Shaina Wolfe – Class Action Defense

October 2, 2023 by Gerald L. Maatman, Jr.

Texas Federal Court Shoots Down Executive Order 14,026

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Shaina Wolfe

Duane Morris Takeaways: On September 26, 2023, in Texas v. Biden, No. 6:22-CV-00004 (S.D. Tex. Sept. 26, 2023), Judge Drew B. Tipton of the U.S. District Court for the Southern District of Texas granted in part and denied in part the States’ Motion for Summary Judgment and enjoined the federal government from enforcing Executive Order 14,026 and the Final Rule against the States of Texas, Louisiana, and Mississippi and their agencies. Judge Tipton found that the President acted exceeded his authority by issuing Executive Order 14,026 and unilaterally requiring federal contractors to increase their employees’ minimum wage from $10.10 to $15 per hour. Other district courts have considered the President’s authority in issuing Executive Order 14,026, but Judge Tipton is the first federal judge to find that the President exceeded his authority. This ruling hits only the surface of what is yet to come. The parties in other cases have already filed appeals in the Ninth and Tenth Circuits challenging district court opinions that have issued contrary rulings, and the government in this case is bound to appeal this decision to the Fifth Circuit.

Procedural Background

The Federal Property and Administrative Services Act (“Procurement Act” or the “Act”) applies to federal and contractor employees. Congress implemented the Act to centralize the process by which various good and services are purchased by agencies on behalf of the government.

On April 21, 2021, President Biden, relying solely on the Act, issued Executive Order 14,026 (“EO 14,026”) to require federal contractors and subcontractors to pay certain employees $15 per hour. EO 14,026 was scheduled to begin on January 30, 2023, with annual increases thereafter. Specifically, in issuing EO 14,026, President Biden invoked his authority to “promote economy and efficiency in procurement by contracting with sources that adequately compensate their workers.” Id. at 5. After engaging in notice-and-comment rulemaking, the U.S. Department of Labor published its Final Rule, Increasing the Minimum Wage for Federal Contractors, on November 24, 2021, implementing EO 14,026 (the Final Rule and EO 14,026 are the “Wage Mandate”). Id.

Three months later, three states – Texas, Louisiana, and Mississippi (the “States”) – sued President Biden, the U.S. Department of Labor (“DOL”), and certain DOL executives (collectively the “federal government”) challenging the validity of the Wage Mandate. Id. at 2-3.

The parties cross-filed cross-motions to dismiss and motions for summary judgment. The federal government argued generally that two of the Act’s provisions, read together, provide the President with a broad grant of authority to implement policies “that the President considers necessary to foster an economical and efficient system for procuring and supplying goods and services for using property,” including the Wage Mandate. Id. at 13. The States argued that the Act is far more narrow and that it is primarily meant as a means to “centralize and introduce flexibility into government contracting to remedy duplicative contracts and inefficiencies,” which does not include setting the minimum wage for federal contractors. Id.

The District Court’s Decision

The District Court granted in part and denied in part the States’ cross-motion for summary judgment. It found that the States proved that that the President acted “ultra vires,” or beyond his authority in issuing EO 14,026. Judge Tipton enjoined the federal government from enforcing EO 14,026 and the Final Rule against Texas, Louisiana, and Mississippi and their agencies.

The District Court agreed with the States and held that Sections 101 and 102 of the Act “read together, unambiguously limit the President’s power to the supervisory role of buying and selling goods.” Id. The District Court found that the Act’s historical context further supported its holding that the President’s authority “does not include a unilateral policy-making power to increase the minimum wage of employees of federal contractors.” Id. at 15.

Judge Tipton further found that the purpose of the Act purpose conflicts with the Wage Mandate. He explained that the Act’s purpose is to provide “a relatively hands-off framework that enables agencies to determine for themselves the quantity and quality of items to procure on behalf of the federal government. It does not confer authority for the President to decree broad employment rules.” Id. at 20. As an example, the District Court compared the Act to two other permissible federal wage statutes – the Davis Bacon Act and the Walsh-Healey Public Contracts Act. Id. at 20-21. Judge Tipton opined that unlike those two permissible federal wage-statutes, in which Congress expressly gave the Secretary of Labor limited power to tailor the minimum wage of certain classes of federal contractors, the Procurement Act did not permit the President unlimited wage-setting authority. Id. at 21. The District Court concluded that the “Procurement Act’s text, history, purpose and structure limit the President to a supervisory role in policy implementation rather than a unilateral, broad policy-making power to set a minimum wage.” Id. at 22.

The federal government will likely appeal the decision, and the Fifth Circuit will join the Ninth and Tenth Circuits in deciding whether the President exceeded his authority in issuing EO 14,026.

Implications for Employers

The District Court’s decision is a huge win for employers in Texas, Louisiana, and Mississippi as the federal government is prohibited from enforcing EO 14,026. Companies should stay tuned for the imminent showdown in the Fifth, Ninth, and Tenth Circuit’s on the President’s Authority over increasing the minimum wage for federal contractors and subcontractors.

July 7, 2023 by Gerald L. Maatman, Jr.

Texas Federal Court Finds That The Final DOL 80/20 Rule Is Still In Play…At Least For Now

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Shaina Wolfe

Duane Morris Takeaways: On July 6, 2023, in Restaurant Law Center, et al. v. U.S. Department of Labor, No. 1:21-CV-1106 (W.D. Tex. July 5, 2023) (ECF No. 67), federal district judge Robert Pitman of the U.S. District Court for the Western District of Texas denied the Restaurant Groups’ motion for preliminary injunction as to the new “80/20 Rule” – after being reversed by the Fifth Circuit several months prior – and denied the Restaurant Groups’ motion for summary judgment and granted the Department of Labor’s (“DOL”) motion for summary judgment. Judge Pitman determined that the DOL’s decision to construct and enforce the Final Rule was a permissible construction of the Fair Labor Standards Act (“FLSA”) and is not arbitrary and capricious. ECF 67 at 28. The ruling is nowhere close to the end of this litigation and the service and hospitality industry should pay close attention to what comes next as the Restaurant Law Center will inevitably appeal the district court’s decisions to the Fifth Circuit and as the U.S. Supreme Court has decided to reconsider the authority of agencies during the next term. The next set of decisions will be part of a broader analysis of the rules regarding tip credit, and more generally, the DOL’s authority.

The Final Rule

In late 2021, the DOL revived and revised the 80/20 Rule by providing that employers can utilize the tip credit only so long as 80 percent or more of the work is tip-producing, and not more than 20 percent is “directly supporting work.” See 29 C.F.R. § 531.56. Under the Final Rule, no tip credit can be taken for any non-tipped work. “Tip-producing work” is defined as work the employee performs directly providing services to customers for which the employee receives tips (i.e., taking orders and serving food). “Directly supporting work” is defined as work that is performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work (i.e., rolling silverware and setting tables). Non-tipped work includes preparing food or cleaning the kitchen, dining room, or bathrooms.

The Final Rule also includes a new requirement that an employer cannot utilize the tip credit when an employee performs more than 30 consecutive minutes of “directly supporting work.” Directly supporting work done in intervals of less than 30 minutes scattered throughout the workday would not invalidate the tip credit, subject to the 80/20 Rule. However, employers must pay minimum wages for “directly supporting work” performed after the lapse of the first 30 continuous minutes.

Procedural Background

In December 2021, the Restaurant Law Center challenged the Final Rule in the U.S. District Court in the Western District of Texas, on the grounds that, among other things, it violated the Fair Labor Standards Act. Restaurant Law Center, No. 1:21-CV-1106 at 4. The Texas federal district court denied the preliminary injunction after finding that the Plaintiffs failed to show that they would suffer irreparable harm absent the preliminary injunction. Id.

On April 28, 2023, the Fifth Circuit reversed the Texas federal district court, finding that the Restaurant Groups “sufficiently showed irreparable harm in unrecoverable compliance costs . . . .” Rest. L. Ctr. v. U.S. DOL, 66 F.4th 593, 595 (5th Cir. 2023). Significantly, the Fifth Circuit noted that that compliance costs would likely be necessary to track the number of minutes worked on nontipped labor and that the new 30-minute rule would impose additional monitoring costs. Id. The Fifth Circuit remanded the case for further proceedings. Id. [Our previous blog post on that ruling is here.]

The Texas Federal District Court’s Decision on Summary Judgment

At the second go-around, the district court had two fully-briefed motions, including: (1) the Restaurant Groups’ motion for preliminary injunction; and (2) the parties’ cross-motions for summary judgment. The district court denied the Restaurant Groups’ motion for summary judgment and granted the DOL’s cross-motion for summary judgment after finding that, contrary to the Restaurant Groups’ assertions, the DOL’s decision to construct and implement the Final Rule was a permissible construction of the FLSA and is not arbitrary and capricious. Id. at 28. In addition, the Texas federal district court denied the Restaurant Groups’ motion for preliminary injunction after finding that the Restaurant Groups did not succeed, and were likely not to succeed, on the merits of the case, that the balance of equities did not tip in the Restaurant Groups’ favor, and that an injunction was not in the public interest. Id.

In determining the Final Rule’s validity, the district court used a two-step framework articulated in Chevron, USA, Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984). Id. at 8. Under Chevron, if a statute has a gap that needs to be filled, Congress gave the agency administering the rule, rather than courts, authority to resolve it. Id. The district court found that Chevron deference applied to the case because Congress “delegated authority to the agency generally to make rules carrying the force of law,” and that the Final Rule “was promulgated in the exercise of that authority.” Id. at 10.

The federal district court also analyzed the FLSA’s text, structure and purpose, and legislative history, and found that, contrary to the Restaurant Group’s assertions, the statute was ambiguous. Id. at 17. The district court explained that “Congress has crafted an ambiguous statute and tasked DOL with implementing the ambiguous provisions,” and the Court “must defer to the agency’s regulation so long as it is not arbitrary, capricious, or manifestly contrary to the statute.” Id. at 17. The district judge further found that the Final Rule “accomplishes” the purposes of the FLSA “by adopting a ‘functional test’ to determine when an employee may be considered engaged in a tipped occupation.” Id. at 19.

Significantly, the district court also considered whether the Major Questions Doctrine was triggered, as discussed in West Virginia v. EPA, 142 S. Ct. 2587 (2022). Id. at 24. The district court found that the Major Questions Doctrine was not triggered because an agency action was only considered to be of “vast economic significance” if it requires “billions of dollars in spending.’” Id. at 25. The district court found that the DOL “pointed out that the average annual cost of the Rule in this case is $183.6 million” and explained that this amount was “far less than the billions considered in the cited cases. Id. The district court further opined that the “DOL has been interpreting the tip credit provision of the FLSA, as well as its other provisions, for decades.” Id.

The Texas Federal District Court’s Decision on the Preliminary Injunction

In addition, as instructed by the Fifth Circuit, the district court reconsidered the Restaurant Groups’ Motion for Preliminary Injunction. At the outset, the district court noted that “[a]lthough a failure to show likelihood of success on the merits is grounds alone for denial of a preliminary injunction, the Court will address the two remaining Rule 65 factors pursuant to the Fifth Circuit’s mandate to ‘proceed expeditiously to consider the remaining prongs of the preliminary injunction analysis.’” Id. at 26 (citing Rest. L. Ctr., 66 F.4th at 600). Despite the Fifth Circuit’s finding that Restaurant Groups will suffer irreparable harm because their compliance costs are non-recoverable, Rest. L. Ctr, 66 F.4th at 595, in balancing the equities, the district court essentially found the opposite – – that the Restaurant Groups, again, failed to show irreparable harm from complying with the Final Rule. See id. at 26-27.

Significantly, the Fifth Circuit previously disagreed with the DOL’s assertion that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.” Rest. Law Ctr., 66 F.4th at 599 (“No explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works.”). Contrary to the Fifth Circuit, the district court agreed with the DOL and found that “restaurants must already monitor the amount of time employees spend on non-tipped labor under the 80/20 rule, and the new 30-minute rule does not impose a new form of monitoring.” ECF 67 at 26. In addition, the district court noted that it is not clear that the Rule imposes significantly greater costs than restaurants incurred under the preexisting guidance because the Restaurant Groups failed to “provide an estimate of this additional monitoring.” Id. In essence, contrary to the Fifth Circuit’s Order, the district court, again, “emphasized the weakness of [the Restaurant Groups’] evidence.” Rest. Law Ctr., 66 F.4th at 598 (“For instance, the court found [the Restaurant Groups] claimed ongoing costs “to be overstate[d]” because the rule does not require “the level of detailed monitoring of which [the Restaurant Groups] warn. . . [this point is] meritless”).

Further, the district court explained that eighteen months had passed since the parties filed their briefs on the preliminary injunction, and that the Rule took effect on December 28, 2021 and has remained in place. Id. Without citing to any evidentiary support, the district court noted that “[r]estaurants and DOL have complied with the Rule since that time.” Id. at 27.

Moreover, similar to the district’s court’s first order, which was reversed by the Fifth Circuit, the district court explained “that even if there are ongoing management costs, the most significant compliance costs associated with the Rule were familiarization and adjustment costs, which have now already been incurred, and that granting an emergency motion to rescind the Rule now cannot undo these costs, and may very well force restaurants to incur additional costs adjusting to the policy that takes its place.” Id. Ultimately, the district court found that the Restaurant Groups’ “compliance costs do not outweigh the substantial harm that DOL may endure from essentially starting from scratch on a rule that serves to codify long-standing guidance.” Id.

Thus, the district court found that even if Restaurant Groups showed a likelihood of success on the merits, “neither the balance of equities nor the public interest would support a nationwide preliminary injunction.” Id. at 28.

Implications For The Service & Hospitality Industry

The fight to end and/or limit the Department of Labor’s authority and promulgation of the tip credit rule is far from over. Although the Texas federal district court sent a clear indication that it did not agree with the Fifth Circuit’s decision, and that it would not disturb the Department of Labor’s authority, the service and hospitality industry should be watchful for what has yet to come. The Restaurant Law Center will undoubtedly appeal both of the Texas federal district court’s rulings, and the Fifth Circuit has already indicated that preventing enforcement of the Final Rule may be on the horizon. Moreover, the Supreme Court’s decision to reconsider the Chevron doctrine in Loper Bright Enterprises v. Gina Raimondo, Case No. 22-451 – which will be heard in the next term – to the extent that it narrows or eliminates federal courts’ deference to agencies’ decisions, could substantially impact the agenda the Department of Labor can pursue. The service and hospitality industry should stay tuned for the Fifth Circuit’s rulings in Restaurant Law Center and Supreme Court’s forthcoming ruling Loper Bright Enterprises.

June 30, 2023 by Gerald L. Maatman, Jr.

Revised Illinois Day and Temporary Labor Services Act: Implications For Staffing Agencies And Their Customers

By Gerald L. Maatman, Jr., Gregory Tsonis, and Shaina Wolfe

Duane Morris Takeaways – Recently, the Illinois General Assembly made substantial modifications to Illinois’ Day and Temporary Labor Services Act (820 ILCS 175/). The legislation drastically alters the legal landscape for staffing agencies and their clients. These amendments, codified in HB2862, were passed on May 19, 2023, and presented to the Governor for signing on June 16, 2023. Absent a veto, the law will automatically come into effect upon the date of the Governor’s approval or no later than August 15, 2023, if no action is taken. The alterations made to the Act are significant and present considerable implications for staffing agencies that employ or utilize day or temporary laborers, as well as their customers. The changes to the Act impose increased obligations and require unprecedented information-sharing between staffing agencies and their customers to ensure compliance with the new requirements. When paired with increased penalties and a third-party enforcement mechanism, staffing agencies and their customers face substantially increased regulatory and compliance burdens and vastly increased exposure to monetary penalties and litigation.

An Overview Of The Changes

The proposed changes can be grouped into various categories, each with its unique impact on staffing agencies and their customers. One element that has not changed, however, is the definition of “day and temporary labor,” which remains defined as “work performed by a day or temporary laborer at a third party client,” but excluding work “of a professional or clerical nature.” 820 ILCS 175/5. The amended Act contains the several significant modifications.

Equivalent Compensation And Benefits

The new legislation requires that day and temporary laborers assigned to a client for more than 90 calendar days must receive equal compensation and benefits (“equal pay for equal work”) as their counterparts directly employed by the client. The requisite equal pay and benefits to qualifying temporary laborers must, at a minimum, match the least paid direct hire at the same seniority level, performing work of a substantially similar nature under substantially similar working conditions. The staffing agency may, in lieu of benefits to a temporary worker, choose to compensate the worker with the cash equivalent of those benefits. In instances where there is no direct hire for comparison, the temporary worker should be paid an equivalent salary and receive the same benefits as the lowest-paid employee at the nearest level of seniority. Furthermore, if a staffing agency requests it, a client company is obligated to supply the staffing agency with all relevant information regarding the job roles, pay, and benefits of directly hired employees.

These changes present significant challenges for staffing agencies and their customers alike. The revised legislation, for example, does not define what “benefits” fall within the Act and which must be provided to qualifying temporary workers and what impact, if any, the staffing agencies’ benefit plans offered to workers have on the requisite compensation. Client companies must provide staffing agencies with the necessary information as to “job duties, pay, and benefits” or risk committing a violation of the Act punishable by a $500 penalty and attorneys’ fees and costs. As a result, the uncertainty injected by the new requirements presents several practical challenges to staffing agencies and client companies alike.

Disclosure Of Labor Disputes

The revised Act requires staffing agencies to inform laborers, before dispatch, if they will be working at a site currently experiencing “a strike, a lockout, or other labor trouble.” 820 ILCS 175/11.

The notice to the temporary worker must be in a language that the worker understands and must inform the worker of the dispute and the worker’s right to refuse the assignment “without prejudice to receiving another assignment.” The phrase “other labor trouble” is undefined in the revised Act, further inserting ambiguity and uncertainty for staffing agencies in compliance with the proposed law.

Safety Inquiries And Training

The amendments also introduce considerable new safety-related responsibilities for both staffing agencies and their client companies.

Prior to assigning a temporary worker, a staffing agency is obligated to inquire into the safety and health practices of the client company, inform the temporary worker about known job hazards, offer general safety training about recognized industry hazards, and document this training. In addition, the agency should give a general overview of its safety training to the client company at the onset of placement, provide temporary workers with the Illinois Department of Labor’s hotline for reporting safety concerns, and instruct the temps on whom to report safety issues to in the workplace.

Simultaneously, client companies are also compelled to adhere to several new safety-related requirements before a temporary worker begins work. Client companies must disclose any anticipated job hazards, review the safety and health awareness training received by the temporary workers from their staffing agencies to ensure its relevance to their specific industry hazards, offer specific worksite hazard training, and maintain records of such training. These records must also be confirmed to the staffing agency within three business days of the training completion. If a temporary worker’s role is altered, the company must provide updated safety training to cover any specific hazards of the new role. In addition, client companies must grant staffing agencies access to the worksite to verify the training and information given to temporary workers.

Increased Fees And Penalties

Under the revised law, fees charged to staffing agencies for registration with the Illinois Department of Labor have increased. Penalties for staffing agencies and client companies in violation of notice requirements have also seen a substantial increase, and now range from $100 to $18,000 per first violation (up from $6,000) and $250 to $7,500 for repeat violations within three years (up from $2,500). Distinct violations may be found on the basis of the type of violation, the day on which the violations occurred, or even each worker impacted by a violation, thereby drastically increasing exposure to staffing agencies and their client companies.

The Illinois Attorney General may even request that a court suspend or revoke the registration of a staffing agency for violating the Act or when warranted by public health concerns.

Third-Party Enforcement

The amendments also provide third-party organizations – defined as any entity “that monitors or is attentive to compliance with public or worker safety laws, wage and hour requirements, or other statutory requirements” – with the power to initiate civil actions to enforce compliance with the Act.

Notably, these “interested parties” can bring suit against staffing agencies and/or their customers if they merely hold a “reasonable belief” that a violation of the Act has occurred in the preceding three years. As a prerequisite to filing suit, these organizations must first file a complaint with the Illinois Department of Labor, which provides notice to the staffing agency or client of the complaint. However, regardless of whether the Department of Labor finds the complaint without merit, or even if the violation is cured, the interested party can still receive a right to sue notice and proceed with litigation. A prevailing party in litigation is entitled to 10% of any assessed penalties, as well as attorneys’ fees and costs.

Implications For Employers

The modifications to the Day and Temporary Labor Services Act present several potential complications and ambiguities for staffing agencies as well as their customers. Notably, the requirement of equal pay for equal work, after a laborer has been with a client for over 90 days, creates substantial issues in what constitutes “equal work,” “equal pay,” and which benefit programs fall within the compensation requirements. Moreover, the provision permitting staffing agencies to pay the hourly cash equivalent of the actual cost benefits in lieu of the required benefits further muddies the waters and requires unprecedented information-sharing between staffing agencies and their clients. Staffing agencies’ obligation to inform temporary workers of “other labor trouble” at client sites is vague, and the lack of a clear definition may lead to compliance issues. Moreover, the increased fees, penalties, and potential civil actions initiated by third-party organizations may lead to additional regulatory and litigation burdens for staffing agencies and clients alike. Finally, the private right of action created by the enactment is sure to prompt class actions by advocacy groups.

These substantial changes call for staffing agencies and their clients to revisit their current policies and practices to ensure compliance with the revised Act before it comes into effect. As the amendments hold significant implications for staffing agencies and client companies alike, early communication and a cooperative approach is recommended to navigate the new requirements effectively. While further guidance from the Department of Labor is likely to clarify several ambiguities in the Act, in the meantime, staffing agencies and client companies should immediately seek legal counsel to better understand the changes, assess the specific impact of each category of changes on their businesses, and ensure compliance to minimize exposure to penalties or litigation.

May 26, 2023 by Gerald L. Maatman, Jr.

Georgia Federal Court Green Lights EEOC Lawsuit For Constructive Discharge Dismissal Based On Threat Of Future Sexual Harassment

By Gerald L. Maatman, Jr., Alex W. Karasik, and Shaina Wolfe

Duane Morris Takeaways: In EEOC v. American Security Associates, Inc., No. 1:21-CV-3870 (N.D. Ga. May 23, 2023), a federal district court in Georgia denied an employer’s motion to dismiss a constructive discharge claim, holding that comments made by the company’s owner regarding how Plaintiff can expect future sexual harassment were sufficient to establish a pervasive environment of intolerable working conditions. Employers who are defending against EEOC-initiated constructive discharge claims can learn valuable lessons from this ruling in terms of how courts may assess comments about harassment that is threatened in the future.

Case Background

The EEOC filed suit on behalf of a former female security officer (the “Claimant”) who worked for Defendant American Security Associates, Inc. (“ASA”). In April 2017, one of the Claimant’s male co-workers sexually harassed her by making lewd sexual statements and touching her in an unwelcome and inappropriate manner. After reporting this conduct to her supervisor and one of ASA’s owners, in June 2017, ASA reportedly reduced her hourly pay rate from $12 per hour to $10 per hour. ASA allegedly told the Claimant that she should expect harassment because of her appearance, and refused to remedy the situation. Id. at 1-2. The Claimant ultimately resigned, alleging that she was being required to accept future harassment as a condition of her employment.

After the Claimant filed an administrate charge, and the EEOC ultimately a filed lawsuit on her behalf, ASA moved to dismiss. On April 27, 2022, the Magistrate Judge issued a non-final Report and Recommendation (“R&R”), in which he recommended the District Judge grant in part and deny in part ASA’s motion to dismiss. In relevant part, the Magistrate Judge recommended that the EEOC amend the complaint to set forth the factual basis for the constructive discharge allegations.

On October 26, 2022, the Magistrate Judge issued an additional R&R recommending that the District Judge grant ASA’s motion to dismiss the constructive discharge claim because it failed as a matter of law. Id. at 5. The Magistrate Judge determined that the EEOC failed to allege that the Claimant was subjected to an ongoing, active pattern of sexual harassment, and therefore failed to meet a necessary element of that claim. Id. at 5-6. On November 9, 2022, the EEOC filed timely Rule 72 objections to the R&R.

The Court’s Decision

On Rule 72 review, the Court sustained the EEOC’s objections to the R&R and denied ASA’s motion to dismiss. First, the Court explained that to state a claim for constructive discharge, the Commission must allege facts to plausibly show that the conditions of employment were so unbearable that a reasonable person would be compelled to resign. Id. at 10. As to this point, the Court found that the Magistrate Judge improperly drew his conclusions from facts alleged in the original complaint, and not the amended complaint, which was the operative pleading.

The EEOC also contended that the R&R subjected the amended complaint to a heightened pleading standard because it failed to consider allegations in the light most favorable to the EEOC. Id. at 12. The Court held that that Magistrate Judge heavily relied on the unsupported assumption that the Claimant was not being actively subjected to any harassment at the time of her resignation. The Court also disagreed with the R&R’s holding that speculation about future harassment from co-workers was “insufficient” to amount to the “intolerable conditions” standard. Id. at 13. The Court opined that the Magistrate Judge again relied on facts not alleged in the amended complaint.

Finally, the Court held that statements made by ASA’s owner established a severe and pervasive environment of intolerable working conditions. Id. at 14-15. The Court determined that the Claimant’s frequent complaints to various supervisors did not deter the offensive behavior. After the Claimant complained to the owner, his responsive comments implied that the Claimant was almost certain to receive future sexual harassment, and potentially, physical attacks. The Court thus held that the Claimant’s psychological well-being is a term, condition or privilege of employment within the meaning of Title VII. Therefore, the Court sustained the EEOC’s objections to the R&R, and denied ASA’s motion to dismiss.

Implications For Employers

For employers that are confronted with EEOC-initiated litigation, this ruling is instructive from both procedural and substantive perspectives. Procedurally, this ruling makes clear that courts should consider the allegations from an operative complaint when evaluating a motion to dismiss. Substantively, employers should take note that the Court relied heavily on comments that the owner made about potential future harm, which ultimately was part of the Court’s basis for not dismissing the constructive discharge claim.

May 4, 2023 by Gerald L. Maatman, Jr.

Indiana Joins The Bandwagon In Passing A Comprehensive Privacy Law

By Gerald L. Maatman, Jr., Jennifer A. Riley, Alex W. Karasik, and Shaina Wolfe

Duane Morris Takeaways: The United States currently has no comprehensive data privacy law. Rather, a patchwork quilt of various privacy laws cover different types of data, such as information in credit reports (the Fair Credit Reporting Act), student records (Family Educational Rights and Privacy Act), and consumer financial products (Gramm-Leach-Bliley Act). In an attempt to fill the void of federal legislation, Indiana recently joined six other states – California, Colorado, Connecticut, Iowa, Utah, and Virginia – in enacting a comprehensive privacy statute, the Indiana Consumer Data Protection Act (“ICDPA”). At least nineteen states have introduced similar privacy bills this legislative session. Montana and Tennessee have comprehensive consumer privacy statutes pending signature by their governors. Businesses in Indiana should start immediately reviewing their policies and implementing processes for complying with ICDPA to avoid enforcement litigation by the Indiana Attorney General.

Indiana Legislation

On May 1, 2023, Indiana Governor Holcomb signed Senate Bill 5, known as the ICDPA. This new law will take effect on January 1, 2026.

The ICDPA applies to companies that conduct business in Indiana or produce products or services that are targeted to residents of Indiana and during a calendar year: (1) control or process the personal data of 100,000 consumers (who are Indiana residents) or (2) control or process personal data of at least 25,000 consumers (who are Indiana residents) and more than 50% of gross revenue from the sale of personal data. Significantly, the ICDPA does not apply to data processed or maintained in the course of applying to or being employed by a business. Moreover, the ICDPA does not apply to government entities, non-profit organizations or higher education institutions.

The ICDPA provides consumers with rights to their personal data, including:

– opt-out rights related to the sale of personal data, targeted marketing and profiling (automated decision making that could have significant legal effects, such as those related to employment and benefits);
– access rights, including a right to confirm whether a company is processing any data at all;
– deletion rights;
– correction rights, limited to data the consumer previously provided;
– appeal rights; and
– data portability rights (summary of the personal data sent to the consumer must be in a portable and readily usable format).

“Personal data” is broadly defined as information that is “linked or reasonably linkable to an identified or identifiable individual.” Personal data does not include de-identified data, publicly available information, or data related to a group or category of customers that is not linked or reasonably linked to an individual customer. The ICDPA also provides consumers the right to opt-out of the collection and processing of their sensitive personal data. “Sensitive personal data” includes: (1) personal data revealing racial or ethnic origin, religious beliefs, a mental or physical health diagnosis made by a healthcare provider, sexual orientation, or citizenship or immigration status; (2) genetic or biometric data that is processed for the purpose of uniquely identifying a specific individual; (3) personal data collected from a known child; and (4) precise geolocation data. Certain personal data that is covered by other statutes like the Fair Credit Reporting Act or Family Educational Rights and Privacy Act is exempt.

Once the ICDPA takes effect, companies must respond to a consumer personal data request within 45 days of receipt of the request. Companies may also seek a 45-day extension to respond. If a consumer appeals a company’s decision to deny the consumer’s request, the appeal response must be delivered within 60 days. If the appeal is denied, the company must provide the consumer with a method for contacting the state attorney general.

Importantly, the ICDPA does not provide individuals with a private right of action against businesses that violate the Indiana Law. Rather, the Indiana Attorney General will have exclusive enforcement authority. Prior to any enforcement action, the business will be allowed 30 days to cure the alleged violation. Only after the thirty days pass will the Indiana Attorney General be permitted to bring an enforcement action for the alleged violation. If the Indiana Attorney General decides to bring an enforcement action, the business may be fined up to $7,500 per violation.

Implications for Businesses

The ICDPA does not take effect until January 1, 2026. Covered businesses should start reviewing their policies and implementing processes for complying with the ICDPA to avoid enforcement by the Indiana Attorney General.

April 29, 2023May 1, 2023 by Gerald L. Maatman, Jr.

Fifth Circuit Casts A Doubtful Eye On The U.S. Department of Labor’s Final Tip Credit Rule

By Gerald L. Maatman, Jr. and Shaina Wolfe

Duane Morris Takeaways: In Restaurant Law Center, et al. v. United States Department of Labor, et al., No. 22-50145 (Apr. 28, 2023), a decision of significant importance to all employers in general and the service and hospitality industry in particular, the U.S. Court of Appeals for the Fifth Circuit reversed a Texas federal district court’s order denying a preliminary injunction against enforcement of the new tip credit rule of the U.S. Department of Labor (“DOL”) and remanded for further proceedings. In Restaurant Law Center, the plaintiffs seek a nationwide preliminary injunction prohibiting enforcement of the DOL Final Rule regarding tip credit and dual jobs (the “Final Rule”). Importantly, the Final Rule reinstated the “80/20 Rule” by providing that employers can utilize the tip credit so long as 80 percent or more of the work is tip-generating, and not more than 20 percent is directly supporting work. However, the Final Rule also provides that employers cannot utilize the tip credit when an employee performs non-tipped work for more than 30 consecutive minutes. Plaintiffs claim that the DOL impermissibly created a new definition of “tipped occupation” that lacks support in the FLSA, and that enforcement of the Final Rule will impose substantial, ongoing costs on businesses. The district court had denied Plaintiff’s preliminary injunction solely because they failed to establish irreparable harm from complying with the Final Rule. The Fifth Circuit found that Plaintiffs submitted sufficient evidence that the Final Rule necessarily imposes a recordkeeping requirement and that employers who want to continue claiming the tip credit will “incur ongoing management costs” to ensure compliance. This decision is of signal importance as the Fifth Circuit’s decision indicates that the Final Rule may be on shaky ground.

Case Background

In late 2021, the DOL revived and revised the 80/20 Rule by providing that employers can utilize the tip credit only so long as 80 percent or more of the work is tip-producing, and not more than 20 percent is “directly supporting work.” See 29 C.F.R. § 531.56. Under the Final Rule, no tip credit can be taken for any non-tipped work. “Tip-producing work” is defined as work the employee performs directly providing services to customers for which the employee receives tips (i.e. taking orders and serving food). “Directly supporting work” is defined as work that is performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work (i.e., rolling silverware and setting tables). Non-tipped work includes preparing food or cleaning the kitchen, dining room, or bathrooms.

The Final Rule also includes a new requirement that an employer cannot utilize the tip credit when an employee performs more than 30 consecutive minutes performing “directly supporting work.” Directly supporting work done in intervals of less than 30 minutes scattered throughout the workday would not invalidate the tip credit, subject to the 80/20 Rule. However, employers must pay minimum wages for “directly supporting work” performed after the lapse of the first 30 continuous minutes.

In December 2021, Plaintiffs challenged the Final Rule in federal district court in Texas on the grounds, among other things, that it violated the Fair Labor Standards Act. Restaurant Law Center, No. 22-50145 at 3. Plaintiffs moved for a preliminary injunction and after holding an evidentiary hearing, the district court denied the preliminary injunction. Id. The district court did not reach the merits of Plaintiffs’ claims. Id. Rather, the district court assumed Plaintiffs were likely to succeed on the merits, but concluded they had failed to show they were irreparably harmed by the costs of complying with the new rule. Id. at 3-4. The district court noted that the compliance costs had already been incurred since the Final Rule was in place for more than one month, and any other costs were speculative at best. Id. at 4. Further, the district court found that the new Final Rule, which is similar to the 80/20 rule, does not require employers to monitor their employees’ time. Id.

The Fifth Circuit’s Ruling Reversing The Denial Of The Preliminary Injunction

The Fifth Circuit reversed the district court’s denial of the preliminary injunction and remanded the case for further proceedings with the expectation that the district court “will proceed expeditiously” to reconsider the preliminary injunction motion with the benefit of the Fifth Circuit’s ruling. Id. at 11.

In reversing the district court, the Fifth Circuit found that employers who want to continue claiming the tip credit will “incur ongoing management costs” to ensure employees do not spend more than 30 minutes continuously performing directly supporting work. Id. at 9. Significantly, the Fifth Circuit commented that compliance with the Final Rule requires employers to record their employees’ time. The Fifth Circuit explained that it “cannot fathom how an employer could honor these specific constraints without recording employee time. What if an employer is investigated by the Department or sued by an employee for wrongly claiming the tip credit? Without time records, how could an employer defend itself?” Id. at 7.

The Fifth Circuit also disagreed with the DOL’s assertion that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.” Id. The Fifth Circuit opined that “[n]o explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works” and that an employer will need to account for blocks of employee time, “especially if an employer is accused of violating the rule.” Id. (emphasis in original).

Circuit Judge Higginbotham dissented from the majority opinion. He explained that “the majority yields to the temptation to insert its own logic to fill the void,” insinuating that the majority substituted its own reasoning (and potentially desire for a particular outcome) for Plaintiffs’ lack of a “clear showing they were harmed.” Id. at 17.

The Texas district court now has two important rulings to make. First, according to the Fifth Circuit, it will need to analyze the other preliminary injunction factors and issue another ruling on the motion for preliminary injunction. Second, the district court will need to analyze and issue its opinion on the parties’ fully-briefed motion for summary judgment. It is likely that the district court will issue one ruling tackling both motions. Regardless of the outcome, this case will likely be heavily litigated in the Fifth Circuit.

Implications For The Service & Hospitality Industry

The Fifth Circuit’s decision indicates that a nationwide preliminary injunction preventing enforcement of the Final Rule may be on the horizon. The Fifth Circuit’s decision showcases the unreasonable and costly task of complying with the Final Rule. The service and hospitality industry should stay tuned for the Texas federal district court’s imminent rulings on Restaurant Law Center’s motion for preliminary injunction and motion for summary judgment.

April 17, 2023June 7, 2023 by Gerald L. Maatman, Jr.

Seventh Circuit Teaches Important Lesson On The “Rigorous Analysis” Required for Rule 23 Class Certification

By Gerald L. Maatman, Jr., Shaina Wolfe, and Aaron A. Bauer

Duane Morris Takeaways: In Eddlemon v. Bradley University, No. 20-01264 (7th Cir. Apr. 12, 2023), the U.S. Court of Appeal for the Seventh Circuit vacated an Illinois federal district court’s class certification order because it failed to conduct a “rigorous analysis” of each of the Rule 23 factors – numerosity, commonality, typicality, and adequacy of representation. A student alleged, among other things, that during the COVID-19 pandemic, Bradley University breached its implied contract with students by shortening the Spring 2020 semester and continuing to charge students full tuition, and was unjustly enriched by charging students for their unused activity fees. The district court granted class certification to students that paid full tuition and activity fees for the Spring 2020 semester. The Seventh Circuit held that the district court did not thoroughly evaluate the Rule 23 factors because it relied only on the pleadings and failed to ensure that the plaintiff had met each of the required factors. The Seventh Circuit’s decision serves as a reminder that plaintiffs must offer sufficient evidence and show how each of the Rule 23 factors are met, and district courts must rigorously analyze the Rule 23 requirements prior to certifying a class action.

Case Background

With the unexpected onset of COVID-19 during the Spring Semester of 2020, Bradley University, like many other schools, transitioned from in-person to remote learning. To facilitate the transition, the university extended its Spring break, which in-turn, shortened the school’s 15-week spring semester to 14 weeks.

A student sued the university for breach of an implied contract because the university charged students full tuition despite the shortened semester. The student alleged that the university’s class catalog served as a contract that entitled the student to 15 weeks of education. The student also alleged that the university was unjustly enriched by the collected student activity fees because students did not attend any on-campus activities. The student sought class certification on behalf of the 7,759 other students.

The U.S. District Court for the Central District of Illinois granted Rule 23 certification of two classes, including: (1) students whose Spring 2020 semester was shortened, and (2) students who paid the Spring 2020 semester activity fees. The university filed a Rule 23(f) appeal with the Seventh Circuit, challenging the district court’s analysis of the commonality and predominance requirements. The university argued that the district court erred in granting class certification because it relied solely on the student’s pleadings without assessing the record. The university also argued that the district court failed to identify or separately analyze the student’s claims.

The Seventh Circuit’s Ruling Vacating Class Certification

The Seventh Circuit vacated the district court’s class certification order and remanded for further proceedings. The Seventh Circuit agreed with the university’s two main arguments.

First, the Seventh Circuit noted that “[t]he district court’s certification order does not reveal whether the court examined the record,” but that the district court repeatedly referred to the student’s allegations without addressing his purported evidence (e.g., the university’s class catalog) or examining how the student would prove his allegations with common evidence. The Seventh Circuit held that the district court’s certification order, therefore, rested on an error of law and amounted to an abuse of discretion because Rule 23 required it to “go beyond the pleadings.”

Second, the Seventh Circuit explained that the district court’s analysis was incomplete because it did not identify or separately analyze the elements of plaintiff’s claims, which is critical to the predominance analysis. The Seventh Circuit emphasized that the district court failed to note the elements of the student’s claims. Instead, the district court listed only one common question for each class without explaining the question’s “relative importance” to each claim, whether any individual questions existed, or how the common question predominated over individual questions. The Seventh Circuit opined that the district court’s analysis was “fatal,” and reiterated that a “one size (or one claim approach) is at odds with the rigorous analysis required at the class certification stage.”

Finally, the Seventh Circuit took the “opportunity” to clarify that, at the certification stage, the district court may only consider the merits of a claim to the extent it is relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.

Implications for Employers

The Seventh Circuit’s decision in Eddlemon serves as important reminder that plaintiffs must support their motions for class certification with a “preponderance of the evidence” and district courts must conduct a “rigorous analysis” of the evidence in the record. To defeat class certification, defendants should emphasize the importance of each Rule 23 factor and attempt to show why, under a rigorous analysis, the plaintiff’s class claims should not be certified.

March 30, 2023March 30, 2023 by Gerald L. Maatman, Jr.

Illinois Court Dismisses BIPA Class Action Brought Against Seller Of Point-Of-Sale Technology For Lack Of Personal Jurisdiction

By Gerald L. Maatman, Jr., Tyler Z. Zmick, and Shaina Wolfe

Duane Morris Takeaways: In White v. HungerRush LLC, No. 22-1206 (C.D. Ill. Mar. 28, 2023), the Court dismissed claims for violations of the Biometric Information Privacy Act (“BIPA”) brought against a company that sells point-of-sale technology for lack of personal jurisdiction. White serves as a reminder to businesses that personal jurisdiction in Illinois may be lacking where their conduct has only a tenuous connection to Illinois and/or where they do not “collect” or “possess” biometric data. This ruling – which is largely consistent with federal court decisions addressing the issue – is a rare win for companies facing BIPA class actions, and is a required read for companies facing privacy class action litigation.

Case Background

Plaintiff worked at a restaurant in Peoria, Illinois, which used a point-of-sale system sold by Defendant HungerRush LLC, a Texas-based company. While working at the restaurant, Plaintiff enrolled her fingerprint onto the point-of sale system as a means of clocking in and out of work. She later sued the Texas-based Company, claiming that it violated the BIPA in connection with its sale of the point-of sale system by (i) failing to develop a written policy made available to the public establishing a retention policy and guidelines for destroying biometric data, and (ii) collecting her biometric data without providing her with the requisite notice and obtaining her written consent.

In response to the complaint, the Company moved to dismiss on the basis that the Court lacked personal jurisdiction. In support of its jurisdictional argument, the Company submitted an affidavit signed by its Chief Administrative Officer and General Counsel.

The Company’s affidavit explained that: (i) it is a Texas-based company; (ii) it does not manufacture finger-scan devices or software; (iii) Plaintiff’s employer purchased a point-of-sale system from it and separately purchased a finger-scan device from a third-party; (iv) the finger-scan device operates independently from its software; and (v) finger-scan data is not transmitted to its point-of-sale software – instead, the finger-scan device sends only an approval signal to its software.

Based on these facts, Defendant argued that its limited contact with Illinois (i.e., selling a point-of-sale system to Plaintiff’s Illinois-based employer) was insufficient to establish personal jurisdiction.

The District Court’s Decision

The Court granted the Company’s motion to dismiss under Rule 12(b)(2).

First, the Court noted that “[w]here, as here, the defendant submits ‘evidence opposing the district court’s exercise of personal jurisdiction, the plaintiff must similarly submit affirmative evidence supporting the court’s exercise of jurisdiction.’” The Court explained that because Plaintiff failed to submit any evidence refuting the Company’s evidence, i.e. the sworn affidavit, the affidavit was considered “unrebutted.”

Second, the Court found that the Company’s unrebutted evidence demonstrated that it did not have sufficient minimum contacts with Illinois for this case and it was not reasonably foreseeable that Plaintiff’s claims related to the Company’s contacts with Illinois. Significantly, Plaintiff failed to submit any evidence refuting the affidavit’s sworn statements that Plaintiff’s Illinois-based employer initiated the transaction with the Company, that any contracts the Company makes with Illinois restaurants are made in Texas with Illinois restaurants reaching out to the Company, that the Company’s system has no cloud functions, or that the Company does not and has never manufactured a fingerprint scanner.

The Court held that because Plaintiff failed to offer evidence or adequate explanations refuting the Company’s sworn statements, she failed to meet her burden in establishing personal jurisdiction.

Implications For Employers

White serves as a reminder that companies must have sufficient contacts with the state in order for the courts to have personal jurisdiction over them. In other words, companies with only limited contacts with Illinois will not be subject to personal jurisdiction in courts within Illinois.

White also illustrates the importance of submitting extrinsic materials (e.g., sworn affidavits) in support of showing lack of personal jurisdiction. Significantly, once the defendant has submitted affidavits or other extrinsic evidence supporting lack of jurisdiction, the plaintiff must go beyond the pleadings and submit affirmative evidence supporting the exercise of jurisdiction. Moreover, courts can dismiss BIPA class actions for lack of personal jurisdiction based on supporting affidavits – even where the affidavits speak in part to the merits of the case. See Order & Op. at 8.

November 29, 2022 by Gerald L. Maatman, Jr.

Sixth Circuit Denies Writ Of Mandamus In Opioid Class Actions For District Court’s Order That Pushes Discretion Under Rule 16(b) to the Edge

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Shaina Wolfe

Duane Morris Takeaways: In the proceeding entitled In Re National Prescription Opiate Litigation, No. 21-4051, 2022 U.S. App. LEXIS 31328 (6th Cir. Nov. 10, 2022), the Sixth Circuit denied a petition for writ of mandamus regarding a District Court’s Scheduling Order in the giant opioid multidistrict class action and its allowance of the late pleadings amendments as to new defendants, Meijer Distribution, Inc., and Meijer Stores Limited Partnership (“Meijer Defendants”). The newly-added Meijer Defendants argued that the District Court violated the Rule 16(b) of the Federal Rules of Civil Procedure by allowing Plaintiffs to improperly join them in the ongoing 3-year old case without first seeking leave of court and without demonstrating good cause. The Sixth Circuit held that the District Court acted within its broad discretion and did not violate the Federal Rules of Civil Procedure because it provided a cut-off date that allowed for the specific amendments. The Sixth Circuit explained “[t]hough unconventional, the District Court’s actions are not so extraordinary as to warrant mandamus.” Id. at *1. The decision illuminates the broad discretion that district courts enjoy in managing class action litigation and the important role that scheduling orders play throughout the entire litigation.

Case Background

In July 2018, Plaintiffs filed the underlying lawsuit against a group of pharmacies. The case was removed to federal court and ultimately became part of the opioid multidistrict class action proceeding entitled In Re National Prescription Opiate Litigation, 1:17-MD-2804 (N.D. Ohio 2017) (“MDL”).

Significantly, in the underlying case, the district court entered an order on May 3, 2018, which amended its Case Management Order and provided that “‘[i]f a case is later designated as a bellwether for motion practice or trial, a separate CMO will be entered that will provide further opportunity to amend.’” (“2021 Bellwether Order”). See Petition at 4-5.

In 2021, the District Court selected the underlying case to proceed as a bellwether case against the pharmacies. See Sixth Circuit Order at 1. Subsequently, on May 19, 2021, Plaintiff filed a supplemental pleading, adding the Meijer Defendants to the underlying case. See id.; Petition at 5. The amendments were made nearly three years after Plaintiff filed suit and more than 26 months after the deadline to add new defendants.

After unsuccessfully moving to strike the Meijer Amendments and certify the Court’s 2021 Bellwether Order for interlocutory appeal, on November 9, 2021, Defendants filed a petition for a writ of mandamus with the Sixth Circuit. See Petition at 7. In the Petition, the Meijer Defendants argued that the District Court allowed Plaintiff to add the Meijer Defendants years after the deadline for amending pleadings passed and without requiring Plaintiff to demonstrate good cause, as required by Rule 16(b) of the Federal Rules of Civil Procedure. See Petition at 1. The Meijer Defendants requested that the Sixth Circuit issue a writ ordering the District Court to strike the untimely amendments and dismiss the Meijer Defendants from the case. See id. at 2.

The Sixth Circuit’s Ruling Denying The Writ Of Mandamus

The Sixth Circuit denied the writ of mandamus. It held that the District Court’s order, while “unconventional,” fell within the parameters of Rule 16(b). See Sixth Circuit Order at 1. The Court of Appeals explained that Rule 16(b) requires that “scheduling orders limit the time to join other parties” and the District Court’s 2021 Bellwether Order “explicitly provided permission for plaintiffs to amend their complaint if their case was selected as a bellwether.” Id. The Sixth Circuit reasoned that because Plaintiffs exercised their right to amend after the underlying case was chosen as a bellwether, Plaintiffs did not need to seek permission from the District Court. Id. at 2.

The Sixth Circuit noted that the 2021 Bellwether Order allowed plaintiffs to amend whenever their case was selected as a bellwether, and there was no cut-off for amendments. Id. The Sixth Circuit acknowledged that, under the 2021 Bellwether Order and without any cut-off date, the amendments could have gone differently (i.e., made on the eve of trial or adding a defendant that was completely new to the litigation). Id. at 2. Instead, the Sixth Circuit determined that the Meijer Defendants suffered little, if any, prejudice. Id. at 2-3. Thus, the Court of Appeals explained, “[t]hat unusual aspect of the scheduling order did not clearly violate Rule 16 because it provided some limit (when the case was selected as a bellwether), although the order went right to the edge of the district court’s discretion under Rule 16.” Id. at 2.

In denying the writ, the Sixth Circuit held that the Meijer Defendants “ha[ve] shown that the district court’s scheduling order was unconventional but not a judicial usurpation of power nor a clear abuse of discretion.” Id. at 3.

Implications For Companies

The Sixth Circuit’s order recognizes the broad discretion that district courts have in managing their dockets and illustrates the importance that scheduling orders play in all types of cases, and specifically in MDLs and class actions. Companies should pay close attention to all of the proposed deadlines included in any scheduling orders, and try to prevent these types of amendments from being entered at the outset.

November 28, 2022 by Gerald L. Maatman, Jr.

Ohio State Wins More Than Just Games, As The Ohio Court of Appeals Reverses Class Certification In Favor Of The University

By Gerald L. Maatman, Jr., Jennifer A. Riley, Shaina Wolfe

Duane Morris Synopsis – In Smith v. Ohio State University, 2022-Ohio-4101 (Ohio App. Nov. 17, 2022), The Ohio State University successfully appealed an Ohio Court of Claim’s (“trial court”) Order granting class certification in a lawsuit brought by a former undergraduate student. The former student alleged that when the university only offered online classes due to COVID-19, it breached its contract by keeping all the tuition payments from her and other students without giving them the robust in-person experience promised when they initially paid their tuition bills. The Ohio Court of Appeals held that while the trial court has broad discretion in granting class certification, it failed to determine proof of injury and economic damages relative to the former student and potential class members. In crafting a class certification defense strategy, especially in a breach of contract case where the injury and damages typically are in play, employers should focus on the lawsuit basics when opposing class certification, i.e., demanding that plaintiffs show causation and injury in fact.

Case Background

Plaintiff, a former college student, filed a lawsuit alleging that Defendant, The Ohio State University (“OSU”), breached its contract and received unjust enrichment in Spring 2020 by failing to partially refund students their tuition and fees after transitioning from their robust, in-person education to “subpar” online education during COVID-19. Id. at 4-5.

In June 2021, Plaintiff moved for class certification. Id. at 5. After briefing and oral argument, the trial court granted Plaintiff’s motion and certified a class consisting of all undergraduate students enrolled in classes at Defendant’s Columbus campus during the Spring 2020 semester. Notably, the trial court found that the class suffered the same injury, i.e., losing the benefit of in-person classes and access to the campus. Id. at 9-10.

In appealing the trial court’s decision, Defendant raised several arguments for why the trial court’s decision was incorrect. Significantly, Defendant’s main, and ultimately successful, arguments focused on the trial court’s failure to conduct the “rigorous analysis” required by Ohio Civil Rule 23 (like Federal Rule of Civil Procedure 23) in determining whether Plaintiff had satisfied the prerequisites for class certification. Id. at 10-11.

The Court Of Appeals’ Ruling Reversing Class Action Certification

The Ohio Court of Appeals agreed with Defendant and reversed the trial court’s order granting class certification for three reasons.

First, the Court of Appeals found that the Plaintiff failed to present sufficient evidence of an economic injury. Id. at 17-18. Instead, the trial court simply assumed that a “benefit” was lost based only on the fact Defendant closed its campus and switched to remote classes and services in response to the pandemic. Id. at 18.

Second, the Court of Appeals found that the trial court failed to consider Defendant’s arguments and evidence contesting proof of injury. Id. at 18-19. Defendant submitted an expert report that included evidence that students paid the same for in-person and online learning and that the in-person teaching modality carried the possibility of substantial remote instruction even in a normal semester. Id. at 19. Meanwhile, Plaintiff submitted no expert testimony regarding how and or whether other students were injured in this case. Id. Indeed, Plaintiff’s expert’s report excluded any survey questions or consideration of market preferences during an emergency such as the pandemic that forced the closure. Id.

Third, the Court of Appeals found that the trial court’s analysis of Plaintiff’s unjust enrichment claim was merely folded into the same generalized injury analysis without any individualized consideration. Id. at 19-20.

In holding that the trial abused its discretion, the Court of Appeals reasoned that, “[t]he trial court, in assuming an injury from the fact of closure and termination of in-person classes, did not assess these complicated and difficult considerations, particularly as they relate to whether [Plaintiff] presented any common evidence — or even a method to possibly determine — that class members suffered an economic injury considering the effect of the pandemic.” Id. at 20. Further, the Court of Appeals opined that “having accepted the closure of campus and temporary termination of in-person classes and services as an injury per se, and having failed to consider how the pandemic affects class certification in this case at all, the trial court did not undertake a rigorous analysis with respect to the number and nature of individualized inquires that might be necessary to establish liability with respect to both tuition and fees.” Id.

Implications

In class actions asserting breach of contract claims, it is not uncommon for plaintiffs to seek class certification before developing their case through affidavits from other individuals and expert testimony. Employers can use this to their advantage by attacking causation and damages. This strategy may not only hinder a plaintiff from notifying potentially thousands of other putative class members of the claims, but also potentially saving money through limited discovery.