On June 3, 2016, the U.S. Court of Appeals for the DC Circuit, in Rhea Lana, Inc., et al., v. Department of Labor, reversed the district court’s holding that a warning letter sent to the plaintiff by the Wage and Hour Division of the Department of Labor (DOL) was not a “final action” for purposes of review under the Administrative Procedure Act (APA). The decision is significant because it appears to presage the use of “final agency action” as a means of seeking pre-enforcement judicial review in the federal courts for a host of governmental communications (orders, letters, formal notifications, etc.).

Plaintiff “operate[s], and franchise[s] the opportunity to operate, semi-annual consignment sales of used children’s toys, clothing, and related items” with the assistance of unpaid “consignor-volunteers.” In January 2013, the DOL began investigating the plaintiff’s employment practices. At a meeting in May of that same year, DOL advised the plaintiff that it considered the company’s consignor-volunteers to be employees under the FLSA “entitled to wages, including back pay.”

Several months later, DOL sent two letters. The first was sent directly to the consignor-volunteers. It stated that those workers “might not have been paid as required by the law” and that, although the DOL would “take no further action on [their] behalf,” the consignor-volunteers could file a civil action under the FLSA to recover back pay. The second letter was sent to the plaintiff (the “Letter”). It explained that the DOL’s investigation had disclosed violations of the FLSA’s minimum-wage and overtime provisions. The letter noted that plaintiff “had agreed to pay back wages to thirty-nine managers it had been treating as volunteers, but that the company ‘refuse[d] to comply’ with respect to the consignor-volunteers.” The Letter continued:

“We would like to direct your attention to section 16(e) of the FLSA and Regulations, Part 578. As you will note, section 16(e) provides for the assessment of a civil money penalty for any repeated or willful violations of [the FLSA’s minimum-wage and overtime requirements], in an amount not to exceed $1,100 for each such violation. No penalty is being assessed as a result of this investigation. If at any time in the future your firm is found to have violated the monetary provisions of the FLSA, it will be subject to such penalties.”

Plaintiff filed suit against the DOL under Section 706(2)(A) of the APA challenging the DOL’s determination that the consignor-volunteers are employees under the FLSA and seeking a declaration that they are not employees and an injunction barring DOL from further investigations or enforcement proceedings flowing from its determination. The District Court, ruling on the DOL’s motion to dismiss, held that plaintiff had standing but that the DOL’s action was non-final. It reasoned that “the letters here are indistinguishable from other statements of agency legal opinion that this court has found non-final, such that ‘D.C. Circuit precedent forecloses APA review of the DOL letters at issue.'”

The Court of Appeals reviewed the District Court’s dismissal de novo to determine whether the DOL’s action was “final:”

“First, the action must mark the consummation of the agency’s decisionmaking process . . . . And second, the action must be one by which rights or obligations have been determined, or from which legal consequences will flow.”

With respect to the first issue, the DOL conceded the finality requisite, i.e., its Letter completed its decisionmaking on the consignor-volunteers’ status as employees. With respect to the second issue, at the outset, the Court noted that the plaintiff “casts this case as the spitting image of Sackett [v. EPA], in which the Supreme Court found the challenged agency action to be final.” It noted that “tracking Sackett,” plaintiff contends that the Letter “is functionally equivalent to the EPA’s order” in Sackett, i.e., “[i]t casts the Letter as an order to comply that thus determined rights and obligations, and it asserts that legal consequences flow from the Letter because it renders the company vulnerable to future action for civil penalties.”

The Court agreed with the second contention; otherwise, it noted that “[t]he Letter here, unlike the EPA compliance order in Sackett, created no new legal obligations beyond those the FLSA already imposed.” It compared the Letter to “the type of workaday advice letter that agencies prepare countless times per year in dealing with the regulated community.” It noted that these sorts of letters are routinely used “to warn regulated entities of potential violations before saddling them with expensive and demanding enforcement actions. Treating such reminders of regulated parties’ legal obligations as final and judicially reviewable agency action would discourage their use, ‘quickly muzzl[ing] . . . informal communications between agencies and their regulated communities… that are vital to the smooth operation of both government and business.” It confirmed that the Letter is just like other forms of informal agency advice that the courts have time and again treated as unreviewable.

The Court went on to consider the plaintiff’s argument relating to the legal consequences flowing from the Letter, exposing the plaintiff to civil penalties in any future enforcement action. Plaintiff argued that “as a direct result of the notice provided to it by the Letter, the [DOL] may treat its continued nonpayment of consignor-volunteers as a willful violation of DOL’s regulations, thereby subjecting the company to civil penalties.” The Court agreed with plaintiff that the “new exposure to civil penalties” “constitutes a legal consequence that renders the Letter final agency action.” Its conclusion was premised on the DOL recounting in the Letter “the regulation’s provision for repeated or willful violations of minimum wage or overtime obligations, advising that, although ‘[n]o penalty is being assessed as a result of this investigation,’ [plaintiff] ‘will be subject to [the FLSA’s] penalties’ if it ‘at any time in the future… is found to have violated the monetary provisions of the FLSA.”

The Court concluded that this would expose the plaintiff, if it continued not to pay consignor-volunteers after it received the Letter, to claims by the DOL that it willfully violated the FLSA. The Court noted that the Letter “gave no indication that other facts and circumstances could mitigate the stated effect of the company’s receipt of the Letter.” The Court further confirmed that “[t]he possibility that the [DOL] might not bring an action for penalties or, if it did, might not succeed in establishing the underlying violation did not rob the administrative order in Sackett of its legal consequences, nor does it do so here.” The case was remanded for further proceedings.

As noted above, this decision could have significant implications with respect to whether certain communications are “final” for purposes of obtaining pre-enforcement judicial review to manage risks and exposure to civil penalties, especially where willfulness may be a factor in any assessment of civil penalties.