By Gerald L. Maatman, Jr. and John S. Marrese

Seyfarth Synopsis:  In In Re Subway Footlong Sandwich Mktg. & Sales Practices Litig., No. 16-1652 (7th Cir. Aug. 25, 2017), the U.S. Court of Appeals for the Seventh Circuit overturned a district court’s approval of a class action settlement involving Subway sandwich purchasers who sued for alleged consumer fraud.  The Seventh Circuit called the settlement “worthless” in terms of alleged relief to the class. The decision illustrates that companies defending class action litigation cannot exit such lawsuits by simply “buying peace” by paying-off plaintiffs’ lawyers without providing any value to the class. In this respect, it is one of those unique rulings that is well worth a read by corporate counsel and business executive alike.

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In In Re Subway Footlong Sandwich Mktg. & Sales Practices Litig., No. 16-1652, 2017 U.S. App. LEXIS 16260 (7th Cir. Aug. 25, 2017), the U.S. Court of Appeals for the Seventh Circuit addressed the propriety of an injunctive relief settlement for a class of Subway “Footlong” sandwich purchasers.

A number of state-law consumer protection class actions were filed against Subway based on Subway’s alleged failure to ensure that its Footlong sandwiches were actually 12 inches long.  Id. at *3-5.  Limited discovery showed that the claims had little merit. Subway had always taken steps to ensure that its sandwiches were proper length, but bread length nonetheless varies due to natural and unpreventable variation in the bread-baking process.  Id. at *5.

Rather than pursue resolution on the merits, the parties reached a class-wide settlement for injunctive relief whereby Subway agreed to implement redundant and futile measures in an attempt to ensure Footlongs lived up to their name.  Id. at *7.  Plaintiffs’ attorneys received $520,000 in return for attorneys’ fees.  Id. at *8.  The district court approved of the settlement over objections by certain class members.  Id.

On appeal, the Seventh Circuit reversed, finding that the settlement was “worthless” to the class.  Id. at *14.

Case Background

In 2013, after an online photo went viral showing one customer’s Footlong Subway sandwich was in fact only 11 inches, a slew of plaintiffs’ attorneys filed putative class actions against Subway for damages and injunctive relief.  Id. at *3-4.   The class actions were consolidated in a multidistrict litigation in the U.S. District Court for the Eastern District of Wisconsin.  Id. at *4-5.

Limited discovery revealed that the claims had little merit as: (i) Subway had taken steps to ensure that its Footlongs were in fact 12 inches long; (ii) the minor variability in bread length revealed was due to natural and unpreventable variability in the baking process; and (iii) irrespective of bread length, customers received the same amount of meat, cheese, and other toppings on a sandwich.  Id. Such facts eliminated any hope of certification of a damages class under Rule 23(b)(3), so class counsel focused on certification of a Rule 23(b)(2) injunctive relief class instead.  Id. at *5-6.

The parties subsequently reached a settlement for injunctive relief whereby Subway agreed to implement measures aimed at ensuring Subway Footlongs were in fact 12 inches long, including: (i) requiring franchisees to use a measuring tool for sandwiches; (ii) requiring corporate quality-control inspectors to measure baked bread and check oven operation during regularly scheduled visits; and (iii) posting a notice on its website and in restaurants notifying customers of the variability in baked bread.  Id. at *7.

In return, the plaintiffs agreed to cap their requests for attorneys’ fees at $525,000 and incentive awards at $1,000.  Id. The district court preliminarily approved the settlement, and class counsel filed a motion seeking $520,000 in fees for class counsel and $500 incentive awards for each named plaintiff.  Id. at *8.

A professional objector who was also a member of the class objected to the settlement.  However, the district court overruled the objection, approved the settlement, and certified a class of persons nationwide who had purchased six-inch and Footlong Subway sandwiches between 2003 and 2015.  Id.

The objector appealed.

The Decision

On appeal, the U.S. Court of Appeals for the Seventh Circuit reversed the district court’s approval of the class action settlement.  Id. at *14.

The Seventh Circuit found that the settlement was “worthless” and that “[n]o class action settlement that yields zero benefits for the class should be approved[.]”  Id. at *11.  The Seventh Circuit explained that irrespective of the measures Subway promised to take under the settlement, “there’s still the same small chance that Subway will sell a class member a sandwich that is slightly shorter than advertised.”  Id. at *13 (emphasis in original).

Moreover, the Seventh Circuit found that class members’ right under the settlement to hold Subway in contempt for violating the injunction did not add any value.  Id. at *14.  “Contempt as a remedy to enforce a worthless settlement is itself worthless.  Zero plus zero equals zero.”  Id.

Finally, though not part of its holding, the Seventh Circuit expressed its disdain for the Footlong lawsuits by proclaiming that, because the consolidated class actions sought worthless relief, they “should have been dismissed out of hand.” Id. at *14 (internal quotations and citation omitted).

Implication For Employers

As shown by the Seventh Circuit’s decision, paying-off class action plaintiffs’ counsel can be a poor strategy for efficient resolution of class litigation.  If an employer wishes to realize the cost-savings of early settlement, it must ensure that settlement provides actual value to the class and fees to class counsel commensurate with that value.  Otherwise, expected cost-savings are squandered on opposing objectors (or the trial judge), with the possibility that the trial or an appellate court rejects the settlement and returns the litigation to where settlement talks began.

As an alternative approach, employers should consider efficient and realistic paths to summary judgment.  That approach can make good sense in the face of attorney-driven class litigation with no emotional appeal like the Subway case.  The Seventh Circuit’s emphatic command that meritless class actions should be “dismissed out of hand” should give employers and counsel more confidence in that regard.

seventh circuitBy Gerald L. Maatman, Jr., Mark W. Wallin, and John S. Marrese

Seyfarth Synopsis: After an employee lost his employer-funded health insurance because he failed to complete a medical examination required by his employer, the EEOC sued the employer under the ADA’s ban on involuntary medical examinations. The U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of the suit, not on the merits, but because the relief sought was “unavailable or moot.”

In EEOC v. Flambeau, Inc., No. 16-1402 (7th Cir. Jan. 25, 2017), the EEOC filed suit against Flambeau, Inc. (“Flambeau”) in the U.S. District Court for the Western District of Wisconsin on behalf of a former Flambeau employee.  Flambeau had terminated the employee’s health insurance because he failed to complete a “health risk assessment” and biometric testing, which Flambeau required of employees to participate in its employer-subsidized health plan.

The parties cross-moved for summary judgment.  The district court granted summary judgment for Flambeau and denied summary judgment for the EEOC. The district court found that Flambeau’s program was exempted from liability for involuntary medical examinations under the ADA’s safe harbor provision for the administration of a bona fide benefits plan.  On appeal, the Seventh Circuit declined to decide the case on the merits, but nonetheless affirmed on the grounds that the relief sought by the EEOC was unavailable or moot.

The Seventh Circuit’s opinion provides useful guidance on the issues of punitive damages and mootness in the employment context.  In particular, courts are hesitant to award punitive damages against an employer where plaintiff pursues an unsettled theory of liability, which is the case even if the EEOC has issued guidance that the employer has not followed.  With respect to mootness, an employer’s pre-suit cessation of an allegedly illegal activity may moot a claim where the employer can show it did so for reasons other than impending litigation.

Case Background

In 2012 and 2013, Flambeau required its employees to participate in a wellness program, which included a “health risk assessment” and biometric testing, in order to obtain Flambeau’s employer-subsidized health insurance.  Id. at 3.  Dale Arnold (“Arnold”), a Flambeau employee, failed to complete the assessment and testing prior to the 2012 benefit year deadline, so Flambeau terminated his insurance coverage. Id. Arnold filed complaints with the U.S. Department Of Labor (“DOL”) and the EEOC alleging a violation of the Americans With Disabilities Act (“ADA”) and the Family & Medical Leave Act. Id. at 3-4. After discussions with the DOL, Flambeau agreed to reinstate Arnold’s insurance retroactively once he completed the testing and paid his share of premiums. Id. at 4.  Arnold did both, and Flambeau restored his insurance.  Id.

Before the 2014 benefit year began, Flambeau ended the mandatory assessment and testing, finding that it was not cost-effective. Id. In March 2014, Arnold resigned from Flambeau.  Id.  Nonetheless, six months later, the EEOC sued Flambeau.  The EEOC alleged that Flambeau’s mandatory testing violated the ADA’s prohibition of involuntary medical examinations Id. (citing 42 U.S.C. § 12112(d)(4)).  EEOC enforcement guidance at the time further provided: “A wellness program is ‘voluntary’ as long as an employer neither requires participation nor penalizes employees who do not participate.”  Id. at 10 (citations omitted).  The EEOC sought compensatory and punitive damages on behalf of Arnold as well as an injunction preventing Flambeau from operating such a program.

Flambeau and the EEOC filed cross-motions for summary judgment. Id. at 4.  Flambeau argued that its wellness plan was covered by the ADA’s insurance safe harbor, which exempts the administration of a bona fide benefits plan from liability for involuntary medical examinations. Id. at 4 (citing 42 U.S.C. § 12201(c)(2) & (c)(3)). The EEOC, meanwhile, argued that the safe harbor provision was inapplicable to Flambeau’s program.  Id. at 4. The district court sided with Flambeau, finding that the safe harbor provision “could cover at least some wellness programs,” and Flambeau’s was one such program. Id. at 5.

The Decision

On appeal, the U.S. Court of Appeals for the Seventh Circuit affirmed the judgment in favor of Flambeau.  Id. at 15. However, its decision was not based on the merits of the case, i.e., whether the district court properly ruled that Flambeau’s wellness program was exempted under the ADA.  Instead, the Seventh Circuit found that the EEOC’s claim was moot. Id. at 5-6.

Article III of the Constitution limits federal courts’ jurisdiction to “live controvers[ies].”  Id. at 5 (citations omitted).  Accordingly, a case is moot if a party “lacks a personal stake” in the outcome.  Id. (citations omitted).  The EEOC argued that: (a) Arnold had a personal stake in the outcome because he had both compensatory and punitive damages; and (b) the EEOC had a stake because voluntary cessation of illegal conduct – here, Flambeau’s wellness program – typically does not moot a case.  The Seventh Circuit rejected both arguments.

First, the Seventh Circuit ruled that Arnold failed to establish compensatory damages because he did not actually pay the $82.02 in medical expenses he incurred while without Flambeau’s insurance. Id. at 6. Arnold also failed to establish any damages for emotional distress. Id. at 6-7.

Furthermore, the Seventh Circuit held that Arnold was not entitled to punitive damages.  Punitive damages are recoverable under the ADA where an employer acts “with malice or reckless indifference to the federally protected rights of an aggrieved individual.”  Id. at 7 (citing 42 U.S.C. § 1981a(b)(1)).  The Seventh Circuit explained that Flambeau did not act with reckless indifference to Arnold’s federally protected rights because whether or not the ADA’s safe harbor covered Flambeau’s wellness plan was an unsettled question when Flambeau utilized it (and remains one today).  Id. at 7-8.  Punitive damages are not available under the ADA where plaintiff’s theory of liability is “novel or otherwise poorly recognized.” Id. at 7 (citations omitted).  Importantly, the Seventh Circuit noted that the fact that Flambeau’s program potentially contravened the EEOC’s guideline on wellness programs did not amount to reckless indifference.  Id. at 10-11 (“An employer’s or its attorney’s disagreement with EEOC guidance does not by itself support a punitive damages award, at least where the guidance addresses an area of law as unsettled as this one.”).

Second, the Seventh Circuit found that Flambeau’s voluntary cessation of its wellness program mooted the case because there was no reasonable expectation Flambeau would reinstate the program. Id. at 11. The record showed that Flambeau dropped the program because, based on two years of experience, its economic costs outweighed its benefits. Id. at 12. Moreover, Flambeau’s pre-suit cessation of the program evidenced that it was a genuine business decision and not a mere litigation tactic. Id.  This distinguished it from cases wherein an employer stopped its illegal activity abruptly in relation to litigation and without a sufficient alternative explanation.  Id. at 13.

In closing, the court noted that prudential concerns also weighed against deciding the case on the merits.  Id. at 14.  Given the prevalence of wellness programs among employers, such a decision would have wide-ranging implications.  Id.  Moreover, the EEOC had promulgated further regulations on the issue after this case’s events.  Id. (citing 29 C.F.R. § 1630.14).  As such, the court felt that the “issues should be decided . . . in a case where the answers will matter to the parties.” Id. at 15.

Implication For Employers

This decision illustrates the importance of employer vigilance with respect to company-wide programs, particularly where such a program touches on unsettled areas of the law.  Where an employer can show attempts to consult and comply with the law, it will be in a better position to defend government agency action, which can include requests for punitive damages and impactful injunctive relief.  That is so even where the employer’s action does not necessarily conform with government agency guidance on the topic.

th2H4JI06DSeyfarth Synopsis:  African American pipefitters filed a class action against their labor union based on its allegedly discriminatory system for referring jobs to union members.  Despite the fact that third-party employers retained sole discretion in deciding whether to hire a union referral, the U.S. District Court for the Northern District of Illinois found that such discretion, and the individual hiring determinations resulting therefrom, did not destroy commonality for the claims of the class members.  The Court based its conclusion on the notion that the union’s job referral system was “the first allegedly discriminatory step that tainted the entire job assignment and hiring process.”  The ruling is an important one for employers on discrimination liability for policies delegating decision-making authority to local managers or third parties.

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In Porter et al. v. Pipefitters Ass’n Local Union 597, No. 12-CV-9844 (N.D. Ill. Sept. 20, 2016), a group of African American pipefitters filed a class action against their labor union, alleging racial discrimination in the union’s job referral system.  Under the system, while third-party employers retained sole discretion in the ultimate decision to hire a union referral, union members were supposed to obtain employment based on race-neutral factors like length of time spent waiting for a job and having the requisite skills.  However, Plaintiffs alleged that the union’s policies enabled employers to circumvent the system and hire union members directly, which resulted in white members disproportionately obtaining employment over African American members.

In granting Plaintiffs’ motion and certifying a class, Judge Sara Ellis of the U.S. District Court for the Northern District of Illinois rejected the union’s argument that individual issues relating to the hiring decisions of third-party employers precluded a finding of commonality.  The union’s referral system, which enabled employers to circumvent race-neutral criteria for hiring, was “the first allegedly discriminatory step that tainted the entire job assignment and hiring process” and “allowed and endorsed” discrimination.  Plaintiffs could prove the discriminatory nature of the policy across the class with statistical evidence.

The ruling is significant in that it limits the impact of Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), wherein the U.S. Supreme Court found that an employer’s policy of giving discretion to local managers in employment decisions destroyed commonality among employees’ discrimination claims.

Case Background

In Porter, Plaintiffs filed a class action lawsuit against their union based on its allegedly discriminatory system for referring jobs with third-party employers to Union members.  Id. at 1.  Plaintiffs alleged that the Union’s policies enabled employers to bypass the race-neutral referral system negotiated and hire Union members directly.  According to Plaintiffs, this resulted in African American members receiving fewer work hours than their white counterparts.  Id.

The Union’s job referral system had a history of discriminating against African Americans.  In 1990, a jury found that rather than operate, as negotiated, a system by which members received jobs on a first-come, first-serve basis, the Union actually operated a word-of-mouth referral system disproportionately favoring whites.  Id. at 2-3.  Based on the jury’s finding, the Court issued a consent decree requiring the Union to assign jobs from an out-of-work list on a first-on, first-off basis.  Id. at 3-4.  However, employers retained sole discretion in deciding whether to hire referrals.  Id. at 4.  In addition, written exceptions to the system allowed employers to circumvent the out-of-work list and continue to hire Union members directly.  Id.  In 1996, the court terminated the consent decree.  Id. at 5.  Evidence showed that, by 2004, less than 20% of jobs were filled from the out-of-work list.  Id.

In 2004-2005, the Union negotiated a new job referral system whereby members could either find employment directly with an employer or find employment through the out-of-work list.  Id.  While the Union implemented quotas to ensure appropriate levels of hiring from the out-of-work list, evidence showed those quotas were not met.  Id. at 5-6.

Based on the above, Plaintiffs alleged discrimination in violation of Title VII of the Civil Rights Act of 1964 and 42 U.S.C. § 1981 as well as breach of the union’s duty of fair representation under the Labor Management Relations Act of 1947.  Id. at 1. Plaintiffs moved to certify a class of current and former African American members of the Union who had faced and continued to face such violations.  Id.

The Decision

Judge Ellis certified a class of current and former African American members of the union pursuant to Rule 23(b)(3) to recover money damages.  The Court withheld ruling on certification of a class under Rule 23(b)(2) for injunctive relief.

The Court’s Analysis Under Rule 23(a)

The Court’s analysis under Rule 23(a) focused on Plaintiffs’ showing of “commonality,” which required Plaintiffs to identify an issue central to all class members’ claims that the Court could decide “in one stroke” for the entire class.  Id. at 12 (internal quotations and citations omitted).  The Court explained that challenging the existence of a discriminatory policy may provide commonality, depending on the degree of discretion involved in the policy’s application.  Id. at 12-13  Relying in particular on the U.S. Supreme Court opinion in Wal-Mart along with recent Seventh Circuit precedent, the Court opined that commonality is absent where the policy is “highly discretionary and plaintiffs do not identify a common way in which defendants exercise that discretion.”  Id. at 13.  However, if plaintiffs show that a defendant enforces the policy at the corporate level and the policy affects class members in a common manner, some discretion by employees or third parties in actually applying the policy will not necessarily defeat commonality.  Id. at 13.

Based on those principles, the Court ruled that Plaintiffs had shown commonality based on the existence of the union’s job referral system, which “allowed,” “endorsed,” and “exacerbated” discrimination against African American pipefitters.  Id. at 14-15.  The Court rejected the union’s contention that the independent hiring decisions of third-party employers destroyed commonality.  Indeed, such discretion did “not matter because Plaintiffs challenge [the union]’s overarching policies, which influenced the entire job assignment and hiring process.” Id. at 15 (citation omitted).  Such policies were “the first allegedly discriminatory step that tainted the entire job assignment and hiring process.”  Id.

In addition, the Court found that Plaintiffs had easily satisfied the remaining requirements of numerosity, typicality, and adequacy of representation under Rule 23(a).  Id. at 11-12, 17-19.

The Court’s Analysis Under Rule 23(b)

Having found Plaintiffs satisfied Rule 23(a), the Court addressed whether Plaintiffs had satisfied Rule 23(b)(2) for certification of an injunctive relief class and Rule 23(b)(3) for monetary relief.

The Court explained that Rule 23(b)(2) allows certification of an injunctive relief class where the defendant “has acted or refused to act on grounds that apply generally to the class” such that the Court can appropriately  fashion relief for the class as a whole.  Id. at 20 (quoting Fed. R. Civ. P. 23(b)(2)).  Injunctive relief is not appropriate if a court must make individual determinations to fashion relief for individual class members.  Id.  Plaintiffs’ proposed injunctive relief — a ban on the current job referral system and implementation of a new system — “appear[ed] proper.”  Id.  However, because Plaintiffs did not appear to be current members of the Union and, thus, would not suffer the Union’s policies going forward, they had no basis to request injunctive relief.  Id. at 20-21.  Accordingly, the Court reserved ruling on certification under 23(b)(2) to allow Plaintiffs to show that they were current Union members or to substitute someone who is a current member.  Id. at 22.

The Court next addressed whether Plaintiffs satisfied the “predominance” and “superiority” requirements under Rule 23(b)(3). In particular, class certification is proper if “questions of law or fact common to class members predominate over any questions affecting only individual members, and . . . a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”  Id. (quoting Fed. R. Civ. P. 23(b)(3)).

The Court determined that Plaintiffs can satisfy Rule 23(b)(3)’s predominance requirement by showing that “common questions [among class members] represent a significant aspect of a case” and can be proved by common evidence.  Id. at 22-23. Plaintiffs argued that they could demonstrate the discriminatory impact of the job referral system on all class members by using statistical evidence adduced by its expert.  Id. at 23.  The union argued that predominance did not exist because: (a) Plaintiffs’ statistical evidence was “unrepresentative, inaccurate, [and would only] undermine” Plaintiffs’ claims; and (b) the union did not have a uniform policy because third-party employers made hiring decisions.  Id.  The Court agreed with Plaintiffs, finding that the Union’s arguments only underscored the predominance of common issues because, even if the Union was correct, the claims of the entire class would fail together.  Id. at 24.

The Court also found that Plaintiffs had shown the “superiority” of a class action under the circumstances because it “would be more efficient than proceeding with hundreds of individual suits” challenging the same job referral system.  Id. at 24.  As such, the Court certified a class of current and former African American Union members to seek monetary relief under Rule 23(b)(3).

Implication For Employers

Jude Ellis’ decision is decidedly friendly for Plaintiffs. Based on the ruling in Porter, even after Wal-Mart Stores, Inc. v. Dukes, an employer may be held liable for the discretionary decisions of local managers or third parties if those decisions are discriminatory and the product of an employer’s policy which “allowed” or “exacerbated” the discrimination.  Such a policy can provide the “glue” to hold together a class action where the independent decisions of local managers or third parties would otherwise destroy it.  While the facts in Porter — namely, that a predecessor of the challenged policy had been found discriminatory by a jury — may limit its impact, employers would be wise to monitor policies giving lower level employees decision-making authority to ensure such policies are not allowing or contributing to a pattern of discrimination.

sealBy Gerald L. Maatman, Jr., Christina M. Janice, and Alex W. Karasik

Following the U.S. Supreme Court’s landmark decision in Mach Mining v. EEOC, 135 S.Ct. 1645 (2015), which held that a judge may review whether the EEOC satisfied its statutory obligation to attempt conciliation before filing suit, and that the scope of that review is narrow, the litigation was remanded to the U.S. District Court for the Southern District of Illinois for further proceedings consistent with that ruling. Subsequently, the EEOC renewed its motion for partial summary judgment that originally had been denied by the District Court, and filed motions to strike Mach Mining’s evidence regarding the conciliation process. Applying the Supreme Court’s ruling that we previously blogged about here, Judge J. Phil Gilbert of the U.S. District Court for the Southern District of Illinois granted in part the EEOC’s  motions to strike with respect to evidence of communications during conciliation, and granted the EEOC’s renewed motion for partial summary judgment as to Mach Mining’s defense of failure to conciliate. EEOC v. Mach Mining, LLC, No. 11-cv-00879-JPG-PMF (S.D. Ill. Jan. 19, 2016).

This decision is required reading for employers engaged in EEOC investigations, conciliations and enforcement litigation.

Case Background

In 2011, the EEOC filed suit on behalf of a class of female applicants who had applied for non-office jobs at Mach Mining’s Johnston City, Illinois facility. According to the EEOC, Mach Mining “has never hired a single female for a mining-related position,” and “did not even have a women’s bathroom on its mining premises.” Id. at 1. The complaint alleged that since January 1, 2006 Mach Mining engaged in a pattern or practice of unlawful discrimination on the basis of sex, in violation of Title VII. In its answer, Mach Mining asserted the EEOC’s failure to conciliate in good faith under 42 U.S.C. § 2000e-(5)(b) as an affirmative defense to the litigation.

The EEOC moved for partial summary judgment on Mach Mining’s affirmative defense of failure to conciliate. The District Court denied the motion, finding that the EEOC was not entitled to judgment as a matter of law as the EEOC’s pre-suit duty to conciliate was subject to at least some level of judicial review. Id. at 2. The EEOC then filed a motion for reconsideration or, in the alternative, for certification for appeal under 28 U.S.C. §1292(b). The District Court held oral arguments and denied reconsideration of its order, but granted the motion to certify. The Seventh Circuit ultimately reversed and remanded the case back to the District Court for proceedings on the merits. Mach Mining then petitioned for certiorari to the Supreme Court, which was granted.

The Supreme Court heard arguments on January 13, 2015 and decided on April 29, 2015 that, a judge “may review whether the EEOC satisfied its statutory obligation to attempt conciliation before filing suit…[but] the scope of that review is narrow, thus recognizing the EEOC’s extensive discretion to determine the kind and amount of communication with an employer appropriate in any given case.” Mach Mining, LLC v. EEOC, 135 S.Ct. at 1649 (2015). The Supreme Court reasoned that narrow judicial review of the EEOC’s pre-suit duty to attempt conciliation prior to litigation was appropriate, given the confidential nature of conciliation and the discretion afforded the EEOC under Title VII to determine how to attempt conciliation.  Accordingly, the judgment of the Court of Appeals was vacated and the matter was remanded back to the Seventh Circuit for further proceedings. The Seventh Circuit then remanded the case back to the District Court for proceedings consistent with the opinion of the Supreme Court.

The EEOC subsequently renewed its motion for partial summary judgment on Mach Mining’s affirmative defense of failure to conciliate, arguing that it had sufficiently demonstrated attempting conciliation with Mach Mining, and compliance with 42 U.S.C. § 2000e-5(b). The EEOC also filed two motions to strike, arguing in the first motion that a portion of Mach Mining’s opposition to summary judgment revealed confidential information about the conciliation process in derogation of 42 U.S.C. § 2000e-5. The District Court previously had denied the EEOC’s attempts to strike this information, agreeing with Mach Mining that the information provided in Mach Mining’s papers was focused on what was missing from the conciliation process, as opposed to what was actually said or done during the process. The EEOC argued in the second motion that portions of Mach Mining’s exhibits and statement of additional undisputed facts in support of its opposition to the EEOC’s motion for partial summary judgment similarly should be stricken.

The District Court’s Decision

The District Court granted the EEOC’s motions to strike, in part, and granted the EEOC partial summary judgment on Mach Mining’s affirmative defense of failure to conciliate.  In doing so, the District Court observed that the Supreme Court provided guidance for limited judicial review of the informal “conference, conciliation, and persuasion” requirement of Title VII, and for what information a court may consider in its review.  The District Court relied on the Supreme Court’s reasoning that a judge “looks only to whether the EEOC attempted to confer about a charge, and not to what happened (i.e., statements made or positions taken) during those discussions.”  Mach Mining, No. 11-CV-00879, at 4. The District Court determined that while substantive details had not been disclosed by Mach Mining in its court filings, nevertheless specifics as to that was “said or done” during the conciliation process were disclosed, and went beyond “whether EEOC attempted to confer about a charge.” Id. at 5. Accordingly, the District Court granted the EEOC’s motions to strike portions of Mach Mining’ opposition papers and supporting exhibit.

The District Court declined to strike, however, portions of Mach Mining’s filings attesting to a letter sent by the EEOC stating that conciliation efforts had failed, as well as the date of the lawsuit. The District Court noted that the EEOC previously had stated that such letters were available for review, that the date of filing was a public record, and that information regarding the EEOC’s fiscal year was also publicly available. Id. at 5-6. Accordingly, the District Court found that the information in these paragraphs did not concern statements made or positions taken during conciliation.

Turning to the EEOC’s renewed motion for partial summary judgment, the District Court referred to a two part test outlined in the Supreme Court’s decision to determine whether the EEOC has complied with the statutory requirement of 42 U.S.C. § 2000e-5(b): (1) the EEOC must inform the employer about the specific allegation, as it typically does in a letter announcing its determination of reasonable cause; and (2) the EEOC must try to engage the employer in an informal method of conference, conciliation, and persuasion. The District Court also emphasized that the scope of the review was narrow, looking only to whether the EEOC attempted to confer about a charge, and not to the statements made or positions taken during those discussions. Id. at 7. The District Court found that the EEOC’s letter of determination that it sent to Mach Mining on September 17, 2010 satisfied the first prong since it described Mach Mining’s alleged improper conduct and identified the aggrieved individuals.

As to the second prong, the District Court described how the EEOC provided Mach Mining with the proper notice, and as evidenced by the declaration of its own employee, the EEOC engaged in oral and written communications with Mach Mining to provide the company with the opportunity to remedy the discriminatory practices. To refute the EEOC’s affidavit, Mach Mining was required to provide an affidavit or other evidence indicating that the EEOC did not provide the requisite information about the charge or attempt to engage in a discussion about conciliating the claim. The District Court determined that the affidavit provided by Mach Mining only indicated that the EEOC did not provide all of the information that Mach Mining requested, and not that it failed to provide the requisite information. Therefore, the District Court held that the EEOC met the second prong of the test set out by the Supreme Court, and granted partial summary judgment to the EEOC. Id. at 10.

It is noteworthy that at the end of its decision, the District Court commented that “[a]lthough § 2000e-5(b) of 42 U.S.C. prohibits the disclosure of ‘anything said or done’ during the informal conciliation process, it does not prohibit disclosure of information obtained during the EEOC’s investigation and such information becomes available through discovery.” Id. This observation signals a significant difference between the EEOC’s pre-suit duties to investigate and to attempt conciliation.

Implications For Employers

Following this decision, employers can expect that in EEOC-initiated litigation, the EEOC will seek the narrowest review possible of its conciliation processes, asserting that this pre-suit condition is satisfied merely by producing a letter of determination, a notice of failure of conciliation, and an affidavit by EEOC personnel. With regard to EEOC pre-suit investigations, employers should be prepared to document the EEOC’s pre-suit investigatory conduct and enforce Title VII’s requirement of an investigation prior to the EEOC’s initiation of litigation. Armed with this decision, the EEOC will likely aim for the minimum threshold of satisfying its conciliation requirements for the foreseeable future.

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

thCATMS9YBBy Gerald L. Maatman Jr. and Howard M. Wexler

As we have previously noted, the EEOC continues to push the envelope on many fronts, including new theories/arguments in cases brought under Americans With Disabilities Act, 42 U.S.C. § 12101 et seq. (“ADA”), such as its recent attack on wellness plans, discussed here.

Most recently, in EEOC v. Autozone, Inc., No. 15-1753 (7th Cir. Jan. 4, 2016), the Seventh Circuit affirmed the denial of the EEOC’s request for a new trial in a case brought under the ADA where after a five day trial the jury returned a full verdict for the employer. The decision is an interesting read for corporate counsel focused on EEOC litigation and ADA compliance.

Background

In 2009 an employee who worked for AutoZone as a Parts Sales Manager was permanently restricted her from lifting anything with her right arm that weighed over 15 pounds. Id. at 2. One month later AutoZone discharged the employee because it was unable to accommodate her permanent restriction. Id. The employee filed a charge with the EEOC, which, after issuing a probable cause determination, filed suit against AutoZone alleging that it failed to accommodate her lifting restriction and illegally terminated her employment. Id.

A five-day jury trial was held in November 2014. Id. The jury returned a special verdict finding that the EEOC failed to prove by a preponderance of the evidence that the employee was a “qualified individual with a disability or a record of disability at the time that her employment was terminated.” Id. The EEOC subsequently moved for a new trial. In support of its motion, the EEOC argued: (1) the verdict was against the manifest weight of the evidence; (2) the medical evidence established that [the employee] was disabled as a matter of law; and (3) the jury instructions confused the jury. Id. at 3-4. The district court denied the motion.  Id. at 4. Thereafter, the EEOC appealed.

The Seventh Circuit’s Decision

The Seventh Circuit rejected all three grounds advanced by the EEOC in support of the request for a new trial. With respect to its argument that the jury’s award went against the manifest weight of evidence, the Seventh Circuit held that “based on the substantial evidence presented at trial, a rational jury could have concluded that heavy lifting was a fundamental duty of the PSM position, rather than merely a marginal function.” Id. at 7. Since the employee could not lift more than 15 pounds with her right arm, “there was sufficient evidence for a rational jury to find that she could not perform the essential functions of the PSM position. Thus, a rational jury could find that Zych was not a qualified individual with a disability.” Id. at 7-8.

The Seventh Circuit also rejected the EEOC’s request for a new trial based on the district court’s denial of its proposed team concept instruction. The proposed team concept instruction that the district court rejected stated:

In team working environments, where team members per-form tasks according to their capacities and abilities, job functions that are not required of all team members are not essential functions. Where there is no required manner in which employees are to divide the labor, the fact that one team member may not be able to do all the tasks assigned to the team does not mean that person is unable to per-form his or her essential functions.

Id. at 3.

The EEOC argued that this “team concept” jury instruction was permitted in prior cases, and, by denying it, the district court “provided the jury with an incomplete and misleading statement of the law.” Id. at 9. The Seventh Circuit disagreed.  First, it held that, “the EEOC’s proposed team concept instruction was an attempt to have the jury draw an inference that heavy lifting was not an essential function of the PSM position.” Id. at 12. The Seventh Circuit found that, “the district court was not obligated to promulgate such an inference within the jury instructions. Rather, it was proper for the district court to instead allow the EEOC to make its team concept argument to the jury in its closing arguments.” Id. at 13.

Furthermore, the Seventh Circuit found that the district court’s denial of the proposed instruction did not prejudice the EEOC. Id. at 13. Although the district court denied the instruction, the judge nonetheless allowed the EEOC to argue it to the jury during closing arguments. Id. at 13. However, the EEOC chose not to do so. Accordingly, as “the EEOC decided not to present the team concept argument, despite the district court expressly stating that it could, the EEOC cannot now claim that it was prejudiced by the district court’s refusal to admit its proposed jury instruction.”

Implications For Employers

This decision highlights not only the continued push back against the EEOC’s new “theories” of liability in ADA cases, but also the importance of jury instructions at trial and preserving the record if the district court rejects proposed jury instructions. Here, the Seventh Circuit took pains to point out that the district court, while denying its proposed instruction, nonetheless allowed the EEOC to argue the points to the jury during its closing. By the Commission failing to do so, the Seventh Circuit was quick to point out that the EEOC seemed to have voluntarily abandoned its argument, thus belying any claim of prejudice.

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

thCATMS9YBBy Gerald L. Maatman Jr. and Howard M. Wexler

As we previously blogged about, most recently here and here, the EEOC has gone on the offensive challenging employer severance agreements. In one such case, the EEOC attacked CVS Pharmacy Inc.’s standard release agreement which contained terms more expansive in favor of employees than the EEOC’s own interpretive guidance, and agreements held enforceable by in key court decisions.  The EEOC’s case against CVS was eventually dismissed on procedural grounds because the EEOC had not met its obligation to conciliate the claims filed in that case, so failed to provide additional guidance on the EEOC’s aggressive theories.

The EEOC appealed its well-publicized defeat in the CVS case and on December 17, 2015 the U.S. Court of Appeal for the Seventh Circuit issued yet another stinging rebuke of the EEOC’s “shoot first aim later” litigation tactics and rejected the EEOC’s appeal.

Case Background

In its Complaint, the EEOC alleged that certain provisions of CVS’s standard severance agreement violated Title VII because they interfere with an employee’s right to file charges, communicate voluntarily with the EEOC and other state agencies, and participate in agency investigations.  Id. at 3.  The case arose out of a former CVS pharmacy manager who was discharged in July 2011. Id. at 2.  She filed a charge with the EEOC, alleging that CVS terminated her due to her sex and race.  Id.  On June 13, 2013, the EEOC dismissed the charge, but it then sent CVS a letter saying that it had reasonable cause to believe that CVS was engaged in a pattern or practice of resistance to the full employment of rights secured by Title VII by virtue of the severance agreements that the charging party and others signed at their terminations. Id. at 4. Specifically, the EEOC claimed that the agreement deterred the filing of charges and interfered with the employee’s ability to communicate voluntarily with the EEOC and other federal and state agencies.   Id.

The District Court dismissed the EEOC’s case on purely procedural grounds, as it was undisputed that the EEOC did not engage in any effort to conciliate prior to bringing suit. Id. at 6. The EEOC argued that it was not required to engage in conciliation procedures because it was not bringing a garden-variety pattern or practice claim under section 707(e), but rather was alleging a pattern or practice of resistance to the full enjoyment of rights created by Title VII.  Id.  That “resistance” claim was brought under section 707(a), which does not mandate the same pre-suit procedures as are required under section 707(e).  Id.

Seventh Circuit’s Decision

On appeal, the EEOC alleged that the District Court “got it wrong” because: (1) Section 707(a) authorizes the agency to bring actions challenging a “pattern or practice of resistance” to the full enjoyment of Title VII rights without following any of the pre‐suit procedures contained in Section 706, including conciliation; (2) CVS’s use of a severance agreement that could chill terminated employees from filing charges or participating in EEOC proceedings constitutes a “pattern or practice of resistance” for purposes of Section 707(a); and (3) a reasonable jury could conclude that the Agreement deterred signatories from filing charges with the EEOC because of its length, small font, and the fact that it is drafted in “legalese,” thus making summary judgment for CVS improper.  Id. at 7.  The Seventh Circuit summarily rejected the EEOC’s first argument, and therefore, did not address the additional grounds set forth by the EEOC in support of its appeal.

With respect to the Commission’s contention that it was not required to engage in any pre-suit procedures, the Seventh Circuit rejected “the EEOC’s … novel interpretation of its powers under Section 707(a) that extends beyond the pursuit of unlawful unemployment practices involving discrimination and retaliation, and that frees the EEOC from engaging in informal methods of dispute resolution as a prerequisite to litigation,” as it   “cites to no case law….nor has any case been found that supports the distinction between the two sections as argued by the EEOC.”  Id. at 11.

Moreover, because the Seventh Circuit found no difference between a suit challenging a “pattern or practice of resistance” under Section 707(a) and a “pattern or practice of discrimination” under Section 707(e), it reasoned that the EEOC must comply with all of the pre‐suit procedures contained in Section 706, including conciliation.  Id. at 12.  As the Seventh Circuit noted, “[i]f we were to adopt the EEOC’s interpretation of Section 707(a), the EEOC would never be required to engage in conciliation before filing a suit because it could always contend that it was acting pursuant to its broader power under Section 707(a). In other words, the EEOC’s position reads the conciliation requirement out of the statute.”  Id. at 14-15.

Implications For Employers

While this stinging defeat for the EEOC in its attempt to attack carefully drafted severance agreements in line with the EEOC’s own interpretive guidance, employers are nonetheless well advised to review their separation agreement terms at issue in this case. While CVS may have won the battle for now,  the EEOC appears to be ready for war and focused on continuing to litigate terms of individual and/or form separation agreements. In doing so, the EEOC’s position attempts to alter existing case law authority governing terms of severance agreements, regardless of the Agency’s own guidance and leading case law interpreting such terms.

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

School desk with pencil and appleBy Christopher M. Cascino and Gerald L. Maatman, Jr.

In Chicago Teachers Union, Local No. 1, American Federation of Teachers, AFL-CIO v. Bd. of Educ. of the City of Chicago, Case No. 14-2843 (7th Cir. Aug. 7, 2015), the U.S. Court of Appeals for the Seventh Circuit reversed a district court decision we discussed previously here and certified the discrimination claims of a class of African-American Chicago teachers. The case is significant for employers in that the Seventh Circuit, as it previously did in McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482 (7th Cir. 2012), a case we discussed here, again certified a class even though the final alleged discriminatory decisions were based on subjective decisions by multiple decision-makers. In addition, the Seventh Circuit further limited Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and held that, even where the legality of final employment decisions cannot be decided on a class-wide basis because of individualized exercise of discretion, there are circumstances where the legality of intermediate decisions preceding the final alleged unlawful employment decision can nonetheless be decided on a class-wide basis.

Background Of The Case

Under the Illinois School Code, schools may be subject to a “turnaround” if they have been on probation for at least one year and have failed to make adequate progress in correcting deficiencies. In a turnaround, the Board of Education takes control of the school and removes all staff. Affected teachers and para-professionals are either placed in a reassignment pool or a substitution pool with different rights to salary and other benefits depending on their tenure status and job position.

In 2011, the Board began considering which schools should be turned around in 2012. There were three steps in this process. The process started with an initial list of 226 schools eligible for turnaround because they had been on probation for one year and had failed to make adequate progress in correcting deficiencies. That list was reduced to 74 schools based on composite standardized test scores and graduation rates. Subsequently, in the third step, a qualitative “in-depth investigation process” began for the remaining 74 schools. This involved school visits, additional data collection, and meetings with a variety of school representatives and community members. No written policy applied to the final turnaround decision. Some of the factors considered were: the academic culture of the school, whether quality instruction was being provided, the quality of the leadership, and the academic trends of the school.

After reviewing the information, several Chicago Public Schools officials decided to recommend that 10 schools should be turned around. The Board subsequently agreed. The schools were located exclusively on the south and west sides of Chicago. The total percentage of African-American tenured teachers at the 10 schools selected for turnaround was approximately 51%, while the total percentage of African-American tenured teachers in the entire Chicago public school system was only 25%.

The Chicago Teachers Union and three African-American tenured teachers brought a class action lawsuit against the Chicago Board of Education alleging that the board’s decision to turn around the 10 Chicago public schools was racially discriminatory. Plaintiff sought to certify a class consisting of all African-American teachers or para-professionals in any school subjected to the 2012 turnarounds. The U.S. District Court for the Northern District of Illinois denied class certification, and the Plaintiffs appealed.

The Seventh Circuit’s Decision

The Seventh Circuit began its analysis by noting that one of the purposes of class action litigation is to avoid repeated litigation of the same issues. Chicago Teachers Union, at 8. Then pointing out that the question on appeal was whether there were common issues of law or fact common to the class, the Seventh Circuit addressed the Board’s argument that, given that the third step in the turnaround decision-making process was qualitative and subjective, there was a lack of commonality under Wal-Mart. Id. at 12.

The Seventh Circuit reasoned that the first flaw in this argument was that it skipped to the third step of the decision-making process. It pointed out that the first two steps of the process were “clearly-objective steps.” Id. at 13. The Seventh Circuit opined that these first two steps could have resulted in disparate impact discrimination against African-Americans regardless of what happened at the third step. Id. For example, it hypothesized that, after the first two steps, it could be the case that all schools remaining under consideration for turnaround had 100% African-American teaching staffs, and that the first two steps would thus have had a disparate impact on African-Americans regardless of the third step. Id. The Seventh Circuit therefore found that the question of whether the first two objective steps had a disparate impact could be decided on a class-wide basis. Id. at 14.

The Seventh Circuit concluded that this result followed from its prior decision in McReynolds.  In McReynolds, the Seventh Circuit certified the disparate impact claims of a class of African-Americans even though the employment decisions at issue were made at the discretion of 165 separate individuals because two company-wide policies allegedly caused the 165 individuals to exercise their discretion in a common way that caused discrimination. Id. at 15-16. In Chicago Teachers Union, the Seventh Circuit held that McReynolds demonstrated “that a company-wide practice is appropriate for class challenge even where some decisions in the chain of acts challenged as discriminatory can be exercised by local managers with discretion[,] at least where the class at issue is affected in a common manner[,]” and that under this principle certification of a class to determine the disparate impact of the first two steps of the turnaround decision-making process was appropriate. Id. at 17-18.

The Seventh Circuit went on to consider whether a class could be certified to determine whether the third step of the decision-making process was discriminatory. It found that, despite the fact the Board “describe[d] numerous factors considered in the various schools” during the third step, “they could be boiled down to” 10 factors, including factors like “school culture” and “parent and community input.” Id. at 19-20. It found the fact that there were 10 factors that made the “case worlds away from that in Wal-Mart where a court could have no way of knowing why each of the thousands of individual managers made distinct decisions.” Id. at 22. It did so even though there were cases where only one of the 10 factors was determinative in deciding to turnaround a school.  Id.

The Seventh Circuit also emphasized the fact that there was one decision-making body that was “of one mind, using one process.” Id. at 23. It distinguished this situation from Wal-Mart, where there were “myriad actions of individual managers.” Id. It concluded that “[d]ecisions by myriad low-level managers are different than decisions made by . . . few concentrated top-level managers,” and thus that certification of claims based on the third stage of the decision-making process was appropriate. Id. at 23-24.

The Seventh Circuit also reaffirmed McReynolds’ holding that a class should be certified where liability can be determined on a class-wide basis even though individual trials as to damages would be needed. Id. at 32-33.

Implications For Employers

Plaintiffs’ class action lawyers will likely cite to this case as further support in their McReynolds-based arguments for class certification. Of particular concern to employers might be the fact that the Seventh Circuit found that decisions based on consideration of 10 non-enumerated factors – including factors like “school culture” that are far from objectively measurable – are the type of decisions that can support certification of a discrimination class action.  Moreover, this case provides an additional tool that plaintiffs’ lawyers are likely to use to try to certify classes where employment decisions are made in multiple stages. They will likely try to certify classes even where final decisions were highly individualized and discretionary by arguing that earlier steps leading to the final decision were uniformly applied and discriminatory. Employers should be on the lookout for how successful these attempts are in future litigation.

money bagBy Gerald L. Maatman, Jr. and Jules Levenson

Defendants fighting class actions in the Seventh Circuit may have one less tool in their arsenal following the recent ruling in Chapman v. First Index, Inc., No. 14-2773, 2015 WL 4652878 (7th Cir. Aug. 6, 2015) [here], a putative class action arising from allegedly illegal junk faxes. Though not a workplace class action decision, Chapman is important for any employer facing high-stakes litigation.

Until Chapman (authored by Judge Easterbrook joined by Circuit Judges Posner, and Manion), prevailing case law in the Seventh Circuit held that when a plaintiff received an offer of judgment for full relief requested, the claim became moot. This had particular salience in the class action context where mooting the claim of a would-be class representative often served to head off the specter of a larger case. Though plaintiffs typically avoided this by filing a “placeholder” motion for class certification, the tool was still a valuable one in the proper circumstances. After Chapman, however, an offer of judgment for full relief no longer moots a case for Article III purposes in the Seventh Circuit.

Background Of The Case

The path to this groundbreaking ruling started off as so many other class actions before it. While the parties were wrangling over certification, the defendant made an offer of full relief, which was set to expire 14 days after the district court ruled on class certification.

Following over four years of litigation, including discovery and multiple class certification motions, the district court denied Rule 23 certification.

After the plaintiff failed to accept the offer within two weeks, the defendant moved for, and won, dismissal on mootness grounds.

The Appellate Ruling

On appeal, the Seventh Circuit affirmed the denial of certification, but vacated the dismissal of the plaintiff’s individual claims. It held that cases are “moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party” and that because the trial court “could award damages and enter an injunction” relief was available and the case was not moot. Id. at 5.

Judge Easterbrook acknowledged the prior Seventh Circuit case law, but cited Justice Kagan’s dissent (joined by 3 other Supreme Court Justices) in Genesis Healthcare Corp. v. Symczyk, 133 S.Ct. 1523, 1532-37 (2013), as showing that “an expired (and unaccepted) offer of a judgment does not satisfy the Court’s definition of mootness, because relief remains possible.”  Id. at 5. In addition, the opinion noted that if a case were really mooted by an offer of judgment, dismissal would be required and no court would even be able to enter judgment because “the case would have gone up in smoke.” Id. at 6.

Even though the question of mootness is currently pending before the Supreme Court in the coming term, the Seventh Circuit panel felt that there was no need to wait for further binding guidance and, aligning itself with the other courts of appeals that have considered the question of mootness after Symczyk, overruled prior Seventh Circuit cases “to the extent they hold that a defendant’s offer of full compensation moots the litigation or otherwise ends the Article III case or controversy.” Id. at 7.

Implications For Employers

Despite the apparently unequivocal holding, however, the exact impact of the Chapman ruling is unclear. Even though offers of full relief will no longer result in mootness, the Seventh Circuit still seemed dubious as to allowing litigation to continue once a defendant has offered everything a plaintiff seeks (at least as to individual plaintiffs). Reaffirming that plaintiffs cannot continue to sue after they’ve already won, the Seventh Circuit left open the question of how district courts should deal with offers of full compensation. While that issue which was not directly raised in this case, in a fairly considered dictum Judge Easterbrook suggested potential arguments (such as estoppel or waiver) as to why such cases should not be allowed to continue, but also noted that a fleeting offer (this one expired 14 days after the ruling on class certification) could not be equated to full compensation.

That said, the dictum may be read to cabin the arguments for ending litigation via offers of full relief to non-class cases. Indeed, the Seventh Circuit noted that “it may be that, in class actions, the conclusion ‘not moot’ implies that the case should be allowed to continue — for even a settlement offer after the district judge has declined to certify a class may be designed to prevent an effective appeal (or at least change everyone’s incentives about whether to appeal).” Id.at 8.

If district courts come to the same conclusion, the era of settling with putative class representatives to head off class actions may be at an end – and defendants will have to turn to other strategies to cut off class litigation at an early stage. Even if district courts do not adopt a bright line rule prohibiting full offers of judgment from ending class cases, defendants will have another hoop to jump through in trying to end cases at an early stage.

Regardless of how the arguments play out, one potential change is that placeholder class certification motions, currently used to avoid mootness, might go away, perhaps resulting in a silver lining for defendants who will no longer have a certification motion hanging over their head from the very beginning of the case.

The silver lining aside, Chapman is a blow to the defense of class actions, but the magnitude of that blow remains uncertain. Stay tuned.

imagesBy Pam Devata, John Drury, and Robert Szyba

On March 13, 2015, the Solicitor General of the United States filed an amicus brief opposing the petition for writ of certiorari filed in Spokeo, Inc. v. Robins, No. 13-1339 (U.S.). The Spokeo petition poses a question with a significant impact on the future scope of consumer and workplace-related class actions: whether Congress can confer standing on a plaintiff who suffers no concrete harm, but who instead alleges only a statutory violation? To date, ten different amicus briefs have been filed urging the Supreme Court to grant review.

Case Background

In July 2010, Plaintiff Thomas Robins filed a purported class action under the Fair Credit Reporting Act (“FCRA”) against Spokeo, Inc., a search engine that compiles publicly available information on individuals into a searchable database. Robins alleged that the search results associated with his name included inaccurate information about him, in violation of the FCRA. Robins did not allege that he suffered actual damages, but only that he was entitled to statutory damages because the FCRA created a private right of action where inaccurate consumer information is reported. The district court dismissed Robins’ complaint, finding that a mere violation of the FCRA does not confer standing “where no injury in fact is properly pled.” 2011 WL 11562151, at *1. In February 2014, the U.S. Court of Appeals for the Ninth Circuit reversed, holding that the “violation of a statutory right is usually a sufficient injury in fact to confer standing” and that “a plaintiff can suffer a violation of the statutory right without suffering actual damages.”  742 F.3d 409, 413.

In May 2014, Spokeo filed its petition for writ of certiorari to the U.S. Supreme Court. Spokeo posed this question: “Whether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute.”  Spokeo’s petition identified a circuit split. The Fifth and Sixth Circuits agree with the Ninth Circuit’s Spokeo decision and permit plaintiffs to maintain lawsuits without “injury-in-fact” and based solely on an alleged statutory violation. The Seventh Circuit also has signaled that it agrees with this position. In contrast, the Second, Third and Fourth Circuits have held that Congress cannot create standing by statute alone, and the mere deprivation of a statutory right is insufficient to confer standing.

The Solicitor General Opposes The Grant Of Certiorari

In October 2014, the Supreme Court invited the Solicitor General to file an amicus brief on behalf of the United States. The Supreme Court frequently follows the Solicitor General’s recommendation to grant or deny certiorari. In its opposition to certiorari, the Government essentially recommends that the Supreme Court avoid the broader question of Congressional power to create statutory standing and instead focus on the specifically alleged injury in Spokeo – the public dissemination of inaccurate personal information – and the specific statute at issue – the FCRA. The Government’s position is that a concrete harm exists where a defendant unlawfully disseminates inaccurate personal information. Although the Second, Third and Fourth Circuits have rejected the concept of “statutory standing,” they each did so under other federal statutes.

Implications for Employers

Given the Solicitor General’s recommendation, the Supreme Court may deny certiorari and maintain the uncertain status quo. As a consequence, in some circuits, plaintiffs will be allowed to maintain private causes of action for alleged violations of federal statutes — even where the plaintiffs themselves suffered no actual injury.

If certiorari is granted, the Supreme Court’s ultimate decision will have a significant impact on the future of consumer, workplace, and other class actions. Its impact may reach other federal statutes that authorize private rights of action or statutory damages, such as the Truth in Lending Act, the Fair Debt Collection Practices Act, the Employee Retirement Income Security Act, and the Americans With Disabilities Act. If Spokeo is reversed, plaintiffs would be required to plead and establish actual injury, and not just a violation of the underlying statute. Such a result would undoubtedly limit the number of viable class actions under the FCRA and other federal statutes.

The resolution of the Spokeo petition and appeal stands to dramatically affect employers, consumer reporting agencies, and other corporate defendants. Although the United States’ opposition makes a grant of certiorari less likely, it speaks volumes that ten separate amicus briefs have been filed on behalf of seventeen different companies, trade associations, and other organizations (including the National Association of Professional Background Screeners, Chamber of Commerce of the United States, eBay, Facebook, Google, Yahoo, and leading consumer reporting agencies). Their support for resolution of the Spokeo question — whether Congress can confer standing through statute alone — may tip the scales in favor of the grant of certiorari. For the time being, employers will have to wait and see whether the Supreme Court will ultimately entertain this important question.

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.