By: Gerald L. Maatman Jr., Jennifer A. Riley, and Aaron A. Bauer
Duane Morris Takeaways – In Hornady v. Outokumpu Stainless USA, No. 1:18-CV-317 (S.D. Ala. Oct. 4, 2022), the U.S. District Court for the Southern District of Alabama upheld its sanction of a default judgement against the defendant on all of the Fair Labor Standards Act claims brought by a collective action of current and former employees. In affirming a default judgment of approximately $13 million, the Court cited the employer’s repeated failure to produce pay records, time records and incentive plan data during discovery. Such a catastrophic outcome demonstrates the importance of reliable and honest client communication and responsible and reasonable conduct at all stages of discovery in complex employment-related litigation.
Background Of The Case
In 2018, Plaintiff William Hornady filed a collective action against his former employer Outokumpu Stainless (“OTK”) alleging violations of the Fair Labor Standards Act (“FLSA”) for overtime and timekeeping record violations. The case proceeded to discovery, and on November 18, 2021, things quickly unraveled for OTK when the Court found that the company had “acted in pervasive bad faith throughout the discovery process of this entire case…” Id. at 3. As a result, the Court sanctioned OTK by entering non-final default judgement against the company, thereby holding it liable for all of plaintiffs’ FLSA claims. Id. at 6-7. Earlier this year, OTK challenged this ruling by filing a motion to reconsider the order granting default judgement.
The Court’s Ruling Denying Reconsideration Of The Default Judgement
In seeking reconsideration of the decision to grant default judgement, OTK urged the Court to apply the “good cause” standard of review, under Rule 55 of the Federal Rules of Civil Procedure, which allows courts to evaluate many different factors such as willfulness, prejudice, and whether the defaulting party might have a meritorious defense for purposes of determining whether to reconsider an order of a default judgement. Id. at 7. However, the Court declined to apply this “good cause” standard. Instead, it to use the stricter standard of Rule 54, which allows courts to reconsider interlocutory decisions if there is “evidence of an intervening change in the controlling law, the availability of new evidence, or the need to correct clear error or manifest injustice.” Id. at 12.
Given OTK’s failure to introduce newly available evidence disputing the Court’s previous finding that defense counsel had failed to meet its “discovery obligations,” the Court rejected OTK’s argument that the Court had abused its discretion by improperly imposing “death penalty” sanctions in the form of default judgement. Id. at 14. Specifically, the Court noted that it had ordered OTK to produce pay, time, and incentive plan records on “twelve (12) separate occasions spanning almost three years.” Id. at 17-18. When OTK finally did produce pay records, they were incomplete, and did not even include rate of pay data. Id. The Court also noted that the Magistrate Judge assigned to the case had originally recommended lesser sanctions against OTK. However, while a ruling on this lesser sanction was pending, the Court opined that OTK “engaged in additional sanction-worthy behavior” during discovery. Id. at 15.
OTK attempted to shift the blame for these discovery shortcomings to its payroll software provider and former outside counsel for the case. OTK argued that it could not have produced the formula used to calculate the regular rate of pay (“RROP”) for its employees, as the Court had ordered, because this formula came from the proprietary software of ADP, which OTK would have had to obtain through a subpoena. Id. at 23-24. In reality, the Court observed that it had previously ordered OTK to subpoena ADP for this data in 2020, a year before the entry of default judgement. Id. at 24. For this reason, OTK could no longer argue that the requirement to subpoena ADP was newly available evidence that might allow the Court to reconsider its sanctions order. Moreover, the Court noted that OTK’s failure to produce the RROP data had not been its “primary failing” because OTK also failed to produce hourly pay rates. Id. at 25.
The Court also rejected OTK’s contention that its failures during the discovery process should be attributed to its former outside counsel in the case. Id. at 27-28. In support of this position, OTK submitted emails of its former counsel that purported to show that it had been “kept in the dark… as to what was actually occurring” in discovery. Id. However, the Court found that these emails could only “provide insight into a fraction of the circumstances” leading to the default judgement. Id. at 29. Regardless of whether these emails provided a legitimate excuse for all of OTK’s failures during the discovery process, the Court determined that the emails did not constitute newly available evidence, as OTK had failed to submit them to the Court when it was first facing default judgement sanctions. Id. at 30. Given this record, the Court placed the blame squarely on OTK for failing to “produce accurate and complete time and pay records.”
Implications for Employers
The $13 million sanction of a default judgment in the case is an eye-opener for any litigant. The Hornady decision demonstrates that employers who fail to actively engage and communicate with their outside counsel on a regular basis do so at their own peril. To avoid such a disastrous outcome, clients should always expect and demand regular and truthful case status updates, especially in class and collective actions where the stakes can be so high.