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Class settlement properly enforced despite likely change in state law precluding class claims

By Lorene D. Park, J.D.

Affirming a district court’s decision to deny a motion to decertify a class and to enforce an agreement settling wage hour claims by a group of Kentucky nightclub employees, the Sixth Circuit explained that a possible change in applicable state law (that might preclude pursuing the claims as a class) did not change the binding nature of the agreement the parties reached. Nor did Rule 23 or the Rules Enabling Act require the district court to decertify the class (Whitlock v. FSL Management, LLC, December 14, 2016, Boggs, D.).

The four plaintiffs were former employees of various nightclubs operating in “Fourth Street Live,” an entertainment district located in downtown Louisville, Kentucky, that was managed by the defendants. According to the plaintiffs, the defendants’ policies regarding off-the-clock work and mandatory tip-pooling violated the Kentucky Wage and Hour Act.

Class certification. After the case was removed to federal court, the plaintiffs amended their complaint and sought relief as a class. In 2012, the court granted class certification, finding that the plaintiffs met the requirements of Rule 23. The defendants filed an interlocutory appeal but their petition was denied.

Settlement. Subsequently, the parties engaged in settlement negotiations. In March 2015, they filed a status report with the court declaring they had “agreed to the terms of a settlement agreement and anticipate filing the formal settlement documents . . . by April 17, 2015.”

The defendants then learned of a February 2015 decision by a Kentucky appeals court, McCann v. Sullivan University Systems, Inc., which held that KRS §337.385 could not support class action claims. That was the provision under which the plaintiffs in this case sued. The defendants moved to stay the case pending the state high court’s review of McCann but the motion was denied. The court granted preliminary approval of the settlement and after the defendants’ appeal of that order was denied as untimely, the defendants moved to decertify the class.

In a December 2015 decision, the court denied the motion for decertification and granted final approval of the class action settlement. It explained that the rulings cited by the defendants did not alter the fact that they voluntarily settled the suit in a contract binding under Kentucky law.

Appeal. Having again appealed to the Sixth Circuit, the defendants raised two arguments that were rejected by the court below: 1) that both Rule 23 of the Federal Rules of Civil Procedure and the Rules Enabling Act require decertifying the class in light of KRS §337.385’s prohibition against class actions; and 2) that Rule 23(e) required the court to refuse to enforce the class settlement in light of the same state statutory prohibition.

Settlement agreement binding. As an initial matter, the appeals court decided to refrain from guessing how the Kentucky Supreme Court will rule (when it decides McCann) as to whether Section 337.385 prohibits class-action litigation. Instead, the Sixth Circuit assumed that the defendants’ view of Kentucky state law is correct and that class litigation was prohibited under the state law. That still did not change the binding nature of the parties’ settlement agreement.

Rule 23 met. Furthermore, while the defendants were correct that the district court was required to evaluate whether the requirements of class certification were met even where the parties reached a settlement agreement, they failed to show Section 337.385(2) prevented the plaintiffs from satisfying Rule 23’s certification requirements. Thus, to the extent the court concluded that continued certification of the class was proper under Rule 23, it did not abuse its discretion.

Rules Enabling Act. Nor did the denial of the motion to decertify violate the Rules Enabling Act, which provides that procedural rules like Rule 23 “shall not abridge, enlarge, or modify any substantive right.” Here, the defendants argued that continued certification of the class modified the scope of a state substantive right defined in Section 337.385(2). While they might have a strong argument had the plaintiffs sought to litigate the case on the merits, the parties instead proceeded to settle the case and certification was sought to enforce a settlement agreement.

The “court’s approval of a voluntary settlement, by nature a compromise of rights, does not affect substantive state rights,” explained the appeals court. Rather, “a district court’s certification of a settlement simply recognizes the parties’ deliberate decision to bind themselves according to mutually agreed-upon terms without engaging in any substantive adjudication of the underlying causes of action.” Accordingly, certification of a settlement class here could not have abridged, enlarged, or modified any substantive right under state law.

Rule 23(e) did not bar enforcement. Also rejected was the defendants’ argument that Rule 23(e)’s requirement that courts approve class settlements required it to refuse to enforce the agreement here, where there was a state law prohibiting class actions. To the contrary, Rule 23(e) “does not affect the binding nature of the parties’ underlying agreement.” The court noted that settlements are designed to conclude litigable disputes, were treated as contractual agreements, and the decision to settle was a considered one. The defendants would not be relieved of that decision just because hindsight revealed it to be a bad one. Furthermore, Rule 23(e) was designed to protect absent class members, not defendants who misread the law.