PDX NORTH, INC.; SLS DELIVERY SERVICES, INC. (Intervenor in District Court) v. COMMISSIONER NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT
Nos. 19-2968 and 19-2993
United States Court of Appeals for the Third Circuit
October 22, 2020
Honorable Brian R. Martinotti
PRECEDENTIAL. Argued April 15, 2020.
PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
Nos. 19-2968 and 19-2993
PDX NORTH, INC.; SLS DELIVERY SERVICES, INC. (Intervenor in District Court) v. COMMISSIONER NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT
PDX North, Inc., Appellant in No. 19-2968
SLS Delivery Services, Inc., Appellant in No. 19-2993
On Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 3-15-cv-07011) District Judge: Honorable Brian R. Martinotti
Argued: April 15, 2020
Before: CHAGARES, SCIRICA, and ROTH, Circuit Judges
(Filed: October 22, 2020)
Allison L. Hollows
Fox Rothschild
101 Park Avenue
17th Floor
New York, NY 10178
Jack L. Kolpen
Corinne L. McCann Trainor [ARGUED]
Ian D. Meklinsky
Fox Rothschild
997 Lenox Drive
Princeton Pike Corporate Center, Building 3
Lawrenceville, NJ 08648
Counsel for Appellant in No. 19-2968
Vafa Sarmasti [ARGUED]
271 Route 46 West
Suite A205
Fairfield, NJ 07004
Counsel for Appellant in No. 19-2993
Emily M. Bisnauth, Esq. [ARGUED]
Christopher W. Weber
Office of Attorney General of New Jersey
Department of Law & Public Safety
Division of Law
Richard J. Hughes Justice Complex
25 Market Street, P.O. Box 112
Trenton, NJ 08625
Counsel for Appellee
SCIRICA, Circuit Judge
This case involves a dispute over the employment classification of delivery drivers, either as independent contractors or as employees. The precipitating event in this litigation is the State of New Jersey‘s assertion of non-payment of unemployment compensation taxes because of the employers’ misclassification. To resolve a part of this dispute, we must apply the abstention doctrine of Younger v. Harris, 401 U.S. 37 (1971).
PDX North, Inc., a last-mile shipper, long classified its delivery drivers as independent contractors. After audits by the New Jersey Department of Labor and Workforce Development (the “Department“), PDX was told that its drivers were misclassified. Because they were employees, the Department asserted PDX owed unemployment compensation taxes. PDX challenged this determination before the New Jersey Office of Administrative Law (the “New Jersey OAL“) on February 19, 2015.
On September 22, 2015, PDX filed this suit in federal court against the Department‘s Commissioner contending New Jersey‘s statutory scheme for classifying workers was preempted by the
On February 29, 2016, the New Jersey OAL action was stayed at PDX‘s request and with the consent of the Department. Since then, this stay has been renewed every six months and remains in effect.
Meanwhile, SLS Delivery Services, Inc., also a last-mile shipper, was audited by the Department. Because SLS classified its drivers as independent contractors, it moved to intervene in PDX‘s action against the Commissioner on December 1, 2017. Intervention was granted on July 27, 2018 and SLS filed a complaint alleging nearly identical claims to PDX. The Department‘s audit against SLS is still pending.
The Commissioner filed a motion for judgment on the pleadings in the federal action on October 7, 2018, contending the case was barred by the Younger abstention doctrine. The trial court agreed and dismissed the entire case. We hold that the trial court correctly dismissed PDX, but it erred in dismissing SLS. Accordingly, we will affirm in part, reverse in part, and remand this matter for further proceedings.1
I.
PDX is a last-mile shipper of wholesale auto parts in New Jersey and other states along the Eastern Seaboard. Last-mile shippers, also known as same-day shippers, are companies providing domestic transportation of shipments within a 24-hour period, often on a same-day basis with geographic coverage generally limited to a single metropolitan area. Depending on the volume and timing of its customers’ shipping needs, PDX hires “independent owner-operators” on an “as-needed” basis. PDX long classified these drivers as independent contractors.
Under
Because the Department determined PDX had misclassified its drivers and did not qualify for the Large Motor Carrier Exemption, it concluded the drivers were employees for which PDX had not withheld unemployment compensation taxes. The Department assessed PDX for the amount owed, including principal, interest, and penalties, totaling $1,831,291.83 and filed administrative judgments for those assessments in 2015 and 2018.2 As noted, PDX sought review of the assessment amounts before the New Jersey OAL on February 19, 2015 and that action is currently stayed by PDX‘s motion (and without objection by the Department or Commissioner).
As noted, after filing its challenges with the New Jersey OAL, PDX brought an action for declaratory and injunctive relief in federal court on September 22, 2015. PDX accepts, for purposes of this suit, that it can neither satisfy the elements of the Independent Contractor Test nor the requirements for the Large Motor Carrier Exemption. As a result, its drivers must be classified as employees. In addition to the state and federal tax burdens, PDX complains of the additional costs and obligations of employment. It asserts that classifying these drivers as employees would require additional administrative and human resources costs, the outlay of capital to buy and maintain a fleet of trucks, and a larger payroll to ensure it can always meet peak demand. If it must classify its drivers as employees, PDX alleges, “it will be driven out of business.”
PDX contends the Independent Contractor Test and the Large Trucker Exemption are preempted by the FAAAA because they are “related to a price, route, or service” of an interstate motor carrier.
In a motion to dismiss for failure to state a claim and for lack of jurisdiction under
The case was reassigned to another judge and proceeded to discovery. As noted, SLS moved to intervene in the action on December 1, 2017 because it operated under a similar business model and was being audited by the Department. Intervention was granted on July 27, 2018, PDX submitted an amended complaint, and SLS submitted a complaint containing nearly identical allegations to PDX‘s amended complaint. After responding to the complaints, the Commissioner filed a motion for judgment on the pleadings under
The trial court granted the
PDX and SLS timely appealed, focusing on two main issues.4 First, they contend either
Procedure 12 or judicial estoppel prevented
II.5
First, we will consider whether
A.
PDX and SLS‘s first contention is that the Commissioner‘s
B.
PDX and SLS‘s second contention is that the Commissioner consented to federal jurisdiction over these matters. PDX and SLS point to the Commissioner‘s agreement to stay PDX‘s state court matter pending the outcome of the federal
Consent to a stay of the state court proceeding in this case was not a waiver of Younger abstention, nor is it consent to federal jurisdiction. See Ohio Civil Rights Comm‘n v. Dayton Christian Sch., 477 U.S. 619, 626 (1986) (holding there was no waiver or consent because the state had not requested the federal court to adjudicate the merits); Addiction Specialists, Inc. v. Twp. of Hampton, 411 F.3d 399, 409 (3d Cir. 2005) (concluding state‘s consent to stay of state action is irrelevant to Younger abstention analysis and does not constitute consent or waiver). The trial court did not err in considering the Commissioner‘s Younger abstention argument.
III.
Second, we will consider whether the Commissioner is judicially estopped from asserting Younger abstention.9 PDX and SLS argue the Commissioner was estopped from asserting the Younger abstention doctrine based on inconsistent litigation positions: consenting to a stay of PDX‘s state court action and asserting Younger abstention in federal court. Judicial estoppel “applies to preclude a party from assuming a position in a legal proceeding inconsistent with one previously asserted.” Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3d Cir. 1988). As stated previously, the Commissioner‘s position is not inconsistent. Addiction Specialists, Inc., 411 F.3d at 409 (concluding state‘s consent to stay of state action is irrelevant to Younger abstention
analysis). Accordingly, judicial estoppel did not preclude the trial court from considering Younger abstention.10
IV.
Third, we determine whether the trial court erred in dismissing PDX and SLS‘s cases under Younger abstention.11
When we review a district court‘s judgment on a
The trial court correctly dismissed
Generally, “a federal court‘s ‘obligation’ to hear and decide a case is ‘virtually unflagging.‘” Sprint Commc‘ns., Inc. v. Jacobs, 571 U.S. 69, 77 (2013) (quoting Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). Younger abstention is an exception to that rule that applies when certain types of state proceedings are ongoing at the time a federal case is commenced. Id. Abstention serves a dual-purpose in these situations: (1) to promote comity, “a proper respect for state functions,” by restricting federal courts from interfering with ongoing state judicial proceedings and (2) to restrain equity jurisdiction from operating when state courts provide adequate legal remedies for constitutional claims and there is no risk of irreparable harm. Id.
Younger abstention is only appropriate in three types of underlying state cases: (1) criminal prosecutions, (2) civil enforcement proceedings, and (3) “civil proceedings involving orders in furtherance of the state courts’ judicial function.” ACRA Turf Club, LLC v. Zanzuccki, 748 F.3d 127, 138 (3d Cir. 2014) (citing Sprint Commc‘ns., Inc., 571 U.S. at 78). In this case, the parties agree that Younger abstention is only proper if we determine the underlying state proceedings are civil enforcement proceedings that are quasi-criminal in nature.
To assess whether underlying proceedings are quasi-criminal in nature, we consider whether:
(1) the action was commenced by the State in its sovereign capacity, (2) the proceeding was initiated to sanction the federal plaintiff for some wrongful act, and (3) there are other similarities to criminal actions, such as a preliminary investigation that culminated with the filing of formal charges. . . . We also consider whether the State could have alternatively sought to enforce a parallel criminal statute.
ACRA Turf Club, LLC, 748 F.3d at 138 (citing Sprint Commc‘ns., Inc., 571 U.S. at 79–80).
If we conclude the civil proceeding here was quasi-criminal in nature, we must then consider the Middlesex factors: (1) whether there are “ongoing judicial proceeding[s]“; (2) whether those “proceedings implicate important state interests“; and (3) whether there is “an adequate opportunity in the state proceeding to raise constitutional challenges.” Middlesex Cnty. Ethics Comm., 457 U.S. at 432.
A.
We will consider three factors described in Sprint to determine whether PDX and SLS are subject to civil enforcement actions that are quasi-criminal in nature.12 As described below, each factor supports a finding that the underlying proceedings are civil enforcement actions that are quasi-criminal in nature.
1.
First, we consider whether the underlying action was commenced by New Jersey in its sovereign capacity. PDX contends it initiated the challenge to the assessment, not New Jersey. We disagree. The state administrative action was commenced by New Jersey in its sovereign capacity as to PDX. Unlike in ACRA Turf Club, LLC, where “no state actor conducted an investigation or filed any type of formal complaint,” here the Commissioner performed multiple audits of PDX and issued multiple formal assessments after the culmination of those audits. ACRA Turf Club, LLC, 748 F.3d at 138. The New Jersey OAL action only occurred because of the Commissioner‘s actions.13 As the trial court explained, “[t]he fact that PDX is technically the party seeking review before the [New Jersey OAL] is a mere function of New Jersey administrative procedure.” As to PDX, the New Jersey OAL action was, for Younger purposes, commenced by New Jersey in its sovereign capacity.
2.
Second, we consider whether the proceeding sanctions wrongful conduct. PDX and SLS contend the proceeding does not because the only remedies available are civil in nature. The Commissioner disagrees, pointing out that misclassification of workers and failure to withhold unemployment compensation taxes is wrongful and can result in penalties, fines, and imprisonment. See
“Sanctions are retributive in nature and are typically imposed to punish the sanctioned party ‘for some wrongful act.‘” ACRA Turf Club, LLC, 748 F.3d at 140 (quoting Sprint Commc‘ns., Inc., 571 U.S. at 79). Misclassification of workers that results in the non-payment of state taxes is “wrongful conduct.”
Further, the Commissioner has imposed over $30,000 in penalties on PDX—in addition to the back taxes and interest allegedly owed—and could penalize SLS similarly. See
3.
Third, we consider whether there is also a criminal analog to this action. PDX and SLS contend there is no criminal analog because they have not been criminally charged. But the question is not whether the current action is criminal or whether criminal charges are warranted. To hold as PDX and SLS contend would erase the quasi-criminal category of abstention, as it would require criminal charges to be brought for a quasi-criminal action to exist.
The question is whether there is a criminal analog. See Gonzalez, 755 F.3d at 182 (holding this factor satisfied because “New Jersey could have vindicated similar interests by enforcing its criminal perjury statute“). Under New Jersey law, employers who do not pay or withhold contributions as lawfully required may face a $1,000 fine and a sentence of imprisonment of up to ninety days.
B.
Because we have determined this is a civil enforcement action that is quasi-criminal in nature, we will consider the Middlesex factors as to PDX and SLS. The trial court did not err in finding the Middlesex factors favored Younger abstention as to PDX‘s case. PDX‘s New Jersey OAL action is an ongoing judicial proceeding in which New Jersey has a strong interest and PDX may raise any constitutional claims. But the trial court erred in finding there was an ongoing judicial proceeding as to SLS and in dismissing SLS‘s case on Younger abstention grounds, because SLS is not subject to an ongoing state judicial proceeding. Because the analyses diverge, we will discuss PDX and SLS separately.
1.
First, we consider whether PDX is involved in ongoing judicial proceedings. PDX contends it is not subject to an ongoing state judicial proceeding because the New Jersey OAL matter is
court.” Addiction Specialists, Inc., 411 F.3d at 408–09. The New Jersey OAL action was ongoing at the time PDX brought its federal action. This Middlesex factor favors Younger abstention as to PDX.
Second, we consider whether these proceedings implicate an important state interest. PDX sidesteps this issue by pointing to the merits of its federal case and arguing federal preemption supersedes any state interest to the contrary. Even assuming PDX is correct about the merits of its claims, we do not consider the merits “when we inquire into the substantiality of the State‘s interest in its proceedings.” O‘Neill v. City of Phila., 32 F.3d 785, 791–92 (3d Cir. 1994) (quoting New Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 491 U.S. 350, 364–65 (1989)). “Rather, what we look to is the importance of the generic proceedings to the State.” Id. New Jersey has an interest in the collection of unemployment compensation taxes through proper enforcement actions in the New Jersey OAL and its courts. PDX provides nothing to rebut this fact. The state administrative proceedings implicate important state interests.
Finally, we consider whether there is an adequate opportunity in the state proceedings for PDX to present its constitutional claims. PDX is currently subject to a New Jersey OAL action. PDX argues the New Jersey OAL lacks the authority to consider their constitutional claims because the New Jersey OAL may only consider constitutional issues that are necessary to the issue presented. They narrowly define the issue presented to the New Jersey OAL to include only whether the workers were properly classified. But PDX admits that constitutional questions may be reserved for the judicial review process, after the administrative process is complete.
“The Supreme Court has held that this third element is satisfied in the context of a state administrative proceeding when the federal claimant can assert his constitutional claims during state-court judicial review of the administrative determination.” O‘Neill, 32 F.3d at 792 (citing Dayton Christian Sch., 477 U.S. at 629; Middlesex Cnty. Ethics Comm., 457 U.S. at 436). As noted, PDX admits its claims may be heard at the judicial review phase. Our review of New Jersey law confirms that these constitutional claims may be raised in this state judicial proceeding. PDX has an adequate opportunity to present those claims.
Balancing these factors, we will affirm the trial court‘s conclusion that it should abstain as to PDX. All the Middlesex factors point towards abstention and the trial court did not err in dismissing PDX‘s case on Younger abstention grounds.
2.
The trial court erred in dismissing SLS‘s case on Younger abstention grounds. We first consider whether there was an ongoing judicial proceeding. The first Middlesex
We see no waiver. The trial court erred because “failures to raise [an] issue in the District Court . . . are . . . more properly characterized as forfeitures rather than as waivers.” Barna v. Bd. of Sch. Dirs. of Panther Valley Sch. Dist., 877 F.3d 136, 148 (3d Cir. 2017). Moreover, SLS twice pointed out in its opposition brief that Younger abstention does not apply because there is no pending state proceeding. While this contention may have benefitted from further factual and legal development, it was neither waived nor forfeited.
The Commissioner‘s final two contentions are inapposite. If a judicial proceeding is only imminent, Younger abstention is inappropriate because that proceeding is not pending or ongoing. See Malhan v. Sec‘y U.S. Dep‘t of State, 938 F.3d 453, 463–64 (3d Cir. 2019) (“That Malhan‘s garnishment proceeding is merely threatened . . . makes abstention ‘clearly erroneous.‘” (quoting Miller v. Mitchell, 598 F.3d 139, 146 (3d Cir. 2010))). The Commissioner‘s assertion that SLS is stonewalling cannot be considered under our standard of review: we must draw all reasonable inferences in favor of SLS based on the allegations in its complaint. It is also unsupported by the evidence of record.
Accordingly, we consider whether SLS‘s audit is an “ongoing judicial proceeding.” The Commissioner‘s position seems to be that once the Department initiates a formal audit, an “ongoing judicial proceeding” exists for Younger purposes. SLS‘s position is that a proceeding is only ongoing once it becomes judicial in nature. On these facts, we find the initiation of an audit is insufficient to serve as an ongoing judicial proceeding for Younger purposes.
The trial court—and the Commissioner—rely on two cases that involved the issuance of a search warrant and a grand jury subpoena.15 Both cases are inapposite because they (1) are criminal Younger cases, (2) rely on New York state law as to the definition of “criminal proceeding,” and (3) involve judicial oversight not part of the Department‘s audit process. Nick v. Abrams, 717 F. Supp. 1053, 1056 (S.D.N.Y. 1989) (search warrant); Notey v. Hynes, 418 F. Supp. 1320, 1326 (E.D.N.Y. 1976) (grand jury subpoena). These cases do not inform our decision here.
On the relevant facts in this case, the Department‘s audit did not involve judicial oversight and cannot be considered an ongoing judicial proceeding for Younger abstention purposes. We believe our colleagues on the First, Fourth, Fifth, Seventh, and Eleventh Circuits would agree. See Google, Inc. v. Hood, 822 F.3d 212, 224 (5th Cir. 2016) (holding “that the issuance of a non-self-executing administrative subpoena does not, without more, mandate Younger abstention“); Mulholland v. Marion Cnty. Election Bd., 746 F.3d 811, 813 (7th Cir. 2014) (holding an
The first Middlesex factor does not favor Younger abstention as to SLS. Because SLS is not subject to an ongoing state proceeding, there is no state interest in those proceedings and SLS does not have the opportunity to present its constitutional claims. Accordingly, we will reverse the trial court‘s dismissal of SLS‘s case because it erred by invoking the Younger abstention doctrine. We will remand this matter to the trial court to allow SLS to pursue its legal and constitutional challenges.16
V.
For the reasons expressed, we will affirm in part, reverse in part, and remand this matter to the trial court for further proceedings.