Court Rejects "Ultimate Consumer" Defense to FLSA Enterprise Coverage
A federal court in the Southern District of Florida has rejected the "ultimate consumer" defense to enterprise coverage under the Fair Labor Standards Act. The case is Exime v. E.W. Ventures, Inc., Case No. 08-60099-CIV-SEITZ/O'SULLIVAN (S.D. Fla., December 23, 2008).
First, some background: To establish coverage under the Fair Labor Standards Act, a plaintiff must show that: (1) she was “engaged in commerce or in the production of goods for commerce” [individual coverage]; or (2) that she was employed in an enterprise “engaged in commerce or in the production of goods for commerce” [enterprise coverage]. See 29 U.S.C. § 207(a)(1).
With respect to FLSA enterprise coverage, the relevant provisions are set forth in 29 U.S.C. § 203(s)(1)(A) and 29 C.F.R. § 779.238:
“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that --
[H]as employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person; and
[I]s an enterprise whose annual gross volume of sales made or business done is not less than $500,000. . .
29 U.S.C. § 203(s)(1)(A)(i)-(ii).
. . . An enterprise described in [29 U.S.C. § 203(s)(1)] will be considered to have employees engaged in commerce or in the production of goods for commerce. . .if during the annual period which it uses in calculating its annual sales for purposes of the other conditions of these sections, it regularly and recurrently has at least two or more employees engaged in such activities. On the other hand, it is plain that an enterprise that has employees engaged in such activities only in isolated or sporadic occasions, will not meet this condition.
29 C.F.R. § 779.238.
Based on these rules, courts have adopted a two-prong test for enterprise coverage: (1) the enterprise commerce requirement; and (2) the gross sales requirement. Both prongs must be met in order to establish FLSA enterprise coverage.
The "Ultimate Consumer" Defense
The "ultimate consumer" defense asserts that employees' handling of interstate goods or materials cannot be used to establish FLSA enterprise coverage if the employer is the ultimate consumer of those goods or materials. The defense is derived from 29 U.S.C. § 203(i) and § 203(s)(1)(A)(i), which state as follows:
“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that. . .has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person;
29 U.S.C. § 203(s)(1)(A)(i).
“Goods” means goods (including ships and marine equipment), wares, products, commodities, merchandise, or articles or subjects of commerce of any character, or any part or ingredient thereof, but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof.
29 U.S.C. § 203(i) (emphasis added).
Judge Rejects "Ultimate Consumer" Defense
In Exime, the employer was a dry cleaning business. The vast majority of the employer's equipment (dry cleaning machines, pressing machines, boilers, and vans) was manufactured outside Florida. The chemicals that the employees used were purchased mostly from local retailers. And the employer served only Florida customers.
Under these facts, the employer argued that to the extent employees handled interstate goods and materials, the employer was the ultimate consumer of those goods and materials, and therefore the employees' handling of such goods and materials could not be used to establish enterprise coverage.
Judge Patricia Seitz rejected this argument, stating in part as follows:
Defendants' argument.... ultimately turns on the assumption that the terms “goods” and “materials” share the same statutory definition. But, in order to accept Defendants' narrow interpretation, it would be necessary to wholly ignore the 1974 amendment to § 203(s)(1)(A)(i), as well as the accompanying Senate Report. That Report provides:
The bill also adds the words “or materials” after the word “goods” [in § 203(s)(1)(A)(i)] to make clear the Congressional intent to include within this additional basis of coverage the handling of goods consumed in the employer's business, as, e.g., the soap used by a laundry. . .S.Rep. No. 93-690, 93rd Cong., 2nd Sess. at 17 (1974) (emphasis added).
Significantly, the specific example cited in the 1974 Senate Report, “e.g., the soap used by a laundry,” demonstrates a clear Congressional intent to expand enterprise jurisdiction to companies whose employees handle interstate materials used in the employer's own business, regardless of whether that employer is the ultimate consumer of those materials. In other words, the additional term “materials” broadens FLSA jurisdiction by substantially constricting the “ultimate consumer” defense now asserted by Defendants....
The "ultimate consumer" defense, read broadly, is a potentially powerful weapon for employers in defense of an FLSA lawsuit. There are many small businesses, such as dry cleaners, that are the ultimate consumers of interstate materials, but who serve only local customers and do not otherwise handle, sell or work on goods in interstate commerce. But under Judge Seitz's narrow reading of the defense, businesses that do not handle, sell or work on interstate goods, but use interstate materials in their operations, are nevertheless covered under the FLSA. It is the rare business indeed that uses only intrastate materials in its operations. Thus, under Judge Seitz's interpretation, the "ultimate consumer" defense is effectively dead.
Is Exime the last word on the "ultimate consumer" defense? Stay tuned.
AmericasNewsToday reported that 16 foreign nationals and corporations have been indicted in Miami on charges of illegally exporting potential military and explosives components to Iran. I reproduce here below the entire article: “A federal grand jury in Miami, Fla., has returned a Superseding Indictment charging eight individuals and eight corporations in connection with their participation in conspiracies to export U.S.-manufactured commodities to prohibited entities and to Iran. The defendants are named in a thirteen (13) count Indictment – returned on Sept. 11, 2008 and unsealed today -- that includes charges of conspiracy, violations of the International Emergency Economic Powers Act and the United States Iran Embargo, and making false statements to federal agencies in connection with the export of thousands of U.S. goods to Iran. The charges were announced today by R. Alexander Acosta, U.S. Attorney for the Southern District of Florida; Patrick Rowan, Acting Assistant Attorney General for National Security, U.S. Department of Justice; Mario Mancuso, Under Secretary of Commerce for Industry and Security, U.S. Department of Commerce; Adam Szubin, Director, Department of the Treasury, Office of Foreign Assets Control (OFAC); Sharon Woods, Director, Defense Criminal Investigative Service (DCIS); and Julie L. Myers, Homeland Security Assistant Secretary for U.S. Immigration and Customs Enforcement (ICE). The Superseding Indictment alleges that the defendants purchased, and then illegally exported to ultimate buyers in Iran, numerous "dual use" commodities. "Dual-use" commodities are goods and technologies that have commercial application, but could also be used to further the military or nuclear potential of other nations and could be detrimental to the foreign policy or national security of the United States. In this regard, the Superseding Indictment alleges that the defendants caused the export of 120 field-programmable gate arrays, more than 5000 integrated circuits of varying types, approximately 345 Global Positioning Systems ("GPS"), 12,000 Microchip brand micro-controllers, and a Field Communicator. All of these items have potential military applications, including as components in the construction of improvised explosive devices (IEDs). The charges announced today are the result of an extensive inter-agency investigation into the use of U.S.-made goods in the construction of IEDs and other explosive devices used against Coalition Forces in Iraq and Afghanistan. Charged in the Superseding Indictment are: Ali Akbar Yahya, an Iranian national and naturalized British citizen; F.N. Yaghmaei, a/k/a " Farrokh Nia Yaghmaei," an Iranian national; Mayrow General Trading, Atlinx Electronics, Micatic General Trading, Madjico Micro Electronics, a/k/a "MME," and Al-Faris, all Dubai-based businesses; Neda Industrial Group, an Iran-based business; Bahman Ghandi, a/k/a "Brian Ghandi," an Iranian national; Farshid Gillardian, a/k/a "Isaac Gillardian," a/k/a "Isaac Gill," an Iranian national and a naturalized British citizen; Kaam Chee Mun, a/k/a "Brian Kaam," a resident of Malaysia; Djamshid Nezhad, a/k/a "Reza," a resident of Germany; Ahmad Rahzad, a/k/a "Saeb Karim," an Iranian national; Majid Seif, a/k/a "Mark Ong,"a/k/a "Matti Chong," an Iranian national residing in Malaysia; and Eco Biochem Sdn BHD and Vast Solution Sdn BHD, Malaysian businesses. The defendants are charged with purchasing and causing the export of U.S. goods to Iran through middle countries, including the United Arab Emirates, Malaysia, England, Germany, and Singapore. More specifically, the charges in the Indictment are as follows: