Grand jury instructions
BOTTOM LINE: Where grand jury was improperly instructed that the acting-on-advice-of-counsel defense was irrelevant at the charging stage of the proceeding, there was grave doubt that the grand jury’s decision to indict was free from the substantial influence of the erroneous legal instruction.
CASE: United States v. Stevens, No. RWT 10cr0694 (filed March 23, 2011) (Judge Titus). RecordFax No. 11-0323-40, 19 pages.
FACTS: Lauren Stevens was formerly the Vice President and Associate General Counsel of GlaxoSmithKline (GSK). On Oct. 29, 2002, the FDA sent a letter to GSK stating that the FDA had recently received information indicating that GSK had possibly promoted the anti-depressant drug Wellbutrin for weight loss, a use not approved by the FDA. The FDA asked GSK to provide it with materials related to Wellbutrin promotional programs sponsored by GSK, including copies of all slides, videos, handouts, and other materials presented or distributed at any GSK program or activity related to Wellbutrin.
Stevens was in charge of the response to the inquiry and led a team of lawyers and paralegals who gathered documents and information. In responding to the FDA’s inquiry, Stevens was also assisted outside counsel.
In November 2010, Stevens was indicted on multiple counts with regard to the FDA investigation. It was alleged that Stevens obstructed the FDA’s investigation by withholding and concealing documents and other information about GSK’s promotional activities for Wellbutrin, including for unapproved uses, while representing to the FDA that she had completed her response to its inquiry, and that Stevens falsified and altered documents in order to impede the investigation. In particular, it was alleged that Stevens withheld slide sets used by speakers at GSK promotional events that promoted off-label use of Wellbutrin and withheld information regarding compensation received by attendees at promotional events. The government further alleged that Stevens signed and sent to the FDA six letters containing materially false statements regarding promotion of Wellbutrin for off-label uses.
Stevens’ primary defense to the charges in the indictment was that she relied in good faith on the advice of counsel in responding to the FDA’s inquiry, and that such reliance negated the requisite intent to obstruct the FDA’s investigation or to make false statements. A grand juror asked one of the government prosecutors about the legal implications of Stevens’ reliance on the advice of others in responding to the FDA. The government instructed the grand juror that advice of counsel was not relevant to the decision to indict, but rather was an issue to be raised in defense at trial.
The government moved to preclude Stevens from asserting good faith reliance on the advice of counsel as a defense to the charge of falsification and concealment of documents. The government also filed a motion in limine to exclude evidence regarding the opinions of other in-house and outside counsel that were not expressed to Stevens at the time of GSK’s response to the FDA’s inquiry regarding whether they viewed GSK’s responses to be appropriate and not misleading.
Stevens filed eight pretrial motions, including a motion to dismiss the indictment on the basis that the jury instruction on advice of counsel was incorrect, and that there was grave doubt that the decision to indict was free from the substantial influence of the erroneous legal instruction.
The district court granted Stevens’ motion to dismiss the indictment.
LAW: Though often referred to as the “advice of counsel defense,” good faith reliance on the advice of counsel is not an affirmative defense, but instead negates the element of wrongful intent of a defendant that is required for a conviction. See United States v. Peterson, 101 F.3d 375, 381 (5th Cir. 1996). An affirmative defense is a “defendant’s assertion of facts and arguments that, if true, will defeat the plaintiff’s or prosecution’s claim, even if all the allegations in the complaint are true.” Black’s Law Dictionary 482 (9th. ed. 2009). By contrast, the advice of counsel “defense” negates the defendant’s wrongful intent, and therefore demonstrates an absence of mens rea.
In this case, to the extent that Stevens relied in good faith on the advice of counsel in responding to the FDA’s inquiries, such reliance would negate the government’s charge that she falsified and concealed documents with the intent to impede, obstruct, or influence the FDA’s investigation into the marketing of Wellbutrin. Stevens’ good faith reliance on advice of counsel would also negate the wrongful intent required to convict Stevens of making false statements under 18 U.S.C. §1001, which requires a defendant to act “knowingly and willfully,” and of obstructing justice under 18 U.S.C. §1512, which requires a defendant to act “knowingly…corruptly.”
Because good faith reliance on the advice of counsel negates the mens rea required for conviction on all counts of the indictment, it was necessary to closely scrutinize the government’s instruction to the grand jury regarding the advice of counsel defense.
The grand jury is charged with the dual responsibilities of determining whether there is probable cause to believe a crime has been committed, and protecting citizens against unfounded criminal prosecutions. United States v. Calandra, 414 U.S. 338, 343 (1974). In this way, the grand jury serves as the “protector of citizens against arbitrary and oppressive government action.” Id. The Government is not required to present exculpatory information to the grand jury. United States v. Williams, 504 U.S. 36 (1992). The Government is also not required to anticipate and present all of a defendant’s affirmative defenses to the grand jury. United States v. Gardner, 860 F.2d 1391, 1395 (7th Cir.1988). However, where a prosecutor’s legal instruction to the grand jury seriously misstates the applicable law, the indictment is subject to dismissal if the misstatement casts “grave doubt that the decision to indict was free from the substantial influence” of the erroneous instruction. United States v. Peralta, 763 F.Supp. 14, 21 (S.D.N.Y.1991).
In United States v. Peralta, a highly analogous case, the district court dismissed an indictment after finding that the prosecutor improperly instructed the grand jury regarding the elements of constructive possession by failing to explain that constructive possession required that a defendant “knowingly ha[ve] the power and the intention at a given time to exercise dominion and control over the object,” in this case a gun and drugs. Id. at 19. Instead, the prosecutor erroneously stated that constructive possession could be shown by mere availability or accessibility, without the required elements of knowledge and intent. Id. at 19-20. The Peralta court held that the prosecutor did not merely fail to instruct the grand jury on a question of applicable law, but rather relied on misleading statements on the meaning of constructive possession. Id. at 20. This misstatement of law left “grave doubt that the decision to indict was free from the substantial influence” of the prosecutor’s erroneous instruction. Id. at 21.
In this case, the government’s instruction to a grand juror that advice of counsel was not relevant to the decision to indict, but rather was an issue to be raised in defense at trial, was clearly erroneous because it incorrectly indicated that the advice of counsel defense was not relevant at the charging stage. One prosecutor stated that “the advice of counsel defense…is a defense that a defendant can raise, once the defendant has been charged.” The second prosecutor reinforced the statement that the advice of counsel was irrelevant at the charging stage by stating that “while [the advice of counsel defense] can be relevant at trial…if you find probable cause for the elements here that the attorney Lauren Stevens reasonably knew that she was making false statements and the elements [of the crime], then that’s sufficient to find probable cause.” The grand jurors were thus instructed erroneously that the advice of counsel was irrelevant to a determination of whether there was probable cause to indict Stevens.
Because good faith reliance on the advice of counsel negates a defendant’s wrongful intent, this defense was highly relevant to the decision to indict. A proper instruction would have informed the grand jurors that if Stevens relied in good faith on the advice of counsel, after fully disclosing to counsel all relevant facts, then she would lack the wrongful intent to violate the law and could not be indicted for the crimes charged in the proposed indictment.
The grand jury was well aware of Stevens’ role as the leader of a team of lawyers and paralegals, and the question regarding her reliance on the advice of counsel was a natural one that arose out of her status. Thus, the question went to the heart of the intent required to indict. The incorrect answer either substantially influenced the decision to indict or, at the very least, created grave doubts as to whether the decision to indict was free from the substantial influence of the improper advice of counsel instruction.
Accordingly, dismissal of the indictment was appropriate and required in the interests of justice.
COMMENTARY: Good faith reliance on the advice of counsel is relevant only to specific intent crimes because such reliance demonstrates a defendant’s lack of the requisite intent to violate the law. United States v. Miller, 658 F.2d 235, 237 (4th Cir. 1981).
Here, the government argued that 18 U.S.C. §1519 was a general intent crime, and that therefore Stevens’ good faith reliance on advice of counsel was irrelevant to a determination of her guilt as to the count of falsification and concealment of documents.
Section 1519 provides: “Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”
The court’s analysis was guided by Arthur Andersen LLP v. United States, 544 U.S. 696 (2005), which interpreted 18 U.S.C. §1512(b)(2)(A), a similar obstruction statute. Section 1512(b)(2)(A) provides, in relevant part: “Whoever knowingly uses intimidation or physical force, threatens, or corruptly persuades another person, or attempts to do so, or engages in misleading conduct toward another person, with intent to…cause or induce any person to…withhold testimony, or withhold a record, document, or other object, from an official proceeding [or] alter, destroy, mutilate, or conceal an object with intent to impair the object’s integrity or availability for use in an official proceeding…shall be fined under this title or imprisoned not more than ten years, or both.”
The Court held that the most natural reading of the statute was one in which the word “knowingly” modifies “corruptly persuades.” Andersen, 544 U.S. at 705-706. The Supreme Court held that one could not “knowingly…corruptly persuad[e]” another person with intent to cause that person to withhold documents from, or alter documents for use in, an official proceeding without being conscious of his wrongdoing. Andersen, 544 U.S. at 705-706. The Supreme Court stated that “limiting criminality to persuaders conscious of their wrongdoing sensibly allows §1512(b) to reach only those with the level of culpability usually required to impose criminal liability.” Id.
As in Arthur Andersen, the most natural, grammatical reading of §1519 is one in which the word “knowingly” modifies “with intent to impede, obstruct, or influence.” The mens rea of §1519 is not just “knowingly” but rather “knowingly…with intent to impede, obstruct, or influence,” a mens rea clearly requiring consciousness of wrongdoing. One cannot be said to knowingly alter, conceal, cover up, falsify, or make false entry in any record or document with intent to impede, obstruct, or influence an investigation or administration of a matter within the jurisdiction of a federal agency unless it is that individual’s intent to do that which is wrongful.
As with 18 U.S.C. §1512, the most reasonable reading of §1519 is one which imposes criminal liability only on those who were conscious of the wrongfulness of their actions. To hold otherwise would allow §1519 to reach inherently innocent conduct, such as a lawyer’s instruction to his client to withhold documents the lawyer in good faith believes are privileged. Any other interpretation of § 1519 would ignore the admonition of the Supreme Court in Arthur Andersen that criminal liability ordinarily may be imposed only on those with consciousness of their wrongdoing.
Because the §1519 is a specific intent crime, proof of Stevens’ good-faith reliance on the advice of counsel would negate her wrongful intent on that count. Accordingly, the government’s Motion to Preclude the Advice of Counsel Defense was denied.
PRACTICE TIPS: The federal criminal statute which prohibits the knowing alteration, destruction or falsification of documents with the intent to impede or obstruct the investigation of a United States federal agency does not apply only to preexisting documents. The statute applies equally to one who takes a pre-existing document and adds or deletes information from it to make it false, and to one who creates a false document.
Labor & Employment
BOTTOM LINE: District court held that an insurer could not be subject to penalties unless the insurer falls within ERISA’s definition of a plan administrator and that, in any event, penalties were not warranted based on the insurer’s failure to disclose an internal policy manual to the plaintiff.
CASE: Flores v. Life Insurance Company of North America, Civil No. L-10-0098 (filed March 17, 2011) (Judge Legg). RecordFax No. 11-0317-40, 13 pages.
FACTS: In July 2007, Carolyn Flores, proceeding pro se, applied for short term disability benefits (STD) from an employee benefits plan sponsored and administered by her employer, Bechtel Corporation. Defendant Life Insurance Company of America (LINA) was the plan’s insurer. LINA reviewed Flores’ claim and found that she was entitled to STD for a three-week period. Because it concluded that Flores did not have a continuing disability, it did not pay further benefits. Flores took an administrative appeal from this decision but did not prevail. In May 2008, she returned to work on a part-time basis.
In September 2008, Scott Elkind, an experienced employee benefits attorney, began representing Flores. On Sept. 25, Elkind requested that LINA produce certain documents related to Flores’ claim. Among other things, Elkind requested copies of all internal claim procedures, training instructions, protocols, other instructional or guiding materials or internal memoranda used, or referred to during the course of the review of employee benefit claims. The request specifically referenced the claim and policy numbers for Flores’ claim for STD.
LINA produced several documents in response to Elkind’s request, but stated that it would not produce its internal manuals because they were “proprietary copyrighted material.” Flores then sent a second letter in which she stated that LINA had failed to meet its production obligations and reiterated her request for the internal manuals.
LINA sent additional materials, but not manuals, to Flores and gave her the opportunity to renew her appeal of its decision to deny her claim for STD. Flores filed her renewed appeal by letter dated Dec. 26, 2008, stating that she was submitting additional medical, functional capacity, and vocational documentation in support of the long term disability claim. The letter specifically referenced the claim and policy numbers for Flores’ claim for STD.
LINA rejected Flores’ renewed appeal, stating that the supplemental information she had provided was irrelevant. Flores then filed her renewed appeal a second time. LINA accepted the renewed appeal and referred Flores’ case for a new medical review. LINA continued to view Flores’ claim as for STD only and it denied her claim once again.
In January 2010, Flores filed suit in the district court. Although the caption of Flores’ complaint named both the short-term and long-term Bechtel plans as defendants, the complaint did not specify whether Flores was seeking short term disability, long term disability, or both.
Flores did not file a formal administrative claim for LTD until May 7, 2010, after which LINA moved to dismiss, contending that Flores had failed to exhaust her LTD claim. Flores opposed the motion and moved for statutory penalties. She argued that by failing to disclose the “STD to LTD Transition” portion of its claim manual, LINA had failed to meet its disclosure obligations under ERISA.
LINA agreed to pay Flores a full STD award and LTD for the period of December 2007 through September 2008. The parties then jointly informed the Court that although they had resolved the merits of the dispute, Flores would nevertheless pursue her Motion for Penalties and also file a Motion for Attorney’s Fees.
The district court denied Flores’ Motion for Penalties, and granted in part and denied in part the Motion for Fees.
LAW: Under the plain language of ERISA, civil penalties can be imposed only upon a plan administrator. See 29 U.S.C. §1132(c)(1). ERISA defines the administrator as “(i) the person specifically so designated by the terms of the instrument under which the plan is operated; (ii) if an administrator is not so designated, the plan sponsor; or (iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.” §1002(16)(A).
Here, it was undisputed that Bechtel was the designated plan administrator. Nevertheless, Flores argued that penalties could be assessed against LINA because it acted as a “de facto” plan administrator, in that LINA not only underwrote the plan but also reviewed claims for benefits.
Although other Circuits have done so, the Fourth Circuit has not yet endorsed the “de facto” administrator doctrine. See, e.g., Rosen v. TRW, Inc., 979 F.2d 191, 193-94 (11th Cir. 1992). Rather, the law in the Fourth Circuit is that a court cannot impose penalties on an insurer unless the insurer falls within ERISA’s definition of a plan administrator. Coleman v. Nationwide Life Ins. Co., 969 F.2d 54, 62 (4th Cir. 1992).
The Fourth Circuit has explained that an insurer does not become a plan administrator simply because it “has administrative responsibilities with respect to the review of claims under the policy.” Id. In Sentara Virginia Beach General Hosp. v. LeBeau, 182 F. Supp. 2d 518 (E.D. Va. 2002), an insurer moved to dismiss the plaintiff’s claim for penalties, contending that it was not the plan administrator. Although the court denied the insurer’s motion, it also declined to apply the “de facto” administrator doctrine. Id. at 526.
Here, in the absence of authority compelling it to do so, the district court likewise declined to adopt the “de facto” administrator doctrine. Because it was undisputed that Bechtel, not LINA, was the designated plan administrator, only Bechtel could be subject to a penalty for the alleged disclosure violations.
Nevertheless, assuming arguendo that a penalty could be assessed against LINA, the district court considered whether a penalty was warranted under the facts of the case. Flores requested the documents at issue so that she could prepare her renewed appeal. C.F.R. §2560.503-1(h) addresses the procedures a plan must follow when a claimant appeals an adverse determination. Upon request, the plan administrator must provide the claimant with copies of “all documents, records, and other information relevant to the claimant’s claim for benefits.” §2560.503-1(h)(2)(iii).
LINA’s Transition Manual stated, in pertinent part, that a claim “should be escalated to the LTD Case Manager when it becomes clear that a return to work may not or will not occur prior to the STD Termination Date.” Flores contended that, under the terms of the manual, LINA was required to refer her claim for LTD because she did not return to work until after her STD benefits terminated. Therefore, although it was undisputed that LINA did not rely on the Transition Manual while resolving Flores’ claim, Flores argued that the manual was relevant insofar as it constituted a “statement of policy or guidance” with respect to the administration of STD and LTD benefits. §2560.503-1(m)(8)(iv).
On the other hand, two parts of the Transition Manual supported LINA’s contention that the Manual was inapplicable to Flores’ claim because the manual was relevant only to cases in which the claimant had received STD for the maximum amount of time allowable under the plan. First, a sample “STD to LTD Escalation Letter” in the manual informs the sample claimant that her STD claim will be transitioned to LTD because she has exceeded “the maximum period of time that STD benefits are payable under your policy/contract.” Second, the referral protocol portion of the manual instructs the claim manager for the STD claim to “set repetitive pay until the end of the claim, or as far ahead as possible and diary to update.”
Thus, the connection between the Manual and Flores’ claim was tenuous at best. Flores received STD for a limited period of time. In LINA’s eyes, even though Flores did not return to work until May 2008, Flores’ claim for STD had not expired and, therefore, it need not have been referred for LTD. As such, LINA’s argument was more persuasive, and the Court found that LINA was not required to produce the manual.
Moreover, even if LINA had been obligated to produce the manual, the penalty analysis favored the defendant. In determining whether to impose a penalty, the court must consider several factors, including: (i) prejudice to the plaintiff; (ii) the nature of the administrator’s conduct in responding to the participant’s request for plan documents; and (iii) frustration, trouble, and expense incurred by the plaintiff. Davis v. Featherstone, 97 F.3d 734, 738-39 (4th Cir. 1996).
In this case, there was no evidence that LINA acted in bad faith by failing to produce the Manual. Rather, LINA denied continuing STD because it concluded that Flores did not have a continuing disability. The Manual was silent on this issue. Although Flores had not yet returned to work when she requested the Manual, she also had not exhausted her STD benefits. LINA, therefore, reasonably concluded that she was not eligible for LTD and, therefore, that the Manual was irrelevant to her appeal.
Finally, Flores suffered no prejudice from Bechtel’s failure to disclose the Manual. In response to Flores’ first request for documents, LINA produced a copy of the summary plan description (SPD), which provided, in pertinent part: “If you filed and are receiving STD, you will automatically receive an LTD claim form and filing information when you enter your fourth month of disability. If you do not receive this information or you did not file and receive STD, you will need to contact the Bechtel employee Service Center…”
Thus, Flores was on notice that she had to contact LINA if she wanted to pursue a claim for LTD. By contrast, the Manual, which set forth LINA’s internal policies, contained no information that would have assisted Flores in either preparing her appeal or filing a claim for LTD. Therefore, Flores suffered no prejudice.
Accordingly, Flores’ Motion for Penalties was denied.
COMMENTARY: Flores also sought to recover the attorney’s fees. Pursuant to 29 U.S.C. §1132(g)(1), the court in its discretion may award fees to a party in an ERISA action who achieves “some degree of success on the merits.” Williams v. Metro. Life Ins. Co., 609 F.3d 622, 634 (4th Cir. 2010).
LINA argued that Flores was not entitled to fees because she obtained all of her relief through the administrative process. See Rego v. Westvaco Corp., 319 F.3d 140, 150 (4th Cir. 2003). Although Flores did not request any attorney’s fees for work done in the administrative process, LINA argued that an award of fees would be improper because Flores never achieved any success in the instant suit.
However, an ERISA claimant need not fully litigate her claims to receive an award of attorney’s fees. See, e.g., Hackett v. Standard Ins. Co., No. CIV. 06-5040-JLV, 2010 WL 5068098, *3-4 (D.S.D. Dec. 7, 2010). In Hackett, the claimant and the defendant stipulated to the payment of benefits and left the issue of attorney’s fees and costs to the court. Ultimately, the court concluded that an award of fees was proper, reasoning that Hackett had achieved a settlement that amounted to a “complete victory — the very prayer for relief which she sought by her original complaint.” Id.
Here, Flores achieved a similar degree of success because LINA awarded her full STD and partial LTD. Although Flores technically prevailed in the administrative arena, this litigation was the catalyst for LINA’s decision to award her benefits, and LINA admitted that it did not invite Flores to file a claim for LTD until after she filed suit. Thus, Flores, like the claimants in Hardt and Hackett, achieved the very prayer for relief which she sought by her original complaint, and an award of fees could be appropriate, depending on the circumstances.
In deciding whether to make an award of attorney’s fees, the court must consider five factors: (1) any bad faith by the opposing party; (2) the ability of the opposing party to satisfy an award of attorney’s fees; (3) whether an award of attorney’s fees would deter other persons acting under similar circumstances; (4) whether the requesting party sought to benefit all participants in a plan or to resolve a significant question of law regarding ERISA itself; and (5) the relative merits of the parties’ positions. Williams, 609 F.3d at 635. Although none of these factors is decisive, “they constitute the nucleus of the inquiry.” Cox v. Reliance Standard Life Ins. Co., 179 F. Supp. 2d 630, 633 (E.D. Va. 2001).
Flores’ counsel devoted the majority of his argument on these points to whether LINA acted in bad faith by withholding its claim manual. Given the court’s conclusion that LINA was not obligated to disclose the Manual, this argument carried little weight, but an award of attorney’s fees was nevertheless proper. In short, this suit prompted LINA to reconsider an earlier denial that must be considered erroneous. Thus, the suit was the catalyst in securing benefits for Flores and in correcting LINA’s original error. Further, Elkind managed to achieve a complete victory for Flores without having to litigate the case to the end.
Under these circumstances, an award of attorney’s fees was proper.
PRACTICE TIPS: In concluding that a party is entitled to attorney’s fees, the court must first decide the reasonable hourly rate that should be applied. This determination is made by assessing the attorney’s experience and skill, and comparing his rate to the rates charged by lawyers of reasonably comparable skill, experience, and reputation. The fee must be proportional to the type of litigation and the amount at stake.
Labor & Employment
Fair Labor Standards Act
BOTTOM LINE: An owner-employee of two taverns was prohibited from participating in tip pools, despite the fact that he worked as a bartender at the two establishments.
CASE: Gionfriddo v. Jason Zink, LLC, Civil Action No. RDB-09-1733 (filed March 11, 2011) (Judge Bennett). RecordFax No. 11-0311-40, 22 pages.
FACTS: Jason Zink was the owner and operator of two taverns, the Don’t Know Tavern and the No Idea Tavern, both located in Baltimore City. Zink was the sole owner of both JR Zink, Inc., a Maryland corporation that owned the No Idea Tavern, and Jason Zink, LLC, a Maryland limited liability company that owned the Don’t Know Tavern. Zink possessed management authority and generally supervised and controlled the two taverns. In addition to operating and supervising the taverns, Zink worked as a bartender at the two establishments.
As a bartender, Zink received tips from tavern patrons and contributed those tips to a collective pool that was subsequently divided up among the bartenders according to a formula which took into account the number of hours worked by each bartender. Zink shared in the tip pool with the other bartenders according to the formula. Although Zink had received modest distributions from his tavern businesses, he did not take a salary from either entity, and his share of the tip pool was his primary mode of compensation from the businesses.
Plaintiffs Tara Gionfriddo, Eric Gilbert, Aaron Zetzer, and Astrid Garrison were former employees of the taverns. With the exception of Garrison, who was employed as a sous chef at Don’t Know, the plaintiffs formerly worked as bartenders. Gionfriddo, Gilbert, and Zetzer filed a collective action against Zink for alleged unlawful wage and hour practices pursuant to the Fair Labor Standards Act (FLSA) and the Maryland Wage Payment and Collection Law. The plaintiffs alleged that as the owner of the taverns, Zink was prohibited under the FLSA from retaining any tips from the bartender pool, and that they were unlawfully deprived of wages as a result of Zink’s participation in the tip pools. Brian Emar, a former bartender at both taverns, joined the action as an opt-in plaintiff. Emar claimed that during the time he worked at the taverns, he received no wages at all aside from the tips he retained after the tip pool was divided amongst the bartenders. Garrison’s claims centered on the argument that she did not receive proper overtime and regular wage compensation.
The district court found that Emar and Garrison were not “similarly situated” to the other plaintiffs and that their claims were not properly brought in this collective action, granting Zink’s motion for decertification as to these two plaintiffs.
The district court also found that, as an owner-employee of the taverns, Zink was prohibited from participating in tip pools, and granted the plaintiffs partial summary judgment on that issue.
LAW: The FLSA was enacted to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” Pub.L. No. 75-718, 52 Stat. 1060 (1938) (codified as amended at 29 U.S.C. §§201 et seq.). To effectuate this aim, the FLSA requires that employees be paid a minimum wage of $7.25 per hour. §206(a)(1)(c). An exception exists for “tipped employees.”
Tipped employees are those employees that are engaged in an occupation in which they customarily and regularly receive more than $30 per month in tips. §203(t). Those employees are required to receive at least the minimum wage, but their employers are permitted to pay a direct wage of $2.13 per hour and then take a “tip credit” to meet the $7.25 per hour minimum wage requirement. §203(m). In other words, an employer satisfies the FLSA if he pays his tipped employees at least $2.13 per hour, and that wage, in conjunction with the tips they receive, make up at least the $7.25 per hour minimum wage.
Employees are permitted to share tips through pooling arrangements so long as each employee customarily receives more than $30 per month in tips. §531.54. However, if tipped employees are required to participate in a pool with other employees who do not customarily receive tips, then the tip pool is invalid and the employer is not permitted to take a tip credit. Wajcman v. Inv. Corp. of Palm Beach, 620 F.Supp.2d 1353, 1356 n.3 (S.D.Fla. 2009).
Here, although Zink was an “employer” as defined under §203(d), he participated in the tip pool. The parties agreed that bartending is typically a tipped occupation. The parties disagreed, however, on the question of whether an “employer” may also be a “tipped employee” and receive a share of the tip pool.
Although this question was an issue of first impression in this district and in the Fourth Circuit, it has been considered by courts in other districts. Every court that has considered the issue has unequivocally held that the FLSA expressly prohibits employers from participating in employee tip pools.
“Congress, in crafting the tip credit provision of section 3(m) of the FLSA did not create a middle ground allowing an employer both to take the tip credit and share employees’ tips.” Chung v. New Silver Palace Restaurant, Inc., 246 F.Supp.2d 220, 230 (S.D.N.Y.2002). In some close circumstances, it is, at least theoretically, possible for a person to be an employer under the FLSA and at the same time share in a tip pool.
However, the present case was not a close case. Zink was the sole owner of both taverns, and was unquestionably an “employer” under the FLSA. Thus, it was unnecessary to evaluate the extent of Zink’s bartending activities because it would be anathema to the purpose behind the FLSA to simultaneously allow Zink to take tips from a collective tip pool that was set up to allow him to pay his employees at a rate substantially below the minimum wage. As the sole owner of the taverns, Zink was essentially the sole beneficiary of the “tip credit” provision of the FLSA. As such, he was prohibited from participating in the tip pool at the taverns. A contrary finding, allowing an owner to participate in a tip pool, would broaden the FLSA’s tip credit provisions to a point where they would become meaningless.
Accordingly, plaintiffs were granted partial summary judgment.
COMMENTARY: Under the FLSA, a plaintiff may bring an action on behalf of himself and other employees so long as the other employees are “similarly situated” to the plaintiff. §216(b). A two-step inquiry is employed in deciding whether to certify a collective action under the FLSA. First, upon a minimal evidentiary showing that a plaintiff can meet the substantive requirements of §216(b), the plaintiff may proceed with a collective action on a provisional basis. Second, following discovery, the court engages in a more stringent inquiry to determine whether the plaintiff class is “similarly situated” in accordance with the requirements of §216, and renders a final decision regarding the propriety of proceeding as a collective action. Rawls v. Augustine Home Health Care, Inc., 244 F.R.D. 298, 300 (D.Md.2007).
The second, more “stringent” phase of collective action certification under the FLSA is often prompted by a defendant’s filing of a motion to decertify, and is often referred to as the “decertification stage.” See Syrja v. Westat, Inc., — F.Supp.2d —-, 1956 WL 95230, at *3. In this case, the action was conditionally certified as a collective action brought under the FLSA. However, the defendants filed a motion to decertify the collective action on the ground that some of the plaintiffs were not similarly situated. As such, the court undertook the second, and more stringent, prong of the certification analysis.
The central issue in this case was Zink’s participation in the tip-pooling arrangement. Gionfriddo, Gilbert, and Zetzer, all former bartenders at the taverns, had identical claims. Thus, they were similarly situated, as their claims all rested on the same facts and common questions of law. See Marroquin v. Canales, 236 F.R.D. 257, 260 (D.Md. 2006).
In contrast, the claims made by plaintiffs Emar and Garrison had nothing to do with Zink’s participation in the tip pool. Emar, a former bartender, did not specifically contend that he was owed wages as a result of Zink’s participation in the tip pool, but rather that he was owed back wages because he had never been paid any wages at all. Given the marked difference between Emar’s claims and the claims of the other bartender plaintiffs, the collective action was not the proper vehicle for Emar’s claims. Meanwhile, Garrison, a chef, was unquestionably never part of a tip pool; Garrison claimed that she was denied overtime and was therefore owed unpaid wages. Since Garrison’s claims were also wholly unrelated to the bartenders’ claims, she was not a “similarly situated” party.
Accordingly, Zink’s Motion to Decertify was granted with respect to Emar and Garrison.
PRACTICE TIPS: To be protected by the Fair Labor Standards Act, an employee must be employed in an enterprise “engaged in commerce,” meaning that the enterprise must have annual gross revenues of $500,000 or more. Two or more businesses may constitute a “single enterprise” if they conduct related activities, performed under unified operations or common control, for a common business purpose. Thus, a plaintiff seeking to bring a claim under the FLSA may satisfy the $500,000 limitation by showing that two businesses were a “single enterprise” and that their combined revenues exceeded the statutory limitation.