New Federal Court Ruling Backs Class Action Defendants

By Dan Pipitone and Amber Karns

The hotel and hospitality business sector in general is unique under the law for industry professionals, as they’re typically limited to wage and hour litigation governed by the provisions of the Fair Labor Standards Act (FLSA). The majority of FLSA cases seek class action status or collective classification, while other FLSA litigation is initiated by individuals seeking damages. For instance—for the former, past and current employees can opt into class action litigation and seek collective damages against hoteliers. The looming financial burden of class action or collective litigation directed against hotel owners can end up consuming time, money and resources. Often in such scenarios, it often becomes advisable for defendants to negotiate a rushed and unfair settlement.

Yet, thanks to a recent federal court decision on March 27, the legal maneuvering behind unreasonable plaintiff demands may soon be counterbalanced by the class action defendants’ right to due process review. A recent legal opinion in a recent FLSA case has potentially wide-ranging implications for defendant employers mired in future class action litigation. Moreover, as the FLSA applies to all employers, this decision potentially applies to all ownership groups represented by the hotel and hospitality industry.

In Laney et al v. Clements Fluids Inc et al (6:18-cv-00497-JCB-KNM), a class action case pending in the United States District Court for the Eastern District of Texas, Tyler Division, the court recently considered novel arguments that the defendants would be summarily deprived of their due process rights, if the court declined to timely consider merit-based arguments that the four individuals pursuing the litigation and seeking class action or collective designation were without any viable claims against Clements Fluids, thereby negating their standing, which is critical to their ability to proceed as part of a class action. The court determined that a pretrial “fishing expedition” was improper, essentially declining to approve the class action status of the plaintiffs.

The court’s opinion reasons that hotel companies, in this case future class action defendants, are owed due process rights to merit-based claims withstanding court-sanctioned production and distribution of protected and privileged information. The decision potentially halts the breadth, scope and relevance of plaintiff class action certification demands for information when pursuing class action litigation. Plaintiffs’ previously unrestrained demands for sensitive and valuable class action-related information from defendants, which most in the extended hotelier industry world would—and should—consider proprietary. These demands will now be subjected to a heretofore unrecognized fundamental due process review as to their relevance, burden and importance to class action claims. Thus the playing field becomes balanced, with the defendants’ interests in keeping their proprietary information shielded from class action litigation demands. Bear in mind, the FLSA applies to all employers. The precedent this decision sets may pave the way for additional levels of protection, not just for ownership groups in the hotel industry, but other trade sectors such as manufacturing and technology, restaurants, construction, real estate, energy and health care companies—to name a few.

Before this landmark decision, courts have historically avoided merit-based, preliminary considerations of plaintiffs seeking class action or collective designation. Many plaintiffs’ lawyers aggressively pursued proprietary information from putative defendants during conditional class certification process, establishing routine “fishing expeditions” for information which could lead to additional litigants and clients. The “fishing expedition” was made possible by the pretrial disclosure enforced on defendant employers which required disclosure of the names and contact information of all employees, including those who no longer work for the company. Moreover, many defendants were forced to disclose customer lists, pricing, contracts, partnerships and other information-sensitive documentation to facilitate the discovery of potential claims and class members.

Prior to this ruling, defendant employers lacked any viable objection, defense or remedy to this wholesale court-sanctioned turnover of proprietary, trade secret and privileged information. Plaintiffs formerly needed only to show potential relevance for pre-litigation access to defendants’ critical information, furnished with only the barest of contractual protective orders. With the new due process review, defendants can for first time raise substantive objections to handing over valuable and privileged information and challenge class certification attempts.

While the burden and risk of exposure to a business enterprise remains with employers seeking to defend the claims of individuals pursuing class action litigation, this decision represents a monumental shift in judicial review of class action and class certification. The opinion provides precedent for employers seeking to avoid class certification in the litigation phase. Employers throughout the hotel and hospitality industry should be aware they now have the ability to cite a vital new precedent in seeking to avoid the burdensome legal expense and weight of a class action or collective classification. For owners, groups and organizations who make up the wide and diverse hotel industry, this new ruling could become an effective tool in avoiding premature, unwarranted and costly out-of-court settlement terms.

Dan Pipitone is a shareholder and leader in the Labor & Employment practice group in the law firm of Munsch Hardt. His practice includes the representation of both individuals and companies charged with violations of the Fair Labor Standards Act (FLSA) and his team successfully persuaded the court to hand down the landmark decision in this column, as well as a 2014 landmark decision in which he persuaded the court to establish independent contract exemption. He can be reached at [email protected]

Amber Karns is an associate in the Labor & Employment practice group in the law firm of Munsch Hardt. She has extensive experience representing clients in Fair Labor Standards Act (FLSA) collective actions and helped persuade the court to hand down the decision in this column. She can be reached at [email protected]  

This is a contributed piece to Hotel Business, authored by industry professionals. The thoughts expressed are the perspective of the bylined individuals.