United States: Arbitration Of PAGA Claims: Another California Divide Emerges

In a March 8, 2017, article, we talked about how the Ninth Circuit Court of Appeals compelled the arbitration of a California Private Attorney General Act (PAGA) representative claim in Valdez v. Terminix International Co., L.P., No. 15-56736 (9th Cir. Mar. 3, 2017). And, while we mentioned potential difficulties in arbitrating such cases, we didn't address the differing interpretations of Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014) by California courts. But a recent California Court of Appeals opinion has highlighted the issue.

In Betancourt v. Prudential Overall Supply, No. EO64326 (Cal. Ct. App. 4th Dist., Mar. 7, 2017), the California Court of Appeals took the position that arbitration was not available. The Betancourt plaintiff sued Prudential Overall Supply, raising only a PAGA claim. The trial court denied Prudential's motion to compel arbitration, concluding that a PAGA claim was not subject to arbitration under an existing agreement. The Court of Appeals affirmed.

The court's analysis of Iskanian offered a different perspective than the Ninth Circuit's:

"We have not interpreted Iskanian as prohibiting arbitration of all PAGA claims. Hypothetically, a PAGA plaintiff might consent to arbitration after the filing of a complaint. We provide no advice on whether such a procedure would be proper. Our reading of Iskanian is limited to a defendant's reliance on a predispute arbitration agreement to compel arbitration when an employee becomes a type of qui tam plaintiff in a PAGA action. The problem ... concerns using a predispute contract between private parties to bind the state."

Based on its analysis, the appellate court distinguished the type of arbitration agreement sufficient to compel arbitration, declaring:

"The issue in the instant case is not an all-or-nothing question of whether PAGA cases can be arbitrated. The issue is whether Prudential can rely upon a predispute arbitration agreement with Betancourt to compel arbitration in a PAGA case. In Iskanian, our Supreme Court explained, 'Simply put, a PAGA claim lies outside the FAA's coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents – either the Labor and Workforce Development Agency or aggrieved employees – that the employer has violated the Labor Code.' Betancourt is not suing in his private capacity. Betancourt is suing on behalf of the state."

Yet, other than stating that predispute arbitration agreements are insufficient, the California appellate court doesn't address what type of agreement might pass muster. And, in the unpublished Eaton v. Big League Dreams Manteco, LLC, No. CO79374 (Cal. Ct. App. 3d Dist., Nov. 2, 2016) decision, the court found "that the question whether representative PAGA claims can ever be subject to mandatory arbitration remains unsettled."

But this runs counter to the reasoning of Sakkab v. Luxotta Retail N. Am., which stated:

"In sum, the Iskanian rule does not conflict with the [Federal Arbitration Act (FAA)], because it leaves parties free to adopt the kinds of informal procedures normally available in arbitration. It only prohibits them from opting out of the central feature of the PAGA's private enforcement scheme – the right to act as a private attorney general to recover the full measure of penalties the state could recover."

Other California appellate decisions have also foreclosed having arbitrators decide any issues relating to PAGA claims, including whether the plaintiff is an "aggrieved" individual under PAGA. See Hernandez v. Ross Stores, Inc., No. EO64026, 2016 WL 7131651 (Cal. Ct. App. 4th Dist., Dec. 7, 2016).

In Hernandez, the appellate court considered whether under the FAA an employer and employee have a right to "individually arbitrate discrete disputes underlying a PAGA claim while leaving the PAGA claim and PAGA remedies to be collectively litigated under Iskanian." Ultimately, the court affirmed the trial court's denial of the motion to compel arbitration.

The affirmance was premised, in part, on Williams v. Superior Court, 237 Cal. App. 4th 642 (2015), which found decisions "suggest that a single representative PAGA claim cannot be split into an arbitrable individual claim and a non-arbitrable representative claim" and that an employee "cannot be compelled to submit any portion of his representative PAGA claim to arbitration, including whether he was an 'aggrieved employee.'"

Upon this foundation, the court found no basis to split the individual portion of a PAGA claim from the representative segment to be pursued in court. Indeed, the court concluded that to pursue a PAGA claim in multiple venues "would thwart the public policy of PAGA."

So, contrary to the Ninth Circuit, the California courts have concluded that predispute arbitration agreements should play no role in the resolution of PAGA.

It is unclear what has caused the differences between the California and federal courts as far as the handling of PAGA claims. Is it ideological – or is it dependent on a characterization of the nature of PAGA claims and the role of the individual plaintiff?

BOTTOM LINE:

Putting aside the potential challenges of arbitrating a PAGA representative claim, the division between the California and federal courts makes decision-making for employers extremely challenging. The ability to enforce an arbitration agreement covering PAGA claims now may depend entirely on whether federal jurisdiction exists.

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