Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-36067/USCOURTS-ca9-13-36067-0/pdf.json

Parties Involved:
Maurialee Bracke
Appellant
Hannah Fredrickson
Appellant
Ashley Krening
Appellant
Starbucks Corporation
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HANNAH FREDRICKSON;

ASHLEY KRENING;

MAURIALEE BRACKE,

Plaintiffs-Appellants,

v.

STARBUCKS CORPORATION, a

Washington corporation,

Defendant-Appellee.

No. 13-36067

D.C.

No. 3:13-cv-00029-HU

OPINION

Appeal from the United States District Court

for the District of Oregon

Malcolm F. Marsh, Senior District Judge, Presiding

Argued and Submitted March 9, 2016

Portland, Oregon

Filed November 3, 2016

Before: Raymond C. Fisher and Paul J. Watford, Circuit

Judges, and Donald E. Walter,* Senior District Judge.

Opinion by Judge Watford

* The Honorable Donald E. Walter, Senior District Judge for the U.S.

District Court for the Western District ofLouisiana, sitting by designation.

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2 FREDRICKSON V. STARBUCKS

SUMMARY**

Tax Injunction Act / Federal-State Comity Doctrine

The panel reversed the district court’s judgment in a class

action brought by three Starbucks baristas challenging

Starbucks’ practice of withholding state and federal taxes

from barsitas’ paychecks based on the cash tips they receive,

and remanded with instructions to remand to state court

because all of the claims were jurisdictionally barred or

foreclosed by the comity doctrine.

The panel held that under the Tax Injunction Act and the

Anti-Injunction Act, the district court lacked subject

jurisdiction over the plaintiffs’ claims for declaratory and

injunctive relief with respect to Starbucks’ withholding of

state and federal taxes. The panel also held that the federalcomity doctrine barred the district court from awarding

statutory damages on the state-tax component of plaintiffs’

claims, from which the federal-tax component could not be

severed. 

COUNSEL

Jon M. Egan (argued), Jon M. Egan PC, Lake Oswego,

Oregon, for Plaintiffs-Appellants.

Pratik A. Shah (argued), Daniel L. Nash, James E. Tysse, and

Z.W. Julius Chen, Akin Gump Strauss Hauer & Feld LLP,

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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FREDRICKSON V. STARBUCKS 3

Washington, D.C.; Gregory W. Knopp and Rex S. Heinke,

Akin Gump Strauss Hauer & Feld LLP, Los Angeles,

California; Carol J. Bernick, Christopher F. McCracken, and

Derek D. Green, Davis Wright Tremaine LLP, Portland,

Oregon; for Defendant-Appellee.

OPINION

WATFORD, Circuit Judge:

This is a class action brought against Starbucks by three

baristas who used to work at the company’s coffee shops in

Oregon. They challenge the legality of Starbucks’ practice of

withholding state and federal taxes from baristas’ paychecks

based on the cash tips they receive. We must decide whether

the district court may hear this case given the constraints

imposed by the Tax Injunction Act, the Anti-Injunction Act,

and the federal-state comity doctrine.

I

A familiar sight at any neighborhood Starbucks is the tip

jar near the cash register inviting customers to leave tips for

the baristas. According to the plaintiffs (and what follows is

drawn entirely from their complaint), the baristas pool the

tips left by customers and divide them up at the end of each

week. As a general practice, the baristas do not report to

Starbucks how much they receive in tips. Instead, for tax

withholding purposes, the company simply imputes 50 cents

per hour in estimated tip income to each barista and withholds

state and federal taxes from the baristas’ paychecks based on

that amount.

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4 FREDRICKSON V. STARBUCKS

The plaintiffs allege that neither state nor federal tax law

allows Starbucks to withhold taxes in this fashion. They

contend that federal law permits employers to withhold

federal taxes based on estimated tip income only in certain

circumstances not met here, and that Oregon law does not

treat the baristas’ tips as wages subject to withholding of state

taxes at all.

The plaintiffs filed a class action against Starbucks in

Oregon state court on behalf of all current and former baristas

employed at the company’s coffee shops in Oregon. Their

complaint asserts five state-law causes of action, each

predicated on the alleged violation of an Oregon wage-andhour statute. See Or. Rev. Stat. §§ 652.120, 652.140,

652.610, 653.025, 653.261. Each claim alleges that

Starbucks violated state wage-and-hour laws by deducting

taxes from the baristas’ paychecks in a manner not authorized

by state or federal law, thereby failing to pay the baristas their

full wages when due.

The plaintiffs do not seek actual damages; they have been

able to recover any taxes wrongfully withheld by filing their

annual tax returns and obtaining refunds for any overwithholding that occurred. They instead seek statutory

damages, which differ depending on the statute invoked. As

to some of the claims, Oregon law allows an employee who

was not paid her full wages when due to recover up to 30

days of wages as a penalty. Or. Rev. Stat. §§ 652.150,

653.055. The plaintiffs seek 30 days of wages per barista for

each of those claims. As to the remaining claim, Oregon law

authorizes an employee to recover a $200 statutory penalty

for any wrongful deduction from wages. § 652.615. The

plaintiffs seek a penalty of $200 per paycheck for each

barista, on their view that the wrongful deduction provision

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FREDRICKSON V. STARBUCKS 5

applies to each paycheck and allows for only one violation

based on the total amount wrongfully deducted.

The complaint also requests declaratory and injunctive

relief barring Starbucks from continuing to withhold state and

federal taxes based on the imputed 50 cents per hour in tip

income. (Because nothing ultimately turns on it, we need not

decide whether the three named plaintiffs, who are no longer

employed by Starbucks, have Article III standing to seek

prospective relief.)

Starbucks removed the case to federal court, and the

plaintiffs now concede that the Class Action Fairness Act

provides a basis for federal subject matter jurisdiction. See

28 U.S.C. § 1332(d). Shortly after removing the case,

Starbucks moved to dismiss the complaint with prejudice on

the ground that all of the plaintiffs’ claims are either

preempted by federal tax law or barred under Oregon law. 

The plaintiffs opposed Starbucks’ motion and filed their own

motion requesting that the case be remanded to state court. 

The district court denied the plaintiffs’ motion, granted

Starbucks’ motion, and entered judgment dismissing the case

with prejudice.

II

Before we can address the merits of the district court’s

ruling, we must decide whether the district court had the

authority to hear this case. That requires us to unpack the

plaintiffs’ claims, both in terms of the relief they seek and the

theories of liability they assert. The plaintiffs seek two

distinct forms of relief: declaratory and injunctive relief on

the one hand, and statutory damages on the other. And their

claims under Oregon’s wage-and-hour statutes are predicated

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6 FREDRICKSON V. STARBUCKS

on alleged violations of both state and federal tax law: They

contend that Oregon law does not authorize Starbucks to

withhold the state taxes at issue, and that federal law does not

authorize Starbucks to withhold the federal taxes at issue.

We explain first why the district court lacks the authority

to grant declaratoryand injunctive relief with respect to either

the state-tax component or the federal-tax component of the

plaintiffs’ claims. We then explain why the district court is

also foreclosed from awarding statutory damages, which

requires that the entire case be remanded to state court.

A

We begin with the plaintiffs’ request for declaratory and

injunctive relief with respect to Starbucks’ withholding of

state taxes. Congress has sharply curtailed the authority of

federal courts to issue declaratory or injunctive relief that

impedes the administration of state tax laws. The Tax

Injunction Act provides: “The district courts shall not enjoin,

suspend or restrain the assessment, levy or collection of any

tax under State law where a plain, speedy and efficient

remedy may be had in the courts of such State.” 28 U.S.C.

§ 1341. No one disputes that a plain, speedy, and efficient

remedy is available to the plaintiffs in Oregon’s courts, and

it is well settled that the Tax Injunction Act bars the entry of

declaratory judgments to the same extent that it bars the

issuance of injunctions. See California v. Grace Brethren

Church, 457 U.S. 393, 408–11 (1982). Thus, the only

question is whether the declaratory and injunctive relief the

plaintiffs seek would “enjoin, suspend or restrain”—that is,

stop—the collection of state taxes within the meaning of the

Act. Direct Marketing Association v. Brohl, 135 S. Ct. 1124,

1132–33 (2015).

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FREDRICKSON V. STARBUCKS 7

We think the plaintiffs’ requested relief would do just

that. The plaintiffs want the district court to declare that

Starbucks’ withholding of state taxes on the basis of imputed

tip income is illegal under Oregon law and to enjoin

Starbucks from continuing to engage in that practice. The

Supreme Court has held that an employer’s withholding of

tax payments from wages constitutes a method of tax

“collection,” and that an order enjoining employer

withholding therefore stops collection of the tax. United

States v. American Friends Service Committee, 419 U.S. 7, 10

(1974) (per curiam). (American Friends involved the AntiInjunction Act, 26 U.S.C. § 7421(a), which bars actions

seeking to restrain the collection of federal taxes, but the

Court construes the two Acts in tandem. See Direct

Marketing, 135 S. Ct. at 1129.) The Third Circuit has

squarely held that the Tax Injunction Act bars actions, like

this one, seeking to enjoin an employer’s withholding of state

taxes from wages. Sipe v. Amerada Hess Corp., 689 F.2d

396, 401–03 (3d Cir. 1982). And the Fourth Circuit has held

that withholding state taxes from lottery winnings is part of

a State’s collection of taxes and therefore may not be

enjoined under the Act. International Lotto Fund v. Virginia

State Lottery Department, 20 F.3d 589, 591–93 (4th Cir.

1994). We agree with the Third and Fourth Circuits and hold

that the Tax Injunction Act bars the district court from

enjoining Starbucks’ withholding of state taxes from the

baristas’ paychecks.1

1 Starbucks contends that Bright v. Bechtel Petroleum, Inc., 780 F.2d

766 (9th Cir. 1986), compels a different result because the court there did

not hold that the Tax Injunction Act barred an employee’s breach-ofcontract action against his employer for withholding state taxes from his

paychecks. Bright does not control the outcome in this case. Although

Bright mentioned the Tax Injunction Act in a footnote, the court engaged

in no analysis as to whether it applied there, while at the same time

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8 FREDRICKSON V. STARBUCKS

Our holding is consistent with the Supreme Court’s

decision in Hibbs v. Winn, 542 U.S. 88 (2004), which

explained that the Tax Injunction Act serves “state-revenueprotective objectives” and accordingly applies only if the

requested relief would “reduce the flow of state tax revenue.” 

Id. at 104, 106; see May Trucking Co. v. Oregon Department

of Transportation, 388 F.3d 1261, 1267 (9th Cir. 2004). The

Court concluded that the Act did not bar a challenge to state

tax credits because granting the relief the plaintiffs sought

(invalidation of the credits) would actually have increased,

not reduced, the flow of state tax revenue. See Hibbs,

542 U.S. at 96. Granting the declaratory and injunctive relief

requested here, by contrast, would reduce the flow of state tax

revenue: If the relief were granted, Starbucks would no

longer collect the state taxes in question and would no longer

remit those funds to Oregon’s treasury.

It is true that the plaintiffs are not challenging the amount

in taxes ultimately owed, but that was also true in American

Friends and Sipe yet did not change the outcome. See

American Friends, 419 U.S. at 8; Sipe, 689 F.2d at 402. That

the plaintiffs concede the baristas’ tips are taxable income

under Oregon law does not alter the revenue-reducing effect

of the relief they seek. Even though the plaintiffs may owe

the same amount in taxes at the end of the year regardless of

whether Starbucks collects those taxes through withholding,

that does not mean Oregon’s tax revenue would remain the

same in the absence of withholding. If withholding were

enjoined, Oregon would no longer receive taxes on the

baristas’ tip income unless the baristas report that income on

holding that the Anti-Injunction Act did apply with respect to the

analogous claim against the withholding of federal taxes. See id. at 770,

771 n.6.

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FREDRICKSON V. STARBUCKS 9

their tax returns and have the money to pay the taxes owed

when it comes time to file their returns. There is no basis for

us to assume that would happen. Indeed, it is for this very

reason that States collect taxes through paycheck withholding

in the first place. Because the requested declaratory and

injunctive relief would stop, not merely inhibit, the flow of

tax revenue into Oregon’s coffers, the Tax Injunction Act

strips the district court of jurisdiction to award such relief. 

See Direct Marketing, 135 S. Ct. at 1133.

Our holding is also consistent with the scope of the Tax

Injunction Act outlined by the Supreme Court in Direct

Marketing. The plaintiffs there challenged the

constitutionality of certain notice and reporting requirements

designed to facilitate Colorado’s collection of sales and use

taxes. Id. at 1128. The Court held that, although the notice

and reporting requirements “may improve Colorado’s ability

to assess and ultimately collect its sales and use taxes,” the

Tax Injunction Act is “not keyed to all activities that may

improve a State’s ability to assess and collect taxes.” Id. at

1131. Instead, the Court held, the Act is “keyed to the acts of

assessment, levy, and collection themselves, and enforcement

of the notice and reporting requirements is none of these.” Id.

(emphasis added). Here, the plaintiffs challenge their

employer’s withholding practices. As explained above, an

employer’s withholding of taxes constitutes a method of tax

“collection,” and an order enjoining that withholding stops

collection of the tax. American Friends, 419 U.S. at 10. 

Accordingly, this case falls within the scope of the Tax

Injunction Act contemplated by Direct Marketing.

For similar reasons, we conclude that the district court

lacks jurisdiction to issue declaratory or injunctive relief with

respect to Starbucks’ withholding of federal taxes. The Anti-

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10 FREDRICKSON V. STARBUCKS

Injunction Act—the counterpart to the Tax Injunction Act

applicable to federal taxes—provides that “no suit for the

purpose of restraining the assessment or collection of any tax

shall be maintained in any court by any person,” subject to

several exceptions that do not apply here. 26 U.S.C.

§ 7421(a). Like the Tax Injunction Act, the Anti-Injunction

Act applies to claims for declaratory as well as injunctive

relief. See Hansen v. Department of Treasury, 528 F.3d 597,

601 (9th Cir. 2007). As noted above, the Supreme Court has

squarelyheld that the Anti-Injunction Act bars actions against

an employer’s withholding of federal taxes from wages. 

American Friends, 419 U.S. at 10; see Maxfield v. U.S. Postal

Service, 752 F.2d 433, 434 (9th Cir. 1984). Our analysis of

the bar imposed by the Tax Injunction Act with respect to the

state-tax component of the plaintiffs’ claims applies equally

under the Anti-Injunction Act to the federal-tax component of

their claims. The district court therefore lacks jurisdiction to

issue declaratory and injunctive relief with respect to

Starbucks’ withholding of state or federal taxes.

B

We next consider whether the district court had the

authority to entertain the plaintiffs’ claims for statutory

damages. Those claims are again predicated on Starbucks’

alleged violation of both state and federal tax law.

As to the state-tax component of the plaintiffs’ claims, the

Supreme Court has not yet decided whether the Tax

Injunction Act bars claims for damages. That is a question

we need not resolve because an award of statutory damages

is precluded here by the federal-state comity doctrine.

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FREDRICKSON V. STARBUCKS 11

In cases involving state taxes, the comity doctrine

establishes an even “[m]ore embracive” prudential rule that

federal courts should refrain from hearing “claims for relief

that risk disrupting state tax administration.” Levin v.

Commerce Energy, Inc., 560 U.S. 413, 417 (2010). The

comity doctrine extends to claims seeking damages based on

the same federalism concerns animating the Tax Injunction

Act’s limits on declaratory and injunctive relief. Fair

Assessment in Real Estate Association, Inc. v. McNary,

454 U.S. 100, 107, 115–16 (1981); Marvin F. Poer & Co. v.

County of Alameda, 725 F.2d 1234, 1236 (9th Cir. 1984);

Sipe, 689 F.2d at 403–04. That the plaintiffs seek to recover

only statutory damages, and not the tax amounts said to be

improperly collected, does not matter. Fair Assessment itself

involved a claim for punitive damages in addition to actual

damages, 454 U.S. at 106, and the alleged damages in Sipe

included statutory penalties, 689 F.2d at 399–400.

Any award of statutory damages here would have the

same disruptive effect as entry of a declaratory judgment or

issuance of an injunction, thereby undermining the staterevenue-protective objectives of the Tax Injunction Act. See

May Trucking Co., 388 F.3d at 1274. To award statutory

damages, the district court would first have to declare that

Oregon law prohibits Starbucks’ practice of withholding state

taxes on the basis of imputed tip income, and Starbucks

would of course cease doing so in order to avoid future

liability. See Fair Assessment, 454 U.S. at 113. The

impermissible end result, as with declaratory or injunctive

relief, would be to stop the flow of tax revenue into Oregon’s

coffers.

As Starbucks notes, the plaintiffs do not aim to invalidate

Oregon’s tax laws as unconstitutional or to drag state officers

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12 FREDRICKSON V. STARBUCKS

into federal court to defend those laws, factors that

contributed to the comity concerns in Fair Assessment. Id. at

115–16. But the damages relief sought by the plaintiffs

would nonetheless “halt” a part of Oregon’s tax scheme. Id.

at 115. The fact that the plaintiffs seek to disrupt this scheme

by attempting to enforce their own interpretation of state tax

law rather than asserting a federal constitutional challenge

actually strengthens the case for comity. Precisely because

the plaintiffs’ claims turn solely on the proper interpretation

of state law, there is no federal interest involved in the

dispute, which Oregon’s courts are better equipped to resolve

given their greater familiarity with the nuances of state tax

law. Nor does the fact that the plaintiffs have sued a private

employer rather than state officials change the analysis, for

Starbucks has been sued—and is before the court defending

its tax withholding practices—only in its role as the State’s

“private collection agent[].” Brennan v. Southwest Airlines

Co., 134 F.3d 1405, 1411 (9th Cir. 1998) (alteration omitted).

Starbucks’ reliance on Bright v. Bechtel Petroleum, Inc.,

780 F.2d 766 (9th Cir. 1986), is again unavailing. There, an

employee alleged that his employer’s withholding of state and

federal taxes breached his employment contract, and we

refused to remand his claim challenging the withholding of

state taxes to state court. We declined to invoke the comity

doctrine because the “state income taxation system [was] not

at issue” in the case. Id. at 771. Resolution of the plaintiff’s

challenge to the withholding of state taxes turned entirely on

the validity of his challenge to the withholding of federal

taxes, because a state regulation directed the plaintiff’s

employer to withhold state taxes from his paycheck if the

employer was required to withhold federal taxes. We first

determined that the plaintiff’s federal withholding challenge

was utterly frivolous. We then held that, to conserve judicial

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FREDRICKSON V. STARBUCKS 13

resources, the district court properly disposed of the

plaintiff’s equallyfrivolous challenge to state-tax withholding

without remanding that portion of the case to state court. Id.

Bright did not involve a dispute, like this one, over the proper

interpretation of state law—a dispute, as we have said, that is

best left to the Oregon courts to resolve.

What remains is the federal-tax component of the

plaintiffs’ claims for statutory damages. We need not decide

whether the jurisdictional bar imposed by the Anti-Injunction

Act extends to the plaintiffs’ requested damages relief

because the plaintiffs may not pursue the federal-tax

component of their claims on a stand-alone basis. The

plaintiffs have pleaded each of their claims in a unitary

fashion such that the improper withholding of either state or

federal taxes would entitle each class member to the same

indivisible statutory penalty. For some of their claims, the

plaintiffs seek a single statutory penalty of 30 days’ wages for

each barista, which each barista may recover only once

regardless of whether their wages were subject to improper

deductions for state taxes, federal taxes, or both. The same is

true for the $200 statutory penalty per paycheck, which the

plaintiffs assert may be recovered only once for the total

amount wrongfully deducted. Thus, the plaintiffs’ claims for

damages cannot be severed into separate state-tax and

federal-tax components; for each claim, the plaintiffs have

pleaded two theories of liability for the same relief to cure the

same wrong. Starbucks concedes this point in its brief,

acknowledging that “each of the five counts alleged in the

complaint weaves predicate federal- and state-law theories

into a unitary state-law claim that must be heard in either

state or federal court, but not both.”

* * *

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14 FREDRICKSON V. STARBUCKS

Under the Tax Injunction Act and the Anti-Injunction

Act, the district court lacks subject matter jurisdiction over

the plaintiffs’ claims for declaratory and injunctive relief. 

The federal-state comity doctrine bars the district court from

awarding statutory damages on the state-tax component of the

plaintiffs’ claims, from which the federal-tax component

cannot be severed. Because all of the claims are

jurisdictionally barred or foreclosed by the comity doctrine,

the entire action must be remanded to state court. See

28 U.S.C. § 1447(c); Hawthorne Savings F.S.B. v. Reliance

Insurance Co. of Illinois, 421 F.3d 835, 852 (9th Cir. 2005).

We reverse the district court’s judgment and remand with

instructions to remand the case to state court.

REVERSED and REMANDED.

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