A. Employment Law Developments
1. Wage and Hour
a. Sixth and Eighth Circuits Hold That Federal Courts Cannot Exercise Jurisdiction over Fair Labor Standards Act Claims Arising from Out-of-State Conduct When a Defendant Is Not Subject to Personal Jurisdiction.
In Canaday v. Anthem Companies, Inc. and Vallone v. CJS Solutions Group, LLC, the Sixth and Eighth Circuits, respectively, ruled that a federal court does not have jurisdiction over claims brought under the Fair Labor Standards Act (FLSA) when the conduct on which those claims are based took place outside of the forum state and the court does not have personal jurisdiction over the defendant. Accordingly, those claims could not be included in a proposed FSLA collective actions brought against the employer. These decisions—issued within a day of each other—were the first federal court decisions to address this issue.
In Canaday, a review nurse from Tennessee filed suit against her employer, the Anthem Companies, Inc. (Anthem), in federal district court in Tennessee, alleging that Anthem misclassified her and other review nurses as exempt from the FLSA’s overtime provisions. She sought to certify a collective action of all the review nurses that Anthem classified as exempt, including those outside Tennessee. The district court dismissed the claims of the out-of-state nurses for lack of personal jurisdiction.
In Vallone, plaintiffs sued their employer in federal district court in Minnesota for wages under the FLSA for out-of-town travel to and from worksites serviced by their employer. They moved to certify a collective action on behalf of all employees who traveled to any of their employer’s projects, but their employer argued that the court did not have personal jurisdiction over claims with no connection to the forum state of Minnesota. Similar to Canaday, the district court in Vallone limited the action to employees who engaged in travel to or from a Minnesota jobsite for their employer or who were residents of Minnesota.
On appeal, the Sixth and Eighth Circuits, respectively, affirmed the decisions of the district courts, concluding that presiding over claims for which they had no personal jurisdiction would be a violation of defendants’ due process rights. In reaching this conclusion, both Circuits relied on the Supreme Court’s rationale in Bristol-Myers Squibb Co. v. Superior Court, a “mass action” case where the Court determined that there needed to be “a connection between the forum and the specific claims at issue” in order to exercise specific jurisdiction. Because they lacked the requisite nexus with the forum state, the district courts could not exercise specific personal jurisdiction over the claims of the non-Tennessee residents in Canady, or in Vallone, over the claims of non-Minnesota residents or claims which did not involve travel to or from Minnesota. Thus, those claims were properly excluded from the FLSA collective actions involved in those cases.
b. First Circuit Holds That Out-of-State Claimants May Opt In to Fair Labor Standards Act Collective Actions.
In contrast to Canady and Vallone, the Court of Appeals for the First Circuit held in Waters v. Day & Zimmermann NPS, Inc. that employees who reside outside of the state in which an FLSA collective action is pending may opt in to such an action despite their non-resident status. The First Circuit’s decision creates a split with the Sixth and Eighth Circuits.
Plaintiff, a mechanical supervisor from Massachusetts, filed suit against his employer in Massachusetts federal district court, alleging that the employer failed to pay overtime to him and other similarly situated employees in violation of the FLSA. Per the FLSA’s collective action procedures, more than 100 current and former employees from around the country—including many who had worked only outside of Massachusetts—opted in to the suit. The employer, relying on the Supreme Court’s decision in Bristol-Myers Squibb, filed a motion to dismiss in which it contended that the court did not have personal jurisdiction over the claims of the out-of-state plaintiffs because they had no connection to the forum state. Unlike Canaday and Vallone, the district court denied the motion to dismiss.
On interlocutory appeal, the First Circuit affirmed, concluding that out-of-state claimants are permitted to bring claims in FLSA collective actions despite their non-resident status. In its view, Bristol-Myers Squibb was inapplicable because it involved out-of-state residents pursuing state claims, and not federal claims pursued in federal court. The First Circuit also rejected the employer’s argument based on Federal Rule of Civil Procedure 4(k), which speaks to the territorial limits of effective service. The employer argued that Rule 4(k) “incorporates the Fourteenth Amendment’s limits on the jurisdiction of federal courts wherever a federal statute [like the FLSA] does not provide for nationwide service of process,” and thus precluded the exercise of personal jurisdiction over the FLSA claims of the non-resident, opt-in employees. The First Circuit instead reasoned that “Rule 4(k) is a ‘territorial limit’ on ‘effective service’ of a summons” and thus logically could not “be read to limit a federal court’s jurisdiction after a summons is properly served.” Because the employer had been properly served by the original plaintiff and already was within the court’s jurisdiction, jurisdiction could be exercised over the federal claims of the non-resident, opt-in plaintiffs.
2. Federal Arbitration Act
a. First Circuit Holds That Lyft Drivers Do Not Fall Within Exemption to Federal Arbitration Act for Transportation Workers Engaged in Interstate Commerce.
In Cunningham v. Lyft, Inc.,the First Circuit held that rideshare drivers are among a class of transportation workers engaged primarily in local intrastate transportation, as opposed to interstate commerce, and thus are subject to the Federal Arbitration Act (FAA). Plaintiff and a group of Massachusetts drivers for rideshare company Lyft, Inc. (Lyft) filed suit in federal district court, alleging that Lyft misclassified its drivers as independent contractors and thus failed to provide them with employee benefits. Lyft filed a motion to compel arbitration of the drivers’ claims. The drivers opposed the motion, arguing that they fell within an exemption to the FAA for transportation workers engaged in interstate commerce. The district court denied Lyft’s motion, concluding that the drivers were engaged in interstate commerce and therefore covered by the transportation worker exemption.
On interlocutory appeal, the First Circuit reversed, holding that that the drivers were engaged primarily in local intrastate transportation and thus outside the exemption. The First Circuit rejected the drivers’ argument that transporting passengers to and from Boston Logan Airport for trips to other states and countries qualified as transportation in interstate commerce. The court drew parallels to United States v. Yellow Cab Co.,where the Supreme Court found that a local taxi service that drove passengers to locations such as rail stations, which in turn provided interstate transportation services, had not engaged in interstate commerce. The First Circuit also rejected the drivers’ argument that their occasional direct transport of passengers across state lines implicated the FAA exemption for interstate travel, finding that “Lyft is clearly primarily in the business of facilitating local, intrastate trips.” Because Lyft’s drivers did not qualify as transportation workers engaged in interstate commerce, they were subject to the FAA and required to arbitrate their claims. With its decision, the First Circuit joins the Ninth and Seventh Circuits in siding with gig companies Uber and Grubhub, respectively, on the issue of the FAA exemption.
B. Labor Law Developments
1. Supreme Court
a. Supreme Court Holds That California Law Requiring Agricultural Employers to Provide Union Representatives Access to Their Premises Constitutes a Taking Under the Fifth Amendment.
In Cedar Point Nursery v. Hassid, the Supreme Court held that a requirement under California Code of Regulation title 8, section 20900(e) that agricultural employers must allow union organizers to access their property constitutes a per setaking under the Fifth Amendment to the U.S. Constitution. The Court’s decision is significant for agricultural employers and could have ramifications for employers and unions more broadly.
The plaintiffs in Cedar Point Nursery—two California agricultural employers—filed suit in federal district court in California against members of California’s Agricultural Labor Relations Board, alleging that California’s “access regulation effected an unconstitutional per sephysical taking under the Fifth and Fourteenth Amendments.” They sought an injunction against the Board’s enforcement of the regulation which allows “the right of access by union organizers to the premises of an agricultural employer” to meet and talk with employees and to solicit their support for as many as three hours per day, 120 days per year. The plaintiffs claimed that the regulation appropriated, without required compensation, an easement for union organizers to enter their property.
The district court denied the plaintiffs’ motion for a preliminary injunction and dismissed their complaint, holding that the access regulation did not constitute a per setaking because it did not “allow the public to access their property in a permanent and continuous manner for whatever reason.” The Ninth Circuit affirmed. It concluded that “per se treatment was inappropriate” because the access regulation did not allow broad, unlimited access to the plaintiffs’ property, and the plaintiffs had not alleged they were deprived of all economically beneficial use of their property.
The Supreme Court reversed the Ninth Circuit’s decision. The Supreme Court stated that where “a regulation results in a physical appropriation of property, a per setaking has occurred.” The Court concluded that “the access regulation appropriates a right to invade the growers’ property and therefore constitutes a per sephysical taking.” The Court explained that the California regulation “appropriates for the enjoyment of third parties the owners’ right to exclude,” which is “one of the most treasured rights of property ownership.”
C. Employee Retirement Income Security Act Developments
1. Hughes v. Northwestern University: Supreme Court Hears “Excessive Fee” Issues, Responds Without Definitive Guidance.
Contrary to expectations, the Supreme Court in Hughes v. Northwestern University did not establish clear guidelines either for the ERISA fiduciaries responsible for choosing the investment options available in participant-directed defined contribution plans or for the lower federal courts in addressing at the “motion to dismiss” stage the tsunami of “excessive fees” class actions challenging those decisions that have come to dominate ERISA fiduciary litigation. However, the Court’s unanimous decision reversing the Seventh Circuit’s affirmance of the dismissal of the case was a far cry from the victory that the plaintiffs’ bar had desired. And it contains several pronouncements that, if applied faithfully by the lower courts, suggest that the tide of these cases finally may be turning in the defendants’ favor.
In Hughes (styled Divane v. Northwestern University in the lower courts), plaintiffs, participants in Northwestern University’s two participant-directed 403(b) plans, brought suit alleging that the defendants had violated their ERISA obligations by, among other things, imprudently offering participants “investment options that were too numerous, too expensive, and underperforming” and causing the plans to pay excessive recordkeeping expenses. Central to their claims were complaints that the plans’ investment menus included among their many options more expensive “retail” mutual funds as well as actively managed funds that were more expensive (and allegedly performed less well) than passively managed index funds.
The Seventh Circuit affirmed the district court’s dismissal of the case for failure to state a claim. While its precise rationale was somewhat opaque, the court ultimately found that the plaintiffs had no viable complaint, given the wide array of investment choices available to them that included both the index and institutional funds that they apparently preferred:
Taken as a whole, the amended complaint appears to reflect plaintiffs’ own opinions on ERISA and the investment strategy they believe is appropriate for people without specialized knowledge in stocks or mutual funds. Ultimately, defendants “cannot be faulted for” leaving “choice to the people who have the most interest in the outcome.”
In its unanimous and rather brief opinion, the Supreme Court did not determine the pleading standard for excessive fee cases even though that question was squarely presented for review. Rather, it simply concluded that the Seventh Circuit’s reasoning was flawed, characterizing the Seventh Circuit as holding that the plaintiffs’ allegations failed because their “preferred type of low-cost investments were available as plan options” and that availability “eliminated any concerns that other plan options were imprudent.” That “exclusive focus on participant choice,” the Court determined, was error because it failed to take into account the Court’s decision in Tibble v. Edison International in which the Court held that fiduciaries of participant-directed plans have an ongoing duty to monitor a plan’s investment options and remove those that become imprudent. Because the Seventh Circuit had not considered this monitoring responsibility, the Court vacated and remanded the case for reconsideration.
While the Court’s reversal of the Seventh Circuit was ostensibly a “victory” for the plaintiffs, its narrow holding is hardly an endorsement of the excessive fees claims that have flooded the federal courts. Significantly, the Court did not conclude that the plaintiffs’ massive 287-paragraph, 141-page amended complaint actually stated a plausible claim for breach of ERISA fiduciary duty. That question was left for the Seventh Circuit to determine on remand.
Moreover, the Court’s opinion contains several nuggets for defendants. First, the Court made clear that, on a motion to dismiss, these types of ERISA complaints are fully subject to the strict pleading standards of Iqbal and Twombly. Second, the Court confirmed ERISA’s long-standing prudence principle that a fiduciary’s actions are to be tested as of time the fiduciary makes the decision at issue, and not on the basis of 20/20 hindsight. Third, and perhaps most importantly, the Court indicated that the fiduciary’s decisions in this area were entitled to deference in determining whether a breach occurred: “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
In sum, other than making clear that a diverse menu of investment options, by itself, will not defeat an “excessive fees” claim at the motion to dismiss stage, the Supreme Court’s decision offers little comfort to the plaintiffs’ bar. In particular, its clear statements that Iqbal and Twombly apply, that the fiduciary inquiry turns on the circumstances prevailing when decisions are made, and that deference is due “the range of reasonable judgments that a fiduciary may make,” all suggest that there is tough sledding ahead for plaintiffs. Whatever the case, further developments in this area are sure to come before it all sorts out.
2. Arbitration Developments
Seventh Circuit Refuses to Enforce an Arbitration Clause in a Narrow Ruling.
Smith v. Board of Directors of Triad Manufacturing, Inc. arose from an employee stock ownership plan (ESOP) purchase of one hundred percent of the company’s stock from three shareholders. Plaintiff, alleging that the plan paid too much for the stock, sued the independent fiduciary that had approved the transaction on the plan’s behalf and members of the company’s board of directors, who, he alleged, had participated in the independent fiduciary’s breach.
After plaintiff terminated employment, but before he brought his suit, the plan was amended to require claims for breach of fiduciary duty to be arbitrated individually, so that claimants could seek to recover only losses to their own plan accounts; any relief that they obtained could not bind the plan administrator or trustee with respect to other participants. On the basis of that plan provision, the directors moved to compel arbitration of the plaintiff’s claim. The district court denied the motion, and the Seventh Circuit affirmed.
The Seventh Circuit first held, as has every other Circuit to consider the question, that mandatory arbitration of participants’ claims is consistent with ERISA. It then proceeded to ask “whether this ERISA arbitration provision is enforceable.” In concluding that it was not, the court issued a narrow ruling in which it relied on a so-called exception to the scope of the Federal Arbitration Act—the “effective vindication” exception. Under this “exception,” which the Supreme Court has referred to on several occasions but never actually applied, an arbitration provision would not be honored if it had the effect of requiring a “prospective waiver of a party’s right to pursue statutory remedies.”
The Seventh Circuit concluded that the case before it was the rare one in which arbitration precluded “effective vindication” of the plaintiff’s substantive statutory rights. Section 409(a) of ERISA, which sets forth the available remedies for fiduciary breach, includes removal of the breaching fiduciary, and removal was part of the relief that the plaintiff had sought. The plan’s arbitration provision and its class action waiver would have prohibited the participant from pursuing that removal remedy. Thus, the arbitration clause prevented the “effective vindication” of the plaintiff’s rights. The court stressed, however, that “the problem with the plan’s arbitration provision is its prohibition on certain plan-wide remedies, not plan-wide representation.” If plaintiff had sought only restoration of the losses occasioned by the fiduciary breach, he could have been compelled to arbitrate, because an arbitrator could have awarded him his share of the plan’s loss without any further effect.
b. Divided Second Circuit Holds That Agreement to Arbitrate “Employment-Related Claims” Does Not Extend to ERISA Fiduciary Claims.
The question in Cooper v. Ruane Cunniff & Goldfarb Inc. was the same that the Ninth Circuit confronted in Munro v. University of Southern California—whether an arbitration clause in an employment agreement can be invoked to compel arbitration of a claim for breach of ERISA fiduciary duty—and the outcome was the same. It could not. But the reasoning was wholly different. Indeed, the Second Circuit took no notice of the earlier case.
The plaintiff in Cooper filed suit against his employer, its profit-sharing plan committee, and the plan’s investment manager, alleging that the investment of thirty percent of the plan’s assets in a single stock was imprudent. All claims except those against the investment manager were resolved through mediation. The manager moved to compel arbitration of the claims against it.
The investment manager’s arbitration demand relied on the plaintiff’s employment agreement, which mandated arbitration of “all legal claims arising out of or relating to employment, application for employment, or termination of employment. . . .” The Second Circuit majority concluded that arbitration was not required because the plaintiff had not asserted “legal claims arising out of or relating to employment.” First, the court determined that the fact the plaintiff would have had no occasion to bring suit had he not been an employee was insufficient to render his claim “employment-related,” citing a number of non-ERISA cases rejecting such a “but for” argument. It also found that the plan was part of the plaintiff’s compensation package. This fact did not make his claim employment-related because his claim hinged entirely on the investment decisions made by the manager and had nothing to do with his individual employment experience. Under ERISA, that other parties who never worked for the employer, such as beneficiaries, plan fiduciaries, and the Secretary of Labor, could bring identical fiduciary breach claims further buttressed this conclusion.
Thus, the Second Circuit held that the claim was outside the scope of the arbitration agreement. In Munro, the Ninth Circuit declined to enforce a similar arbitration agreement, but based on a different rationale: an action for fiduciary breach is brought on behalf of the plan, and the plan included no provision consenting to arbitration. The Ninth Circuit concluded that the plan, the real party to the litigation, had not consented to arbitration, as the FAA requires.
