California Appellate Courts Continue to Defy U.S. Supreme Court Arbitration Decision
California employers using pre-dispute arbitration agreements with their employees were thrown another curve on the enforceability of those agreements. The Sixth Appellate District of California ruled on June 4th that arbitration agreements requiring arbitration of only individual claims would not be enforced for representative claims under the California Labor Code Private Attorneys General Act (PAGA). The decision, Brown v. Superior Court of Santa Clara County, is yet another skirmish in the ongoing battle of California courts against the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act (FAA) preempts certain state laws prohibiting arbitration.
First, what is PAGA? PAGA is an insidious California statute that allows a single lawsuit to be filed for current and former employees to recover civil penalties that would otherwise only be recoverable by the government. The plaintiff in effect steps into the shoes of the government, where the government, because of the small size of the claims or its lack of resources, is unable or unwilling to bring an action against the employer. It is frequently used to assert safety and wage-and-hour violations, such as missed meal and rest periods.
A PAGA lawsuit is filed on behalf of the named plaintiff and other “aggrieved” current and former employees. Although this sounds like a class-action lawsuit, it has significant differences. Called a “representative lawsuit,” it can be pursued without meeting all the elements required for class certification. That means it is easier for a plaintiff’s attorney to pursue, but still has the ability to aggregate the claims of multiple current and former employees.
The issue in the Brown case was whether the FAA permits arbitration agreements to override the statutory right to bring a PAGA claim. The court ruled that a private arbitration agreement purporting to waive the right to take representative action is unenforceable. PAGA, it held, is an unwaivable statutory right.
The arbitration agreement in Brown stated that the parties waived any right to, among other things, a class action, a collective action or a representative action. The language allowed only individual claims to be arbitrated. Such language is similar to language adopted by many employers following the U.S. Supreme Court’s Concepcion decision. According to the Brown court, the arbitration language would effectively prohibit the employee from prosecuting any PAGA claim at all, since by its very nature, a PAGA claim must be on behalf of others.
Even though the ultimate Brown ruling was against the employer, the decision did hold that the employer did not waive its right to enforce the arbitration agreement by participating in the litigation without raising the defense of arbitration. It also held that such a provision could be severed and otherwise enforced. Another side victory for employers was the court’s rejection of the plaintiff’s theory that arbitration under the FAA impermissibly interfered with the right to collective action granted by the National Labor Relations Act (NLRA).
As the state versus federal clash continues, there is speculation that the U.S. Supreme Court’s patience is being tried by such seemingly non-conforming decisions in California and other states as well. The pre-emption basis of the Concepcion case was the Supremacy Clause, and the U.S. Supreme Court is, well, supposed to be Supreme and have its decisions followed. Some of the issues decided in Brown are also currently pending before the California Supreme Court. Until future appellate decisions in California and other states reach the U.S. Supreme Court for a possible judicial rebuke, these decisions will continue to leave employers up in the air.
Meanwhile, employers are advised to update their arbitration agreement to state of the art language and to obtain legal advice on the pros and cons of using arbitration agreements that restrict class actions and representative lawsuits. Knowing the potential risks and benefits of including class action and representative action waivers can help the employer make an informed decision about the contents of its arbitration agreement. Arbitration agreements continue to be valuable tools to manage potential claims filed by employees.