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Texas federal court had no authority to sanction plaintiff in Chipotle suit suing in New Jersey under enjoined overtime rule

By Lisa Milam, J.D.and Kathleen Kapusta, J.D.

An employee and her attorneys were not in privity with the DOL. When a statute authorizes both government litigation and private actions, the interests of private plaintiffs are not identical to those of an agency protecting the general public.

A federal district court in Texas improperly held a plaintiff and her attorneys in contempt for filing an FLSA overtime suit in New Jersey against her employer, Chipotle Mexican Grill, based on the revised overtime rule that the DOL had been enjoined from enforcing. The plaintiff (and her attorneys) did not act in privity with the DOL, and she was not adequately represented by the agency in the injunction case. The appeals court found no basis for the lower court’s conclusion that “the DOL represents every worker’s legal interests through its enforcement of the FLSA so as to bind every worker in the United States to an injunction where the DOL is the only bound party.” Consequently, the Texas court lacked personal jurisdiction over the employee, the Fifth Circuit held, reversing the judgment and an award of attorneys’ fees to Chipotle (State of Texas vs. U.S. Department of Labor, July 1, 2019, Dennis, J.).

Revised overtime rule. In May 2016 the DOL issued a final rule revising the FLSA’s “white-collar” exemption for executive, administrative, and professional employees, sharply increasing the salary threshold that must be met for the exemptions to apply. The rule quickly drew legal challenges and, on November 22, 2016, a federal court in Texas issued a nationwide preliminary injunction prohibiting the DOL from implementing and enforcing the rule.

Lawsuit. Six months later, the employee sued Chipotle in New Jersey on behalf of herself and others similarly situated, asserting that under the revised overtime rule, she was entitled to overtime. She sought to certify an FLSA collective and class action. Her counsel acknowledged the injunction in the complaint but stated that it did not apply to them or their client. (In a second lawsuit filed in Massachusetts, another attorney representing the employee also argued that the final rule did not apply to him or his client.)

Contending that the plaintiffs violated the Texas court’s order by suing to enforce the enjoined final rule, Chipotle filed a motion for contempt in the federal court in Texas against the employee in the New Jersey case, and the lawyers representing her.

Sanctioned. The federal court in Texas granted Chipotle’s motion for contempt, rejecting the plaintiffs’ claim that the court’s injunction had only barred the DOL from enforcing the final rule but did not block the rule itself from taking effect. The court said the plaintiff and her counsel had acted in direct violation of the nationwide injunction and pursued a claim “they should have known was unwarranted in fact or law.” The court ordered the employee and her counsel to withdraw their overtime allegations, both individual and representative, against Chipotle and to file a notice of compliance. The court also awarded Chipotle its fees and expenses incurred in litigating the contempt proceeding.

Lower court: plaintiff in privity with DOL. The district court found the employee was acting in privity with the DOL and, as such, she was bound by the court’s injunction. In the original injunction proceeding, the DOL declared that it represented the rights of employees and had warned that enjoining the final rule would “have a profoundly harmful impact on the public” and would deprive more than four million workers “of the protections that Congress intended they receive on the basis of an outdated and less effective salary level—one that has not been updated in over a decade.” Thus, the lower court reasoned, the DOL had adequately represented the interests of employees, including the plaintiff, when it advocated for the validity of the final rule. Had the DOL prevailed in the original injunction proceeding, the rule would have been deemed valid and enforced, and the employee’s New Jersey lawsuit would have been unwarranted. Therefore, the employee was prohibited from bringing suit.

Fifth Circuit reverses. But the appeals court disagreed, finding that the employee did not act in privity with, and was not adequately represented by, the DOL in the injunction case. Under Federal Rule 65(d)(2), which governs injunctions, courts consider three relationships “sufficiently close” to establish privity. Invoked here was the “non-party whose interests were represented adequately by a party in the original suit.” But “adequate representation does not exist where a nonparty is merely interested in the same issue or same set of facts, ‘or because the issue being litigated is one that might affect their interests by providing a judicial precedent that would be applied in a subsequent action,’” the appeals court explained.

The lower court had relied in error on the circuit’s 1977 preclusion decision in Southwest Airlines Co. v. Texas International Airlines, Inc., but that case was inapposite here, the appeals court said, distinguishing its holding from the case at hand. Yet, the appeals court did point out that in Southwest, it had explicitly endorsed the notion that “‘government actors would not be in privity with private litigants under Title VII, a federal employment statute that, similar to the FLSA, authorizes both government litigation and private actions.’” It observed there that “‘litigation by a government agency will not preclude a private party from vindicating a wrong that arises from related facts but generates a distinct, individual cause of action.’” It added: “‘Such actions, like Alvarez’s FLSA lawsuit, are “for violation of distinct legal duties owed individual employees,’ rather than ‘for violation of legal duties owed the public.’”

The Congressional policy underlying the FLSA is “the general welfare of employees employed in certain industries engaged in American commerce.” But this statement of policy “does not create a legal nexus or the kind of close identity of interests between a party to litigation and a nonparty required to amount to privity,” the appeals court wrote. Rather, just as with suits under Title VII, a private plaintiff claims remedies “‘distinct from the relief imposed in the government litigation’ and complains of ‘a violation of distinct legal duties owed individual employees.’”

District court lacked jurisdiction. Because the employee was not in privity with the DOL, she did not participate in the Texas litigation in any manner. Consequently, the Texas court had no basis for exercising personal jurisdiction over her or her counsel. Therefore, the appeals court reversed the district court’s judgment, including the award of attorneys’ fees to Chipotle.