In Through the Out Door: Third Circuit Says FLSA Collective Actions Not Incompatible With Rule 23 State Law Class Actions
In a decision that will thrill readers of all ages with its scintillating recitation of the Portal-to-Portal Act's legislative history, the Third Circuit has held that there is no inherent incompatibility between the opt-in mechanism of Section 16(b) of the Fair Labor Standards Act (that's 29 U.S.C. 216(b) for those of you keeping score at home) and the opt-out mechanism required by Rule 23(b)(3) of the Federal Rules of Civil Procedure. Knepper v. Rite Aid Corp., 2012 U.S. App. LEXIS 6218 (3d Cir. Mar. 27, 2012). But, before digging through the garbage cans behind the Third Circuit's opinion, some background on this question will be helpful.
While the plaintiffs' bar finds the FLSA's multitude of employer pitfalls absolutely adorable (not to mention its liquidated damages and fee recovery provisions), they're much less enamored with its opt-in mechanism. In a typical Rule 23(b)(3) class action, absent class members are bound by a judgment in the case unless they affirmatively refuse to join (i.e., they must "opt out"). In a Section 16(b) collective action, on the other hand, an individual can only be part of the "class" if he/she affirmatively consents in writing to join (i.e., they must "opt in"). (As an aside, there technically isn't a "class" in a Section 16(b) case. That's what everyone calls it, however, probably because it's a lot easier to say than "the group of party plaintiffs who were not originally in the case but who received the notice ordered by the Court and decided to join thereafter by giving their consent in writing.")
So, what's wrong with the FLSA's opt-in mechanism? Well, to borrow a simply precious euphemism coined by one commentator, it doesn't "encourage fee-maximizing behavior." (If you look closely at your screen, you can actually see the academia dripping from that phrase.) While estimates of the average opt-in rate for an FLSA collective action vary wildly, most fall in the range of 10-20%, with virtually no estimates higher than 30 percent. In a Rule 23(b)(3) opt-out class action, however, the average opt-out rate is almost non-existent, a fraction of a percent. More people means more money, which can be good or bad depending on whether you're the payor or the payee.
Always the enterprising folk, the plaintiffs' bar has been trying over the last several years to get the best (or worst, again depending on your perspective) of both worlds--they bring FLSA Section 16(b) collective actions joined together with one or more proposed Rule 23 class actions under state wage and hour laws. The federal hook--the FLSA claim--gives them the convenience of a single forum from which they can send, in many cases, nationwide notice. Once they get their multi-state collection of opt-in plaintiffs--voila!--they can select named class representatives for Rule 23 state law class actions. Best of all, they can still keep the case in one court on their own playground (not to suggest that there's any forum-shopping involved).
Feeling much like the NBA team that Joey Crawford bets against in a game he's officiating, employers have cried foul on this neat little procedural maneuver. They've argued that the FLSA's opt-in requirement is inherently inconsistent with Rule 23(b)(3)'s opt-out procedure.
In Knepper, the Third Circuit unfortunately joined the Second, Seventh, Ninth and D.C. Circuits in rejecting this argument. The court held that, because Congress did not intend for the FLSA to displace state regulation of wages and working hours, the FLSA's opt-in enforcement mechanism cannot displace enforcement of state wage-and-hour laws through Rule 23 opt-out class actions. From this premise, the Third Circuit concluded that there is no barrier to joining such claims together in the same matter.
At first glance, it might seem that there's a silver lining to this grandaddy of a cumulo-nimbus storm cloud. After all, the Third Circuit was very careful to distinguish a prior case where it rejected the combination of an FLSA collective action with a Rule 23(b)(3) class action (De Asencio v. Tyson Foods, Inc., 342 F.3d 301 (3d Cir. 2003)). The court distinguished De Asencio on the basis that the district court in that case was only exercising supplemental jurisdiction over the state law claims, and the state law class proposed in the case would have swallowed the federal action in terms of both size and complexity. In contrast, the Third Circuit noted that the state law class at issue in Knepper was brought under the Class Action Fairness Act, and that the district court therefore had independent diversity jurisdiction over the state law claims.
But, as Jerry Garcia once sagely observed, every silver lining's got a touch of grey. (Brief pause to enjoy melody playing in head.) Indeed, if that brief stroll through federal court jurisdiction didn't put you to sleep, you've probably already noticed the inconsistency in the reasoning. The proposed state law class in De Asencio was just too darn big, so it was appropriate to reject a combined action. But, if a state law class action is so big that it satisfies CAFA's requirements (including the requisite $5 million in controversy), then, by all means, proceed! Well, that's.....interesting logic.
In truth, it seems the real distinction between Knepper and De Asencio is the fact that CAFA didn't exist when De Asencio was decided in 2003. That's a bad omen for two reasons. First, it means that the bigger a proposed state law class is, the more likely it can go forward (at least in the Third Circuit). Second, it means that any number of the CAFA victories we enjoy on the employer side may someday come back to bite us on our collective backside.
The Bottom Line: The best we can hope for on combined FLSA/Rule 23 collective/class actions is a circuit split, and that prospect grows dimmer with every circuit to weigh in on the issue.