Management of PAGA Litigation after Iskanian

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court ruled that claims to enforce civil penalties under the Private Attorneys General Act (PAGA), were not waivable, and refused to enforce a predispute agreement to arbitrate that purported to impose such a waiver. (Class action waivers must be enforced under AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).) In the wage of Iskanian, the trial courts have routinely severed and retained PAGA claims, while ordering non PAGA claims to arbitration.

In Williams v. Superior Court (Pinkerton), Case No. B261007 (Cal. Ct. App. June 9, 2015), the employee's complaint asserted a single representative PAGA claim. The trial court ordered the underlying dispute over whether there had been a Labor Code violation to arbitration. The Second District Court of Appeal reversed the order as contrary to Iskanian. "[W]e conclude that petitioner’s single cause of action under PAGA cannot be split into an arbitrable 'individual claim' and a nonarbitrable representative claim."

Hence, employees who are willing to forego any individual recovery and be content with a percentage of the civil penalties under PAGA may avoid arbitration.

Class Action Waivers

Disputes over the enforceability of class action waivers are percolating in several forums. Most recently, the National Labor Relations Board has rejected federal courts of appeals rulings that upheld class action waivers against attacks that they violate the National Labor Relations Act. In Murphy Oil USA, Inc., Case No. 10-CA-038804 (Oct. 28, 2014), the Board ruled that extracting a class action waiver as a condition of employment and then enforcing it in a judicial forum violates employees' right under section 7 of the NLRA to engage in concerted activities. Because section 7 applies regardless of whether the workplace is unionized or not, all employers risk an enforcement action by the Board if they obtain class action waivers from their employees.

As the Murphy Oil opinion itself recognizes, judicial reception to the Board's position has been hostile. It originally announced that position in the D.R. Horton case. The Fifth Circuit declined to enforce that decision in D.R. Horton, Inc. v. NLRB, 737 F. 3d 344 (5th Cir. 2013). Two other circuits have refused enforcement of Board rulings based on the Board's rejection of class action waivers. See Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013) and  Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013).

In the mean time, as mentioned in a previous post, California courts are dealing with the enforcement of arbitration agreements that do not include class claims. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court ruled that an arbitration agreement with a class action waiver was enforceable, but that PAGA claims covered by the agreement could not be waived. A petition for certiorari is pending in the U.S. Supreme Court. There is a split in the courts of appeal about who decides whether an arbitration clause provides for arbitration of class claims. The Second District Court of Appeal in Los Angeles has ruled that the question is for the arbitrator. Sandquist v. Lebo Auto., Inc., 228 Cal. App. 4th 65 (2014). Division Three of the Fourth District Court of Appeal in Santa Ana has ruled that it is for the court. Network Capital Funding Corp. v. Papke, 2014 Cal. App. LEXIS 907(Cal. App. 4th Dist. Oct. 9, 2014)

Can California ban arbitration?

California and the U.S. Supreme Court have been engaged in a vigorous back and forth regarding arbitration for many years. In Southland Corp. v. Keating, 465 U.S. 1 (1984), the Supreme Court overturned a ban on arbitration imposed by the California Franchise Investment Law, because it violated the Federal Arbitration Act. That Act provides: "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. section 2.

The ensuing years have seen the Supreme Court rebuff various attempts to get around the Act's requirement that courts must enforce arbitration agreements. Perry v. Thomas, 482 U.S. 483 (1987) (California could not refuse to enforce arbitration of wage disputes); Preston v. Ferrer, 552 U.S. 346 (2008) (California Labor Commissioner's authority could not supplant that of the arbitrator); AT&T Mobility LL C v. Concepcion, 563 US 321 (2011) (California cannot refuse to enforce arbitration agreements that bar arbitration of class actions).

Two recent developments, one from the California Supreme Court and one from the California Legislature promise to keep the conflict alive:

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court refused to enforce an arbitration clause that required the claimant to waive representative claims under the Private Attorneys General Act of 2004, because enforcement would violate public policy. CLS filed a petition for certiorari with the Supreme Court on September 22, 2014.

On September 30, 2014, Governor Brown signed Assembly Bill 2617, which bars enforcement of arbitration agreements that are extracted as a condition of entering into a contract for goods or services, to the extent that such an agreement purports to include claims based on the right to be free from any violence, or intimidation by threat of violence. It seems unlikely that the statute will survive a challenge under the Federal Arbitration Act.

Arbitration Agreement May Not Preclude PAGA Representative Actions

The Labor Code Private Attorneys General Act of 2004 (Labor Code sections 2698 - 2699.5) (PAGA) allows a aggrieved employee to recover civil penalties for violations of the California Labor Code on behalf of himself or herself and other employees. 75 percent of the amount recovered goes to the State and the balance to the aggrieved employees. The Federal Arbitration Act requires all courts in the United States to enforce arbitration agreements, "save upon such grounds as exist at law or in equity for the revocation of any contract." In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court rejected a California Supreme Court ruling that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract, disputes between the parties are likely to involve small amounts of damages, and the party with inferior bargaining power alleges a deliberate scheme to defraud. (See Discover Bank v. Superior Court, 36 Cal.4th 148 (2005).) The ruling stood as an obstacle to the accomplishment of the FAA's objectives.

The effect of the Concepcion case on class action waivers in the employment context is unsettled. The California Supreme Court has granted review in several cases that raise that issue. The lead case is Iskanian v. CLS Transportation of Los Angeles. Others include Franco v. Arakelian Enterprises and Flores v. West Covina Auto Group.

In Brown v. Superior Court, Case No. H037271 (Jun. 4, 2013), the Sixth District Court of Appeal has ruled that, when applied to the PAGA, an arbitration agreement that purports to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right. Concepcion does not require a different result, because a PAGA claim is asserted on behalf of the State and does not belong to the individual employee.