     Case: 14-20224   Document: 00513062516     Page: 1   Date Filed: 06/01/2015




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT


                                 No. 14-20224                  United States Court of Appeals
                                                                        Fifth Circuit

                                                                      FILED
AMBRE BODLE; LESLIE MEECH,                                         June 1, 2015
                                                                 Lyle W. Cayce
             Plaintiffs - Appellants                                  Clerk

v.

TXL MORTGAGE CORPORATION; WILLIAM DALE COUCH, Individually,

             Defendants - Appellees




                Appeal from the United States District Court
                     for the Southern District of Texas


Before REAVLEY, SMITH, and GRAVES, Circuit Judges.
JAMES E. GRAVES, JR., Circuit Judge:
      In this appeal, we are requested to extend our holding in Martin v.
Spring Break ’83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012) to the facts
of this case. In Martin, we held that a private settlement reached over a bona
fide dispute regarding Fair Labor Standards Act (“FLSA”) claims was
enforceable despite the general prohibition against the waiver of FLSA claims.
Applying Martin, the district court in the instant action enforced a generic,
broad release against the plaintiffs’ subsequent FLSA claims, even though the
release was obtained through the private settlement of a prior state court
action that did not involve the FLSA or any claim of unpaid wages. For the
reasons outlined below, principally that we cannot be assured under these facts
     Case: 14-20224        Document: 00513062516          Page: 2     Date Filed: 06/01/2015



                                        No. 14-20224
that the release resulted from a bona fide dispute regarding overtime wages,
we decline to extend Martin and reverse.
                                               I.
       Plaintiffs-Appellants Ambre Bodle and Leslie Meech (collectively
referred to as “the plaintiffs”) filed the instant FLSA action against their
former employer TXL Mortgage Corporation (“TXL”) and its president William
Dale Couch (collectively referred to as “the defendants”) on May 16, 2012. 1 The
plaintiffs alleged that the defendants failed to compensate them for their
overtime work as required by Section 207 of the FLSA. The defendants moved
for summary judgment asserting res judicata as a basis for dismissal. The
defendants also argued that the plaintiffs executed a valid and enforceable
waiver in a prior state court action, which released all claims against the
defendants arising from the parties’ employment relationship. 2 The district
court found the latter contention dispositive.
       The defendants in the instant case filed the prior state court action
against the plaintiffs on February 3, 2012. The defendants claimed that the
plaintiffs, who had resigned from the company about a year prior, had begun
to work for a direct competitor and had violated their noncompetition
covenants with TXL by soliciting business and employees to leave TXL for the
competitor. In connection with these allegations, the defendants asserted nine
state law causes of action against the plaintiffs. 3 In response, the plaintiffs




1 Although the plaintiffs filed this suit as a collective action, the district court denied class
action certification.
2 The defendants further asserted collateral estoppel as a third ground for dismissal but have

abandoned this argument on appeal.
3 The causes of action were breach of contract, breach of fiduciary and other duties, tortious

interference with contract, tortious interference with prospective business relationships,
misappropriation of trade secrets, conversion, a claim under the Texas Theft Liability Act,
civil conspiracy, and unjust enrichment.
                                               2
      Case: 14-20224   Document: 00513062516      Page: 3   Date Filed: 06/01/2015



                                  No. 14-20224
sought a declaration that the non-compete and non-solicitation of client
provisions in the employment agreements were unenforceable.
       On May 16, 2012, the parties filed with the state court a joint motion for
entry of agreed final judgment pursuant to a settlement agreement. The state
court granted the parties’ motion and entered an agreed final judgment on May
23, 2012. The private settlement agreement between the parties contained a
release by the plaintiffs which stated the following:
       In exchange for the consideration identified above,
       DEFENDANTS hereby fully and completely release and
       discharge TXL and its agents, representatives, attorneys,
       successors, and assigns from any and all actual or potential
       claims, demands, actions, causes of action, and liabilities of any
       kind or nature, whether known or unknown, including but not
       limited to all claims and causes of action that were or could
       have been asserted in the Lawsuit and all claims and causes of
       action related to or in any way arising from DEFENDANTS’
       employment with TXL, whether based in tort, contract (express
       or implied), warranty, deceptive trade practices, or any federal,
       state or local law, statute, or regulation. This is meant to be,
       and shall be construed as, a broad release.
       The district court in the instant action granted summary judgment to
the defendants on the basis that the plain language of the release from the
state court settlement was binding on the plaintiffs and therefore banned their
subsequent FLSA claims.        The plaintiffs now appeal the dismissal.       The
defendants contend that the dismissal was proper under the state court
settlement release, and in the alternative, that res judicata bars the plaintiffs’
FLSA claims.
                                        II.
       This court reviews the district court’s grant of summary judgment de
novo. Kariuki v. Tarango, 709 F.3d 495, 501 (5th Cir. 2013). We view the
evidence and draw all inferences in the light most favorable to the non-movant.
Id.
                                         3
     Case: 14-20224       Document: 00513062516          Page: 4     Date Filed: 06/01/2015



                                       No. 14-20224
       The FLSA requires covered employers who employ their employees for
hours in excess of forty hours per week to compensate those employees for the
additional hours at a rate of at least one and one-half times the regular rate.
29 U.S.C. § 207(a)(1). Pursuant to 29 U.S.C. § 216(b), an employer who violates
the FLSA by failing to pay overtime compensation shall be liable to its
employees in the amount of their overtime compensation plus an equal amount
of liquidated damages. Id. The Supreme Court has explained that the FLSA
was enacted to “protect certain groups of the population from substandard
wages and excessive hours which endangered the national health and well-
being and the free flow of goods in interstate commerce.” Brooklyn Sav. Bank
v. O’Neil, 324 U.S. 697, 706 (1945). In light of the FLSA’s recognition of the
unequal bargaining power between employers and employees, the Supreme
Court has concluded that the FLSA forbids waiver of the right to statutory
wages or to liquidated damages. Id. at 706–08.
       In D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946), the Supreme Court
held that even when there is a bona fide dispute as to whether certain
employees are covered by the FLSA, and when that dispute has been settled in
favor of paying the employees FLSA required wages, the employees’ right to
recover liquidated damages cannot be waived. Id. at 114. However, the Gangi
Court left open the possibility that a settlement reached for a bona fide dispute
over the number of hours worked or the applicable wage may be permissible.
Id. at 114–15 (“Nor do we need to consider here the possibility of compromises
in other situations which may arise, such as a dispute over the number of hours
worked or the regular rate of employment.”). 4


4 The Eleventh Circuit has interpreted the Supreme Court’s decisions in Brooklyn Savings
Bank and Gangi to forbid FLSA settlements for back wage claims unless supervised by the
Secretary of Labor or unless the district court enters a stipulated judgment “after scrutinizing
the settlement for fairness.” Lynn’s Food Stores, Inc. v. U.S., 679 F.2d 1350, 1352–55 (11th
Cir. 1982).
                                               4
    Case: 14-20224    Document: 00513062516      Page: 5   Date Filed: 06/01/2015



                                 No. 14-20224
      We considered this question in Martin v. Spring Break ’83 Productions,
L.L.C., 688 F.3d 247 (5th Cir. 2012).        In Martin, we enforced a private
settlement agreement that constituted a compromise over FLSA claims
because the settlement resolved a bona fide dispute about the number of hours
worked. Id. at 255. In reaching this conclusion, we adopted reasoning from
Martinez v. Bohls Bearing Equipment Co., 361 F. Supp. 2d 608 (W.D. Tex.
2005). Martinez held that “parties may reach private compromises as to FLSA
claims where there is a bona fide dispute as to the amount of hours worked or
compensation due. A release of a party’s rights under the FLSA is enforceable
under such circumstances.” Id. at 631.
      In Martinez, the district court found a bona fide dispute as to hours
worked and compensation owed where the release resulted directly from a
complaint by the plaintiff that he had not been paid for his overtime work for
a period of two years. Id. Each party presented evidence of compensation
owed, but the evidence was inconclusive. Id. Due to the lack of conclusive
evidence, the district court determined that there was a bona fide dispute as to
liability. Id. 631–32. Therefore, the settlement document was enforceable. Id.
at 632. That document stated, “I [the plaintiff] on this 2nd day of June 2003,
accept $1,000.00 in full payment for all overtime accumulated and unpaid
during the period from 06/01/01 to 06/01/03. I consider this amount as full
settlement for all overtime in question and reported.” Id. at 631.
      In Martin, we approved, as an enforceable compromise of a bona fide
dispute, a settlement between a union representative and a movie production
company. 688 F.3d at 249. After an investigation, the union representative
concluded it would be impossible to validate the number of hours claimed by
the workers for unpaid wages.      Id.    The parties’ settlement of the union
members’ complaints read as follows:


                                         5
    Case: 14-20224    Document: 00513062516     Page: 6   Date Filed: 06/01/2015



                                 No. 14-20224
      The Union on its own behalf and on behalf of the IATSE
      Employees agrees and acknowledges that the Union has not
      and will not file any complaints, charges, or other proceedings
      against Producer, its successors, licenses and/or assignees,
      with any agency, court, administrative body, or in any forum,
      on condition that payment in full is made pursuant to the terms
      of this Settlement Agreement.
Id. at 254. In reaching the conclusion that a bona fide dispute existed, we
emphasized the union representative’s inability to “determine whether or not
Appellants worked on the days they claimed they had worked[.]” Id. at 255.
      In the instant action, the settlement containing the release of future
claims derived from a state court action centered upon a disputed non-compete
agreement. Nevertheless, the district court concluded that the release validly
barred the plaintiffs’ subsequent FLSA claims because the topic of unpaid
wages for commissions and salary arose in the settlement negotiations. The
district court found that at the time of the settlement discussions regarding
the unpaid wages, the plaintiffs were aware of their claims for unpaid overtime
because they had signed consent forms to join the instant lawsuit. However,
the plaintiffs chose, at that time, to remain silent about their overtime claims.
The district court concluded that the overall “bona fide dispute” as to wages
(which focused on wages for commissions and salary), could have included the
claims for overtime wages, but for the plaintiffs’ silence. And for that reason,
the district court held that the plaintiffs are now barred from claiming that the
compromise resulting from their bona fide dispute over wages did not
encompass their claim for unpaid overtime.
      The plaintiffs contend on appeal that the district court erred in extending
Martin’s limited holding to the circumstances of this case. The plaintiffs point
out that in Martin the settlement was reached in response to the filing of a
FLSA lawsuit, as opposed to the state court action concerning a non-compete
agreement that is present in this case. The plaintiffs further emphasize that
                                       6
    Case: 14-20224     Document: 00513062516    Page: 7   Date Filed: 06/01/2015



                                 No. 14-20224
in Martin, the parties specifically disputed the amounts due and the number
of overtime hours claimed under the FLSA.         The plaintiffs maintain that
because they did not receive any FLSA compensation for unpaid overtime in
the state court settlement, the rationale set out in Martin, does not apply to
this case. The defendants argue that since the state court settlement resolved
a bona fide dispute about hours worked and compensation due in a general
sense, the release of a claim for unpaid overtime is valid, even if brought under
the FLSA.    The defendants state that if the plaintiffs wished to bring a
subsequent FLSA claim, they should have carved that claim out of the
settlement agreement.
      The plaintiffs have the stronger argument on this issue. The general
rule establishes that FLSA claims (for unpaid overtime, in this case) cannot be
waived. See Brooklyn Sav. Bank, 324 U.S. at 706–08. Accordingly, many
courts have held that, in the absence of supervision by the Department of Labor
or scrutiny from a court, a settlement of an FLSA claim is prohibited. See, e.g.,
Lynn’s Food Stores, Inc. v. U.S., 679 F.2d 1350, 1355 (11th Cir. 1982) (“Other
than a section 216(c) payment supervised by the Department of Labor, there
is only one context in which compromises of FLSA back wage or liquidated
damage claims may be allowed: a stipulated judgment entered by a court
which has determined that a settlement proposed by an employer and
employees, in a suit brought by the employees under the FLSA, is a fair and
reasonable resolution of a bona fide dispute over FLSA provisions.”) (emphasis
added); Taylor v. Progress Energy, Inc., 493 F.3d 454, 460 (4th Cir. 2007),
superseded by regulation on other grounds as stated in Whiting v. Johns
Hopkins Hosp., 416 F. App’x 312 (4th Cir. 2011) (“[U]nder the FLSA, a labor
standards law, there is a judicial prohibition against the unsupervised waiver
or settlement of claims.”).


                                       7
    Case: 14-20224    Document: 00513062516     Page: 8   Date Filed: 06/01/2015



                                No. 14-20224
      Nevertheless, we have excepted, from this general rule, unsupervised
settlements that are reached due to a bona fide FLSA dispute over hours
worked or compensation owed. See Martin, 688 F.3d at 255. In doing so, we
reasoned that such an exception would not undermine the purpose of the FLSA
because the plaintiffs did not waive their claims through some sort of bargain
but instead received compensation for the disputed hours. Id. at 257. The
Martin exception does not apply to the instant case because not only did the
prior state court action not involve the FLSA, the parties never discussed
overtime compensation or the FLSA in their settlement negotiations.
Therefore, there was no factual development of the number of unpaid overtime
hours nor of compensation due for unpaid overtime. To deem the plaintiffs as
having fairly bargained away unmentioned overtime pay based on a settlement
that involves a compromise over wages due for commissions and salary would
subvert the purpose of the FLSA: namely, in this case, the protection of the
right to overtime pay. Under these circumstances where overtime pay was
never specifically negotiated, there is no guarantee that the plaintiffs have
been or will be compensated for the overtime wages they are allegedly due
under the Act.
      Accordingly, we hold that the absence of any mention or factual
development of any claim of unpaid overtime compensation in the state court
settlement negotiations precludes a finding that the release resulted from a
bona fide dispute under Martin.      The general prohibition against FLSA
waivers applies in this case, and the state court settlement release cannot be
enforced against the plaintiffs’ FLSA claims.
                                     III.
      Because the district court found the state court settlement agreement
enforceable against the plaintiffs’ instant FLSA action, it did not reach the
defendants’ alternative argument that the plaintiffs’ FLSA claims are barred
                                      8
     Case: 14-20224       Document: 00513062516          Page: 9     Date Filed: 06/01/2015



                                         No. 14-20224
under the theory of res judicata. On appeal, the defendants contend that the
state court judgment dismissing their suit with prejudice against the plaintiffs
for violation of their noncompetition covenants precludes the plaintiffs’ instant
FLSA action. Significantly, the state court judgment made no mention of
wages but instead concerned only issues related to noncompetition.
       When determining the impact of a state court judgment, 5 federal courts
apply the res judicata law of that state. Shimon v. Sewerage & Water Bd. of
New Orleans, 565 F.3d 195, 199 (5th Cir. 2009). “Res judicata, or claims
preclusion, prevents the relitigation of a claim or cause of action that has been
finally adjudicated, as well as related matters that, with the use of diligence,
should have been litigated in the prior suit.” Barr v. Resolution Trust Corp.,
837 S.W.2d 627, 628 (Tex. 1992). 6             Texas courts have diverged in their
determinations of what claims must have been litigated in a prior suit. Id. at
629 (“Even if only cases from more recent times are considered, our holdings
with respect to res judicata are difficult to reconcile.”). However, in Barr v.
Resolution     Trust     Corp.,    the    Texas    Supreme       Court     reaffirmed     the
“transactional” approach to res judicata and explained that “a subsequent suit
will be barred if it arises out of the same subject matter of a previous suit[.]”
Id. at 631. An action arises from the same subject matter of a previous suit




5 Res judicata principles apply to agreed judgments. Freeman v. Cherokee Water Co., 11
S.W.3d 480, 483 (Tex. App.–Texarkana 2000, pet. denied.) (“An agreed judgment of dismissal
in settlement of a controversy is a judgment on the merits. It too is conclusive, not only on
the matters actually raised and litigated, but it is also conclusive on every other matter that
could have been litigated and decided as an incident to or essentially connected with the
subject matter of the prior litigation.”).
6 To rely on the affirmative defense of res judicata, a party must show “(1) a prior final

determination on the merits by a court of competent jurisdiction; (2) identity of parties or
those in privity with them; and (3) a second action based on the same claims as were or could
have been raised in the first action.” Travelers Ins. Co. v. Joachim, 315 S.W.3d 860, 862 (Tex.
2010).
                                              9
   Case: 14-20224    Document: 00513062516      Page: 10   Date Filed: 06/01/2015



                                 No. 14-20224
where the same factual matters that made up the gist of the prior action form
the factual basis of the subsequent action. Id. at 630.
      The facts at issue in the state court action between the defendants and
the plaintiffs revolved around the plaintiffs’ purported violation of a
noncompetition agreement. In order to support their claims, the defendants
would have needed to show a valid noncompetition agreement and evidence
that the plaintiffs solicited TXL clients and employees to leave TXL for its
competitor. In the instant FLSA lawsuit, the plaintiffs would need to prove
that they worked overtime hours for which they were not compensated. Thus,
the two cases do not involve the same subject matter, and the second suit is
therefore not barred by res judicata.
                                        IV.
      Because we hold that the generic, broad state court settlement release
in this action does not bar the plaintiffs’ subsequent FLSA claims and because
the alternative defense of res judicata fails, we REVERSE and REMAND for
further proceedings consistent with this opinion.




                                        10
