PAGA Class Action Waiver | Attorney Lawyer

On February 25, 2019, the California Court of Appeal held that employers cannot require employees to arbitrate their representative claims under the California Private Attorney General Act of 2004 (“PAGA”), Labor Code § 2699 et seq., without the State’s consent. The court wrote,

The employees’ purported waiver of PAGA representative claims was unenforceable under California Supreme Court precedent, which remained valid because the United States Supreme Court had not decided the same question differently. Arbitration could not be compelled because the state, as the real party in interest (Lab. Code, § 2699), had not consented to arbitration or waived the right to go to court.

Correia v. NB Baker Electric, Inc. (2019) 32 Cal. App. 5th 602.

Discussed below – California laws are inconsistent with federal law under these federal cases (discussed below):

Valdez v. Terminix Internat. Co. Ltd. Partnership (9th Cir. 2017) 681 Fed. Appx. 592 (Valdez)
Wulfe v. Valero Refining Co.-California (9th Cir. 2016) 641 Fed. Appx. 758, 760;
Cabrera v. CVS Rx Services, Inc. (N.D.Cal. 2018) ___ F.Supp.3d ___ [2018 U.S.Dist. Lexis 43681, p. *12] [compelling arbitration of PAGA claims because, while “the law is clear” that PAGA claims cannot be waived, “nothing prevents them from being arbitrated”].)

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Applicable Law

Congress enacted the FAA in response to judicial hostility to arbitration and to ensure that private arbitration agreements are enforced according to their terms. (American Express Co. v. Italian Colors Restaurant (2013) 570 U.S. 228, 232 [186 L.Ed.2d 417, 133 S.Ct. 2304] (Italian Colors).) HN4 Under section 2 of the FAA, state laws inconsistent with the federal act’s provisions and objectives are preempted. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 343 [179 L.Ed.2d 742, 131 S.Ct. 1740] (Concepcion).) Under this rule, a state law contract defense is unenforceable if it applies only to arbitration contracts, derives its meaning from the fact an arbitration agreement is at issue, or interferes with the fundamental attributes of arbitration. (Id. at pp. 341–344; see Epic, supra, 584 U.S. at p. ___ [138 S.Ct. at p. 1622].) But state laws applying to arbitration contracts are enforceable to the extent they are not in conflict with the FAA. (Concepcion, at pp. 339, 343.)

In Concepcion, the United States Supreme Court held the FAA preempted a California Supreme Court decision (Discover Bank v. Superior Court (2005) 36 Cal.4th 148 [30 Cal. Rptr. 3d 76, 113 P.3d 1100]) holding that class action waivers are unenforceable in consumer contracts as [***13] against public policy. (Concepcion, supra, 563 U.S. 333.) The Concepcion court found the California Supreme Court’s holding interfered with the “fundamental attributes of arbitration” (id. at p. 344) because arbitration is “poorly suited” to resolve class actions (id. at p. 350), emphasizing a class action’s strict procedural formalities, complex notice requirements, and potential severe consequences to a defendant (id. at pp. 346–352).

Precedent: PAGA Waiver is Unenforceable

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, the California Supreme Court considered Concepcion’s impact on arbitration agreements in the employment context. (Iskanian, supra, 59 Cal.4th at pp. 362–363.) Iskanian held that a ban on bringing PAGA actions in any forum violates public policy and that this rule is not preempted by the FAA because the claim is a governmental claim. (Iskanian, supra, 59 Cal.4th at pp. 384–389.)

The Iskanian plaintiffs (who had signed arbitration agreements with class action and representative action waivers as part of their employment) asserted wage-and-hour class action claims and PAGA claims seeking statutory penalties for Labor Code violations. (Iskanian, at p. 361.)

The Iskanian court first addressed the issue whether the FAA preempts the state law rule, embodied in Gentry v. Superior Court (2007) 42 Cal.4th 443, providing class- [**184] action waivers in employment contracts generally violate public policy. (Iskanian, at pp. 362–366.)

The Iskanian court determined Concepcion’s holding and reasoning applied to class action waivers in employment contracts and overruled Gentry. (Iskanian, at pp. 362–366.) The Iskanian court specifically recognized that—as in Concepcion—the refusal to enforce the employment arbitration [***14] agreement class action waivers interfered with the fundamental attributes of arbitration. (Iskanian, at p. 364.)

In so ruling, the Iskanian court rejected the employees’ arguments that the class action waiver was unlawful under the National Labor Relations Act (NLRA; 29 U.S.C. § 151 et seq.), finding the NLRA did not override FAA’s preemption provision. (Iskanian, at pp. 366–374.)

The Iskanian court, however, reached a different conclusion on the waiver of the employee’s PAGA cause of action, holding a complete ban on PAGA actions is unenforceable. (Iskanian, supra, 59 Cal.4th at pp. 378–391.) The court’s conclusion was predicated on its view that a PAGA claim functions as a law enforcement mechanism to implement state labor laws. (Iskanian, at pp. 382, 386–387.)

As explained by Iskanian, the Legislature enacted PAGA to address the lack of civil penalties and the dearth of available resources to enforce state labor laws in California’s vast economy. (Iskanian, at p. 379; see Williams v. Superior Court (2017) 3 Cal.5th 531, 545.) The Legislature sought to remedy these problems by deputizing employees to bring civil penalty actions on behalf of the state. (Iskanian, at p. 379.)

To maintain some oversight, the Legislature required the employee to provide the state labor Agency with written notice of the alleged violations and permitted an employee to pursue the PAGA claim in court only if the Agency did not intervene. [***15] (Iskanian, at p. 380; see § 2699.3, subd. (a)(2)(A).) A successful PAGA claimant is entitled to collect 25 percent of the civil penalties for the employees, with the remainder going to the government. (§ 2699, subd. (i).) Although the Agency does not have supervisorial authority over the employee in the litigation (see Iskanian, at pp. 390–391), the Agency must be provided with prior notice of any proposed settlement, and the superior court must approve the final settlement (§ 2699, subd. (l)(2)).

Employee Waiver of Labor Code 2698 et seq. Unenforceable & Arbitration Cannot Compel California Real Party In Interest

In Correia v. NB Baker Electric, Inc. (2019) 32 Cal. App. 5th 602, the court held that employees’ purported waiver of Private Attorney General Act of 2004 (PAGA), Lab. Code, § 2698 et seq., representative claims was unenforceable under California Supreme Court precedent, which remained valid because the United States Supreme Court had not decided the same question differently; [3]-Arbitration could not be compelled because the state, as the real party in interest under Lab. Code, § 2699, had not consented to arbitration or waived the right to go to court.

In Correia – in 2014 and 2015, plaintiffs began working for Baker. At the outset, each employee [**180] signed an identical arbitration agreement (Arbitration Agreement). This agreement provided in relevant part:

“Section 4

“The Company and Employee agree that Employee’s employment … involves interstate commerce and thus the [FAA] applies.
[*610]

“Section 5

“Employee and the Company agree that in the event any dispute arises between Employee and the Company relating to Employee’s employment with the Company, including without limitation, any claim(s) based on common law, any express or implied contract, any federal or state statute, any statute or provision relating to employment discrimination and/or employment rights, any wage and hour claims, the federal or any state constitution and/or any public policy, will be determined by binding arbitration and not by a lawsuit or resort to court process. [¶] … [¶]

“The arbitration provided for in this Agreement shall be the exclusive forum for any dispute between Employee and the Company related to the claims set forth above… . [***5] [¶] … [¶]

“Section 6

“No claims covered by this Agreement shall be permitted by the arbitrator or a court to proceed or be maintained as a class action or representative action by an Employee on behalf of other Employees.

“Section 7

“NOTICE: BY SIGNING THIS AGREEMENT, YOU ARE GIVING UP YOUR RIGHT TO MAINTAIN ANY CLASS ACTION OR REPRESENTATIVE ACTION IN ARBITRATION OR ANY COURT CONCERNING ANY DISPUTE SPECIFIED IN SECTION 5 ABOVE.

“Section 8

“NOTICE: BY SIGNING THIS AGREEMENT, YOU ARE AGREEING TO HAVE ANY ISSUE RELATING TO YOUR EMPLOYMENT OR OTHER DISPUTE SPECIFIED IN SECTION 5 ABOVE DECIDED BY NEUTRAL ARBITRATION AND YOU ARE GIVING UP YOUR RIGHT TO A JURY OR COURT TRIAL.”

After a full analysis of state and federal laws, the court in Correia held:

In sum, we agree with the California Courts of Appeal that have held Iskanian’s view of a PAGA representative action necessarily means that HN16 this claim cannot be compelled to arbitration based on an employee’s [*625] predispute arbitration [**192] agreement absent some evidence that the state consented to the waiver of the right to bring the PAGA claim in court.3Link to the text of the note There was no such evidence produced in this case.

CA(18) (18) Finally, we reject Baker’s claim that the court erred in failing to order plaintiffs’ individual PAGA claims to arbitration. HN17 Generally, every PAGA action seeking penalties “‘is a representative action on behalf of the state.’” (Iskanian, supra, 59 Cal.4th at p. 387, italics added, quoting conc. opn. of Chin, J., at p. 394.) Thus, a single representative claim cannot be split into an arbitrable individual claim and a nonarbitrable representative claim. (Williams v. Superior Court (2015) 237 Cal.App.4th 642, 649 .)

Federal Law re Arbitration Agreement

Several federal courts have reached a different conclusion on this issue regarding the enforceability of a PAGA arbitration requirement contained in a predispute arbitration agreement.

Valdez v. Terminix Internat. Co. Ltd. Partnership (9th Cir. 2017) 681 Fed. Appx. 592 (Valdez)
Wulfe v. Valero Refining Co.-California (9th Cir. 2016) 641 Fed. Appx. 758, 760;
Cabrera v. CVS Rx Services, Inc. (N.D.Cal. 2018) Cabrera v. CVS Rx Servs., 2018 U.S. Dist. LEXIS 43681 – [compelling arbitration of PAGA claims because, while “the law is clear” that PAGA claims cannot be waived, “nothing prevents them from being arbitrated”.

Valdez v Terminix

The Valdez court described the reasoning underlying this conclusion. (Valdez, supra, 681 Fed. Appx. 592.) The district court in Valdez had found (similar to the Tanguilig and Betancourt courts) that a PAGA claim “‘belongs to the state, and the state has not waived the judicial forum,’” and therefore the PAGA claims could not be compelled to arbitration. (Valdez, at p. 594.)

The Ninth Circuit rejected this analysis and declined to create a rule that PAGA claims “categorically cannot proceed to arbitration,” explaining: “Iskanian and Sakkab clearly contemplate that an individual employee can pursue a PAGA claim in arbitration, and [***31] thus that individual employees can bind the state to an arbitral forum… . Iskanian recognized that although ‘[t]he government entity on whose behalf the plaintiff files suit is always the real party in interest in the suit,’ [citation], ‘the judgment in a PAGA representative action is binding not only on the named employee plaintiff but also on government agencies and any aggrieved employee not a party to the proceeding,’ [citation].

Employees can bind [**191] government agencies because they ‘represent[] the same legal right and interest’ as the government in PAGA proceedings. [Citation.] Indeed, ‘[a]n employee plaintiff suing … under the PAGA does so as the proxy or agent of the state’s labor law enforcement agencies.’ [Citation.] Accordingly, an individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration. Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid. [Citation.] [¶] Sakkab likewise recognized that individual employees may pursue PAGA claims in arbitration.” (Valdez, at p. 594.)

Note: California courts are not persuaded by Valdez’s anlaysis on this issue. (See Corresia p624-625)

Wulfe v Valero

In Wulfe, the court held:

The FAA applied to an employee’s wage claims. Although wage claims under Cal. Lab. Code § 229 were generally not subject to arbitration, the FAA superseded contrary state law;
The employee’s arbitration agreement was not unconscionable;
The district court properly compelled arbitration of the employee’s claim under the California Private Attorneys General Act (PAGA), as the order did not prevent the employee from bringing a PAGA claim in arbitration;
The employee was properly found to be judicially estopped from arguing that the arbitrator’s award should be reviewed de novo, as that argument was clearly inconsistent with the employee’s earlier position;
Remand was necessary for the district court to consider whether the arbitrator exceeded her powers by allegedly ordering the employee to proceed with his PAGA claim on an individual basis.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, applies to Wulfe’s wage claims. Although wage claims under California Labor Code section 229 are generally not subject to arbitration, the FAA supersedes any contrary state law. See Perry v. Thomas, 482 U.S. 483, 491, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987). The FAA “provide[s] for the enforcement of arbitration agreements within the full reach of the Commerce Clause.” Id. at 490. Here, not only does the DRP expressly state that the FAA applies, Wulfe and Valero’s employment [**3] relationship undoubtedly involves interstate commerce: Wulfe, a citizen of California, was employed by Valero, a citizen of Texas, as an oil refinery operator at one of Valero’s California facilities.

The district court did not err in compelling arbitration of Wulfe’s Private Attorneys General Act (“PAGA”), Cal. Labor Code § 2698, et seq. claim. The California Supreme Court and we have recently held that HN3 pre-dispute agreements to waive the right to bring a representative PAGA claim are unenforceable and that this rule is not preempted by the FAA. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015); Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348 (Cal. 2014). 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 [**4] the arbitrator to decide in the first instance.

Cabrera v CVS Rx

In Cabrera, the court addressed the issue: Whether Plaintiffs’ Claims Are Subject to Individual Arbitration.

Defendants CVS Rx Services, Inc., CVS Pharmacy, Inc., and Garfield Beach CVS, LLC provide pharmacy services and operate retail stores. CVS employed plaintiff Enko Telahun as a pharmacist and pharmacy manager. CVS also employed plaintiff Sigfredo Cabrera as a pharmacy service associate and pharmacy technician.

Although not identical, CVS’s arbitration agreements with Telahun and Cabrera both covered any and all “claims, disputes or controversies . . . arising out of or related to” plaintiffs’ employment [*3] with CVS, including “disputes regarding wages and other forms of compensation, hours of work, meal and rest break periods, seating, [and] expense reimbursement”

Section 6 of the arbitration agreements included a class action waiver, requiring plaintiffs to “bring any Covered Claims in arbitration on an individual basis only” and providing that plaintiffs waived any right to bring a claim “as a class, collective, representative or private attorney general action.” This waiver explicitly did not apply, however, to claims brought as a private attorney general solely on the employee’s own behalf and “not on behalf of or regarding others” (ibid.) (emphasis in original).

The court analyzed:

Citing to Iskanian, 59 Cal. 4th at 360, plaintiffs first argue that no portion of their PAGA claim can be compelled to arbitration. Plaintiffs’ reading of Iskanian is overbroad. While the law is clear that PAGA claims are not waivable, nothing prevents them from being arbitrated. Iskanian held that agreements waiving the right to bring representative PAGA claims — claims seeking civil penalties for Labor Code violations affecting other employees — are unenforceable under California law. Id. at 384. But as observed by our court of appeals, Iskanian “expresse[d] no preference regarding whether individual PAGA claims are litigated or arbitrated,” and provided only that representative PAGA claims may not be waived outright. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 434 (9th Cir. 2015). Our court of appeals later confirmed that nothing categorically prevents PAGA claims from proceeding to arbitration, and explained that Iskanian and Sakkab clearly contemplated that individual employees can agree to arbitrate PAGA claims. Valdez v. Terminix Int’l Co. Ltd. P’ship, 681 Fed. Appx. 592, 594 (9th Cir. 2017).

With respect to plaintiffs’ representative claim for civil penalties, the result is straightforward. The arbitration agreements purport to waive plaintiffs’ right to bring a PAGA claim “on behalf of or regarding others.” As explained above, however, such waiver is unenforceable [*13] under California law. The question then becomes whether the parties agreed to arbitrate the surviving representative claim. This order concludes that they did not. As the arbitration agreements clearly state, to the extent that the class action waiver is found unenforceable as to any PAGA action, that action “must be litigated in a civil court of competent jurisdiction.” Accordingly, pursuant to the terms of the parties’ agreement, plaintiffs’ representative PAGA claim for civil penalties must remain pending in this forum. CVS’s motion to compel this claim to arbitration is denied.

With respect to plaintiffs’ additional request for unpaid wages under Section 558, further analysis is needed. In opposing plaintiffs’ motion for leave to amend, CVS cites Esparza v. KS Industries, L.P., 13 Cal. App. 5th 1228, 221 Cal. Rptr. 3d 594 (2017), to argue that — even if plaintiffs’ representative PAGA claim for civil penalties must proceed in this forum — their request for unpaid wages is subject to individualized arbitration. Plaintiffs, in turn, cite Lawson v. ZB, N.A., 18 Cal. App. 5th 705, 227 Cal. Rptr. 3d 613 (2017), and argue that their request for unpaid wages under Section 558 is an “indivisible” part of their representative PAGA claim that they cannot be required to separately arbitrate.

In Esparza, the California Court of Appeal explained that PAGA authorizes [*14] both “civil penalties” (largely payable to the State of California) as well as unpaid wages pursuant to Section 558 (payable solely to the aggrieved employee). Id. at 1234. Esparza further explained that unlike a claim for civil penalties, a claim for unpaid wages “is a private dispute because, among other things, it could be pursued by [an employee] in his own right” rather than on behalf of the State. Id. at 1246. As a result, where an employee has agreed to arbitrate his or her claims and then asserts a claim for unpaid wages — even under PAGA — the employee must arbitrate his claim. Ibid.

In Lawson, by contrast, the California Court of Appeal disagreed with Esparza and held that representative PAGA claims are not arbitrable regardless of whether they seek unpaid wages payable only to aggrieved employees. Lawson reasoned that the legislature intended for unpaid wages to be treated as part of PAGA’s civil penalties, and accordingly such a remedy is not severable from the remainder of the PAGA claim. 18 Cal. App. 5th at 723-724.

Our court of appeals recently recognized this conflict among the California appellate courts. Mandviwala v. Five Star Quality Care, Inc., 723 Fed. Appx. 415, 2018 U.S. App. LEXIS 2770, 2018 WL 671138, at *2 (9th Cir. Feb. 2, 2018). In attempting to determine how the California Supreme Court would decide the issue, Mandviwala followed Esparza. Our court [*15] of appeals explained that Esparza “specifically distinguished between individual claims for compensatory damages (such as unpaid wages) and PAGA claims for civil penalties,” a distinction which is “more consistent with Iskanian and reduces the likelihood that Iskanian will create FAA preemption issues.” 2018 U.S. App. LEXIS 2770, [WL] at *2. This order finds the reasoning of Mandviwala persuasive and agrees that claims for unpaid wages under PAGA may be pursued in arbitration.

Unlike their request for civil penalties, plaintiffs’ claim for unpaid wages is not implicated by the class action waiver contained in CVS’s arbitration agreement. The class action waiver explicitly excludes claims brought by an employee “as a private attorney general solely on the Employee’s own behalf and not on behalf of or regarding others.” Plaintiffs’ PAGA claim for unpaid wages accordingly falls squarely within the scope of the parties’ agreement to arbitrate and arbitration of this victim-specific relief is therefore proper. CVS’s motions to compel this claim to arbitration are granted.

CVS next requests that this order stay plaintiffs’ PAGA claim pending the outcome of arbitration. Courts have discretion either to proceed with nonarbitrable [*16] claims or to stay remaining litigation. See U.S. for Use & Benefit of Newton v. Neumann Caribbean Int’l, Ltd., 750 F.2d 1422, 1426 (9th Cir. 1985). Here, plaintiffs have been granted leave to add a new class representative to the complaint. Moreover, because plaintiffs’ counsel has represented that plaintiffs will not pursue any claim which must be brought in arbitration, there is no risk that the undersigned judge and an arbitrator will reach inconsistent results with respect to plaintiffs’ claims. A stay in these circumstances is not warranted.

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