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In the 6th U.S. Circuit Court of Appeals, a class action deal is a deal.
That’s the takeaway from a thoughtful Dec. 14 decision from Judges Ralph Guy, Danny Boggs and Richard Allen Griffin, who held that the restaurant operator FSL Management cannot walk away from a million-dollar settlement with 400 employees in Kentucky even if, as FSL contends, the Kentucky employment law at the heart of the case turns out not to support class actions.
“A post-settlement change in the law does not alter the binding nature of the parties’ settlement agreement, nor does it violate Rule 23 of the Federal Rules of Civil Procedure or the Rules Enabling Act,” Judge Boggs wrote for the panel. “Whatever the substance of Kentucky state law, a point which this court need not decide here, we hold that it does not affect the ability of the district court to enforce a binding settlement agreement.”
It’s rare, as you know, for class action defendants to attempt to undo their own settlements. The most notorious recent example is BP, which appealed to the 5th Circuit to reverse the court’s previous affirmance of its multibillion-dollar Deepwater Horizon settlement after BP was flooded with claims from purportedly uninjured plaintiffs. In that case, a divided 5th Circuit upheld the constitutionality of the settlement and the U.S. Supreme Court declined to take up the case.
The stakes are not as high in the FSL case, in which the company agreed to pay $1.04 million in 2015, after years of battling claims that its off-the-clock and mandatory tip pooling policies violated the Kentucky Wage and Hour Act. The case started off as a state-court action by several individual FSL employees, but after FSL removed the litigation to federal court, plaintiffs' lawyers at Craig Henry amended the complaint to convert the suit into a class action. U.S. District Judge Joseph McKinley of Louisville ended up certifying two classes of employees, one of allegedly underpaid workers and the other of tip pool participants.
After the 6th Circuit declined to review the certification, FSL entered settlement talks with the plaintiffs. The talks wore on for nearly a year but in April 2015, the two sides informed the judge in a joint status report that they had reached a settlement.
Soon thereafter, however, FSL’s lawyers learned that a Kentucky appellate court in an unrelated case had interpreted the Kentucky employment law at issue in the FSL litigation not to support class actions. Class counsel contended that other employers had been advancing that argument for long enough that FSL should have known about it before agreeing to the settlement. FSL, though, argued that because certification of the class would contravene Kentucky law, approval of the class action would violate the federal rule on class action procedure, Rule 23, as well as the Rules Enabling Act.
Judge McKinley upheld class certification and approved the settlement despite FSL’s arguments. FSL appealed. “The settlement violated the public policy as defined by the Kentucky legislature,” FSL said in its appellate brief. “Just as a court cannot approve an unlawful consent decree simply because the parties agreed to it, a court cannot approve a class settlement that contravenes substantive law.”
The 6th Circuit said first that the Kentucky Supreme Court has not yet issued definitive guidance on the state employment law, which is now before the court. But even if FSL is correct that the law doesn’t support enforcement of its provisions through class actions, the appeals court said, FSL is still bound to the settlement it agreed to.
The court parsed both the Rule 23 and Rules Enabling Act attacks on the FSL settlement. Rule 23, the court said, was designed to protect the interests of class members who don’t participate directly in a case, not “the interests of parties who were fairly represented throughout the class-action litigation process.” FSL had cited the U.S. Supreme Court’s 1997 decision in Amchem v. Windsor, in which the justices struck down a class action settlement both sides had agreed. The 6th Circuit said Amchem is inapposite because the justices were worried in that case about future class members – not about a well-represented defendant.
The appeals court also said the supposed bar against class actions in the Kentucky employment law is procedural, not substantive, so it does not affect whether plaintiffs can satisfy the procedural requirements of Rule 23, a federal rule. “This subtle distinction is borne out in the sparse, but informative, case law that the appellants present to this court,” the 6th Circuit concluded. “Throughout their brief, the appellants cannot cite a single case that stands for the proposition that a state statutory provision prohibiting class-action suits results in a failure to meet Rule 23(a) or (b) certification requirements.”
FSL might have had a strong case that the Rules Enabling Act bars class certification if the company had chosen to litigate the case, the 6th Circuit said – but it did not. As you know, the Rules Enabling Act holds that procedural court rules like Rule 23 cannot abridge substantive rights. FSL argued that permitting certification under Rule 23 of the employee class action conflicts with the supposed statutory prohibition against class actions in the relevant Kentucky employment law.
The 6th Circuit said that even if it assumed that the supposed prohibition is substantive (as several federal district judges in Kentucky have), “the Rules Enabling Act is not fatal to class certification where, as here, class certification is sought to enforce a settlement agreement.” In certifying a settlement class, the appeals court found, Judge McKinley did not make a finding that the plaintiffs are actually entitled to recover under substantive state law, so FSL’s rights were not abridged. “Therefore, certification of the settlement class in this case does not implicate the Rules Enabling Act,” the 6th Circuit said.
To my surprise, there’s actually precedent addressing FSL’s arguments from a 3rd Circuit case “in which the facts bear a startling resemblance to our present controversy,” the 6th Circuit said. In Ehrheart v. Verizon Wireless, plaintiffs sued Verizon for violating the Fair and Accurate Credit Transaction Act. After the class was certified, Verizon agreed to a settlement. The settlement proposal received preliminary approval from the court – but before final approval, Congress amended the law and eliminated the cause of action at the core of the class action. Verizon tried to pull out. The 3rd Circuit held the company had to go through with the settlement.
I left a phone message for Clark Johnson of Stites & Harbison, who argued for FSL at the 6th Circuit, to see if the company intends to ask for reconsideration of the panel’s decision. He didn’t get back to me. Nor did class counsel Michele Henry, who argued the appeal for plaintiffs.
This post has been corrected. An earlier version incorrectly reported that Stites & Harbison was counsel to FSL at the trial level.