By: Gerald L. Maatman, Jr. and Mark W. Wallin

Seyfarth Synopsis:  A Maryland federal district court recently found that a successor employer could be liable in an EEOC lawsuit for its predecessor’s alleged employment discrimination.  For employers, this decision is a cautionary tale — the lesson being that liability for claims of employment discrimination can extend beyond the entity alleged to have been responsible for the conduct to reach a successor entity that played no role in the alleged bad acts.  In light of this decision, due diligence in corporate acquisitions is more important than ever.  An entity acquiring not only assets but also employees must understand the risks of liability regarding the workforce it is inheriting.  As the Court decided here, no matter how explicit the disclaimer of liability, a successor may still be liable in an EEOC lawsuit for the discriminatory acts of its predecessor.

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In EEOC v. Phase 2 Invs. Inc., Case No. 17-CV-2463, 2018 U.S. Dist. LEXIS 65719 (D. Md. April 17, 2018), a Maryland district court denied motions to dismiss and for summary judgment brought by a successor employer and the predecessor employer, finding that the Court not only had jurisdiction over the claims against the successor employer, but also that the successor employer could be held liable for the discrimination allegations levied against its predecessor.  What’s more, the Court found that although the charging parties were undocumented workers, such status did not prevent the EEOC from pursuing Title VII claims on their behalf, contrary to the argument advanced by the predecessor employer. However, the Court recognized the precarious nature of the relief it could grant under such circumstances, as back pay and injunctive relief (i.e., re-hiring) are unavailable.  Nevertheless, the Court stated that the Defendants would not get off “scot-free” if the allegations were proven true.

Case Background

In EEOC v. Phase 2, Invs., Inc., the employee charging parties worked for Maritime Autowash, Inc. (“Maritime,” and later became Phase 2 Investments).  Maritime operated a car wash in Edgewater, Maryland.  The charging parties alleged that they and other Hispanic employees were subject to harassment and discrimination while working for Maritime, and that they were fired after they complained to management about the alleged mistreatment.  Notably, several months prior to their termination, an audit by U.S. Immigration and Customs Enforcement revealed that thirty-nine Maritime employees, including the charging parties, were not authorized to work in the United States.  According to the charging parties, Maritime management gave each of these employees money “so that they could obtain new papers and be re-hired . . . under new names.”  Upon their termination, in July 2013, the charging parties contacted the EEOC and eventually signed formal charges of discrimination against Maritime in February 2014.

In January 2015, after many months of negotiation, Maritime sold its assets including the Edgewater car wash to CWP West Corp. t/a Mister Car Wash (“Mister”).  According to Mister, the deal was structured as an asset purchase agreement, in order to avoid assuming Maritime’s existing liabilities other than those expressly stated in the agreement — which did not include employment discrimination liability.  However, as part of the purchase, Maritime did disclose to Mister its responses to the charges of discrimination filed by the charging parties with the EEOC.

In August 2017, after more than three years of investigation, litigation regarding EEOC subpoenas, and failed conciliation (including Mister), the EEOC filed suit against Maritime and Mister.  In its lawsuit, the EEOC alleged, pursuant to Title VII, race discrimination in the form of harassment, intimidation, unequal terms and conditions of employment, lower wages, denial of promotional opportunities, disparate discipline and discharge because of their race and in retaliation for engaging in protected activity.  Moreover, although the charging parties never worked for Mister, the EEOC alleged that Mister could be liable as a successor in interest.

On this record, Maritime and Mister moved for dismissal and summary judgment.  After considering Maritime and Mister’s arguments, the Court issued a thorough opinion rejecting them in total.

Jurisdiction

Mister first challenged the Court’s jurisdiction over it as a successor entity.  Although neither the charging parties nor the EEOC brought administrative charges against Mister — which is a jurisdictional requirement under Title VII — the Court found that it had jurisdiction over the claims.  Id. at *21.  To reach this conclusion, the Court drew a distinction between successor jurisdiction, and the more substantive inquiry regarding successor liability.  Id. at *26.  The former, it found, could be satisfied as long as the jurisdictional requirements were satisfied for the predecessor company, and the successor had notice of the charge and an opportunity to voluntarily comply.  Id. at *26.  Specifically, “[a] federal court has jurisdiction over a Title VII claim against a defendant-employer who was not named in an administrative charge of discrimination when the theory of liability rests on the actions of a different employer who was named in the charge of discrimination, and the defendant-employer had notice of the charge and an opportunity to voluntarily comply prior to the plaintiff bringing the claim in court.” Id. at *26 (emphasis in original).

Because Mister had notice of the charges prior to filing of the lawsuit, and even had the opportunity to conciliate with the EEOC, the Court found that Mister need not actually be named in a charge.  Id. at *27.  The Court rejected a formalistic approach that would require the refiling of the exact same charges against Mister.  Id.

Successor Liability And The Applicability Of Title VII To Undocumented Workers

Satisfied that it had jurisdiction over the claims, the Court moved on to address Mister and Maritime’s substantive arguments.  Maritime argued that because it never employed the charging parties, it should not be treated as successor for liability purposes under Title VII.  Further, Maritime argued that the charging parties’ status as undocumented workers required the lawsuit to be dismissed.

The Court held that as Maritime’s successor, Mister could be found liable under Title VII, despite the charging parties having never worked for Mister.  The Court stated that successor liability under Title VII was equitable in nature, and that the Court should thus “balance the needs of discriminatees and the national policy against discrimination . . . against the unfairness of holding an innocent purchaser liable for another’s misdeed . . .”  Id. at *39.  Specifically, the Court looked to three primary factors: “whether a successor had notice, whether a predecessor had the ability to provide relief, and the continuity of the business.”  Id. at *40-41.

As to notice, the Court distinguished successor liability notice from successor jurisdiction, stating that for liability purposes, Mister needed to have actual or constructive notice of the charges prior to purchasing Maritime’s assets.  Id. at *41.  While Mister’s knowledge as to the full extent of the charges was unclear, the Court found that Mister had at least constructive knowledge that Maritime faced some potential employment discrimination liability prior to purchase.  Id. at *41-42.  Indeed, the Court found it persuasive that Mister was a relatively sophisticated consumer that could have acted upon the red flags it uncovered during its due diligence.  Id. at *42.  Moreover, the Court noted that in the event the EEOC prevails and Mister suffers economic liability as a result, then Mister may look to the asset purchase agreement for recourse against Maritime, but that potential recourse against Maritime did not absolve Mister from liability “vis a vis the EEOC.”  Id. at *42-43.

The Court next found that as the former employer, Maritime would not be able to provide relief, because the EEOC sought injunctive relief that Maritime could no longer provide at this juncture.  Id. at *44.  As to the continuity factor, the Court held that because Mister continued to run essentially the same business, a car wash, this factor also weighed in favor of finding that Mister may be liable as a successor.  Id. at *45.  Accordingly, under these three factors, the Court determined that it would be equitable to hold Mister jointly and severally liability for any liability that Maritime incurred.  Id. at *46.

Finally, the Court addressed the thorny issue of whether discrimination against an undocumented worker was an unlawful employment action under Title VII.  Id. at *54.  After analyzing Title VII itself, along with Supreme Court and Fourth Circuit precedent, the Court found that “discrimination against an employee on the basis of his race, national origin, or participation in EEOC investigations is an unlawful employment practice under Title VII even if that employee is an undocumented alien, and the EEOC may therefore pursue its claim here.”  Id. at *65.  Among other things, the Court noted that finding otherwise would essentially give Maritime and other employers the ability to both hire undocumented workers and then unlawfully discriminate against those it unlawfully hired.  Id. at *64.  It further reasoned that “[e]ven if Maritime was unaware of the Charging Parties’ immigration status when it hired them, if the Court were to ‘sanction the formation of [that] statutorily declared illegal relationship’ by shielding Maritime (and its successors) from Title VII scrutiny, other employers may well find an incentive to look the other way when potential employees are unable to provide proper documentation.”  Id.

Nevertheless, the Court noted that as a result of the charging parties’ undocumented status, the nature of relief that could be sought was limited.  For instance, the Court found that it could not require Mister to re-hire the charging parties or award back pay.  Id. at *66.  Instead, the Court found that if the EEOC proves that Maritime discriminated against the charging parties, Title VII grants the Court broad discretion in fashioning relief and that the public interest would be best served through some monetary penalty.  Id.

Implications For Employers

This opinion should be required reading for any employer contemplating an acquisition of another company.  Indeed, the Court provided a detailed road map for when employment discrimination claims may be maintained against successor employers, even if such employees never worked for the successor and never named it in the charging documents.  Based on this decision, merely disclaiming the liability of a predecessor entity through an asset purchase agreement is not enough to shield a successor employer from the EEOC’s pursuit of employment discrimination liability — although such disclaimers are still useful for recouping any monetary loss against the predecessor entity.  Accordingly, through due diligence, employers must be sure to seek information regarding this potential employment liability, and understand the risks acquiring a company that has received charges of discrimination against it before deciding to proceed.  Willful ignorance is unlikely to be a fruitful defense to such claims.

By: Gerald L. Maatman, Jr. & Michael L. DeMarino

Seyfarth Synopsis:  In September 2017, our blog posted a video highlighting an emerging class action litigation risk for employers – the Illinois Biometric Information Privacy, commonly known as “BIPA.”  Since this time, class action filings under BIPA have exploded, including a potentially-landmark case against social media giant Facebook.  Today, Seyfarth Shaw Associate Mike DeMarino discusses the Facebook case, as well as its potential impact on employers, with Partner Jerry Maatman.

The BIPA statute was enacted by the Illinois legislature in 2008 in an effort to keep up with various industries’ use of employees’ biometric data.  In this context, biometric data refers to a number of measurements of individual biological patterns that can be used to identify individuals.  Examples we have seen cited in BIPA litigation include retina/iris scans, fingerprints, voiceprints, and scans of hand/face geometry.

Though the BIPA statute was enacted in Illinois ten years ago, employers and litigators are still waiting to see how certain aspects of the law will be interpreted.  A recent class action, entitled In Re Facebook Biometric Information Privacy Litigation, Case No. 15-CV-3747 (N.D. Cal.), may provide some important answers.  This matter, filed by three Facebook users in Illinois, involves allegations that Facebook violated users’ rights to privacy under BIPA through its automatic face-tagging feature.  On April 16, 2018, a federal judge in California certified (see order here) the class as all “Facebook users located in Illinois for whom Facebook created and stored a face template after June 7, 2011.”  The case is set for trial in June 2018.

As Jerry explains in the video, employers should keep a close eye on the outcome of this class action.  The key debate, centered around the concept of “standing” under Spokeo, Inc. v. Robins 136 S. Ct. 1540 (2016), has the potential to significantly impact future BIPA litigation.  For a full explanation of this case and employer class action litigation risk under BIPA, make sure to watch the video above!

By Gerald L. Maatman, Timothy F. Haley, and Ashley K. Laken

Seyfarth Synopsis: There are currently pending at least four class actions claiming that provisions contained in franchise agreements prohibiting the hiring of employees of other intrabrand franchisees without the consent of their employer violate the antitrust laws.  That being said, in 1993 the Ninth Circuit affirmed summary judgment in favor of a franchisor in a similar “no-hire” case.  It reasoned that due to the control the franchisor exercised over its franchisees, the franchisor and its franchisees were incapable of conspiring in violation of Section 1 of the Sherman Act. While the so-called “single enterprise” defense is potentially available, franchisors should be cognizant that in developing that defense, they may create evidence or admissions that would support a subsequent claim that the franchisors are joint employers of their franchisees’ employees.  In light of the availability of other defenses, franchisor employers should assess whether the joint employer risk is worth accepting in order to pursue the single enterprise defense. 

Introduction

“No-hire” (sometimes referred to as “no-switching”) agreements are contracts between or among employers not to hire each other’s employees.  A “no-poaching” agreement is different but similar.  It prevents the solicitation of another employers’ employees, but does not prevent their hire, so long as there was no solicitation.  The franchise no-hire agreements typically are limited in duration.  For example, in pending litigation against Pizza Hut,  it is alleged that the challenged agreement only prohibits hiring anyone who was in a managerial position at another Pizza Hut restaurant at any time during the previous six months.  Ion v. Pizza Hut, LLC, Case No. 4:17-cv-00788, Complaint at ¶ 4, available at https://www.classaction.org/media/ion-v-pizza-hut-llc.pdf (last visited on 4/10/2018).

In 2017, at least three class action cases were brought against separate franchisors alleging that the organizations’ “no-hire” agreements suppress wages and violate antitrust laws.  And a fourth was filed in January 2018.  There may be more to come.  In a letter to Attorney General Jeff Sessions dated November 21, 2017, Senators Elizabeth Warren and Cory Booker inquired as to whether DOJ was “currently investigating the use of no-poach agreements in the franchise industry.”  In that correspondence, Senators Warren and Booker cited to a study by Princeton economists that found that “fully 58% of the 156 largest franchisors operating around 340,000 franchise units used some form of anti-competitive ‘no-poach’ agreements.”  See https://www.warren.senate.gov./files/documents/2017_11_21_No_Poach.pdf (last visited on 4/10/2018).

To prove a violation of Section 1 of the Sherman Act, the plaintiff must show an agreement between or among two or more persons or entities.  Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984).  In 1993, a Jack-in-the-Box franchisor successfully defended a challenge to its no-switching agreement on the grounds that the franchisor and its franchisees were a single enterprise and incapable of conspiring in violation of Section 1.  Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447-48 (9th Cir. 1993) (per curiam).

That defense is premised upon the control that a franchisor has over the operations of its franchisees.  And the question then is whether developing that defense creates an unacceptable risk of creating evidence or admissions supporting joint employer status.

The Single Enterprise Defense

In the franchise no-hire context, usually there is little dispute that an agreement exists.  It is typically contained in the franchise agreements between the franchisor and each of its franchisees.  But the parties to the alleged unlawful agreement must also be legally capable of conspiring.  In Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984), the U.S. Supreme Court held that a parent and its wholly owned subsidiary were incapable of conspiring in violation of Section 1 because their conduct must be viewed as that of a single enterprise.  The Supreme Court reasoned that “[a] parent and its wholly owned subsidiary have a complete unity of interest.  The objectives are common, not disparate; the general corporate actions are guided or determined not by two separate corporate consciousnesses, but one.”  Id.  It therefore reversed the decision of the Seventh Circuit which had affirmed a jury verdict in favor of the plaintiff.

In 1993, without mentioning Copperweld, the Ninth Circuit extended this single enterprise concept to the franchise environment in a no-hire case.  Williams, 999 F.2d at 447-48.  Other courts have also found that franchisors were incapable of conspiring with their franchisees within the meaning of the Sherman Act.  See Danforth & Associates, Inc.,  v. Coldwell Banker Real Estate, LLC, Case No. C10-1621, 2011 U.S. Dist. LEXIS 10882, *6-7 (W.D. Wash. Feb. 2, 2011) (franchisor and franchisee cannot conspire within the meaning of the Sherman Act); Search International, Inc. v. Snelling and Snelling, Inc., 168 F. Supp. 2d 621, 626-27 (N.D. Tex. 2001) (unity of interest between franchisor and its franchisees made them incapable of conspiring in violation of the Sherman Act); Hall v. Burger King Corporation, 912 F. Supp. 1509, 1548 (S.D. Fla. 1995) (franchisor and franchisee were incapable of conspiring under the Sherman Act).

But the authorities cited above do not stand for the broad proposition that franchisors, in general, cannot unlawfully conspire with their franchisees.  The district court in Williams itself acknowledged that the issue required an examination of the particular facts.  Williams v. I.B. Fischer Nevada, 794 F. Supp. 1026, 1030 (D. Nev. 1992).  Likewise, some have opined that the Supreme Court’s subsequent decision in American Needle v. National Football League, 560 U.S. 183 (2010), makes it more difficult for franchisors to argue that the franchise system is a single economic enterprise.  See B. Block & M. Ridings, Antitrust Conspiracies in Franchise Systems After American Needle, Franchise L.J., Vol. 30, No. 4 (Spring 2011).  In American Needle, the Supreme Court held that the National Football League was not a single enterprise for antitrust purposes regarding certain licensing activities.  Id. at 186.

Thus, while certainly authority exists to support the argument that franchisors cannot conspire with their franchisees in violation of Section 1, the defense may not be successful in every case.  And as noted, developing that defense may create evidence or admissions that could be used to support a joint employer argument that could create legal risks for franchisors in other contexts.

Potential Joint Employer Liability

There are numerous laws that recognize that an employee can be simultaneously employed by more than one employer.  This is referred to as joint or co-employment.  If a franchisor is found to be the joint employer of the employees of its franchisee, it could be exposed to liability for, among other things: benefits under the franchisor’s benefit plans; Occupational Safety and Health Act (“OSHA”) violations; violations of the National Labor Relations Act (“NLRA”); violations of the Fair Labor Standards Act (“FLSA”); violations of state and federal employment practices statutes; and violations of numerous state laws, depending upon the state.

Franchisors have had notable success in defeating claims that they are a joint employer of their franchisees’ employees.  For example, in Pope v. Espeseth, Inc., 228 F. Supp. 3d 884, 889‑91 (W.D. Wis. 2017), the court held that the franchisor was not a joint employer of the franchisees’ employees under the FLSA.  The court found, among other things, that the franchisor did not exercise control over the franchisees’ employees’ working conditions.  See also Ochoa v. McDonald’s Corp., 133 F. Supp. 3d 1228, 1235-38 (N.D. Cal. 2015) (franchisor was not joint employer of franchisees’ employees because, among other things, it did not exercise requisite control of their wages, hours or working conditions).

But it is difficult to predict whether a joint employer relationship exists.  First, the tests vary depending upon the law or statute at issue.  Compare Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156, slip op. at 6 (Dec. 14, 2017), vacated on other grounds by Hy-Brand Industrial Contractors, Ltd., 366 NLRB No. 26 (Feb. 26, 2018) (applying common law agency principles) with Barfield v. New York City Health and Hospitals, 537 F.3d 132, 141‑43 (2d Cir. 2008) (applying an economic realities test under the FLSA).  And even under the same law, the courts sometimes apply different tests depending upon the jurisdiction.  See Hall v. DirecTV, LLC, 846 F.3d 757, 766 (4th Cir. 2017) (noting that “courts in various jurisdictions within this Circuit and throughout the country [apply] numerous, distinct, multifactor joint employment tests” under the FLSA).  Likewise, even under the NLRA, the law has fluctuated between a direct and indirect control test.  See Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156, slip op. at 1-8 (Feb. 26, 2018).

The joint employer tests are also ambiguous.  Most of the tests require consideration of multiple factors, no one of which is controlling, and require the decision-maker to consider the “totality of circumstances.”  See, e.g., Barfield, 537 F.3d at 141-42 (noting that the FLSA multifactor test considers the totality of the circumstances).  The courts recognize that this is an inherently ambiguous test that at times leads to arbitrary results.  See Salinas v. Commercial Interiors, Inc., 848 F.3d at 137 ( “[L]ike other open-ended balancing tests,” this universe of nebulous factors test has “yield[ed] unpredictable and at times arbitrary results”) (internal citations and quotations omitted).

But in all of these multifactor tests, one of the factors considered is whether the potential joint employer has the right to, or exercises, “control.”  See, e.g., Hy-Brand Industrial Contractors, Ltd., 365 NLRB 156, slip op. at 35  (“requires proof that the alleged joint-employer entities have actually exercised joint control over essential employment terms”) (emphasis in original); Zheng v Liberty Apparel Co., 355 F.3d 61, 72 (2d Cir. 2003) (listing factors to consider to ascertain whether alleged joint employer has “functional control over workers” for purposes of the FLSA).

Certainly, the case can be made that the control necessary to establish the single enterprise defense is not the type of control necessary to support a joint employer finding.  For example, a parent-subsidiary relationship is sufficient to establish the single enterprise defense, see, e.g., Copperweld, 467 U.S. at 777, but insufficient to show a joint employer relationship, see Anwar v. Dow Chemical Co., 876 F.3d 841, 852-53 (6th Cir. 2017) (parent company not joint employer of subsidiary’s employees).  To establish the single enterprise defense in the franchise context, the franchisor will have to show that it has substantial control over the franchisees’ operations.  For example, in Williams, the court found that the franchisor exercised “almost complete control” over all decisions affecting the operation of the restaurants.  794 F. Supp. at 1032.  Whether a franchisor can make a similar showing without creating evidence of joint employment is not risk free.

Other Defenses To The Antitrust No-Hire Claims May Be Strong

Normally, an agreement will violate Section 1 of the Sherman Act only if it has an unreasonably adverse effect on competition.  The so-called “rule of reason” standard requires courts, in most cases, to analyze the effect of the agreement on competition in a relevant market and determine whether its anticompetitive effects outweigh its procompetitive benefits in that market.  See generally Atlantic Richfield Co. v. U.S.A. Petroleum Co., 495 U.S. 328, 342 (1990).  Judicial experience with certain types of agreements, however, has demonstrated that such agreements are so plainly or manifestly anticompetitive that no elaborate study is necessary.  Such agreements are conclusively presumed to be unreasonable and are deemed unlawful per se.  See, e.g., Business Electronics Corp. v. Sharp Electronics, Corp., 485 U.S. 717, 723-24 (1988).

Rule Of Reason Analysis Should Apply

The rule of reason should apply in determining the antitrust legality of no-hire agreements in the franchise setting.  First, the restraint is not naked but rather ancillary to the franchise agreement.  In Williams. the agreement’s purpose was to prevent raiding after time and expense had been invested in training.  794 F. Supp. at 1092.  Ancillary restraints are judged under the rule of reason.  See generally Eichorn v. AT&T Corp., 248 F.3d 131, 142-46 (3d Cir. 2001) (ancillary agreements are judged under the rule of reason).

Second, since the agreements are limited to a single brand, they should be viewed as an intrabrand restraint imposed vertically by the franchisor to encourage training by franchisees to assist in competing against other franchise brands.  Interbrand, as opposed to intrabrand, competition is “the primary concern of antitrust law.”  Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36, 52 n.19 (1977).  And nonprice vertical restraints that impose limitations on intrabrand competition are normally judged under the rule of reason.  See generally ABA Section of Antitrust Law, Antitrust Law Developments, 152-57 (8th ed. 2017) (“Developments”); see also Bogan v. Hodgkins, 166 F.3d 509, 515 (2d Cir. 1999) (refusing to apply per se rule to antitrust challenge to no-switching agreement).

Individual Franchisors Do Not Have the Power To Suppress
Wages In The Market For Restaurant Manager Jobs

Under the rule of reason, courts usually require “proof of a defendant’s market power as a prerequisite for a plaintiff seeking to satisfy its burden of proving likely anticompetitive effect.”  Developments at 71.  Market power is defined as the ability to raise prices above those that would be charged in a competitive market.  Id. at 70-71.  In the wage suppression context, that translates into the capability of a defendant to lower wages below those that would be paid in a competitive market.  Courts rarely find that market power exists if a defendant’s market share is under 30 percent.  Id. at 71.

To prove that a defendant has market power, the plaintiff must normally establish a relevant market, both in terms of the product involved and the geographic scope.  The product market must include all products that are reasonably interchangeable.  See generally id. at 583‑88.  Significantly, “relevant markets generally cannot be limited to a single manufacturer’s products.”  Id. at 591.  In the franchise no-hire cases, that means that the product market must include jobs provided by all employers who offer positions that are reasonable substitutes for one another.

The plaintiffs in the pending franchise no-hire cases claim that specialized training renders jobs at other franchises unreasonable substitutes.  E.g., Ion v. Pizza Hut, LLC, Case No. 4:17‑cv‑00788, Complaint at ¶¶ 80-81, available at https://www.classaction.org/media/ion-v-pizza-hut-llc.pdf (last visited on 4/10/2018).  Thus, the plaintiffs are necessarily contending that the relevant product market is limited only to jobs at the defendant franchisor’s franchisees.  But to accept this argument the court would have to adopt the disfavored single brand market, and plaintiffs have failed to prevail on similar arguments in at least three other no-hire cases.  See Eichorn, 248 F.3d at 148 (rejecting argument that relevant market was limited to jobs at AT&T and its affiliates); Bogan, 166 F.3d at 516 (affirming summary judgment in a no-switching agreement case because plaintiffs were unable to show that the “specialized training and expertise” was sufficient to create an antitrust submarket consisting of agent positions provided by a single insurance company); CMT, 2008 U.S. Dist. LEXIS 63633 at *29‑31 (granting summary judgment to defendants because plaintiffs had not shown that the relevant market was limited to jobs in the oil and petrochemical industry).

It is also highly unlikely that a plaintiff can show that any single franchisor possesses market power (i.e., the ability to suppress wages) in the market for supervisor jobs, or even for manager or supervisor positions limited to such establishments..  Certainly, no franchisor possesses 30 percent or more of either of those markets.

Plaintiffs may try to avoid this outcome by arguing that they can demonstrate actual anticompetitive effects resulting from the no-hire agreements with direct evidence, making a showing of market power unnecessary.  See generally Developments at 68-70 (noting that some cases have acknowledged that proof of actual competitive harm can obviate the need to show market power even when restraints are not naked restrictions on price or output).  But such a showing is difficult to make and has been rejected in at least one wage suppression case involving the exchange of wage information because the plaintiffs were unable to show that the relevant market was limited to jobs in the oil and petrochemical industry.  See CMT, 2008 U.S. Dist. LEXIS 63633 at *23‑26; see also Developments at 68‑70 (“attempts to prove substantial, actual anticompetitive effects have often been unsuccessful,” citing cases).

For these reasons, franchisors have very strong arguments that no-hire agreements limited to their own franchisees that are limited in duration and designed to create incentives for franchisees to provide training do not violate the antitrust laws.  Thus, franchisor defendants in these cases should carefully consider whether it is necessary to pursue the single enterprise defense and risk creating evidence that could support a joint employer argument in other contexts.

Conclusion

While each case will turn on its own facts, franchisors may have strong defenses available to them to resist antitrust challenges to their no-hire agreements.  One of those defenses is the single enterprise defense, but pursuing that defense may create evidence that could be used against the franchisor in a subsequent joint employer claim.  And, it is difficult to predict the potential adverse effects of creating that evidence given the current ambiguity and evolving nature of the joint employer doctrine.  Thus, before raising the single enterprise defense, franchisors should carefully analyze the strength of that and other available defenses to the no-hire claim and weigh that against the risk of a joint employer claim.

 

By Gerald L. Maatman, Timothy F. Haley, and Ashley K. Laken

Seyfarth Synopsis: True to his word, the Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice has announced the first of a number of anticipated no-poach enforcement actions.  While this was a civil proceeding, the Department of Justice has said that in some cases it may treat the conduct as criminal.  Many executives and HR professionals are unaware that the antitrust laws apply to the employment marketplace.  Thus, if they have not done so already, employers should consider the implementation of compliance programs to make sure that appropriate employees are aware of these developments and risks.

In January 2018, Makan Delrahim, the Assistant Attorney General for the Antitrust Division, said that the Department Of Justice (“DOJ”) had been very active in reviewing potential antitrust violations resulting from agreements among employers not to compete for workers.  (We previously reported on this announcement here.)  He said that he was “shocked” at how many there were and that in the coming months there would be announcements of enforcement actions.  He also mentioned that if the conduct occurred or continued after issuance of the October 2016 joint DOJ and Federal Trade Commission (“FTC”) Antitrust Guidance for Human Resource Professionals (the “Joint Guidance”), the DOJ may treat those agreements as criminal.

On April 3, 2018, the first of these announcements was made.  See “Justice Department Requires Knorr and Wabtec to Terminate Unlawful Agreements Not to Compete for Employees,” available at (“News Release”).  The DOJ advised that it filed a complaint in which it alleged that Knorr-Bremse AG (“Knorr”), Westinghouse Air Brake Technologies Corporation (“Wabtec”) and Faiveley Transport S.A., before it was acquired by Wabtec, entered into agreements not to compete for each other’s employees (“no-poach” agreements).  The DOJ contends that these were naked agreements – i.e., not reasonably necessary for a separate, legitimate business transaction or collaboration – and amounted to per se violations of Section 1 of the Sherman Act.  With the Complaint DOJ also filed a Competitive Impact Statement; Explanation of Consent Decree; and Stipulation and Proposed Final Judgment.  (See News Release.)

As noted, Mr. Delrahim stated that there were a number of these investigations ongoing, and in the News Release said that this Complaint was “part of a broader investigation by the Antitrust Division into naked agreements not to compete for employees.”  So more of these announcements can be expected, and some may be announcements of criminal prosecutions.

Many Employees Are Unaware That the Antitrust Laws Apply to the Employment Market

Often some business executives and human resource professionals are unaware that the antitrust laws apply to the workplace.  Executives who would never consider discussing prices with their competitors are unaware that discussing wages or salaries could have antitrust risks.  Similarly, employee covenants not to compete are commonplace and many executives have them in their own employment contracts.  So unless they have received specific training, an executive may be unaware of the antitrust risks associated with no-poaching agreements.  And up until recently even the most elaborate and detailed antitrust compliance policies that strictly prohibited discussing prices rarely addressed the exchange of wage and salary information or prohibited no-poaching agreements.

But the DOJ and FTC have now greatly ratcheted up their enforcement efforts with respect to alleged restraints in the employment market.  And with the DOJ and FTC taking the position that naked no-poaching agreements are per se unlawful and subject to criminal prosecution, the antitrust risks have been greatly increased — not to mention the costly class actions that are likely to follow any settlement with the DOJ.

Employers Should Investigate and Implement Compliance Programs

Thus, employers can no longer ignore the risk.  If they have not already done so, employers should consider:

  1. Conducting an internal investigation to determine whether the company is engaging in the informal gathering of wage, salary or benefit information; or whether it has entered into any no-poach agreements.  The investigation should be conducted or closely supervised by counsel with steps taken to preserve the attorney-client privilege.  Also, if it is discovered that the company has engaged in any “naked” wage-fixing or no-poaching agreements on or after October 25, 2016, then criminal counsel should be consulted as DOJ may treat such conduct as criminal.
  2. Implementing an antitrust compliance program that ensures that all management and human resources personnel are aware that they cannot: (1) engage in a naked wage, salary or benefits-fixing agreement with any other unrelated employer; (2) engage in the gathering or exchange of wage, salary or benefits information without full compliance with the Joint Guidance; or (3) enter into any no-poach agreement without prior approval of counsel.  Such individuals should, on an annual basis, be required to acknowledge in writing that they are aware of these prohibitions.  Also, anyone hired or transferred into any of these positions should be made aware of these prohibitions at the time they are hired or transferred.  These employees should also be advised that the DOJ is likely to treat naked wage/salary/benefit-fixing and no-poaching agreements as criminal and employees could be sentenced to prison for engaging in such conduct.

By Gerald L. Maatman, Jr.

Seyfarth Synopsis: On Monday, March 26, the U.S. Supreme Court focused on two notable class action issues, each with the potential to significantly impact workplace litigation.  In today’s video vlog, Partner Jerry Maatman of Seyfarth Shaw breaks down the importance of class action tolling issues and the concept of “cy pres” settlements for employers.

The first Supreme Court case discussed in the video is China Agritech v. Resh, et al. No. 17-432.  This case involves allegations of securities fraud by a class of shareholders against a Chinese fertilizer company.  Plaintiffs failed to gain class certification in two successive class actions, and while these lawsuits were pending, the two-year statute of limitations for securities fraud claims expired.  Nevertheless, the 9th Circuit allowed a third class action to move forward on the basis of American Pipe tolling, and Defendant China Agritech appealed to the Supreme Court. The Supreme Court’s consideration of the boundaries of American Pipe tolling in the China Agritech case may well have profound implications for workplace class action litigation.

Next, we analyze the legal concept of “cy pres” distributions in class action settlement.  “Cy pres” is a French doctrine translated to mean “as close as possible.”  This notion was originally intended to apply to trust-law and the division of excess charitable funds.  However, it has been adapted by the Plaintiffs’ bar to apply in situations involving class action settlements without a clear beneficiary.  On March 26, the Supreme Court denied certiorari in two matters addressing this topic, including Tavares et al. v. Gene Whitehouse et al., No. 17-429, and the combined cases Tingle v. Perdue, No. 17-807 and Mandan v. Perdue, No. 17-897.  The Perdue cases considered the distribution from a $380 million settlement of a landmark 2010 Native American discrimination case known as the Keepseagle.

As Jerry discusses in the video, the outcomes of both debates have the potential to shift important facets of class action litigation.  Notably, for the China Agritech case, the Supreme Court might re-shape the landmark 1974 decision in American Pipe & Construction v. Utah, 414 U.S. 538 (1974).  Regarding “cy pres” settlement distributions, though the Supreme Court denied review in this instance, the debate is too pressing in respect to class action litigation to be avoided for long.  Make sure to watch the video above for Jerry’s complete analysis on both topics!

By Gerald L. Maatman, Jr. and Matthew J. Gagnon

Seyfarth Synopsis: In a cautionary tale for all employers, the Eleventh Circuit recently upheld a jury verdict of intentional discrimination in an EEOC lawsuit when an employer hired a current employee who was facing an imminent lay-off, rather than the charging party. The employer’s policy was to favor internal candidates who were about to be terminated even if they were not the most qualified or “best” candidate for the open position. The Eleventh Circuit held that a reasonable jury could have found that the application of that policy was merely a pretext for discrimination.

In EEOC v. Exel, Inc., No. 14-11007, 2018 U.S. App. LEXIS 6629 (11th Cir. Mar. 16, 2018) (available here), the Eleventh Circuit considered and rejected an employer’s challenge to a jury verdict of liability in an EEOC lawsuit, but rejected the jury’s imposition of punitive damages. At issue was the employer’s policy of favoring current employees whose positions were being eliminated for other jobs within the Company, so those employees would not have to lose their jobs. The Eleventh Circuit upheld a jury verdict that was based on the finding that a Hiring Manager discriminated on the basis of sex even though he was ostensibly following the Company’s policy when he hired a soon-to-be-terminated male employee instead of the female charging party.

Case Background

In EEOC v. Exel, the charging party/intervenor complained that her supervisor had denied her a promotion because of her sex. At issue was how the Company filled vacancies. When a job became available, the Hiring Manager would submit an online job requisition for the vacancy. The HR department would then post the job and locate interested candidates from within and outside the Company. Internal applicants could apply on the Company’s website, like external candidates, or they could complete an internal application. HR would consider all candidates together and then forward the best candidates to the Hiring Manger.

However, the Company had a different procedure for considering current employees who were facing termination. The Company’s priority transfer practice (“PTP”) was designed to save employees who worked at a site that was about to undergo a workforce reduction from losing their jobs. Employees applying through the PTP process were given priority over other internal and external candidates as long as they met the minimum qualifications for the job, whether or not they were considered the “best” applicant for the position.

The charging party was passed over for promotion to a supervisory position in favor of an employee who was applying through the PTP process. The EEOC argued that the PTP process was merely a pretext for sex discrimination. It alleged that the Hiring Manager had informed the charging party “behind closed doors” that he would never make a woman a manager. It also alleged that he treated women differently than men and was more “stand-offish” with women.

A jury found in favor of the EEOC and awarded the charging party back pay, compensatory damages, and punitive damages. After trial, the employer filed a renewed motion for judgment as a matter of law with respect to liability and the imposition of punitive damages. The district court denied the motion with respect to liability, but vacated the punitive damages award. The EEOC appealed the vacatur to the Eleventh Circuit. The employer also cross-appealed the denial of its motion as to liability.

Eleventh Circuit Issues Split Decision On Question Of Liability

The Eleventh Circuit refused to overturn the jury’s verdict against the employer on the issue of liability. It was persuaded that a reasonable juror could have found against the employer because the jury heard evidence that: (1) the Hiring Manger had the discretion to hire the charging party despite being presented with a PTP candidate; and (2) the evidence showed that the Hiring Manager harbored a bias against women. Based on that evidence, the Eleventh Circuit held that a reasonable jury could have concluded that the Hiring Manager maintained discretion over his own hiring decisions regardless of the PTP process, and that he exercised that discretion in conformity with his discriminatory animus.

In a lengthy dissent, Judge Tjoflat vigorously disagreed with the majority’s conclusion. According to Judge Tjoflat, no reasonable juror could find that sex discrimination motivated the promotion decision at issue because there was insufficient evidence tying the decision-maker’s generalized discriminatory behavior to the specific employment decision at issue.

He agreed with the majority that the EEOC had presented sufficient evidence that would allow a reasonable factfinder to conclude that the Hiring Manager harbored discriminatory animus towards women. However, the dissent opined that there was not sufficient evidence to demonstrate that the Hiring Manager had any chance to put his alleged bias into action because the evidence demonstrated that he was simply following the PTP process when he hired a man for the open supervisory position instead of the charging party.

No Punitive Damages

With respect to punitive damages, the Eleventh Circuit noted that Title VII allows for the recovery of punitive damages only if an employer engaged in a discriminatory practice “with malice or with reckless indifference to the federally protected rights of an aggrieved individual.” Id. at *9 (quoting 42 U.S.C. § 1981a(b)(1)). That standard focuses on the decision-maker’s state of mind; however, the EEOC must also impute liability for the punitive damages to the employer.

Under prior Eleventh Circuit precedent, liability is imputable to an employer by showing either that the discriminating employee was high up in the corporate hierarchy, or that higher management countenanced or approved of the behavior. Id. at *10 (quoting Dudley v. Wal-Mart Stores, Inc., 166 F.3d 1317, 1323 (11th Cir. 1999)). However, the Supreme Court later held that punitive damages are imputable to an employer when the discriminatory actor was acting within the scope of employment and acting in a managerial capacity. See Kolstad v. Am. Dental Ass’n, 527 U.S. 526, 535 (1999). The Eleventh Circuit held that it was bound to apply its prior precedent because its subsequent decisions had continued to apply Dudley’s “higher management” standard even after Kolstad was decided. The Eleventh Circuit found that it was bound to apply that precedent unless and until it is overruled or squarely abrogated by the Supreme Court or the Eleventh Circuit sitting en banc.

Applying that standard, the Eleventh Circuit affirmed the district court’s decision vacating the award of punitive damages because the EEOC had failed to present evidence that the Hiring Manager (who was also a General Manager) was high enough in the corporate hierarchy. He was one of 329 other General Managers, and he oversaw only 25 employees. The EEOC had also failed to present evidence that any employee above the actor’s rank were aware of the discriminatory decision.

Implications For Employers

One point that was significant for the majority’s decision on liability was that the PTP process was not rigorously followed in all of its details when the discriminatory decision was made. Among other things, the Hiring Manager identified the wrong position when he submitted a requisition for the open position to Corporate HR. This opened the door for the EEOC to argue that the PTP process was merely a pretext for the decision, which the Hiring Manager had used as cover for the discriminatory animus that was really motivating his decision. According to the EEOC, the Hiring Manager requisitioned the wrong position as a means of ensuring that the charging party would not apply for the open position.

One lesson for employers to take away from this case is that any policy that favors one candidate over another is potentially problematic, even where the intentions behind the policy are to protect current employees from layoffs. Employers should take care to ensure that such policies are rigorously applied. Any deviations from that policy could later be called into question and even used against the employer as evidence that the application of that policy in that instance was merely a pretext for discrimination.

By Gerald L. Maatman, Jr. and Andrew Scroggins

Seyfarth Synopsis: The chief legal officer of the EEOC is an important post, and one which impacts all employers interacting with the Commission. Nearly 14 months after the start of his Administration, President Trump has finally announced his choice for General Counsel of the EEOC.

On the evening of March 19, 2019, the White House announced it will nominate Sharon Fast Gustafson to fill the position of General Counsel at the EEOC. The announcement was a long-time coming, as James Lee had been serving as Acting General Counsel since 2016, after former EEOC David Lopez resigned.

Ms. Gustafson has been an employment lawyer for more than 25 years, almost all of it as a sole practitioner focused on Virginia, Maryland, and the District of Columbia (from 1995-present).  In her practice, she represents primarily employees, though she does represent employers as well.  As noted on her firm’s website, she is a member of the National Employment Lawyers Association (NELA), an organization that holds itself out as advancing employee rights.

Ms. Gustafson’s most high-profile litigation matter is her representation of the plaintiff in Young v. UPS, a pregnancy discrimination case decided by the U.S. Supreme Court in 2015.  In that case, the plaintiff argued that her employer should have provided an accommodation when her physician limited her to light duty work during her pregnancy.  The Supreme Court declined to follow the EEOC’s Enforcement Guidance for Pregnancy Discrimination and Related Issues. However, the plaintiff obtained an employee-friendly decision that employers should provide the same reasonable accommodations to pregnant employees as are offered to employees with disabilities.

In addition to her employment practice, Ms. Gustafson has devoted a significant portion of her practice to adoption law and has been recognized as a Fellow of the American Academy of Adoption Attorneys since 1997.  Her other affiliations include membership in the Federalist Society, Federal Bar Association, and Metropolitan Washington Employment Lawyers Association.  Ms. Gustafson also is a member of the Board of Trustees for Gordon Conwell Theological Seminary.

Ms. Gustafson is married to David Gustafson, a judge on the United States Tax Court in Washington, D.C. who was appointed by President George W. Bush.  The Gustafsons met as undergraduates at Bob Jones University, before she attended Georgetown University Law Center.

To the extent employers had expected the President to announce the appointment of a management-side defense lawyer as the next General Counsel of the EEOC, this announcement is sure to prompt discussion amongst the employer community.

Ms. Gustafson’s nomination continues the Trump administration’s trend of somewhat non-traditional appointment announcements related to the EEOC.  In June 2017, the administration nominated Janet Dhillon, a lawyer working in-house as Executive Vice President, General Counsel, and Corporate Secretary of Burlington Stores, Inc. to serve as Chair.  (The Senate has taken no action on Ms. Dhillon’s confirmation since October 2017; in the meantime, Vicki Lipnic continues to serve as Acting Chair.)  In December 2017, the President nominated Obama-appointee Chai Feldblum to be reappointed as a Commissioner, for a term expiring in 2023, an announcement subsequently criticized by many conservative Republicans.  (The Senate has taken no action on Ms. Feldblum either.)

Like Ms. Dhillon and Ms. Feldblum, Ms. Gustafson must await confirmation by the Senate.  There currently is no timetable for the Senate to take up these issues.

By: Gerald L. Maatman, Jr. and Alex Karasik

Seyfarth Synopsis: Over the past few weeks, two federal appellate courts have issued major decisions on the scope of workplace discrimination protections covered under Title VII of the Civil Rights Act of 1964 (“Title VII”).  In addition to creating a conflict between various past appellate court precedents, these decisions highlight an ideological divide between two major federal government agencies.  In this video blog, Associate Alex Karasik and Partner Jerry Maatman of Seyfarth Shaw discuss the importance of these decisions, and what employers can expect to see in the evolving debate over Title VII protections.

On February 26, 2018, the U.S. Court of Appeal for the Second Circuit issued an impactful decision in Zarda, et al. v. Altitude Express, d/b/a Skydive Long Island, et al., No. 15-3775 (2d Cir. Feb. 26, 2018), which fueled the debate over protections for sexual orientation under Title VII. The Second Circuit ruled in favor of a (now-deceased) skydiving instructor who claimed to be fired because he was gay, therefore ruling that sexual orientation is a protected category under Title VII.

Then, just last week, the U.S. Equal Employment Opportunity Commission (“EEOC”) notched a major win when the Sixth Circuit sided with the Commission’s position in EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., Nos. 16-2424 & 2018 (6th Cir. Mar. 7, 2018).  We previously blogged about this decision here.  This case considered a transgender worker.

These recent appellate court decisions have agreed with the EEOC’s position on the definition of sex discrimination under Title VII.  However, there is also significant opposition to this position – namely by the U.S. Department of Justice (“DOJ”).  In the Zarda case mentioned above, the EEOC and DOJ both submitted amicus briefs, taking completely opposite sides on this issue.  Additionally, the 11th Circuit issued a decision in March of 2017 entitled Evans v. Georgia Reg’l Hosp., No. 15-15234 (11th Cir. Mar. 10, 2017), which sided with the DOJ and a more strict interpretation of the workplace discrimination laws at hand.

In today’s video, Jerry and Alex discuss this controversial topic in detail, and provide their own insights on the matter.  As Jerry states in the video, what this issue looks to be driving towards is, “a showdown in the U.S. Supreme Court, or the halls of Congress, over the scope and parameters over the protections of Title VII.”

 

By Gerald L. Maatman, Jr. and Alex W. Karasik

Synopsis: In an ADEA collective action alleging that a community college discriminated on the basis of age when it announced it would no longer employ any person receiving an annuity from the State Universities Retirement System (SURS), a federal district court in Illinois granted the college’s motion for summary judgment, holding that the decision to discontinue the employment of all SURS annuitants regardless of age did not amount to discrimination.

For employers considering mass employment actions that may impact a large number of older employees, this ruling provides insight into the factors that courts will examine in potential ADEA collective actions.

***

Case Background

In November 2014, Oakton Community College (“Oakton”) announced that as of July 1, 2015, it would no longer employ any person receiving an annuity from the State Universities Retirement System (“SURS”).  Affected SURS annuitants — all of whom worked at Oakton as part-time, or adjunct, faculty members prior to July 2015 — filed three separate lawsuits against Oakton.  Following the Court’s consolidation of the lawsuits, in Filipek  v. Oakton Community College, No. 16-CV-2902, 2018 U.S. Dist. LEXIS 31727 (N.D. Ill. Feb. 28, 2018), Plaintiffs alleged that Oakton’s decision not to employ SURS annuitants violated the Age Discrimination in Employment Act of 1967 (“ADEA”) and Illinois Human Rights Act (“IHRA”), among other claims.  Id. at *2-3.

The Court granted Plaintiffs’ motion for certification of an ADEA collective action and Rule 23 class certification on the IHRA claims that consisted of “all part-time and adjunct faculty who were denied employment at Oakton Community College as the result of its policy not to employ or re-employ [SURS] and who are not ‘affected annuitants’ pursuant to 40 …”  Id. at *3.  Thereafter, Oakton (and the individual Defendants) moved for summary judgment.

The Court’s Decision

The Court granted Oakton’s motion for summary judgment as to all claims.  First, regarding Plaintiffs’ disparate treatment claims, Oakton argued that summary judgment was warranted because no reasonable factfinder could conclude that age was a “but-for” cause of Oakton’s decision not to employ any SURS annuitants after July 1, 2015.  Id. at *9-10.  Plaintiffs contended that they presented evidence sufficient to make out a prima facie case of disparate treatment under the McDonnell Douglas framework, and that a grant of summary judgment was unwarranted because there were disputed factual issues regarding whether Oakton’s given reason for the decision not to employ any SURS annuitants was pretextual.  Id. at *10.  Noting that all SURS annuitants were fired, and that all employees — regardless of age — who remained employed by the college were not SURS annuitants, the Court held that Plaintiffs did not make out a prima facie case of discrimination under the McDonnell Douglas framework.  Id. at *11.

Turning to Plaintiffs’ disparate impact claims, Oakton argued that Plaintiffs could not make out a prima facie case because they could not establish that Oakton’s decision to no longer employ SURS annuitants caused a significantly disproportionate adverse impact based on age, and that even if Plaintiffs could make out a prima facie case, summary judgment was warranted because its decision to discontinue the employment of all SURS annuitants was based on a reasonable factor other than age — namely, the desire to eliminate the risk of having to pay a penalty to SURS for employing an affected annuitant.  Id. at *14-15.  Plaintiffs identified a specific, facially neutral employment practice that they alleged adversely impacted them because of their age: i.e., Oakton’s decision not to employ any SURS annuitant after July 1, 2015.  Id. at *15.  The Court held this was likely sufficient to establish a prima facie case under a disparate impact theory.  Id.  However, the Court noted that none of the evidence cited by Plaintiffs undermined Oakton’s explanation that the only sure way to prevent mistaken employment of an affected annuitant and the resulting payment to SURS was to discontinue the employment of all SURS annuitants.  Id. at *16.  Acknowledging that there may have been other reasonable and more narrowly tailored ways for Oakton to address this problem, the Court nonetheless held that no reasonable jury could find that Oakton’s decision to no longer employ any SURS annuitants was unreasonable.  Id. 

Accordingly, the Court granted summary judgment for Oakton (and all other Defendants) on Plaintiffs’ disparate impact age discrimination claims under the ADEA and the IHRA.  The Court also granted summary judgment for Defendants as to the remaining state law and other claims.

Implications For Employers

Employers who are considering whether to discontinue the employment of a large number of older employees must be cognizant that such personnel decisions could make them prime targets for ADEA collective actions and/or class actions under state workplace laws.  In Filipek, the employer emerged victorious at the summary judgment stage because it discontinued the employment of all annuitants, and therefore, its employment decision did not amount to age discrimination.  Nonetheless, employers should exercise extreme caution when considering mass lay-offs or employment discontinuances given how closely courts (and the plaintiffs’ class action bar) scrutinize such decisions.

 

By Scott Rabe, Gerald L. Maatman, Jr., and Marlin Duro

Seyfarth Synopsis: In its recent decision in EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., No. 16-2424, 2018 U.S. App. LEXIS 5720 (6th Cir. Mar. 7, 2018), the U.S. Court of Appeal for the Sixth Circuit has sent the strong message that the Religious Freedom Restoration Act (“RFRA”) has minimal impact on the Equal Employment Opportunity Commission’s (“EEOC”) authority to enforce the anti-discrimination laws under Title VII of the Civil Rights Act of 1964 (“Title VII”).  The ruling is a big win for the EEOC.

In EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., a Sixth Circuit panel held in a unanimous decision that: (i) Title VII’s proscription of discrimination on the basis of sex encompasses a prohibition on discrimination based on transgender status, and that (ii) in this case the RFRA would not limit the EEOC’s authority to enforce anti-discrimination laws under Title VII.  With this decision, the Sixth Circuit became the first federal Court of Appeals to address the extent to which the RFRA may limit the EEOC’s power to enforce Title VII.[1]

Case Background

By way of background, the EEOC brought suit against a funeral home on behalf of a transgender employee, Aimee Stephens, who was terminated from her employment shortly after informing her employer that she intended to transition from male to female.  The EEOC alleged the funeral home violated Title VII by terminating Stephens’ employment on the basis of her transgender or transitioning status and her refusal to conform to sex-based stereotypes.  The funeral home argued that Title VII did not prohibit discrimination on the basis of transgender status and that the funeral home was protected from enforcement of Title VII by the  RFRA as the government action would constitute an unjustified substantial burden upon the funeral home owner’s exercise of his sincerely held religious beliefs.

Both parties moved for summary judgment and the district court found in favor of the funeral home on both motions  The district court found that Title VII did not protect against discrimination based on transgender status and that, while Stephens had suffered discrimination based on sex stereotyping, the RFRA prevented the EEOC from suing on her behalf.

The Sixth Circuit Appeal

On the EEOC’s appeal, the Sixth Circuit reversed the district court with respect to both motions and  granted summary judgment in favor of the EEOC. First, the Sixth Circuit held that the funeral home’s conduct violated Title VII, reinforcing its prior holdings that discrimination against employees because of their gender identity and transgender status are illegal under Title VII’s prohibition of sex discrimination based on sex stereotyping.  The Sixth Circuit explained that “discrimination on the basis of transgender and transitioning status is necessarily discrimination on the basis of sex” and found that firing a person because he or she will no longer represent him or herself as the gender that he or she was born with “falls squarely within the ambit of sex-based discrimination” forbidden under Title VII.  Id. at *18.

Second, the Sixth Circuit held that the EEOC’s enforcement of Title VII against the funeral home did not violate the funeral home’s rights under the RFRA.  A viable defense based on the RFRA requires a demonstration that the government action at issue would substantially burden a sincerely held religious exercise.  Although the Sixth Circuit treated the running of the funeral home as a sincere religious exercise by the owner, it held that the alleged burden caused by the enforcement of Title VII was not “substantial” within the meaning of RFRA.  The Sixth Circuit reasoned that tolerating an employee’s understanding of his or her sex and gender identity was not “tantamount to supporting it” and that mere compliance with Title VII, “without actually assisting or facilitating transition efforts,” did not amount to an endorsement by the employer of the employee’s views.  Id. at *59, *61.  Nor, the Sixth Circuit explained, could the funeral home rely on customers’ “presumed biases” against transgender individuals to meet the substantial burden test. Accordingly, the Sixth Circuit held that the funeral home had not demonstrated a substantial burden on the its religious exercise.

While the Sixth Circuit could have ended its analysis there, it went on to hold that even if tolerating Stephens’ gender identity and transitioning status were a “substantial burden” on the funeral home’s religious exercise, the EEOC did not violate the RFRA because the agency had a compelling interest in eradicating all forms of invidious employment discrimination, and enforcement of Title VII through its enforcement function was the least restrictive means for eradicating discrimination in the workforce.  This analysis, if found not to apply only to the facts of this case, could ostensibly doom any defense to a Title VII action within the Sixth Circuit where an employer raises a defense based on the RFRA.

Implications For Employers

The Sixth Circuit’s opinion is an important one, as it addresses two of the more hot button topics in employment jurisprudence:  the scope of the definition of “sex discrimination” under Title VII and the impact of laws protecting the free exercise of religion in the workplace.  On the former, this opinion joins the recent trend in decisions finding that gender identity is inextricably linked with sex and therefore is protected under Title VII.  And on the latter, the Sixth Circuit has laid down a gauntlet as the first federal circuit addressing the RFRA’s impact on the EEOC’s Title VII enforcement power.  The decision is clearly intended to send a strong message that the RFRA has limited application, if any, in defense of a Title VII action brought by the Commission.  While time will tell whether other federal circuits will adopt a similar interpretation, if the Sixth Circuit’s legal rationale is followed, employers will be hard-pressed to defend Title VII claims brought by the EEOC based on the alleged exercise of religious freedom.

In light of the current uncertainty regarding the ultimate interpretation of Title VII as it applies to gender identity, employers should regularly review their policies to ensure that adequate protections are provided to employees on the basis of their gender identity, and transgender and transitioning status.  As always, we also invite employers to reach out to their Seyfarth contact for solutions and recommendations regarding anti-harassment and EEO policies and addressing compliance with LGBTQ+ issues in the law.

[1]              The RFRA, enacted in 1993, prohibits the government from enforcing a law that is religiously neutral against an individual, if the natural law “substantially burdens” the individual’s religious exercise and is not the least restrictive way to further a compelling government interest.  Importantly, the RFRA applies only in the context of government action, and therefore would not provide a defense for an employer in a civil suit brought by a private plaintiff.