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Phillips v. Carpet Direct Corporation

United States District Court, D. Colorado

January 10, 2017

LEX PHILLIPS, and LEX PHILLIPS & ASSOCIATES, INC., Plaintiffs,
v.
CARPET DIRECT CORPORATION, GAYLE CROUCH, GREG JENSEN, CHARLES OWENS, and TODD KINSEY, Defendants.

          ORDER ON MOTION TO DISMISS

          Michael E. Hegarty, United States Magistrate Judge.

         Before the Court is Defendants' Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) [filed November 11, 2016; ECF No. 19]. The motion is fully briefed, and the Court finds that oral argument (not requested by the parties) would not materially assist the Court in its adjudication of the motion. Based on the record before it, the Court grants in part and denies in part the Defendants' motion.[1]

         BACKGROUND

         Plaintiffs initiated this action on September 29, 2016 asserting this Court's federal question jurisdiction based on alleged federal claims and its pendent jurisdiction over the alleged state law claims. ECF No. 1.

         I. Statement of Facts

         The following are pertinent factual allegations (as opposed to legal conclusions, bare assertions or merely conclusory allegations) made by Plaintiffs in the Complaint, which are taken as true for analysis under Fed.R.Civ.P. 12(b)(6) pursuant to Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court must limit its review to the four corners of the Complaint, but may also consider documents attached to the pleading as exhibits, Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001), as well as any unattached documents which are referred to in the Complaint and central to the plaintiff's claim, so long as the authenticity of such documents is undisputed. Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002).

         Defendant Carpet Direct Corporation (“CDC”) sells floor coverings including carpet, hardwood, laminate, tile, and stone to end-user consumers. According to CDC's business model, “Brokers” are individuals who, for proper consideration paid to CDC, are permitted to form their own businesses under the CDC business model and name and are paid commissions by CDC for sales they complete. These Brokers are required to meet certain sales quotas, and failure to meet such quotas may result in reduction of commissions. CDC profits from its employment of Brokers across the country.

         Plaintiff Lex Phillips (“Phillips”) was employed by CDC in the summer 1996 as a “Broker.” At or about that time, Phillips attended a broker meeting with Earl Crouch, owner and founder of CDC. Crouch convinced Phillips to form a business with CDC by telling him and other attendees that they would eventually own and have complete control of their own businesses. Based on Crouch's statements, Phillips decided to invest his time and resources to become a Broker for CDC, and incorporated the Plaintiff business entity, Lex Phillips & Associates, Inc. (“LP&A”) solely for such purpose.

         According to the contract with CDC, the Plaintiffs had exclusive rights to operate as a Broker in a defined territory in Northern Colorado and Southern Wyoming: the “counties of Larimer, Boulder[, ] and Weld” and “[t]he municipalities of Ft. Collins, Loveland, Windsor, Greeley, Wellington, and Cheyenne, WY.” Phillips understood from Crouch and other CDC personnel that his rights to operate in this territory would be exclusive and, from 1996 to 2015, it was exclusive.

         As a Broker, Phillips worked hard to establish his business by handling all sales, marketing, and expenses for CDC within his territory, and by selling products during the day and removing and disposing of carpet for new customers without compensation at night. He rented a truck large enough to hold the carpet and pad he picked up and delivered, and at the outset even stored carpet and pad in his own garage because he could not afford to lease a warehouse and/or forklift necessary for his jobs. Later, Phillips established a warehouse for CDC in Windsor, Colorado for which CDC paid 1% of Plaintiffs' sales volume; however, if warehouse expenses exceeded 1% for any given period, the difference was deducted from Phillips' commissions. But, if Plaintiffs' volume exceeded warehouse expenses in a given period, it was not credited to later shortfalls.

         Defendant Todd Kinsey is a former employee of LP&A and, also, a family friend of Defendant Charles Owens, CDC Director of Sales and Marketing. In or about 2015, Kinsey complained to Owens that he was not making enough money working at LP&A. Owens, although aware that Plaintiffs had exclusive rights to operate there, established a CDC brokerage in Loveland, Colorado and assigned Kinsey as the Broker. In an effort to conceal this apparent “breach” of Plaintiffs' contract, Owens directed Kinsey to transfer sales information onto generic forms listing no city or zip code to disguise where sales were made, so Kinsey could be paid brokerage commissions for product delivered to the LP&A's Windsor warehouse. When Phillips complained, Owens promised to reimburse Plaintiffs for 100% of the commissions improperly paid to Kinsey, but he never did so.

         Phillips lodged complaints to Vearl Jones, CDC Assistant Director of Sales and Marketing, on August 19, 2015, directly to Owens in January 2016, and to Defendant Greg Jenson, CDC Director of Operations, in May 2016, but they did nothing to remedy the problems.

         In addition, CDC represented to its Brokers, including Phillips, and to its customers that the carpet pad they obtained from CDC was made of “virgin foam, ” an industry term denoting the high quality of the pad. However, while charging a higher price for such “virgin foam, ” CDC knew the carpet pads were made from recycled carpet pads.

         CDC imposes several requirements on Brokers including: (1) comply with CDC's rules, policies, and procedures or face termination; (2) attend training and meetings upon notice of CDC; (3) provide services as dictated by CDC's business model; (4) refrain from assigning Broker duties; (5) hire employees only with CDC approval; (6) refrain from engaging in any competing employment; (7) work full time and the days and hours specified by CDC, including Saturdays, up to 62 hours per week; (8) work on the CDC's leased premises using equipment owned by CDC; (9) perform their duties on days of the week directed by CDC; (10) submit bi-weekly written reports concerning activities of the brokerage and the Broker's supervision of sales agents; (11) incur business and travel expenses, some of which were reimbursed by CDC; (12) recognize that all samples, materials, training materials, brochures, warehouse equipment, and buildings were owned and/or controlled by CDC; (13) use warehouses and equipment provided by CDC, but not invest in any facilities or materials; and (14) acknowledge that their employment could be terminated at any time and they could quit employment at any time.

         Phillips, as a Broker, was paid by CDC as an independent contractor and was not provided any employment benefits including vacation pay, paid overtime, unemployment when terminated, workers compensation, social security benefits, or training required by the Department of Transportation, Occupational Safety & Health Administration and other federal and state agencies.

         II. Procedural History

         Based on these allegations, Plaintiffs assert violations of the Fair Labor Standards Act (“FLSA”), unjust enrichment, breach of contract, and tortious interference against the Defendants. Complaint, ECF No. 1-1. Plaintiffs seek injunctive relief under the FLSA and recovery for “compensatory damages, ” “liquidated damages for violations of the FLSA, ” and “punitive damages to be determined at trial.” Id. at 9.

         In response to the Complaint, Defendants filed the present motion to dismiss on November 11, 2016, arguing that Plaintiffs' allegations fail to state plausible claims for relief pursuant to Fed.R.Civ.P. 12(b)(6). Specifically, Defendants contend that LP&A is not a proper plaintiff in this case; the FLSA claim is barred by the applicable statute of limitations; Plaintiffs fail to state FLSA claims against the individuals Defendants; Plaintiffs' unjust enrichment claim is precluded by the existence of a contract and is barred by the statute of limitations; Plaintiffs fail to state an unjust enrichment claim against the individual Defendants; Plaintiffs fail to state breach of contract and tortious interference claims because the subject contract term does not exist; and Plaintiffs' allegations against the individual Defendants are not sufficient to state tortious interference.

         Plaintiffs counter that although LP&A was not a party to any contracts, it was the recipient of most at-issue payments in this case; Defendants' case law concerning the FLSA statute of limitations is inapplicable; Plaintiffs' FLSA claims are properly stated against the individual Defendants; factual disputes concerning the existence of a contract preclude dismissal of Plaintiffs' unjust enrichment claim; Plaintiffs' allegations regarding “exclusivity rights” are sufficient to demonstrate a contract term for purposes of the breach of contract and tortious interference claims; and the allegations are sufficient to demonstrate “motivation” for the tortious interference claims.

         Defendants reply that Plaintiffs are incorrect in interpreting case law concerning FLSA statute of limitations; their allegations of individual liability do not survive the standard set by the Supreme Court in Twombly; neither the statute nor case law support LP&A as an FLSA plaintiff; Plaintiffs' affirmation of his contracts with CDC foreclose recovery under a theory of unjust enrichment against the entity, and Plaintiffs have abandoned the claim against the individual Defendants; an ongoing injury does not toll limitations for unjust enrichment; and Plaintiffs have failed to adequately plead an “exclusivity” contract term.

         LEGAL STANDARDS

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pled facts which allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Twombly requires a two prong analysis. First, a court must identify “the allegations in the complaint that are not entitled to the assumption of truth, ” that is, those allegations which are legal conclusions, bare assertions, or merely conclusory. Id. at 678-80. Second, the Court must consider the factual allegations “to determine if they plausibly suggest an entitlement to relief.” Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 680.

         Plausibility refers “to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs ‘have not nudged their claims across the line from conceivable to plausible.'” Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012) (quoting Robbins v. Okla., 519 F.3d 1242, 1247 (10th Cir. 2008)). “The nature and specificity of the allegations required to state a plausible claim will vary based on context.” Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1215 (10th Cir. 2011). Thus, while the Rule 12(b)(6) standard does not require that a plaintiff establish a prima facie case in a complaint, the elements of each alleged cause of action may help to determine whether the plaintiff has set forth a plausible claim. Khalik, 671 F.3d at 1191.

         The adequacy of pleadings is governed by Federal Civil Procedure Rule 8(a)(2), which requires that a complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). This rule “requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (internal citations omitted). Determining whether the allegations in a complaint are “plausible” is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679. If the “well pleaded facts do not permit the court to infer more than the mere possibility of misconduct, ” the complaint should be dismissed for failing to “show[ ] that the pleader is entitled to relief” as required by Rule 8(a)(2). Id.

         ANALYSIS

         Defendants' motion challenges all claims made by the Plaintiffs against them; accordingly, the Court will analyze the motion by addressing each claim in turn.

         I. Count I - FLSA Violations

         For this count, Defendants contend LP&A is not a proper plaintiff; the FLSA claims are barred by the applicable statute of limitations; and, Plaintiffs fail to state FLSA claims against Crouch, Jenson, and Owens.

         A. Is the Entity Plaintiff a Proper FLSA Plaintiff?

         The Court notes at the outset that neither the Defendants nor the Plaintiffs cite to any case law determining whether an entity may constitute an “employee” under the applicable FLSA provisions. After its own investigation, the Court found no case on point and only one unpublished opinion “assum[ing], for the sake of argument, that a corporate entity [could] be properly classified as an employee [under the FLSA], at least to the extent the entity is an alter ego of an individual” for that court's adjudication of a motion to decertify an FLSA collective action. See Saravia v. Dynamex, Inc., No. C 14-05003 WHA, 2016 WL 5946850, at *2 (N.D. Cal. Sept. 30, 2016). Having engaged in no analysis nor consideration of the issue, though, the court's opinion in Saravia is not persuasive here.

         Accordingly, to determine whether an entity is a proper FLSA plaintiff, “[w]e [must] begin with the plain language of the FLSA.” Johns v. Stewart, 57 F.3d 1544, 1557 (10th Cir. 1995). The FLSA provides that, “Any employer who violates the provisions of section 206 or section 207 of this title shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” 29 U.S.C. § 216(b). Under the FLSA, an “employee” is “any individual employed by an employer.” Johns, 57 F.3d at 1557 (citing 29 U.S.C. § 203(e)(1)). “Employ” is defined as to “suffer or permit to work.” Id. (citing § 203(g)). Thus, an employee is an “individual” who an employer suffers or permits to work. Id.; see also Matrai v. DirecTV, LLC, 168 F.Supp.3d 1347, 1352 (D. Kan. 2016) (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (quoting 29 U.S.C. § 203(g))). Courts have interpreted the definition of employee broadly to effectuate the “broad remedial purposes” of the FLSA. Johns, 57 F.3d at 1557 (citing Dole v. Snell, 875 F.2d 802, 804 (10th Cir. 1989)). “The Supreme Court has noted, however, that although the FLSA's definition of ‘employee' is quite broad, ‘it does have its limits.'” Id. (quoting Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290, 295 (1985)).

         An “employer” subject to the FLSA, on the other hand, is defined as “any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” 29 U.S.C. § 203(d). A “person” under the FLSA is defined as “an individual, partnership, association, corporation, business trust, legal representative, or any organized group of persons.” 29 U.S.C. § 203(a). Thus, while an FLSA “employee” is limited in its definition to “an individual, ” an FLSA “employer” is recognized as either an individual or an entity. Considering this distinction, the Court must conclude that Congress intended that only individuals, and not entities, be permitted to bring claims for violations of the FLSA minimum wage (29 U.S.C. § 206) and overtime (29 U.S.C. § 207) provisions. See Robbins v. Chronister, 402 F.3d 1047, 1050 (10th Cir. 2005) (“the function of the courts ... [i]s to construe ... [statutory] language so as to give effect to the intent of Congress.”) (quoting United States v. Am. Trucking Ass'ns, 310 U.S. 534, 542 (1940)); Fish v. Kobac, 840 F.3d 710, 740 (10th Cir. 2016) (“When Congress knows how to achieve a specific statutory effect, its failure to do so evinces an intent not to do so.”). In fact, the Court agrees with Defendants who contend that an entity reasonably cannot be “suffered” or “permitted to work” as required under the FLSA. See 29 U.S.C. § 203(g).

         Accordingly, the Court will grant Defendants' motion to dismiss Plaintiff LP&A's FLSA claims against them.

         B. Are Phillips' FLSA Claims Time-Barred?

         “The FLSA generally imposes a two-year statute of limitations unless the defendant's violations are shown to be willful, in which case a three-year period applies.” Mumby v. Pure Energy Servs. (USA), Inc., 636 F.3d 1266, 1270 (10th Cir. 2011) (citing 29 U.S.C. § 255(a)). To fall under the three-year limitation, the plaintiff must show that “the employer either knew or showed reckless disregard for the matter of ...


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