It is common for one or more named plaintiffs to bring a wage and hour lawsuit as a putative class or collective action but then settle with the defendant-employer on an individual basis.  This may happen because the named plaintiffs and defendant settle before a class certification motion is brought.  It may also happen because the named plaintiffs are unsuccessful in obtaining class certification or initially obtain class certification only to see the court decertify the class after further discovery. 

When a defendant agrees to a settlement with just the named plaintiffs, it understands that the settlement only buys peace of mind with respect to the named plaintiffs’ claims and that members of the uncertified or decertified putative class may later file a separate lawsuit.  What a defendant typically expects from such a settlement, though, is that it ends the lawsuit with the named plaintiffs.  The Seventh Circuit, however, recently found that a settlement with the named plaintiffs after the class and collective were decertified did not buy a final resolution of the named plaintiffs’ lawsuit.  Although the court’s ruling is cabined by the specific circumstances of the underlying case, it serves as another reminder for employers to take great care in negotiating and constructing a settlement agreement in a putative class or collective action.

In Espenscheid et al. v. DirectSat USA, LLC and UniTek USA, LLC, the parties engaged in a long-fought battle involving claims of off-the-clock work in violation of the Fair Labor Standards Act and the wage and hour laws of three states.  The FLSA claims were conditionally certified as a collective action, and the state-law claims as a Rule 23 class action.  More than a year later, the court decertified both the collective and class actions and dismissed the collective and class members’ claims without prejudice.  None of the collective or class members subsequently sought to become named plaintiffs; thus, only the three named plaintiffs’ claims remained for trial.  On the eve of trial, the parties settled and jointly stipulated to the dismissal of the named plaintiffs’ claims with prejudice. 

While the settlement agreement is not publicly available, the parties’ joint stipulation of dismissal with prejudice described the settlement agreement as providing “for dismissal with prejudice of the Plaintiffs’ claims, without waiver of any appellate rights the Plaintiffs may possess regarding the certification and decertification orders in this action including, to the full extent allowed by law, the rights of the individual Plaintiffs to seek enhancement payments … should this matter be allowed to proceed as a class and/or collective action.”  Confident that this provision of the settlement permitted an appeal of the decertification order, the named plaintiffs filed a notice of appeal of the final judgment decertifying the class and collective actions. 

The defendants moved to dismiss the appeal. The defendants argued that the named plaintiffs had stipulated to dismissal of their claims with prejudice and had received full compensation for their claims.  As a result, there was no longer a case or controversy between the parties to the lawsuit, and the plaintiffs lacked a personal stake (or “standing”) as to the decertification decision.  The defendants argued that the parties never agreed to the named plaintiffs actually receiving “enhancement payments” and that the mere possibility of enhancement payments could not confer standing any more than would placing a bet on the outcome of a case.

The Seventh Circuit disagreed with the defendants and, in a decision on August 6, 2012, denied their motion to dismiss the appeal.  The Seventh Circuit did not focus its analysis on the reservation of appellate rights but instead found that the prospect of enhancement payments (a/k/a “incentive rewards”) gave the named plaintiffs a remaining personal stake in the litigation.  It reasoned that the prospect of incentive rewards for the named plaintiffs was “akin to a damages payment agreed in a settlement to be contingent on the outcome of the appeal; and the prospect of such a payment, though probabilistic rather than certain, suffices to confer standing.”  The court analogized the possible incentive rewards to plaintiffs’ counsel’s receipt of attorneys’ fees and to a relator’s share of the government’s recovery in a qui tam lawsuit for services rendered.  Just as for plaintiffs’ counsel or a relator, the Seventh Circuit deemed the named plaintiffs’ financial stake in an outcome favorable to putative class members sufficient to incentivize their provision of adequate representation of the putative class members and, thus, to confer standing on the named plaintiffs. 

The Seventh Circuit concluded its analysis with the justification that allowing the appeal to proceed would serve the interest of judicial economy because, if the named plaintiffs were to “exit the scene” after settling their individual claims, a putative class member could “step forward and take the quitters’ place.”

The Seventh Circuit’s decision in Espenscheid does not mean that settlements with named plaintiffs cannot effectively resolve uncertified or decertified wage and hour class or collective actions, but its decision should serve as a cautionary tale for employers and their counsel in negotiating settlements with named plaintiffs.  Employers should consider carefully whether to agree to incentive rewards (or the possibility of such rewards), particularly if they are not expressly tied and limited to services the named plaintiffs have already provided in advance of settlement.  And, while the Seventh Circuit did not appear to be swayed by the settlement agreement’s reservation of plaintiffs’ appellate rights, employers should consider carefully what, if any, appellate rights they will agree to be reserved rather than waived by the plaintiffs as part of a settlement.