Wallace v. International House of Pancakes, LLC

Background

Niquan Wallace, on his own behalf and on behalf of others similarly situated, sued International House of Pancakes, LLC, and other defendants. Wallace alleged that, while working as a waiter, he was overworked and underpaid. His claims arose under the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). The parties jointly asked the court to approve a settlement agreement.

Under the court’s stated standard, an FLSA settlement must be approved by the court or the Department of Labor. The court must examine whether the settlement is fair, including the plaintiff’s possible recovery, the burdens and risks of continued litigation, whether the agreement resulted from arm’s-length negotiations by experienced counsel, and the possibility of fraud or collusion. The court must also assess the reasonableness of any attorneys’ fees and costs.

Settlement Amount and Attorneys’ Fees

The parties agreed to settle the case for $100,000. Approximately two-thirds would go to Wallace, and approximately $34,000, plus costs and expenses, would go to his counsel. Wallace claimed about $75,000 in damages. The court described the settlement amount as a strong result and found that the proposed fee appeared fair. Counsel’s lodestar—the value of the hours worked multiplied by counsel’s hourly rates—was more than $40,000, which further supported the requested contingency fee.

The court nevertheless could not approve the attorneys’ fees without seeing the retainer agreement. The parties’ submission stated that the agreement provided counsel one-third of any settlement, but the retainer agreement itself was not submitted. The court stated that Wallace must provide it before any attorneys’ fees could be approved.

Problems with the Non-Monetary Terms

The court held that several non-monetary provisions made the settlement unreasonable as drafted:

- Release of future claims: The agreement released Wallace’s existing FLSA, NYLL, and other state wage-and-hour claims, but also purported to waive wage-and-hour claims that he might have in the future. The court found that release impermissibly operated as a license to violate wage-and-hour laws. - Future employment and retaliation: The agreement allowed Wallace to seek future employment with the defendants but stated that the defendants’ decision not to hire him would not constitute unlawful retaliation. The court found that this waived potential future retaliation claims and effectively barred future employment. - Non-disparagement: The agreement generally prevented the parties from criticizing one another. Although it included an exception for truthful statements about Wallace’s experience litigating the case, the court said the provision also had to allow Wallace to speak about any past, present, or future FLSA violation, including violations that might occur if he returned to work for the defendants. - Non-cooperation: The agreement barred Wallace from initiating, encouraging, assisting, or participating in proceedings involving claims released by the agreement, unless his participation was compelled by law or a court or agency. The court stated that the provision had to be removed because it conflicted with the FLSA’s remedial purposes. - Severability and “spoiler” clause: Although the agreement included a severability clause, another provision required Wallace to accept an even broader release or return the settlement payment if the release was limited or invalidated. The court concluded that this “spoiler clause” effectively nullified the severability clause and prevented the court from fixing the agreement by striking or modifying the objectionable terms.

Disposition

Judge Mary Kay Vyskocil denied approval of the settlement as currently proposed. The parties were ordered to submit, by May 20, 2024, either a revised settlement agreement curing the identified problems or a joint letter stating whether they intended to abandon the settlement and continue litigating. The opinion did not decide the underlying wage-and-hour claims.