Cummings v. Cenergy International Services, LLC

Citation: 271 F. Supp. 3d 1182Docket: 1:17-cv-00484-LJO-JLT

Court: District Court, E.D. California; September 20, 2017; Federal District Court

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Plaintiffs Donnie Cummings and Charles Beaty filed a motion for a preliminary injunction against Defendant Cenergy International Services, LLC, while Cenergy sought to dismiss the complaint based on a lack of subject matter jurisdiction, arguing issues of standing and ripeness. The court has deferred the preliminary injunction motion until the jurisdictional motion is resolved. Cenergy's motion to dismiss has been denied.

The plaintiffs allege that they were misclassified as independent contractors by Chevron, which resulted in an unlawful denial of overtime wages under the Fair Labor Standards Act (FLSA). They are involved in separate collective actions against Chevron, including McQueen et al. v. Chevron and a JAMS arbitration. The plaintiffs assert that Chevron, through Cenergy, established a complex structure to evade FLSA liability, despite having direct control and supervision over their work. 

Cummings was initially required to sign a Master Services Agreement (MSA) as an individual but had to create Cummings Consulting LLC (CCLLC) to receive payment through a corporate entity due to changes in payment policies. Beaty was similarly required to form a corporate entity, Drilling Consultants, Inc., to work for Chevron through Cenergy and also signed an MSA.

The Master Service Agreements (MSAs) with Cenergy stipulate that the corporate entities involved must be classified as independent contractors, bear sole responsibility for paying wages to Plaintiffs, and provide indemnification to Cenergy and Chevron for any losses related to the agreements. The MSAs were non-negotiable and a prerequisite for employment with Chevron via Cenergy. An indemnity clause specifies that the contractor is liable for claims arising from illness, injury, or death involving its employees or property damage, regardless of any negligence by Cenergy or Chevron. The contractor must also defend and indemnify Cenergy and its affiliates against related claims, including covering reasonable attorney's fees. Additionally, the MSAs include a dispute resolution process that mandates arbitration in Texas under the American Arbitration Association’s rules. Disputes must first be communicated in writing to Cenergy, allowing for informal resolution. If unresolved after 30 days, disputes will proceed to formal mediation in Houston, Texas. Should mediation fail, disputes will then be arbitrated by a single arbitrator, also in Houston, following specific arbitration rules. The arbitrator has the authority to award reasonable attorney's fees to the prevailing party.

On March 21, 2017, Cenergy issued a demand letter to CCLLC, informing them that Donnie Cummings, an employee of Cummings Consulting, LLC, had joined a class action lawsuit against Chevron. Cenergy stated it might need to defend and indemnify Chevron for costs stemming from this lawsuit, which had already prompted Chevron to request payment for legal expenses from Cenergy. Citing a Master Service Agreement (MSA) from January 2014, Cenergy demanded reimbursement from CCLLC for any expenses related to the lawsuit, totaling $15,488.50, to be paid within 15 days or face legal action in Houston, Texas. 

Subsequently, on April 5, 2017, the Plaintiffs filed a suit seeking a declaration that Cenergy had no right to collect wages from them or their corporate entities, alleging that Chevron and Cenergy were improperly shifting their FLSA obligations onto the Plaintiffs. On May 1, 2017, the Plaintiffs requested a preliminary injunction against Cenergy's arbitration efforts against their corporate entities. Cenergy responded with a motion to dismiss, citing lack of subject matter jurisdiction and failure to state a claim, which was granted. The Plaintiffs subsequently filed an amended complaint on June 29, 2017, and Cenergy's motion to dismiss the amended complaint remains pending, arguing that the Plaintiffs lack standing and that the request for declaratory relief is not ripe.

A defendant can seek dismissal of a case for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Such a motion is granted if the complaint does not sufficiently allege facts establishing jurisdiction. If a plaintiff lacks standing under Article III of the U.S. Constitution, the court lacks jurisdiction, necessitating dismissal. Additionally, the ripeness doctrine allows courts to dismiss cases that are premature due to speculative injuries that may not materialize. In a Rule 12(b)(1) motion, the burden of proving jurisdiction shifts to the opposing party once the motion is filed.

In this context, plaintiffs assert standing to challenge the enforceability of Master Service Agreements (MSAs) with Cenergy, claiming they are third-party beneficiaries and have been threatened with individual lawsuits, resulting in 'injury in fact.' To qualify as a third-party beneficiary, one must show that the contracting parties intended to benefit them, which is indicated in the contract terms. Enforcement is not permitted for those who are merely incidentally benefited. The determination of whether a third party is intended or incidental hinges on the contracting parties' intent, which is assessed by reviewing the contract in its entirety and the circumstances surrounding it. Ultimately, the key factor is the intent of the contracting parties to confer a benefit on the third party.

Determining the intent of the parties in a contract involves ordinary contract interpretation aimed at reflecting the parties’ original intent at the time of contracting, as established by Cal. Civ. Code § 1636 and relevant case law. Intent should primarily be derived from the contract's written terms; however, strict adherence to this principle may overlook the parties' intentions or assume an unrealistic level of verbal precision. Circumstances surrounding the contract's formation and its subject matter can provide additional context (Cal. Civ. Code § 1647). In cases where a contract benefits a third party, evidence regarding the parties' negotiations and circumstances is admissible (Garcia v. Truck Ins. Exchange).

The plaintiffs' allegations of third-party beneficiary status are sufficient at the pleading stage to establish their standing, despite not being named in the MSAs. It is asserted that Cenergy was aware that the plaintiffs were the only workers from their corporate entities providing services to Cenergy's customers. Specific references include plaintiff Beaty's recruitment for a Chevron role and the understanding that he would be the sole performer of services without any discussion of others being involved. Furthermore, Cenergy recognized that additional hires would necessitate consent from both Cenergy and Chevron, reinforcing the notion that individual site managers were the intended direct beneficiaries of the MSAs. The situation is likened to Schauer v. Mandarin Gems, where the court found a woman to be a third-party beneficiary of a contract based on the circumstances of the purchase, indicating a shared understanding of intent among the parties involved. The plaintiffs formed their corporate entities at Cenergy's request, further supporting the claim of intended benefits.

Cenergy directly engaged with its site managers regarding the establishment of corporate entities and specifically requested Plaintiff Beaty to perform work for Chevron, making payment contingent upon Beaty's formation of a corporate entity. Cenergy similarly required Plaintiff Cummings to form a corporate entity for payment of work done for Chevron. This indicates that the Master Service Agreements (MSAs) were intended for the benefit of Plaintiffs Beaty and Cummings, establishing their status as third-party beneficiaries. 

Cenergy contested the Plaintiffs' standing to challenge the MSAs in their personal capacities, arguing that there had been no actual threat of litigation against them individually. However, Plaintiffs claimed they were threatened with suit, which, according to legal principles, constitutes a cognizable injury sufficient to confer standing, even if the threats were directed at their corporate entities. Plaintiffs asserted that the formation of these corporate entities was a condition imposed by Cenergy for obtaining or continuing work with Chevron, suggesting that these entities served Cenergy's interests and left Plaintiffs vulnerable to individual lawsuits.

Cenergy's counsel indicated a willingness to pursue claims against Plaintiffs personally if the corporate entities dissolved or failed to adhere to corporate formalities, as evidenced by letters attached to Plaintiffs' complaint. Plaintiffs also attempted to negotiate a dismissal of the action in exchange for assurances against personal indemnification claims, which Cenergy rejected, asserting that this discussion constituted confidential settlement negotiations inadmissible under Federal Rule of Evidence 408. However, Plaintiffs argued that the references to settlement discussions were not intended to impugn liability or damages but to establish their standing. Ultimately, the facts presented suggest a credible threat of litigation against the Plaintiffs in their individual capacities, supporting their standing in this dispute.

Plaintiffs assert their claim for declaratory relief under the Declaratory Judgment Act (DJA) is constitutionally ripe. The DJA allows U.S. courts to declare the rights of parties in cases of actual controversy. A district court must determine if there exists a substantial controversy with sufficient immediacy and reality. Plaintiffs seek a declaration that the indemnification clauses in their Master Service Agreements (MSAs) are unenforceable due to public policy violations under the Fair Labor Standards Act (FLSA). 

Cenergy argues the claim is not ripe, asserting that the enforceability of the MSAs is contingent on a separate lawsuit determining the employment relationship between Plaintiffs and Chevron, a non-party. If Plaintiffs are deemed independent contractors in that suit, the FLSA would not apply, thereby affecting the validity of the indemnity clauses. Cenergy views the controversy as lacking immediacy since its resolution depends on uncertain future findings.

In contrast, Plaintiffs contend that their claim does not rely on their employment status with Chevron. They argue that if they prevail in the FLSA suit, any attempt by Chevron to transfer FLSA liability would violate public policy. They emphasize that the FLSA's remedial purpose is to encourage private enforcement and protect those who file claims, as indicated by provisions for attorney’s fees awarded only to prevailing plaintiffs and anti-retaliation protections. Plaintiffs maintain that a clause shifting attorney's fees to workers undermines these protections and acts as a deterrent to filing claims. Thus, they argue that the request for a declaration against the indemnity clause is constitutionally ripe and independent of the FLSA suit's outcome.

The ripeness inquiry focuses on whether a case involves uncertain future events that may not occur, making it potentially speculative and unsuitable for judicial resolution. Cenergy argues that the plaintiffs’ claim regarding the indemnity clause's void nature under the Fair Labor Standards Act (FLSA) is not ripe for adjudication. Under California law, a contractual clause that violates public policy is void or unenforceable. Federal public policy is derived from various legal sources, including the Constitution and federal statutes. The Ninth Circuit has yet to rule on the enforceability of indemnity provisions in FLSA cases, although district courts in other circuits have issued conflicting decisions on this matter.

Cenergy cites Spellman v. Am. Eagle Express, Inc., where a court allowed an employer's counterclaim for indemnity based on claims that workers were independent contractors, leading to a determination that the FLSA did not apply. Similarly, in Dobbins v. Scriptfleet, Inc., the court upheld a counterclaim based on the same rationale. Cenergy contends that if the plaintiffs are independent contractors, the FLSA does not govern the indemnity provision's enforceability, and the employment relationship is still under litigation in the FLSA case, creating uncertainty about when a resolution will be reached.

Conversely, plaintiffs highlight that some district courts have ruled that FLSA public policies are engaged when claims are filed, regardless of the outcome. In Fernandez v. Kinray, Inc., a court dismissed a defendant’s indemnity counterclaim, finding it unenforceable due to FLSA public policy concerns, which protect plaintiffs' rights to bring claims and aim to eliminate financial risks associated with filing. The court noted that the FLSA allows prevailing plaintiffs to recover attorney's fees but does not permit fee-shifting to defendants, arguing that allowing such shifts would deter private enforcement of the statute. Another court similarly refused to notify potential class members of possible attorney's fee liabilities arising from indemnity agreements related to independent contractor relationships.

The court determined that even if the plaintiffs are classified as independent contractors, the defendants could only recover attorney’s fees if the litigation was conducted in bad faith or with oppressive motives. The court rejected the notion that awarding fees under the indemnity provision of the independent contractor agreement would be appropriate, as it would undermine the remedial goals of the Fair Labor Standards Act (FLSA). The plaintiffs' challenge to the enforceability of the indemnity provision is deemed jurisdictionally ripe and not solely dependent on whether an employer-employee relationship exists. They presented a plausible argument, backed by case law, that the indemnity clauses violate public policy, as the FLSA's protections apply when a worker files a claim, not just when they win. Two district courts have previously ruled that indemnity provisions shifting attorney’s fees onto workers filing FLSA claims are contrary to public policy, and the court finds these decisions persuasive.

The indemnity clauses in question target the plaintiffs' corporate entities rather than the plaintiffs themselves, meaning the public policy protecting workers’ enforcement of the FLSA is not directly violated. However, the court acknowledged that the plaintiffs could suffer financial loss in their individual capacities due to the corporate indemnity obligations, which could deter private enforcement of the FLSA. Additionally, if corporate entities fail to maintain proper formalities, any indemnity obligations could ultimately affect the plaintiffs personally. 

Thus, the plaintiffs' request for declaratory relief regarding the invalidity of indemnity provisions shifting liability from FLSA claims is jurisdictionally ripe. The court finds their theory viable at this stage, with an immediate controversy present, and will further evaluate the merits through a more developed record and argument. Cenergy retains the right to challenge this issue later.

The Court acknowledges that the First Amended Complaint (FAC) presents more detailed allegations concerning standing and the theory of unenforceability of the indemnity clauses in the Master Service Agreements (MSAs). Plaintiffs are required to inform the Court within two days if they need to amend their motion for a preliminary injunction based on the FAC and to provide an update on the status of arbitration proceedings with Cenergy. The Court concludes that Plaintiffs have standing to contest the enforceability of the indemnity provision and that their claim for declaratory relief is ripe, as it does not depend on any future events in the underlying Fair Labor Standards Act (FLSA) litigation. Consequently, Cenergy’s motion to dismiss for lack of subject matter jurisdiction is denied. If no amendments to the injunction motion are requested, the Court will consider the matter for a decision. To establish standing as a third-party beneficiary under federal law, a party must demonstrate that the contract was intended to benefit them. The Court clarifies that the information is not presented for trial use but for jurisdictional determination and notes that Cenergy has not argued against prudential ripeness regarding the Court's jurisdiction, with no factors indicating a need to decline jurisdiction.