This Littler Lightbulb highlights some of the more significant employment and labor law developments at the U.S. Supreme Court and federal courts of appeal over the last month.

At the Supreme Court

• Out-of-State Plaintiffs in FLSA Collective Actions. On March 6, 2023, the U.S. Supreme Court denied a petition to review Fischer v. Federal Express Corp., 42 F.4th 366 (2022), an FLSA collective action in which the Third Circuit upheld the district court’s refusal to allow individuals who worked for the defendant outside the forum state to opt in to the lawsuit. In so doing, the Court declined to settle the circuit split on whether its decision in Bristol-Myers Squibb Co. v. Superior Court of Cal., 137 S. Ct. 1773 (2017), a product liability action in which the Court limited the scope of federal court jurisdiction over out-of-state claims, applies to collective actions under the FLSA.

In Fischer, the Third Circuit joined the Sixth and Eighth Circuits holding that Bristol-Myers applies to FLSA collective actions and that, accordingly, federal courts may not exercise jurisdiction over claims by out-of-state opt-in plaintiffs in FLSA collective actions. In contrast, a divided First Circuit held in Waters v. Day & Zimmerman NPS, Inc., 23 F.4th  84, 97 (1st Cir. 2022) that out-of-state plaintiffs may join an FLSA collective action finding that the FLSA was designed to enable large-scale collective actions against companies operating in multiple states.  Specifically, the Court stated that “[i]nterpreting the FLSA to bar collective actions by out-of-state employees would frustrate a collective action's two key purposes: ‘(1) enforcement (by preventing violations and letting employees pool resources when seeking relief); and (2) efficiency (by resolving common issues in a single action).’"

In the Federal Appellate Courts

• Deductions from PTO Do Not Defeat FLSA Exempt Classification. In Higgins v Bayada Home Health Care, Inc., No. 21-3286 (3d Cir. Mar. 15, 2023), a case of first impression in the Third Circuit, the court held that paid time off (PTO) is not part of employees’ salary under the Fair Labor Standards Act (FLSA), and therefore deductions from PTO do not defeat employees’ classification as salaried exempt employees under the FLSA.  The employees in the case were registered nurses providing home healthcare services to patients in their homes. They were paid on a salary basis and awarded additional compensation when they exceeded weekly productivity minimums.  If they failed to meet their productivity minimums the employer deducted from their PTO.

The plaintiffs filed a collective action under the FLSA claiming the PTO deductions were inconsistent with their classification as salaried exempt employees under the FLSA. The district court granted summary judgment to the employer and the Third Circuit affirmed. The court stated that although neither the FLSA nor its regulations define the term salary, the regulations require that “an exempt employee...receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.”“An employer does not violate those conditions by deducting from an employee’s PTO,” the court held, “because, when an employer docks an employee’s PTO, but not her base pay, the predetermined amount that the employee receives at the end of a pay period does not change.”The Court continued that “[s]o long as the employer does not dock that pre-determined part of the employee’s compensation, the employer has satisfied the salary basis test.”

• Transfer to a Different Location or Department Not an Adverse Employment Action. The Eighth Circuit upheld summary judgment for the employer regarding a doctor’s claims that she suffered a hostile work environment, discrimination, retaliation and constructive discharge based on her gender. In support of her claims, in Bell v. Baptist Health, 60 F.4th 1198 (8th Cir. Feb. 28, 2023), plaintiff alleged that a male doctor with whom she worked screamed at her, made derogatory statements to her, threw a used syringe past her, and threatened to report her, and that a male co-worker stated that he wished the doctor “would not treat the women here differently than he treats the men.” Following an incident in which another doctor refused to work with plaintiff after she reported she believed he was intoxicated during a procedure, requiring him to undergo a breathalyzer test that proved the allegation was false, plaintiff was placed on paid administrative leave. She was offered the option of returning to work at another location or in a different department with the same duties, hours and pay. She refused and brought suit against the hospital.

As to her gender discrimination and retaliation claims, the Eight Circuit held that to establish a prima facie case for both claims plaintiff was required to establish, among other things, that she suffered an adverse employment action, which she failed to do.  Plaintiff could not show, the court found, that transferring to another location or department, under the circumstances the hospital offered, “would produce a material employment disadvantage.” As to the hostile environment claims, the court found insufficient evidence that the alleged conduct and discrimination by the male doctor was based on sex, dismissing as hearsay the alleged statement by the co-worker that the male doctor about whom plaintiff complained treated women differently than men. Finally, as to the constructive discharge claim the court found no evidence that the hospital intended to force the plaintiff to quit. In fact, the evidence showed that the hospital tried to retain her by giving her paid leave and offering to transfer her to a different location or department on the same terms and conditions.

• California AB 5’s Exclusion of App-Based Driver and Delivery Services Potentially an Equal Protection Violation. In Olson v. State of California, No. 21-55757 (9th Cir. Mar 17, 2023), app-based ride-hailing and delivery platform operators sought to enjoin enforcement of California Assembly Bill 5 (AB 5), as amended, which presumes workers are employees, not independent contractors, unless they meet all of the provisions of a three-part test or are exempt from the three-part test under one of the law’s many exemptions. Plaintiffs claimed the statute violated the Equal Protection, Due Process, Contract, and Bill of Attainder Clauses of the U.S. and California Constitutions by excluding them from the broad list of exemptions from the statute. 

The Ninth Circuit upheld the district court’s dismissal of plaintiffs’ due process, contract, and bill of attainder claims, but reversed the dismissal of the equal protection claims concluding that plaintiffs plausibly alleged that “exclusion from wide-ranging exemptions, including [exemptions] for comparable app-based gig companies, can be attributed to animus rather than reason.” In support of its conclusion, the court quoted a statement by the bill’s sponsor that she was “open to changes in the bill next year, including an exemption for musicians – but not for app-based ride-hailing and delivery giants.” In further support of its conclusion the court described the “piecemeal fashion in which the exemptions were granted,” and noted that other app-based companies that perform similar services were included in the exemptions.  Accordingly, the Ninth Circuit remanded the denial of the plaintiffs’ motion for a preliminary injunction to the district court for reconsideration. We will continue to monitor developments in this case.

• Enforcement of a Noncompete Agreement. In Stryker Employment Co. v. Abbas, 60 F.4th 372 (6th Cir. Feb 16, 2023), the Sixth Circuit upheld a preliminary injunction against a former employee of a spinal implant manufacturer who left the company to work for a direct competitor, in violation of a noncompete agreement. Stating that federal law defines the district court’s power to issue a preliminary injunction, the appellate court held that the district court correctly found the former employer established the necessary factors for a preliminary injunction: likelihood of success on the merits; likelihood of suffering irreparable harm in the absence of preliminary relief; that the balance of equities tips in their favor, and that an injunction is in the public interest.

As to the merits of the former employee’s claim that the preliminary injunction was an overly broad industry-wide ban, the court found that the preliminary injunction was completely consistent with the agreement that the former employee “willingly signed . . . in exchange for stock options,” and only precluded him “from working for a competitor if such work: (i) may result in the ‘application’ of [the company’s] purported Confidential Information; or (ii) overlap[s]with his [former] job responsibilities during the 24months preceding [his] separation.” Thus, the court held, the injunction served only to enforce the agreement’s legitimate noncompetition provision and was not an industry-wide ban.

The former employee also challenged a provision in the preliminary injunction that prohibited him from communicating with the attorneys representing the competitor for whom he sought to work or any other defendants in lawsuits involving his former employer.  That provision also expressly prohibited him from “otherwise disclosing any privileged or strategic information related to [his former employer] or its litigation strategies in those matters.”  These provisions, the former employer claimed, unduly restricted his choice of counsel.  Citing the district court’s finding that he was privy to confidential information that if disclosed to competitor’s counsel would detrimentally affect his former employer, the Sixth Circuit concluded that the prohibition was “an appropriate measure to protect Plaintiffs’ confidential and privileged information.”

In sum, the court concluded, “the balance of equities tips in Plaintiffs’ favor because they simply seek to enforce their contractual rights,” agreeing with the district court that “the public interest lies in enforcing contracts.”

• Termination of Employees Under an Expired Prehire Agreement Not an Unfair Labor Practice.  International Brotherhood of Boilermakers v. NLRB, No. 21-1209 (D.C. Cir. Mar. 7, 2023) involved a prehire agreement between a large general contractor and the boilermakers union. Unique to the construction industry, prehire agreements permit a construction company to contract with a union before it hires any union workers.  When the prehire agreement with the boilermakers union expired and the parties were unable to negotiate a new agreement, the company suspended its welding projects and discharged 13 welders. The employees took the matter to the NLRB, accusing the company of unfair labor practices under the National Labor Relations Act. The NLRB found that the company’s actions were the result of their legitimate business practice of “staffing workers only when a prehire agreement is in place,” and the employees appealed.

The D.C. Circuit recognized that “construction employers are not required to bargain in good faith with a union after a prehire agreement expires” and “[o]nce a prehire agreement expires, either party can walk away.” The court then concluded, “substantial evidence supports the Board’s factual finding that [the company] discharged the welders because of its policy, and not for some discriminatory reason.”  Applying the law and the facts, the court denied the employees’ petition for review.

• Pleading on Information and Belief. In Ahern Rentals, Inc. v. EquipmentShare.com, Inc., 59 F.4th 948 (8th Cir. Feb. 7, 2023), the Eighth Circuit reversed the district court’s dismissal of a case alleging misappropriation of trade secrets based on “information and belief.”¹  “Pleading on information and belief is expressly contemplated by the Federal Rules of Civil Procedure,” the court stated, noting that “robust evidentiary support for their allegations” may not always be available to plaintiffs at the pleading stage “because, in some contexts, that information may not be available to them before discovery.” Thus, the court held, “pleading on information and belief must be permitted in at least some circumstances” Particularly when “the facts are peculiarly within the possession and control of the defendant, or where the belief is based on factual information that makes the inference of culpability plausible.”  Although this was a case of first impression in the Eighth Circuit, the court pointed out that courts in other circuits, including the First, Second, Third, Fifth, Seventh, Ninth, and D.C. Circuits have reached the same conclusion.

Applying this holding to the facts of the case, the court found that one of plaintiff’s competitors in the construction equipment rental industry had recruited a number of plaintiff’s former employees who had signed non-disclosure, non-solicitation, and noncompete agreements, and obtained from them plaintiff’s customer lists, rental and pricing information, and marketing strategies, which constituted trade secrets. The court found the complaint contained sufficient facts to infer that the competitor used this information to siphon off significant portions of plaintiff’s business. It also found the plaintiff pleaded sufficient facts to infer the competitor developed software systems through “the exploitation of [plaintiff’s] trade secrets,” which it required another of plaintiff’s competitors with whom it had a “strategic partnership,” to use to gain a competitive advantage in the rental equipment industry. 

The court emphasized, however, that to state a claim for misappropriation of trade secrets, the plaintiff must plausibly allege that the defendant “knew or had reason to know” that the trade secrets were improperly acquired.  In this case, the complaint alleged, based on information and belief, the competitor using the software systems had reason to know they were developed using illegally obtained trade secrets. “[S]uch pleadings are appropriate here,” the court concluded, because the plaintiff provided enough facts to make the inference of culpability plausible, and hard evidence of the competitor’s knowledge could only be obtained through discovery.