Courts have little leeway to avoid enforcement of an arbitration clause. Indeed, the United States Supreme Court has spilt much ink reinforcing the power and scope of the Federal Arbitration Act (“FAA”), the legislation requiring that courts compel arbitration of claims subject to an arbitration clause. In California, however, employees can circumvent their arbitration clauses by asserting Private Attorneys General Act (“PAGA”) claims, a loophole that two California Courts of Appeal decisions have recently reinforced. The United States Supreme Court, nonetheless, appears poised to step-in and potentially close this loophole for good.
The PAGA Claim Exception
The California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 378 (Cal. 2014), carved out an exception to the general rule that employees can be compelled to arbitration pursuant to an arbitration clause included in their employers’ arbitration agreement. The Iskanian court held that arbitration provisions requiring an employee to litigate their employment claims in arbitration simply do not apply to representative actions. As a result, a California court cannot force an employee to arbitrate claims brought on a representative basis.
Representative basis, in this context, does not mean class action plaintiffs, but qui tam actions in which the plaintiff brings the action on behalf of a completely distinct entity even though only the entity actually has standing to pursue that claim. As a statute that is litigated on a representative basis, PAGA permits employees to act as private attorney generals, enabling them to sue their employers for claims on a representative basis for claims that only the State of California could previously have brought. Indeed, PAGA was a solution to the perceived problem that many Labor Code provisions went unenforced because they were punishable only as criminal misdemeanors for which only a district attorney—not an employee—was entitled to bring suit. As a result, a PAGA action allows an employee to stand in a district attorney’s shoes and enforce Labor Code provisions that only a district attorney previously was permitted to enforce. The employee, however, may only seek civil penalties related to the employer’s noncompliance with particular statutes; PAGA does not recompense the plaintiff for his or her damages he or she experienced as a result of the employer’s noncompliance.
In holding both that arbitration clauses cannot prevent employees from asserting PAGA claims and that the FAA does not preempt that preceding rule, the Iskanian court’s reasoning was relatively simple. As a representative action, a PAGA claim exists between the State of California and the employer, with the employee-plaintiff merely acting as a conduit of the State of California to assert its claim. Because the State of California owns the PAGA claim, not the employee, the employee is without authority to agree to waive jury trial and arbitrate prospective PAGA claims on a pre-dispute basis. In turn, the California Supreme Court held that the FAA does not preempt this state rule because the FAA is limited to private disputes arising out of the parties’ contract. In contrast, as stated above, PAGA actions are disputes between the State of California and the employer. PAGA actions thus fall outside the scope of the FAA.
Recent California Courts of Appeal Decisions
Two recent California Courts of Appeal decisions reinforce the Iskanian holding, and emphasize the reality that California courts are unlikely to favorably receive creative arguments attempting to circumvent the Iskanian holding. First, on April 28, 2022, the California Courts of Appeal decided Wing v. Chico Healthcare & Wellness Centre, LP (“Chico”), 2022 WL 1261452 (Cal. Ct. App. 2022 Apr. 28, 2022), a case in which the employer sought to test whether the PAGA-claim exception that the California Supreme Court upheld in Iskanian remains in effect following relatively recent United States Supreme Court precedent. The employer argued that the US Supreme Court’s rulings in Kindred Nursing Ltd P’ship v. Clark (“Kindred Nursing”), 137 S. Ct. 1421 (2017), and Epic Sys. Corp. v. Lewis (“Epic Systems”), 138 S. Ct. 1612 (2018), require a reexamination of Iskanian. We have previously spoken about the useful import of the Kindred Nursing and Epic Systems decisions, both of which reaffirmed the broad reach of the FAA, and the power of class action waivers when included within arbitration clauses. The Chico court, however, refused to rule that either Supreme Court precedent overruled Iskanian, instead distinguishing both cases because they involved private disputes between private parties (i.e., the employee and the employer), but Iskanian was built upon the premise that PAGA claims are public disputes between the State of California and the employer. The Chico court thus affirmed that the employer was without authority to prevent litigation of the employee’s PAGA claim.
One day later, on April 29, 2022, the California Courts of Appeal decided a second case—Leshane v. Tracy VW, Inc., 2022 WL 1283276 (Cal. Ct. App. Apr. 29, 2022), an employment dispute in which former employees (the “plaintiffs”) brought a PAGA action on behalf of the State of California, among other claims. The employer, Tracy VW, Inc. (“Tracy VW”), moved to compel arbitration pursuant to an arbitration clause in the employees’ employment contracts. In response, the plaintiffs amended their complaint, dismissing without prejudice all but their PAGA claims.
Despite conceding that Iskanian prevents a court from compelling arbitration of PAGA claims, Tracy VW continued with its petition to compel arbitration. It creatively argued that the court still must compel arbitration of the plaintiffs’ individual claims (and stay the case pending that arbitration) because the plaintiffs could (in theory) amend their complaint to resuscitate their individual claims that remain subject to arbitration, given that they had dismissed those claims without prejudice.
The court interpreted Tracy VW’s continued efforts to seek arbitration as an impermissible attempt to have the trial court action stayed. According to the court’s reasoning, Tracy VW was not seeking arbitration as a method to determine the validity of the plaintiffs’ potential individual claims, but as a method to simply delay the PAGA claims. The court refused to endorse this strategy, holding that a defendant cannot compel arbitration of claims that the plaintiff has not yet, and may never, assert.
To the contrary, under the California Code of Civil Procedure statute that operationalizes petitions to compel arbitration, a defendant can compel arbitration only where “an agreement to arbitrate the controversy exists” and, in turn, controversy is defined as “any question arising between the parties to an agreement.” The court relied on “[t]he use of the plural ‘parties’” in determining that a controversy exists only between both parties. And a controversy cannot exist between both parties when the claimant is not pursing that claim. As a result, the Court of Appeal refused to compel arbitration.
Supreme Court to the Rescue?
Hope, however, may be on the horizon. The United States Supreme Court is currently deliberating the appeal in Viking River Cruises, Inc. v. Angie Moriana. There, Viking River Cruises, Inc. has asked the Court to foreclose this very exception and conclude that it violates the FAA, and thus must be overturned. If successful, employees would be unable to circumvent the applicability of arbitration agreements simply by asserting PAGA claims. Instead, a court would need to arbitrate all claims arising out of the employment relationship, even if brought on a representative basis, like under PAGA. A decision is likely forthcoming this summer.
The two PAGA cases, Chico and Leshane, both reinforce that the PAGA-claim exception to the general enforceability of arbitration clauses remains alive and well, even if this exception is on the United States Supreme Court’s chopping block. Employers currently facing PAGA claims should pay close attention to the Supreme Court’s widely anticipated decision in Viking River Cruises, Inc.
Until the Supreme Court overturns Iskanian, however, the Iskanian PAGA-exception remains law in California, and this reality underscores the need for employers to retain and maintain counsel to ensure compliance with California’s Labor Code provisions. Both decisions underpin that employers cannot rely on arbitration clauses, no matter how artfully drafted, to avoid litigating claims that can be brought under PAGA. As a result, the best defense is likely a good offense—that of instituting policies and practices to best ensure compliance with California’s Labor Code provisions.