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McClellan v. Midwest Machining, Inc., No. 17-1992 (6th Cir. Aug. 16, 2018)

The Supreme Court in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), held that an ADEA plaintiff does not have to tender back (offer to return) consideration paid in settlement of a claim as a condition to challenge that settlement in court. Today, the Sixth Circuit (in a 2-1 decision) extends that ruling to Title VII and Equal Pay Act (EPA) claims.

McClellan v. Midwest Machining, Inc., No. 17-1992 (6th Cir. Aug. 16, 2018): The employee McClellan was paid $4000 in severance for a release of all claims against her former employer, Midwest Machining. But McClellan felt that she'd been "blindsided" and hired a lawyer to challenge the agreement.

The district court found that there were genuine disputes of material facts about the enforceability of the severance agreement. "[S]he felt 'bullied,' did not feel free to leave the room, and did not feel like she could ask any questions." The boss "insisted [Plaintiff] sign the agreement and forcefully said if she wanted any money after her abrupt termination, she would need to sign the agreement; she had no time to consider whether to sign the release, and certainly no time to consult with a lawyer."

Nevertheless, the district court granted summary judgment to the employer on the ground that the employee ratified the arguably-infirm settlement by failing to tender back the $4000 before bringing suit. The employee had offered to pay back the money, but only shortly after filing the complaint.

The Sixth Circuit reverses. Although all three judges on the panel concur that there had to be a remand, two judges hold that - as a matter of law - Title VII and the EPA abrogated the common-law doctrines of tender-back and ratification, while the third judge would hold that those doctrines did apply, but that factual issues needed to be resolved as to those equitable defenses.

The panel majority substantially relies on the Supreme Court's reasoning in Oubre and an earlier case decided under the Federal Employers Liability Act (FELA), Hogue v. Southern R.R. Co., 390 U.S. 516 (1968). As Oubre summarized the background law, "contracts tainted by mistake, duress, or even fraud are voidable at the option of the innocent party," but "before the innocent party can elect avoidance, she must first tender back any benefits received under the contract." But the federal statutes in Oubre and Hogue created statutory regimes for settlements in such claims, and neither law provided for tender back.

The panel majority holds that Title VII and the EPA are comparable to the ADEA and FELA:

"Like the ADEA, Congress designed Title VII so that the enforcement of its substantive measures against employers would be effected, at least in substantial part, through private individuals asserting a claim .... And the Court recognized that imposing a tender-back rule in the ADEA context would undermine this feature of the statute insofar as '[i]n many instances a discharged employee likely will have spent the moneys received and will lack the means to tender their return,' thereby tempting employers to 'risk noncompliance . . . knowing it will be difficult to repay the moneys and relying on ratification." The same could be said in the Title VII and EPA contexts, which confront the same economic realities; indeed, employees discharged following instances of sex discrimination (and especially those fired because they are pregnant) are just as likely to need their severance funds for living expenses as are employees discharged following and other form of discrimination." [Citations omitted.]

Alternatively, the panel majority holds that the employee's lawyer attempting to return the money by check shortly after filing the suit effected a tender-back, despite that the employer returned it uncashed. Although the district court held that tender back must occur before the filing of a lawsuit, the panel majority finds that too rigid:

"The Oubre majority ... held that the party 'elect[ing] avoidance' may tender back any benefits received under the severance agreement not only before filing suit, but at any point 'within a reasonable time after learning of her rights.' 522 U.S. at 425 (emphasis added). This comports with the Restatement of Contracts, which provides that '[t]he power of a party to avoid a contract for . . . duress . . . is lost if, after the circumstances that made it voidable have ceased to exist, he does not within a reasonable time manifest to the other party his intention to avoid it.' Restatement (Second) of Contracts § 381(1) (1981) (emphasis added)."

Dissenting in part, Judge Thapar would hold that in contrast to the ADEA and FELA, "Congress did not clearly override the common law ratification and tender-back doctrines when it passed Title VII or the Equal Pay Act." But the judge would remand for fuller consideration of the facts of the defense, finding that "[t]he fact that McClellan tendered back before her employer's first responsive pleading would lend in favor of finding the timing of her tender reasonable."

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