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FLSA collective action fails on res judicata grounds; wage claims were covered by settlement, release in state-law action

By Ronald Miller, J.D.

Finding that a prior state-court action which ended in a settlement of state wage-hour claims and included a broad release of claims satisfied all three elements of res judicata, the Ninth Circuit affirmed a district court’s dismissal of an employee’s FLSA collective action. Here, the class settlement covered “all claims” that “could have been pled based on the factual allegations in the Complaint.” Under California’s primary rights analysis, the same injuries to the same rights were at issue in both cases. Moreover, it was beyond dispute that the employee did not opt out of the state-court settlement. Accordingly, she was a party to that settlement and was bound by the judgment (Rangel v. PLS Check Cashers of California, Inc., August 16, 2018, Berzon, M.).

In early 2014, three employees of a payday lender filed a state-court action alleging several violations of the California Labor Code. In December 2014, the parties reached a tentative settlement. Around the same time, the employees filed a consolidated class action. They brought claims for failure to provide meal periods and rest breaks, failure to pay minimum wage and overtime, failure to pay out accrued vacation or make timely payments on termination, and failure to provide itemized wage statements. The complaint did not assert any federal claims and made no mention of the FLSA.

Class action settlement. The parties reached a final settlement in April 2015. This settlement covered all class members who did not timely send a valid opt-out request. The settlement included a broad release provision that encompassed claims that were or could have been pled based on the factual allegations in the complaint. The language of the settlement made it clear that it was “made in compromise of disputed claims” and “for the sole purpose of settling” the class action. The state court granted final approval.

FLSA collective action. In August 2016, an employee covered by the prior settlement brought a putative collective action under the FLSA, alleging violations of the Act’s minimum-wage and overtime provisions. According to the complaint, the employer instituted a policy and practice wherein the minimum wage was not paid in accordance with federal law. The employer also allegedly required employees to work extra hours, exceeding 40 hours in a week, but without properly compensating them for overtime.

Res judicata. The employer promptly filed a motion to dismiss on res judicata grounds. It argued that the earlier settlement resulted in a final judgment in state court on the merits of the employee’s minimum wage and overtime claims. Moreover, it argued that the settlement expressly released all claims that could have been brought based on the same factual predicate.

Applying federal preclusion law, the district court sided with the employer. It found the elements of res judicata were met and noted that class settlements, in the interest of finality, routinely release related claims that were not pled in the operative complaint. Thus, the district court dismissed the action.

State procedural law. In California, res judicata applies if (1) the decision in the prior proceeding was final and on the merits; (2) the present proceeding is on the same cause of action as the prior proceeding; and (3) the parties in the present proceeding or parties in privity with them were parties to the prior proceeding. The Ninth Circuit found all three elements were satisfied. It is well-settled that a class settlement resulting in a final judgment is sufficient to meet the “final and on the merits” element of res judicata, and “is as conclusive a bar as a judgment rendered after trial.”

Here, the class settlement covered “all claims” that “could have been pled based on the factual allegations in the Complaint.” In this instance, the employee’s FLSA claims, which were direct federal counterparts to the state-law claims settled in the prior action, easily qualified. The release provision in the settlement referred to factually related claims. It did not limit itself to those claims that class members were functionally capable of bringing in the prior action itself. Settlements of this breadth are common and unobjectionable, explained the appeals court.

Primary rights. Under California’s “primary rights” approach to res judicata, “cause of action” refers to “the right to obtain redress for a harm suffered, regardless of the specific remedy sought or the legal theory (common law or statutory) advanced.” The employee’s FLSA claims, as federal versions of the state-law claims asserted in the prior action, were typical examples of claims invoking “the same injury to the same right” litigated in a prior action. Moreover, the difference in procedural mechanism used (opt-out vs. opt-in) has no impact on the California primary rights analysis. The same injuries to the same rights were at issue in both cases.

Plaintiff was bound. Finally, it was beyond dispute that the employee was a party to the prior settlement because she did not opt out. Consequently, she was bound by the resulting judgment. The appeals court declined to delve into the wisdom of the state-court proceeding as it did. Rather, the question facing the court was whether a settlement to which the employee did not object, and to which it was obligated to give effect, extended to her current claims. Concluding that it did, the judgment of the district court was affirmed.