Two Recent Cases Further Divide California Federal and State Courts on Whether PAGA Claims are Arbitrable

Two Recent Cases Further Divide California Federal and State Courts on Whether PAGA Claims are Arbitrable

The California Attorneys General Act of 2004, Labor Code section 2698 et seq., often referred to as the “PAGA” is a fairly unique statute. The PAGA statute allows a private party to be “deputized” as a “private attorney general” for purposes of collecting civil penalties for certain enumerated Labor Code violations. Of course, this is in addition to a private party’s right to collect his or her alleged unpaid wages, and other “damages” he or she may recover, such as statutory penalties, attorneys’ fees, and costs.  PAGA penalties are generally $100 for the first violation and $200 for each subsequent violation, per pay period, and per employee. Accordingly, the PAGA adds significant salt to the wounds of employers faced with seemingly unending lawsuits by former employees.

The more significant concern for employers, however, is the putative class action complaints.  Class action lawsuits greatly enhance the stakes for employers due to the number of potential claims at issue and resulting damages.  But at least for now, employers concerned with class action lawsuits can implement class action waivers inside of arbitration agreements.  In doing so, they can potentially shield themselves from class action litigation.  But what about a PAGA shield?  Unfortunately, the issue is more complex for PAGA claims.

California Supreme Court’s decision addresses this complexity in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 383.  In Iskanian, the California Supreme Court held that pre-dispute waivers of PAGA claims are not enforceable.  Iskanian at 383 (“An agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code. Because such an agreement has as its ‘object … indirectly, to exempt [the employer] from responsibility for [its] own … violation of law,’ it is against public policy and may not be enforced.”).

However, compelling a PAGA claim into arbitration is not “waiving” the right to bring the claim altogether.  The California Supreme Court recognized the difference in Iskanian, leaving the door open to compelling arbitration of PAGA claims. Iskanian at 391. Since then, there has been a significant divergence between California state courts and California federal courts whether PAGA claims are arbitrable, often citing Iskanian to come to different conclusions.

For example, California state appellate decisions have generally been hostile to employers’ attempts to compel arbitration of PAGA claims.  See e.g., Williams v. Superior Court (2015) 237 Cal.App.4th 642, 649 (“Accordingly, petitioner cannot be compelled to submit any portion of his representative PAGA claim to arbitration, including whether he was an “aggrieved employee.”); Hernandez v. Ross Stores, Inc. (2016) 7 Cal.App.5th 171, 178 (“Moreover, we find Williams persuasive that determination of whether the party bringing the PAGA action is an aggrieved party should not be decided separately by arbitration.”); Lawson v. ZB, N.A. (2017) 18 Cal.App.5th 705, 725 (“As the cases emphasize, under the PAGA Lawson is acting as a representative of the state, which has not agreed to arbitrate its claim for civil penalties”). But see Perez v. U-Haul Co. of California (2016) 3 Cal.App.5th 408, 422 (“For the purposes of this case, we need not determine whether PAGA claims are categorically exempted from private arbitration agreements. We conclude only that California law precludes an employer from requiring an employee to individually arbitrate whether he or she qualifies as an “aggrieved employee” within the meaning of PAGA, while simultaneously preserving its right to a judicial forum for all other aspects of the claim.”).

Meanwhile, many California federal courts, including the Ninth Circuit, see no problem sending PAGA claims to arbitration.  Sakkab v. Luxottica Retail North America, Inc. (9th Cir. 2015) 803 F.3d 425, 435 (“The Iskanian rule prohibiting waiver of representative PAGA claims does not diminish parties’ freedom to select informal arbitration procedures.”); Wulfe v. Valero Refining Co.-California (9th Cir. 2016) 641 Fed.Appx. 758, 760 (“But the district court’s order compelling arbitration did not run afoul of Sakkab and Iskanian because the order did not prevent Wulfe from bringing a representative PAGA claim in arbitration; instead, the district court left the scope of the agreement to the arbitrator to decide in the first instance.”); Valdez v. Terminix International Company Limited Partnership (9th Cir. 2017) 681 Fed.Appx. 592, 594 (“Iskanian and Sakkab clearly contemplate that an individual employee can pursue a PAGA claim in arbitration, and thus that individual employees can bind the state to an arbitral forum.”).  But see Whitworth v. SolarCity Corp. (N.D. Cal. 2018) 336 F.Supp.3d 1119, 1126 (“The Court therefore denies SolarCity’s motion to compel arbitration of Plaintiffs Whitworth, Carranza, and Frias’s PAGA claims.”).

Most recently, two California court decisions continued to diverge in opinion on this issue.  A few months ago a federal district court held that PAGA claims were arbitrable in McComack v. Marriott Ownership Resorts, Inc. (S.D. Cal., Sept. 5, 2018, No. 317CV01663BENWVG) 2018 WL 4242098.  McComack was a sales employee for Marriot’s vacation sales division.  She filed a putative class action and PAGA action for various wage claims under California and federal law.  She had signed an arbitration agreement which waived the right to bring class and representative claims.  Marriot moved to compel arbitration of McComack’s individual claims and stay the remaining litigation (which included the representative PAGA claim). McComack argued that the agreement was unenforceable because it waived her right to bring a representative action and that PAGA claims could not be compelled into arbitration.  The District Court disagreed with the following opinion: “The Court finds Plaintiffs’ reading of Iskanian overbroad. The law is clear that PAGA claims are not waivable. However, nothing prevents them from being arbitrated.” McComack, 2018 WL 4242098, at *4.  Although the District Court did not compel arbitration of McComack’s PAGA claim, ultimately, this was likely only due to Marriot’s decision to compel arbitration of only McComack’s individual claims and stay the remaining claims.

Comparatively, two weeks ago, in Correia v. NB Baker Electric, Inc. (Cal. Ct. App., Feb. 25, 2019, No. D073798) 2019 WL 910979, the Fourth Appellate District held that PAGA claims cannot be compelled into arbitration. In Corrreia, two former employees of NB Baker sued for various wage and hours claims and asserted a PAGA claim.  The plaintiffs had signed arbitration agreements which waived both class and representative actions.  NB Baker moved to compel arbitration of all of their claims including their PAGA claim. NB Baker argued that although Iskanian prevented an outright waiver of PAGA claims, they can still be subject to arbitration.  The Fourth Appellate District disagreed, while recognizing the federal/state divergence:

We also reject Baker’s contention that the court erred in failing to order plaintiffs’ PAGA claim to arbitration. Although Iskanian did not decide the issue of whether courts have the authority to order a PAGA representative action into arbitration, several California Courts of Appeal have held a PAGA arbitration requirement in a pre-dispute arbitration agreement is unenforceable based on Iskanian’s view that the state is the real party in interest in a PAGA claim. These courts reasoned the state must have consented to the agreement to effectively waive the right to bring the PAGA claim into court. We agree with this analysis as applied to the circumstances before us.

We are aware the federal courts have reached a different conclusion regarding the arbitrability of a PAGA representative claim, but find these decisions unpersuasive because the courts did not fully consider the implications of the qui tam nature of a PAGA claim on the enforceability of an employer-employee arbitration agreement.

Correia, 2019 WL 910979, at *1–2.

Ultimately, whether or not a PAGA claim can be compelled into arbitration will be decided first by the language of the arbitration agreement, and then by which venue the lawsuit is pending in, federal or state court.  But, whether or not an employer actually wants the PAGA claim in arbitration, or stayed pending arbitration, is a strategy issue for another day.

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