PDX North Inc v. Commissioner New Jersey Dept

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
2
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
_________________
OPINION OF THE COURT
_________________
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
3
(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 Federal Aviation Administration
Authorization Act of 1994 (the “FAAAA”) and was
unconstitutional under the Interstate Commerce Clause.
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
4
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.
In May 2012, after completing an audit of PDX for 2006
through 2009, the Department determined that PDX had
misclassified its drivers, finding they were employees, not
independent contractors. The Department reached the same
conclusion in two subsequent audits examining 2010 through
2015. The parties do not provide the factual basis for this
determination, nor do they provide the Department’s
reasoning.
1
The trial court possessed subject-matter jurisdiction under 28
U.S.C. § 1331, assuming that the Tax Injunction Act does not
withdraw that jurisdiction. See Tenet v. Doe, 544 U.S. 1, 6 n.4
(2005) (noting that the Younger abstention doctrine “represents
the sort of ‘threshold question’ [that] may be resolved before
addressing jurisdiction”). We exercise jurisdiction under 28
U.S.C. § 1291 over the trial court’s Younger abstention
decision.
5
Under N.J. Stat. Ann. § 43:21-19(i)(6) (the
“Independent Contractor Test”), New Jersey presumes workers
are employees unless three statutory elements are met. Those
elements generally require the business to show the worker is
“free from [its] control or direction,” the worker provides a
service “outside the usual course of business,” and the worker
is “customarily engaged in an independently established
trade.” N.J. Stat. Ann. § 43:21-19(i)(6)(A)–(C). Some working
relationships, however, are exempt from the Independent
Contractor Test. One exemption, the Large Motor Carrier
Exemption, may apply if, among other things, the drivers’
vehicles weigh 18,000 pounds or more, the vehicles are used
for the “highway movement of motor freight,” and the driver
receives “a percentage of the gross revenue generated.” N.J.
Stat. Ann. § 43:21-19(i)(7)(X) (the “Large Motor Carrier
Exemption”). If the Large Motor Carrier Exemption applies,
the elements of the Independent Contractor Test do not need to
be satisfied for the worker to qualify as an independent
contractor. Id.
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
2
After PDX’s Amended Complaint was filed in July 2018, the
Department filed an administrative judgment in New Jersey
state court. In addition to the amount owed alleged in PDX’s
Amended Complaint, the judgment reveals $498,134.86 in
6
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. 49 U.S.C. § 14501(c)(1). Moreover,
PDX asserts these provisions violate the Interstate Commerce
Clause, U.S. Const. art. I, § 8, cl. 3, because of the “undue
burdens” they impose on its business. It requested the trial
court to find the Independent Contractor Test and the Large
Motor Carrier Exemption preempted by the FAAAA and
interest, $81,540.00 in penalties, and $680.30 as an
administrative cost assessment. As of September 2018, it
appears PDX owed at least $2,411,645.91.
7
unconstitutional under the Interstate Commerce Clause. It also
requested the trial court to enjoin the enforcement of the
administrative judgments and the performance of future audits.
In a motion to dismiss for failure to state a claim and for
lack of jurisdiction under Rule 12(b) filed on October 30, 2015,
the Commissioner contended PDX’s case should be dismissed
on three separate abstention grounds. The Commissioner did
not raise the Younger abstention doctrine. The trial court
determined none of the cited abstention grounds were
applicable, explicitly noting it did not rule on Younger
abstention because no party had briefed the issue.
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 Rule 12(c) on October 7, 2018, contending for the first
time that Younger abstention required dismissal.
The trial court granted the Rule 12(c) motion on
Younger abstention grounds, dismissing the case in its entirety.
It reasoned the Younger abstention doctrine applied because
the proceeding was quasi-criminal in nature as to both PDX
and SLS. The trial court then considered the applicable
8
Middlesex factors 3 for both PDX and SLS and concluded each
factor favored abstention. Importantly, the trial court held the
Department’s audit of SLS was an ongoing state judicial
proceeding. In the alternative, the trial court noted SLS may
have waived its argument that it was not subject to an ongoing
state proceeding. The trial court also raised the Tax Injunction
Act (“TIA”), sua sponte, and stated it had “significant doubts
that the TIA would permit this action to go forward” because
this was “an action to enjoin the collection of New Jersey
unemployment compensation contributions.” But the trial
court never ruled on the application of the Tax Injunction Act.
PDX and SLS timely appealed, focusing on two main
4
issues. First, they contend either Federal Rule of Civil
3
In Middlesex, the Supreme Court announced three factors for
courts to consider when determining whether Younger
abstention is appropriate: (1) whether there is an ongoing
judicial proceeding, (2) whether an important state interest is
implicated in the state proceeding, and (3) whether the state
proceedings provide an adequate opportunity to present
constitutional arguments. Middlesex Cnty. Ethics Comm. v.
Garden State Bar Ass’n, 457 U.S. 423, 432 (1982).
4
On appeal, the parties briefed and argued whether the TIA
bars this action. Because the trial court never made any
findings nor ruled on this issue, we decline to address it in the
first instance. See Forestal Guarani S.A. v. Daros Int’l, Inc.,
613 F.3d 395, 401 (3d Cir. 2010) (“We ordinarily decline to
consider issues not decided by a district court, choosing instead
to allow that court to consider them in the first instance.”)
(citations omitted). On remand, we direct the trial court to
address the application of the Tax Injunction Act as to SLS.
9
Procedure 12 or judicial estoppel prevented the invocation of
the Younger abstention doctrine. Second, they contend the trial
court incorrectly applied Younger abstention.
II. 5
First, we will consider whether Federal Rule of Civil
Procedure 12 prohibited the trial court from considering
Younger abstention. PDX and SLS contend the trial court
should not have considered the Rule 12(c) motion because it
was filed after extensive discovery was completed. They also
contend the trial court should not have considered the Younger
abstention argument, because the Commissioner consented to
federal jurisdiction by not arguing it in the first motion to
dismiss or by consenting to a stay in PDX’s state action. We
conclude it was not an abuse of discretion for the trial court to
consider the Commissioner’s 12(c) motion or to consider the
Younger abstention arguments.
A.
PDX and SLS’s first contention is that the
Commissioner’s Rule 12(c) motion could not be considered
because it was filed too late. They argue because “PDX ha[d]
already submitted all of its discovery” it was inappropriate for
the trial court to consider the Rule 12(c) motion. Appellants’
5
PDX and SLS couch these alleged Rule 12 violations as
equitable issues but fail to specify which equitable doctrines
were violated. As such, we will consider these issues under
Rule 12, not under equitable doctrines.
10
Br. 21. We disagree. 6
Rule 12(c) states that such motions must be filed “[a]fter
the pleadings are closed—but early enough not to delay trial.”
The pleadings in this case closed on October 5, 2018, only after
SLS was permitted to intervene. The Commissioner’s Rule
12(c) motion was filed on October 7, 2018. The motion
therefore satisfies the first requirement of Rule 12(c). It also
satisfies the second requirement because no trial date had been
set—and therefore no trial date could have been delayed by its
filing. 7 The trial court did not abuse its discretion in
6
Generally, “matters of docket control,” like whether to
consider a motion, “are committed to the sound discretion of
the district court.” In re Fine Paper Antitrust Litig., 685 F.2d
810, 817 (3d Cir. 1982) (citations omitted). We review for
abuse of discretion and “will not interfere with a trial court’s
control of its docket ‘except upon the clearest showing that the
procedures have resulted in actual and substantial prejudice to
the complaining litigant.’” Id. at 817 (quoting Eli Lilly & Co.
v. Generix Drug Sales, Inc., 460 F.2d 1096, 1105 (5th Cir.
1972)).
7
PDX and SLS cite three cases contending the Rule 12(c)
motion was too late. But they are distinguishable because they
confronted the appropriateness of ruling on a Rule 12(c)
motion notwithstanding factual disputes on the merits, not
considerations of the timeliness of abstention. See Grajales v.
P.R. Ports Auth., 682 F.3d 40, 45–46 (1st Cir. 2012)
(considering “the question of whether it is appropriate to apply
the plausibility standard after substantial pretrial discovery has
taken place”); Ideal Steel Supply Corp. v. Anza, 652 F.3d 310,
325 (2d Cir. 2011) (discussing appropriateness of Rule 12(c)
11
considering the Commissioner’s Rule 12(c) motion.
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 case and their failure to raise Younger abstention in
their first motion to dismiss.8 The Commissioner asserts he has
never formally consented to federal court jurisdiction or
waived his Younger abstention argument.
Consent to a stay of the state court proceeding in this
case was not a waiver of Younger abstention, nor is it consent
because “evidence that had already been produced during
discovery would fill the perceived gaps in the Complaint”); Ion
Wave Techs., Inc. v. SciQuest, Inc., 21 F. Supp. 3d 376, 380
(D. Del. 2014) (finding disposition of a claim involved
“material factual disputes” and declining to decide its merits
on a Rule 12(c) motion).
8
PDX and SLS have not argued Younger abstention was
waived under Rule 12. Although it appears to be without merit,
we will not consider whether a failure to raise Younger
abstention in a 12(b) motion would have prohibited the
Commissioner from raising it in a 12(c) motion. See Leyse v.
Bank of Am. Nat’l Ass’n, 804 F.3d 316, 322, 322 n.5 (3d Cir.
2015) (stating Rule 12 permits filing a Rule 12(c) motion on
grounds that were available, but not previously raised, in a
Rule 12(b)(6) motion).
12
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
9
We review the invocation of judicial estoppel for abuse of
discretion. Montrose Med. Grp. Participating Sav. Plan v.
Bulger, 243 F.3d 773, 780 (3d Cir. 2001). A court “abuses its
discretion when its ruling is founded on an error of law or a
misapplication of law to the facts.” Id. (quoting In re O’Brien,
188 F.3d 116, 122 (3d Cir. 1999)).
13
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
10
PDX and SLS also contend the law-of-the-case doctrine
foreclosed the trial court from deciding whether there was an
“ongoing judicial proceeding” for Younger purposes. “Courts
apply the law of the case doctrine when their prior decisions in
an ongoing case either expressly resolved an issue or
necessarily resolved it by implication.” United Artists Theatre
Cir. v. Twp. of Warrington, 316 F.3d 392, 397–98 (3d Cir.
2003) (emphasis omitted) (quoting Aramony v. United Way of
Am., 254 F.3d 403, 410 (2d Cir. 2001)). Whether the law-of-
the-case doctrine applies is subject to plenary review. Coca-
Cola Bottling Co. of Shreveport v. Coca-Cola Co., 988 F.2d
414, 429 (3d Cir. 1993). Reviewing the previous trial court
opinion, we conclude no issue relating to Younger abstention
was either explicitly or implicitly decided.
11
“We exercise plenary review over a trial court’s . . .
determination of whether Younger abstention is proper.”
Hamilton v. Bromley, 862 F.3d 329, 333 (3d Cir. 2017)
(citation omitted). At an earlier time, we reviewed the decision
to abstain—after ensuring the legal requirements had been
met—for abuse of discretion. See, e.g., Addiction Specialists,
Inc., 411 F.3d at 408 (“Once we determine that the
requirements have been met, we review a district court’s
decision to abstain under Younger abstention principles for
abuse of discretion.” (quoting Gwynedd Props., Inc. v. Lower
14
Gwynedd Twp., 970 F.2d 1195, 1199 (3d Cir. 1995)) (citations
omitted)). But the Supreme Court in Sprint Communications,
Inc. v. Jacobs, 571 U.S. 69, 72 (2013) stated “Younger
exemplifies one class of cases in which federal-court
abstention is required . . . .” And since then we have applied a
de novo standard.
This practice is not uniform throughout the circuits, but
several have found the same. Compare Sirva Relocation, LLC
v. Richie, 794 F.3d 185, 191 (1st Cir. 2015) (applying de novo
standard of review to Younger abstention), Trump v. Vance,
941 F.3d 631, 636 (2d Cir. 2019) (same), Aaron v. O’Connor,
914 F.3d 1010, 1015 (6th Cir. 2019) (same), Mulholland v.
Marion Cnty. Election Bd., 746 F.3d 811, 816 (7th Cir. 2014)
(same), Rynearson v. Ferguson, 903 F.3d 920, 924 (9th Cir.
2018) (same), and Elna Sefcovic, LLC v. TEP Rocky Mt., LLC,
953 F.3d 660, 669 (10th Cir. 2020) (same), with Golphin v.
Thomas, 855 F.3d 278, 286 (4th Cir. 2017) (applying abuse of
discretion standard of review to Younger abstention), Gates v.
Strain, 885 F.3d 874, 879 (5th Cir. 2018) (applying de novo
standard of review for legal determinations and abuse of
discretion standard of review for decision to abstain to Younger
abstention), Oglala Sioux Tribe v. Fleming, 904 F.3d 603, 609–
10 (8th Cir. 2018) (same), Tokyo Gwinnett, LLC v. Gwinnett
Cnty., 940 F.3d 1254, 1266 (11th Cir. 2019) (applying abuse
of discretion standard of review to Younger abstention), and
Handy v. Shaw, Bransford, Veilleux & Roth, 325 F.3d 346, 349
(D.C. Cir. 2003) (applying de novo standard of review for legal
determinations and abuse of discretion standard of review for
decision to abstain to Younger abstention).
When we review a district court’s judgment on a Rule
15
The trial court correctly dismissed PDX’s case but erred in
dismissing SLS’s case because, for SLS, there was no ongoing
judicial proceeding.
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.”
12(c) motion for judgment on the pleadings, we must “view the
facts presented in the pleadings and the inferences to be drawn
therefrom in the light most favorable to the nonmoving party,”
and we may not affirm the grant of such a motion “unless the
movant clearly establishes that no material issue of fact
remains to be resolved and that he is entitled to judgment as a
matter of law.” Wolfington v. Reconstructive Orthopaedic
Assocs. II PC, 935 F.3d 187, 195 (3d Cir. 2019) (quotation
marks omitted).
16
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
17
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
12
We will not evaluate whether there are “other similarities to
criminal actions,” as it is sufficiently clear from the other
factors that this is a civil enforcement action that is quasi-
criminal in nature.
13
The Supreme Court does not require the state to commence
the judicial proceedings, as PDX seems to suggest, but only
notes it is often the case. See Sprint Commc’ns., Inc., 571 U.S.
at 79.
18
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 N.J. Stat. Ann. § 43:21-14 (describing civil
penalties for failing to report or withhold unemployment
compensation taxes); N.J. Stat. Ann. § 43:21-16(e) (describing
criminal fine and term of imprisonment for intentionally false
or fraudulent report). As to both PDX and SLS, assessment
may result in sanctions for a wrongful act.
“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 N.J.
Stat. Ann. § 43:21-14 (describing civil penalties for failing to
report or withhold unemployment compensation taxes).
Penalties are, by their very nature, retributive: a sanction for
wrongful conduct. See Gonzalez v. Waterfront Comm’n of N.Y.
Harbor, 755 F.3d 176, 182 (3d Cir. 2014) (concluding a
19
“disciplinary hearing” and possible termination of employment
were sanctions for wrongful conduct, making false statements).
Accordingly, we find this second factor favors finding this is a
civil enforcement action that is quasi-criminal in nature.
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. N.J. Stat. Ann. § 43:21-
16(e). PDX and SLS acknowledge the risk of New Jersey
criminally charging them in their pleadings, stating they fear
criminal consequences. There is a criminal analog here. This
third factor favors finding this civil enforcement action is
quasi-criminal in nature. Considering these factors together,
we hold this is a civil enforcement action that is quasi-criminal
in nature.
20
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 stayed.14 But “state proceedings are ‘ongoing’ for
Younger abstention purposes, notwithstanding [a] state court’s
stay of proceedings” if the state proceeding “was pending at
the time [the plaintiff] filed its initial complaint in federal
14
PDX does not disagree that the New Jersey OAL matter is
judicial in nature. We note proceedings presided over by an
Administrative Law Judge at the New Jersey OAL are judicial
for purposes of Younger abstention. See, e.g., Zahl v. Harper,
282 F.3d 204, 209 (3d Cir. 2002) (discussing a New Jersey
OAL action presided over by an ALJ and concluding “[s]tate
administrative proceedings such as this have long been
recognized as judicial in nature”).
21
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.
22
“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 factor
does not favor Younger abstention as to SLS because it is still
at the audit stage. The Commissioner urges us not to reach the
issue, offering three points in rebuttal: (1) SLS waived this
argument in the trial court; (2) SLS concedes a state action is
imminent; and (3) SLS is stonewalling the Commissioner,
thwarting its ability to conclude the audit and issue an
assessment. We disagree with each contention.
We see no waiver. The trial court erred because
“failures to raise [an] issue in the District Court . . . are . . .
23
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
24
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 ongoing election board investigation was “too
preliminary a proceeding to warrant Younger abstention”);
Guillemard-Ginorio v. Contreras-Gomez, 585 F.3d 508, 519
(1st Cir. 2009) (holding an “agency’s investigation . . . was at
too preliminary a stage to constitute a ‘proceeding’ triggering
Younger abstention”); Telco Commc’ns., Inc. v. Carbaugh, 885
F.2d 1225, 1229 (4th Cir. 1989) (“We decline to hold that
Younger abstention is required whenever a state bureaucracy
15
The trial court also cited one of our precedential cases, but
that involved a child support order that subjected an individual
to an ongoing obligation, even though he was not then
obligated to attend a judicial hearing. Anthony v. Council, 316
F.3d 412, 418–21 (3d Cir. 2003). There is no such judicial
order here.
25
has initiated contact with a putative federal plaintiff. Where no
formal enforcement action has been undertaken, any disruption
of state process will be slight.”); Major League Baseball v.
Butterworth, 181 F. Supp. 2d 1316, 1321 n.2 (N.D. Fla. 2001),
aff’d sub nom. Major League Baseball v. Crist, 331 F.3d 1177
(11th Cir. 2003) (holding Younger abstention inappropriate
when Florida’s attorney general served civil investigative
demands).
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.
16
The trial court did not address the merits of the action. The
Commissioner contends we may still consider the merits of the
action and should affirm the trial court’s dismissal of the case,
even if we conclude Younger abstention is inapplicable. While
we may affirm on any grounds apparent from the record, we
decline to address the merits here. Khazin v. TD Ameritrade
H2olding Corp., 773 F.3d 488, 491 (3d Cir. 2014).
26