F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

H A N N A H F R E D R I C K S O N ; A S H L E Y K R

E N I N G ; M A U R I A L E E B R

A C K E , Plaintiffs-Appellants

,

v.

S T A R B U C K S C O R

P O R A T I O N , a W ashing ton corporation, Defendant-Appellee. No. 13-36067

D .C. N o. 3:13-cv-00029-HU

OPI N I ON

A ppeal from the United States District Court for the District of Oreg on Malcolm F . Marsh, Senior District J udg e, Presiding

Arg ued and Submitted March 9, 2016

Portland, Oreg on

F iled November 3, 2016

B e fore: Ray

mond C. F isher and Paul J . W atford, Circuit J u dg es, and Donald E. W alter, * Senior District J udg e.

Opinion by

J u dg e W atford

* T h e Ho n o rab le Do n ald E. W alter, Sen io r District J u d g e f o r th e U .S. District Co u rt f

o r th e W estern District o f L o u isian a, sittin g b y d esig n atio n

.F R E D R I C K S O N V

. S T A

R B U C K S 2

SUMMARY * *

Tax Injunction Act / F ederal-State Com ity Doctrine

The panel reversed the district c ourt’s judg ment in a class action broug ht by three S t arbucks baristas challeng ing S t arbucks’ practice of withholding state a nd federal tax e s from b arsitas’ pay checks based on the cash tips they r eceive, and r e m a n d ed with instructions to remand to state court because all of the claims w ere jurisd i ctionally barred o r foreclosed by

the comity

doctrine.

The panel held that under the Tax I njunction Act and the Anti-I njunction Act, the d istrict court lacked subject jurisdict i o n over the plaintiffs’ claims for declaratory a nd injunctive relief with respect to Starbucks’ withholding o f
state and f

ederal tax es. T he panel also held that the federalcomity doctrine barred the district court from aw ar d ing statutory damag es on the state-tax component o f p l a intiffs’ claims, from which the federal-tax component co u ld not be severed.

COUNSEL

J on M. Eg an (arg

u ed), J o n M. Eg an PC, L ake Osweg o, Oreg on, for Plaintiffs-Appellants.

Pratik A. Shah (arg

ued), Daniel L

. Nash, J ames E. Ty sse, a nd Z

. W

. J ulius Chen, Akin Gump Strauss Hauer & F eld L L P,

* * T h is su m m ary co n s titu tes n o p art o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.F R E D R I C K S O N V

. S T A

R B U C K S 3

W a s h i ng ton, D.C.; Greg o ry W

. Knopp and Rex S. Heink e, Akin Gump Strauss Hauer & F eld L L P, L os Ang eles, California; Carol J

. B ernick, Christopher F

. McCracken, a nd De r ek D

. Green, D avis W r ig ht Tremaine L L P, Portland, Oreg on; for Defendant-Appellee.

OP INION

W A TF ORD, Circuit J udg e:

This is a c lass action broug ht ag ainst S t a r b ucks b y three baristas w ho used to work at the company ’s coffee sh o p s in Oreg on. They challeng e the leg ality of Starbucks’ practice o f withholding state and federal tax es from baristas’ pay c hecks based on the cash tips they receive. W e must decide whether the district court may hear this case g iven the constra i n ts imposed by

the Tax I njunction Act, the Anti-Injunction Act, and the federal-state comity doctrine.

I

A f amiliar sig ht at a

n y neig hborhood Starbucks is the tip jar near the c ash reg ister inviting customers to leave tips for the baristas. According to the plaintiffs (and w hat follows is drawn entirely from their co m p l a i n t), the baristas pool the tips left by c u s t o m e r s and d ivide them up a t the end of e ach week. As a g eneral practice, the baristas do not report to Starbucks how much they receive in t i p s

. I nstead, for tax withholding purposes, the c ompany simply imputes 50 cents per hour in estimated tip income to each barista and withholds
state and federal tax es from the b aristas’ pay checks based on that amount.F R E D R I C K S O N V

. S T A

R B U C K S 4

The plaintiffs alleg e that neither state nor federal tax law allows Starbucks to w ithhold tax es in this fashion. They contend that f

ederal law permits employ ers t o withhold federal tax es based o n estim a t e d tip income only in c ertain

c i r c u mstances not met here, and that Oreg on law does n o t treat the baristas’ tips as w ag es subject to withholding o f state tax es at all.

The plain t i ffs filed a class action ag ainst Starbucks in Oreg on state c ourt on behalf of all c urrent and former baristas employ e d at the c o m p a n y ’s coffee shops in Oreg on. Their complai n t a sserts five state-law c auses of action, e ach predicated on the a lleg ed violation of an Ore gon wag e-andhour statute

. See O r. Rev. Stat. §§ 652.120, 652.140, 652.610, 653.025, 653. 2 6 1

. Each claim alleg es that Starbucks violated state wag e- a n d -hour laws by deducting
tax es f rom the baristas’ pay checks in a manner not authoriz ed by state or f

ederal law, thereby failing to pay the baristas their full wag es when due.

The plaintiffs do not seek actual damag es; they have been able to recover any tax es wrong fully withheld by

filing their annual tax returns an d o b t a ining refunds for any overwithholding that occurred. They instead seek statutory damag es, which differ depending on the statute invoked. A s to s o m e o f the claims, Oreg o n law allows an e mploy ee w ho

was n ot p a i d h e r f

ull wag e s w hen due to recover u p to 30 day s of wag es a s a penalty

. O r. R e v

. Stat. §§ 652.150, 653.055. The plaintiffs seek 30 day s of wag e s per barista for each of those claims. As to the remaining claim, Oreg on law authoriz es a

n employ ee to r ec o ver a $200 statutory penalty for any wrong ful deduction from w ag es. § 652.615. T he pl a i n t iffs seek a p enalty of $200 per pay check for e ach barista, on their view that the wr o n gf u l deduction provisionF R E D R I C K S O N V

. S T A

R B U C K S 5

applies to each pay check a nd allows for only o n e violation based on the total amount wrong fully deducted.

The complaint also requests declaratory and injunc t ive relief barring Starbucks from continuing to withhold state a nd federal tax es based o n the imputed 50 cents per hour in tip income. (B ecause nothing ultimately turns on it, we need not decide whether the three n amed plaintiffs, who are no long er employ e d b y S t arbucks, h ave A rticle I I I standing to seek prospective relief.)

Starbucks removed the case to f ederal c o u rt, and the plaintiffs now concede that the Class A ction F airness A ct provides a basis for federal subject matter ju r isdiction. See 28 U.S.C. § 1332(d)

. S h o rtly a f ter removing the c ase, Starbucks moved to dismiss the complaint with p r e judice on the g round that all of the plaint i f f s ’ claims a

re either preempted by federal tax law or barr e d under Oreg on law. The plaintiffs opposed Starbucks’ motion and filed their o wn motion requesting that the case be rema nded to state court. The district court denied the plaintiffs ’ motion, g ranted Starbucks’ motion, and entered judg ment dismissing the case with prejudice.

I I

B e fore w e c a n address the merits of the district court’s ruling

, w e must decide whether the district cou r t h a d the

a u t h o rity to hear this c ase. That requires us to unpack t h e plaintiffs’ c laims, both in terms of the r elief they seek and the theori e s o f liability they assert. The plaintiffs seek two distinct f o r ms of relief: declaratory and injunctive relief on the one hand, and statutory damag es on the other. And their claims under O reg o n’s wag e-and-hour statutes are predicatedF R E D R I C K S O N V

. S T A

R B U C K S 6

on alleg ed violations of b oth state and federal tax law: They contend that O reg on law does not authoriz e Starbucks to withhold the state tax es at issue, and that federal law does not authoriz e Starbucks to withhold the federal tax es at issue.

W e ex plain first w hy the district court lacks the authority
to g rant declaratory and injunctive relief w ith respect to either the state-tax co mponent or the federal-tax component of the plaintiffs’ claims. W e then e x plain why the district court is also foreclosed from awarding statutor y damag es, which requires that the entire case be remanded to state court.

A

W e beg in with the plaintiffs’ r e q uest for declaratory

and injunctive relief with respect to Starbucks’ withholding o f
state tax es. Cong ress has sharply curtailed the authority o f f ederal courts to issue declaratory or injunctive relief that impedes the a dministration of state tax laws. The Tax I njunction Act provides: “The district courts shall n ot enjoin, suspend or restrain the assessment, levy or c ollection of any ta x under State law where a p lain, speedy and e fficient remedy may b e h ad in the courts of such State.” 28 U .S.C. § 1341. No o ne disput e s t h at a plain, speedy

, and e fficient remedy is av a i lable to the plaintiffs in Oreg on’s courts, a nd it is well settled that the Tax I njunction Act bars the entry o f declaratory judg ments to the same ex tent that i t b ar s the issuance o f injunctions. See California v. Grace Brethren Church

, 457 U.S. 393, 4 08–11 (1982). Thus, the only question is whether the declaratory an d i n j u n ctive relief the plaintiffs seek would “enjoin, suspend or restrain”—that is, stop—the collection of state tax es within the meaning of the Act. Direct Marketing Association v. Brohl

, 135 S. Ct. 1124, 1132–33 (2015).F R E D R I C K S O N V

. S T A

R B U C K S 7

W e thin k t h e p laintiffs’ r equested relief w ould do just that. The p laintiffs want the district court to de c l ar e that Starbucks’ w ithholding of state tax es on the basis of imputed ti p income is illeg al u nder Oreg on law and to enjoin S t arbucks from continuing to eng ag e in that practice. T h e Supreme Court has held that an employ er’s withholding o f
tax p ay ments from wa ge s constitutes a method of tax “collection,” and that a n o rder e njoining employ er withholding therefore stops collection of the tax

. U nited States v. A merican Friends Service Committee
, 419 U.S. 7, 10 (1974) (per c uriam). (

American Friends involved the AntiI njunct i o n A ct, 26 U.S.C. § 7421(a), which bars actions seeking to restra i n the collection of federal tax es, but the Court con strues the two Acts in tandem. See Direct Marketing

, 135 S. Ct. at 1 129.) T he Third Circuit has squarely h eld that the Tax I n junction Act bars actions, like this one, seeking to enjoin a n employ er’s withholding o f state tax es from wag es. S

ipe v

. Amerada Hess Corp.
, 689 F .2d 396, 401–03 (3d Cir. 1982). And the F ourth Circuit has h eld that withholding state tax es from lottery winni n gs is part o f

a State ’ s collection of tax es and therefore may not be enjoined under the Act. International Lotto Fund v. Virginia State L o t t ery Department
, 2 0 F .3d 589, 591–93 (4th Cir. 1994). W e ag ree with the Third a n d F ourth Circuits and hold
t h a t the Tax I njunction Act bars the district court from enjo i n ing Starbucks’ withholding o f state tax es from the baristas’ pay

checks. 1

1 Starb u ck s co n ten d s th at Brig ht v. Bech tel Petro leu m , In c. , 7 8 0 F.2 d 7 6 6 (9 th Cir. 1 9 86 ), co m

pels a d if f eren t resu lt b ecau s e th e co u rt th ere did

n o t h o ld t h a t th e T ax In

j u n ctio n A ct barred an em p lo y ee’ s breach

- o f

co n tract actio n

ag ain st h i s em

p l o y er f o r w ith h o ld in g state tax es f ro m h is
p ay ch eck s. Brig h t d o es n o t co n tro l th e o u tco m e in t h is case. Al t h o u gh Brig h t m en t i o n ed th e T ax In j u n ctio n A ct in a f

o otn o te, th e co u rt en g ag ed in n o an aly sis as to w

h eth er i t ap p lied th ere, w h i l e a t th e sam e tim eF R E D R I C K S O N V

. S T A

R B U C K S 8

Our holding is c o n s i stent with the Supreme Court’s decision in H

ibbs v

. W

inn
, 542 U. S

. 8 8 (2004), which

ex p lained that the Tax I njunction Act serves “state-revenuep r otective objectives” and according ly applies only if t h e requested r elief 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 challeng e to state ta x c r edits because g ranting the r elief the plaintiffs soug ht (invalidation of the credits) wo u ld actually have increased,

no t r e d uced, the flow of state tax revenue. See Hibbs

, 542 U .S. at 96. Granting the declaratory and injunctive relief requested here, by c ontrast, would reduce the flow of state tax

revenue: I f the relief w e r e g ranted, Starbucks would no long er collect the state tax es in question and w ould no long er remit those funds to Oreg on’s treasury

.

I t is true that the plaintiffs are not challeng ing the amount in tax es ultimately o wed, but that was a lso true in American Friends an d S i

p e y e t did not chang e the outcome. See American Friends

, 419 U.S. at 8; Sipe
, 689 F .2d at 402. That the plaintiffs concede the baris t as’ tips are tax able income under Oreg on law does not alter the revenue-reducing effect of the r elief they seek. Even thoug h the plaintiffs may owe the same amount in tax es at the end of the y ear reg ardless o f whether Starbucks collects those tax es throug h w ithholding

, that do e s n ot mean Oreg on’s tax revenue w ould remain the

same in th e ab s e nce of withholding

. I f withholding were enjoined, O reg on would no long er recei v e t a x e s on the baristas’ tip income unless the baristas r eport that income on

h o ld in g th at th e A n ti- In j u n ctio n A ct d id ap p ly w ith resp ect to th e

an alo g o u s claim

ag ain st th e w ith h o ld in g o f f ed eral tax es. S

ee id

. at 7 7 0
, 7 7 1 n .6

.F R E D R I C K S O N V

. S T A

R B U C K S 9

their tax r eturns and have the money to pay the tax es owe d when it comes time to file their returns. There is no basis for

us to as sume that would happen. I ndeed, it is for this very

reason that States collect tax e s throug h pay check withholding in the first place. B ecause the requested declarator y a nd injunctive relief would stop, not merely inhibit, the flow o f
tax revenue into Oreg on’s coffers, the Tax I njunction A ct strips t he district court o f jurisdiction to award such relief. See Direct Marketing , 135 S. Ct. at 1133.

Our h olding is a l s o consistent with the scope of the Tax I njunction Act outlined by the Supreme Court in Direct M a r k e t i n g

. T h e p l a i n t i f f s t h e r e c h a l l e n g e d t h e constitutionality of certain notice and r eporting requirements desig ned to f

acilitat e Colorado’s collection of sales and use tax es. Id. at 1128. The Co u r t h eld that, althoug h the notice and reporting requirements “may improve Colorado’s ability
to assess a nd ultimately collect its sales and use tax es,” the Tax I n junction Act is “not key e d to all ac t i v i t i e s that may i m prove a State’s ability to assess and collect tax es.” I d. a t 1131. I n stead, the Court held, the A ct is “key ed 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 p laintiffs challeng e their employ e r’s withholding practices. A s ex plai n e d above, an employ e r’s withholding of tax es constitutes a method of tax “collection,” and a n o r der enjoining that withholding stops collection of the tax

. American Friends

, 419 U

. S

. a t 10. According ly

, t h is case falls within the scope of the Tax I njunction Act contemplated by Direct Marketing

.

F or similar r easons, w e c o n c lude that the district court lacks jurisdiction to issue declaratory or injunctive r elief with respect to Starbucks’ withholding o f federal tax es. The Anti-F R E D R I C K S O N V

. S T A

R B U C K S 10

I njunction Act—the counterpart to the Tax I njunction A ct

a p p licable to federal tax es—provides that “no suit for t h e purpose of restraining the assessment or collection o f a ny tax shall be maintained in any c o u r t by any person,” subject to several ex ceptions that d o not app l y h ere. 26 U .S.C. § 7421(a). L ike the Tax I njunction Act, the Anti-I n j unction Act applies to clai m s for declaratory as well a s injunctive relief. See Hansen v. Department of Treasury
, 528 F .3d 597, 601 (9th Cir. 2007). As noted above, the Supreme Court has squarely held that the Anti-I njunction A ct bars actions ag ainst

an employ er’s withholding of federal tax es fr o m wag es. American Friends

, 419 U.S. a t 1 0; see Maxfield v. U

. S. Postal Service
, 7 5 2 F .2d 433, 434 ( 9th Cir. 1 984). Our analy sis o f the b ar imposed by the Tax I njunction Act with respect to the
state-tax component o f the plaintiffs’ claims applies equally under the Anti-I njunction Act to the f ederal-tax component o f their claims. The district court therefore lacks jurisdiction to issue declaratory and injunctive reli ef w ith respect to Starbucks’ withholding of state or federal tax es.

B

W e nex t c onsider whether the district court had the authority to entertain the p l a intiffs’ claims for statutory damag es. Those claims are ag ain predicated o n Starbucks’ alleg ed violation of both state and federal tax law.

As to the state-tax c omponent of the p laintiffs’ claims, the Supreme Court h a s not y et decided whether the Tax I njunctio n Ac t b ars c laims for damag es. That is a question

we need not resolve b ecause an award of statutory d a m a g e s is precluded here by

the federal-state comity

doctrine.F R E D R I C K S O N V

. S T A

R B U C K S 11

I n cases involving state tax es, the comity d o c t rine establishes an even “[ m] ore embrac i v e” prudential rule that federal c ourts should refrain from hearing “ claims for relief that risk disrupting st a t e tax administration.” Levin v

. Commerce Energy, Inc.
, 560 U .S. 41 3, 417 (2010). The comity doctrine ex tends to claims seeking damag es based on the same federalism concer n s animating the T ax I njunction Act’s l i m i ts on declaratory and injunctive relief. Fair Assessment in Real Estate Assoc i a t i on, Inc. v. McNary
, 454 U.S. 100, 107, 115–16 (1981); Marvin F. Poer & Co. v

. Co u n t y o f Alameda

, 725 F .2d 1234, 1236 (9th Cir. 1 984); Sipe
, 689 F

. 2d at 403–04. That the plaintiffs seek to r ecover only statutory damag es, and not the tax amoun t s s a id to be improperly collected, does n ot matter. Fair Assessment itself involved a c laim for punitive damag es in addition to actual damag es, 454 U.S. at 106, and the a lleg ed d amag es in S ipe included statutory

penalties, 689 F .2d at 399–400.

Any award of statutory damag e s here w ould have the

same disruptive effect a s entry of a declaratory judg ment o r issuance of an injunction, thereby under m ining the staterevenue-protective objectives o f the Tax I njunction Act. See May Tru c k i n g Co.
, 388 F .3d at 1274. To award statutory damag es, the d istrict c ourt would first have to declare that Oreg on law prohibits Starbucks’ practice of w ithholding state tax es on the basis of i mputed tip income, and Starbucks would of course c ease doing so in order to avoid future liability

. S

ee F air Assessment
, 454 U.S. at 113. The impermissibl e end result, as with declaratory or injunctive relief, would be to stop the flow of tax revenue into O r eg o n’s coffers.

As Starbucks notes, the plaintiffs do n ot aim to invalidate Oreg on’s tax laws as unconstitutional or to drag state officersF R E D R I C K S O N V

. S T A

R B U C K S 12

i n t o federal court to defend those laws, f actors th at contributed to the c omity concerns in F air Assessment

. Id. at 115–16. B ut the damag es relief soug ht b y the plaintiffs would nonetheless “halt” a part of Oreg on’s tax scheme. Id.
at 1 1 5. The f

act that the plaintiffs seek to disrupt this scheme by attempting to enforce their o wn interpretation of state tax law rather than asserting a f ederal constitutional challeng e actually streng thens the case for comity

. P r e c isely because the plaintiffs’ claims turn solely on the proper interpretation of state law, there is no federal interest invol v e d i n t he dispute, w hich Oreg on’s c o urts are better equipped to resolve
g iven their g r eater familiarity with the n u a n ces of state tax law. Nor does the f

act that the plaintiffs have sued a private employ e r rather than state o fficials chang e the analy sis, for Starbucks h a s been sued—and is b ef o r e the court defending its tax withho l d i ng practices—only in its role as the State’s “private collection ag ent[ ] .” Brennan v. Southwest Airli nes Co.
, 134 F .3d 1 405, 1411 (9th Cir. 1 998) (alteration omitted).

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

. 2d 766 (9th Cir. 1986), is ag ain unavailing

. There, an employ e e alleg ed that his employ er’s withholding of state a nd federal tax e s breache d his employ ment contract, a

nd we refused to remand his c laim challe n gi n g the w ithholding o f
state tax e s t o s t a t e court. We declined to invoke the comity doctrine because the “state income tax ation sy stem [ was] not at issue” in the case. Id. at 771. Resolution of the plaintiff’s challeng e to the withholding of state tax es turned entirely on the validity of his challeng e to the withholding of federal
tax es, because a state reg u l ation directed the plaintiff’s employ e r to withhold state tax es from his pay check i f the employ e r w as required to w ithhold federal tax es. W e first determined that the plaintiff’s federal withholding challeng e

was utterly frivolous. We then held that, to conserve judicialF R E D R I C K S O N V

. S T A

R B U C K S 13

resources, the district court properly disposed of the
p l a i n t iff’s equally f

rivolous challeng e to state-tax w i t h h o l d i n g without remanding that portion of the c a se 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 Oreg on courts to resolve.

W h at r e m a i n s is the federal-tax component of the plaintiffs’ claims for statutory damag es. W e need not decide whether the jurisdictional bar imposed by the Anti-I njunction Ac t ex tends to the p laintiffs’ requested damag es relief because the plaintiffs may not p ursue the f e d eral-tax
compo n e n t of their claims on a stand-alone basis. The plaintiffs have pleaded each of t h e i r c laims in a unitary fashion such that the improper wit hholding of either state or federal tax es would entitle each c l as s member to the same indivis i b le statutory penalty

. F or some of their claims, the plaintiffs seek a sing le statutory penalty of 30 day s’ w ag es for each barista, which each barista may recover on l y o nce reg ardless of whether their wag es were subject to improper deductions for state tax e s, federal tax es, o r b oth. The same is
true for the $200 statutory p e n al t y p e r p ay check, which the plaintiffs assert may be recovered only once for the total
amount w rong fully deducted. Thus, the plaintiffs’ claims for da m a g es cannot be severed into separate state-tax a nd federal-tax component s ; for each claim, the p laintiffs have pleaded two theories o f liability for the same relief to c ure the

same w rong. S t arbucks concedes this point in its brief, acknowledg ing that “ each of t h e five counts alleg ed in the complaint weaves predicate f e d eral- and state-law theories into a u nitary state-law claim that must be heard in either state or federal court, but not both.”

* * *F R E D R I C K S O N V

. S T A

R B U C K S 14

Under the Tax I n

junct i o n Act and the Anti-I njunction Act, the district court lacks s ubject matter jurisdiction over the plaintiffs’ claims for d eclaratory and i n j u nctive relief. The federal-state comity doctrine bars the district court from awarding statutory damag es on the state-tax component of the
p laintiffs’ c laims, from which the federal-tax c omponent cannot be severed. B ecause all of the claims a re jurisdict i o nally b arred or f oreclosed by the comity doctrine, the entire a ction must be remanded to state cou r t

. 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).

W e reverse the district court’s judg ment a nd r emand with instructions to remand the case to state court.

REVERSED and REMANDED.