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Mode v. S-L Distribution Co. LLC

United States District Court, W.D. North Carolina, Charlotte Division

March 6, 2019

JARED MODE, on behalf of himself and all others similarly situated, Plaintiffs,


          Robert J. Conrad Jr United States District Judge

         THIS MATTER comes before the Court on several pending motions[1] and the parties' supporting briefs and exhibits: Defendants' Motion to Dismiss Count III of Plaintiff's Complaint, (Doc. Nos. 22-23, 83, 94); Third-Party Defendants' Motions[2] to Dismiss Third-Party Complaints, (Doc. Nos. 84-85, 100, 102-03, 111); and Plaintiffs' Motion to Dismiss Defendants' Counterclaim, (Doc. Nos. 92-93, 99, 101-02). Also before the Court is a Memorandum and Recommendation (“M&R”) recommending granting Defendants' Motion to Dismiss Count III of Plaintiffs' Complaint, (Doc. No. 97), to which Plaintiffs have objected, (Doc. No. 104), and Defendants have responded in opposition to Plaintiffs' objections, (Doc. No. 117). Additionally, the Magistrate Judge issued another M&R addressing Third-Party Defendants and Plaintiffs' respective Motions to Dismiss, (Doc. No. 122), which recommended denying both Motions. Plaintiffs and Third-Party Defendants filed a joint Objection, (Doc. No. 125), and Defendants filed a Response in Opposition, (Doc. No. 126). Having been fully briefed, the motions are now ripe for adjudication.

         I. BACKGROUND[3]

         This is a class/collective action lawsuit centering on Plaintiff Jared Mode's (“Plaintiff”) allegation that Defendants S-L Distribution Company, LLC, S-L Distribution Company, Inc., and S-L Rouse, LLC (collectively, “Defendants” or “S-L”) intentionally misclassified him and a putative class of Defendants' distributors as independent contractors in violation of federal and state wage and hour laws.

         S-L collectively manufactures and distributes snack foods to retail stores in North Carolina and other states. (Doc. No. 1: Compl. ¶ 10). Plaintiff Jared Mode is a member of J&M Mode Distribution, LLC (“J&M”), a North Carolina limited liability company, and worked as an “Independent Business Operator” (“IBOs”). (Id. ¶ 12; Doc. No. 26: Defs.' Third-Party Compl. Against J&M ¶ 2). S-L entered into similar Distributor Agreements (“Agreements”) with various distribution companies of which the putative class are principals, officers, and/or employees. (See, e.g., Doc. No. 23-1: Distributor Agreement between S-L and J&M). These Agreements expressly state that the distribution companies are independent contractors and further provide that in the event a court finds the parties did not have an independent contractor relationship, either party would be entitled to declare the Agreements null and void. (Id. at 2; id. at Art. 2A).

         Pursuant to these Agreements, S-L granted the distribution companies rights for its snack food products. Under the Agreements, the distribution companies would purchase the products at wholesale from S-L and then sell the products to various stores at a higher price. The distribution companies were responsible for ordering, selling, distributing, and merchandising S-L's products to customers in their respective geographic territories. (Id. at Arts. 3-5, 9). The distribution companies also agreed to be financially responsible for certain aspects of the distributorship, including the costs associated with stale products and product delivery. (Id. at Arts. 3-4, 9). The Agreements provide that the distribution companies control the schedule, hours, and operations of their businesses, claim tax deductions for the expenses associated with running their businesses, and are allowed to distribute other products in addition to S-L's snack foods. (Id. at Arts. 2, 4-5). The distribution companies also agreed to comply with all federal, state, and local laws including wage, overtime and benefit provisions for their employees. (Id. at Art. 2E). The Agreements also contain indemnification provisions. (Id. at Art. 19).

         On March 22, 2018, Named Plaintiff Jared Mode filed this action alleging that he and a putative class of S-L's distributors are actually S-L's employees and thus are entitled to various protections under the Fair Labor Standards Act, 29 U.S.C. §§ 201, et seq., and North Carolina's Wage and Hour Act (“NCHWA”), N.C. Gen. Stat. §§ 95-25 et seq. (Doc. No. 1). Plaintiffs allege that S-L violated these wage and hour laws by failing to pay minimum wage and overtime pay under the FLSA and by making illegal wage deductions under the NCWHA. (Doc. No. 1 ¶¶ 27-39).

         In response, S-L (i.e., “Defendants” or “Third-Party Plaintiffs”) filed an Answer and Counterclaim of unjust enrichment against Plaintiffs in the event that the Court determines that (1) Plaintiffs and/or their distribution companies were misclassified as independent contractors and (2) the Agreements are voided. (Doc. No. 25: Defs.' Answer, Separate Defenses, and Countercl. to Pl.'s Compl. ¶¶ 68-73). Additionally, S-L filed Third-Party Complaints stating claims for indemnification and unjust enrichment against the distribution companies (i.e, “Third-Party Defendants”). (Doc. Nos. 26-47, 52-56: Third-Party Compls.).

         Various motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) are now pending before the Court. The Court has conducted a de novo review of the motions currently pending, the parties' respective briefs and exhibits, and the M&Rs issued addressing the pending motions.


         A district court may assign dispositive pretrial matters, including motions to dismiss, to a magistrate judge for “proposed findings of fact and recommendations.” 28 U.S.C. § 636(b)(1)(A) and (B). The Federal Magistrate Act provides that “a district court shall make a de novo determination of those portions of the report or specific proposed findings or recommendations to which objection is made.” Id. at § 636(b)(1)(C); Fed.R.Civ.P. 72(b)(3); Camby v. Davis, 718 F.2d 198, 200 (4th Cir. 1983).

         On a motion to dismiss for failure to state a claim, the Court must accept the factual allegations of the claim as true and construe them in the light most favorable to the nonmoving party. Coleman v. Maryland Ct. of Appeals, 626 F.3d 187, 189 (4th Cir. 2010). To survive the motion, the “complaint [or counterclaim] must contain sufficient factual matter, accepted as true, ‘to state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To be “plausible on its face, ” a plaintiff (including a third-party plaintiff) must demonstrate more than “a sheer possibility that a defendant has acted unlawfully.” Id. A plaintiff therefore must “articulate facts, when accepted as true, that ‘show' that the plaintiff has stated a claim entitling [it] to relief, i.e., the ‘plausibility of entitlement to relief.'” Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Iqbal, 556 U.S. at 678).


         For the sake of clarity, and because each M&R implicates different legal issues, this Order will address the M&Rs in separate sections.

         A. S-L's Motion to Dismiss Plaintiffs' NCWHA Claim, (Doc. No. 22), and the M&R Recommending Dismissal of Plaintiffs' NCWHA Claim, (Doc. No. 97). Plaintiffs make two specific objections to the M&R's recommendation that this Court dismiss Plaintiffs' NCWHA claim: the M&R erred by finding that (1) Plaintiffs' income does not meet the NCWHA's definition of “wages” and (2) the deductions made from Plaintiffs' paychecks were primarily for S-L's benefit and, thus, were non-wages under 13 N.C. A.C. 12.0301(d). The Court addresses each objection in turn.

         1. The M&R correctly determined that Plaintiffs' income does not meet the NCWHA's definition of wages.

         The M&R recommended dismissal of Plaintiffs' NCWHA claim because it determined that Plaintiffs' income does not meet the NCWHA's definition of “wages.” Under the NCWHA, the term “wages” is defined as “compensation for labor or services rendered by an employee.” N.C. Gen. Stat. § 95-2. Following this Court's precedent as established in Troche v. Bimbo Bakeries Distribution, Incorporated, the M&R recognized that, when a plaintiff purchases goods from a defendant and earns income by selling those goods to third-party retailers at a higher price, the profits earned on that sale fall outside of the NCWHA's definition of “wages.” 2015 WL 4920280, at *7 (W.D. N.C. Aug. 18, 2015). The contractual relationship between the plaintiffs and defendant in Troche is identical to the one at issue here; in Troche, the plaintiff was an independent operator who had a distribution agreement with the defendant, Bimbo Foods Bakeries Distribution (“BFBD”). Id. at *1. This agreement “contemplate[d] that [the] [p]laintiff would purchase products from BFBD at a certain price and then re-sell them to various customers at a higher price, earning a profit on the difference.” Id. Under the agreement, the plaintiff “was also responsible for maintaining adequate supplies in the stores, rotating product, and removing stale or damaged product.” Id.

         Here, the terms of Plaintiffs' Distributor Agreements recognize the same relationship between Plaintiffs and S-L:

As set forth in this Agreement, S-L agrees to sell Products to Distributor, which Products may be sold by Distributor to its customers within the Territory. As permitted by this Agreement, the Products shall be sold to Distributor by S-L on the terms and at the prices established, in writing, by S-L from time to time. . . .
Subject to the needs or requirements of its customers, Distributor has full authority to determine the Products and the amount of Products which it may wish to purchase, from time to time, from S-L.
. . .
Distributor shall pay S-L for all Products purchased each week, per the prices and terms on the current Price List, by Friday of the next week. Correspondingly, S-L will settle on a weekly basis with Distributor for any net amounts owed Distributor for sales made of Products by Distributor for which payment is made by Distributor's customers directly to S-L, from which settlement shall be deducted amounts owed by Distributor to S-L, including, but not limited to, purchase costs for the Products, leasing costs, charges, credits or deductions by Distributor's customers, other agreed upon or required charges, and other deductions authorized by Distributor.

(Doc. No. 23-1 at Arts. 4A, 4C, 10A).[4] Additionally, the Distributor Agreement specifies that “S-L is interested only in the results obtained under this Agreement. The manner, means, and methods by which Distributor achieves the results . . . shall be determined solely by Distributor and based upon the Distributor's independent discretion and judgment.” (Id. at Art. 2B). Plaintiffs even concede in their Complaint that “[S-L] generally paid Plaintiff and other IBOs based on the volume of food products distributed.” (Doc. No. 1 ¶ 18). Thus, just like the plaintiff in Troche, while Plaintiffs performed basic merchandising services under the Distributor Agreement, [5]their compensation was solely based on the volume of goods they purchased from S-L and then resold to third parties at a higher price. In fact, Plaintiffs admitted in a filing submitted after the M&R was issued that they “receive[d] [their] revenue directly from the customers and [S-L] [has] no involvement in that transaction.” (Doc. No. 101 at 6).

         The answer to whether Plaintiffs' income meets the NCWHA's definition of “wages” in the present case is perhaps even clearer than the identical question posed in Troche. In Troche, the defendant made payments to the individual plaintiff, who was a party to the operative agreement. Here, on the other hand, the Distributor Agreements were between Plaintiffs' employers-the distribution companies, corporate entities-and S-L. (Doc. No. 23-1 at 2). Plaintiffs were not parties to the Distributor Agreements in their individual capacity, and under the Distributor Agreements, S-L made payments to the corporate distribution entities, not to Plaintiffs directly. (Id. at Art. 5E (“Distributor agrees to, and shall, bear all costs and expenses associated with the employment or retention of [its personnel], including, but not limited to, wages, overtime, salaries . . . .”)). Moreover, the Distributor Agreements expressly provide that “neither [Distributor] nor its employees will receive from S-L any benefits of the ...

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