of the recovery, the percentage of the recovery should be reduced to make it reasonable. Id. at 8-9.

Implications For Employers

Employers in Iowa and elsewhere who are subject to class actions should use this case to encourage reasonable settlement demands from class counsel. It can be used to convince class counsel that a large settlement or verdict might not necessarily increase their personal recovery, as courts are more likely to reduce the percentage of damages allocated to class counsel’s fees when there are larger verdicts or settlements.

This case also gives employers a new, potentially powerful argument for why class counsel’s fees should be reduced. The Appellate Court found that class counsel’s fees can be reduced as unreasonable if they represent a significant percentage of the recovery because, in the very act of awarding fees, courts force the class to pay class counsel in the form of a smaller recovery for the wrong class counsel claims they suffered. This argument should concern class counsel since, when it is addressed to them, they will have to argue why the class they have been claiming is so hurt that they need an enormous recovery should have their recovery reduced to pay class counsel’s (often) exorbitant fees. That this is potentially concerning to class counsel is confirmed in the Schroeder case itself, with class counsel trying to dodge the issue by asserting the district court abused its discretion by even considering the issue.

Given the sums at issue, we anticipate a further appeal to the Iowa Supreme Court. Stay tuned.

Eleventh Annual Workplace Class Action Report Webinar: Looking Back At Key Developments Of 2014 And What Lies Ahead In 2015

Posted in Class Action Litigation

By Lorie Almon, Gerald L. Maatman, Jr., and Ian Morrison

Back by popular demand, our Annual Workplace Class Action Litigation Report Webinar is on Thursday, January 22, 2015. Click here to register and attend. It’s free!

Workplace class action litigation continues to accelerate, grow, and pose extraordinary risks for employers. Skilled plaintiffs’ lawyers are continually developing new theories and approaches to complex employment litigation. Hence, the events of the past year in the workplace class action world demonstrate that the array of bet-the-company litigation issues that businesses face are continuing to widen and undergo significant change. At the same time, governmental enforcement litigation pursued by the U.S. Equal Employment Commission and the U.S. Department of Labor manifests the aggressive “push-the-envelope” agenda of two activist agencies, and regulatory oversight of workplace issues continues to be a priority. All of these factors combine to challenge businesses to integrate their litigation and risk mitigation strategies to navigate these exposures.

Our readers have given us wide-ranging feedback since the launch of the 11th Annual Report earlier this month. We are pleased with the positive press we received from commentators, including Forbes, Law 360, BNA Class Action Reporter, Corporate Counsel Magazine, and SHRM (click here, here, here, and here to read more.)

For an interactive analysis of 2014 decisions and emerging trends, please join us for our annual webinar offered in conjunction with the publication of our 11th Annual Workplace Class Action Report. The Report’s author, partner Gerald L. Maatman, Jr., along with partners Lorie Almon and Ian Morrison, chairs of our wage & hour and ERISA class action groups, will cover a changed national landscape in workplace class action litigation.

Other significant developments to be addressed include:

  • The increasing focus of the U.S. Equal Employment Opportunity Commission on high-stakes, big-impact litigation
  • A continuing rising tide of Wage & Hour class actions and collective actions
  • Transformative decisions regarding the Class Action Fairness Act
  • The decreasing settlement values in all areas but ERISA litigation and what it means for employers
  • The profound impact of the decisions in Wal-Mart And Comcast Corp. on Rule 23 case law developments

The date and time of the webinar is Thursday, January 22, 2015:

1:00 p.m. to 2:00 p.m. Eastern Time

12:00 p.m. to 1:00 p.m. Central Time

11:00 a.m. to 12:00 p.m. Mountain Time

10:00 a.m. to 11:00 a.m. Pacific Time

Speakers: Lorie Almon, Gerald L. Maatman, Jr., and Ian Morrison