Court of Appeal Holds PAGA Claim Must be Heard in Court – Not Arbitration

February 26, 2015 – The Second Appellate District became the first California appeals court to weigh in on a central question left unanswered by the state Supreme Court’s ruling in Iskanian v. CLS Transportation Los Angeles, LLC : whether a claim for civil penalties under the Private Attorneys’ General Act (“PAGA”) brought by an employee bound by an arbitration agreement should be decided in court or in arbitration. (The Iskanian court had held that a PAGA claim must be permitted to proceed in some forum, but left it to future courts to decide which.)

See this post and this one for more information about PAGA claims.

The arbitration agreement at issue in Franco stated that the employer’s arbitration program was the “only means of resolving any employment-related disputes.” It went on to say that “both you and the Company forego and waive any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity.”

The Franco dispute, filed in April 2007, has now been addressed by the Court of Appeal three times – so a bit of background is warranted. The first Franco appeal in 2009 held that provisions in employment arbitration agreements purporting to waive class actions were enforceable. The following year, SCOTUS ruled in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. that unless an arbitration agreement includes evidence that the parties intended to permit arbitration of class claims, such claims are waived. Relying on Stolt-Nielsen, the defendant in Franco filed a second petition to compel arbitration. The trial court refused to enforce the arbitration agreement, and the defendant again appealed. The employer’s central argument on appeal was that the California Supreme Court’s holding in Gentry v. Superior Court that arbitration agreements “obtained as a condition of employment, containing class action waivers that limit employees’ ability to vindicate statutory protections, are unenforceable as a matter of public policy” had been abrogated by SCOTUS rulings. The second Franco court held that the SCOTUS decisions did not overrule Gentry.

The Franco court’s steadfast refusal to enforce the arbitration agreement at issue was upended by the California Supreme Court’s holding in Iskanian that the Gentry rule was preempted by the Federal Arbitration Act. The Iskanian court concluded that SCOTUS precedent, particularly Concepcion v. AT&T Mobility, compelled enforcement of even those arbitration agreements that allowed “small-dollar claims [to] slip through the legal system.”

Faced with this edict, and yet another effort by the employer to compel arbitration, the THIRD Franco court held that “[w]hen the parties have validly elected to resolve employment disputes in arbitration, the ineffectiveness of an individual proceeding for the resolution of their disputes does not render a class action waiver invalid or unenforceable, nor does it render the arbitration agreement itself invalid or unenforceable. … Here, far from affirmatively agreeing to submit disputes concerning employment wage and hour claims to class action arbitration, the parties have agreed to forego class action treatment of any such claims.”

Thus, the plaintiff’s hopes for class-wide relief were dashed.

Not so for his representative claims under the Labor Code Private Attorneys General Act. The Franco III court found, as it was required to find under Iskanian, that the right to bring a representative PAGA action is unwaivable. “Because the rights asserted in an action under the PAGA are those of the state rather than of the plaintiff-employee, the right to prosecute such an action cannot be waived by private agreement.” The Franco court, like the Iskanian court before it, relied on the idea that a PAGA action is not merely a private dispute – but rather is a dispute between the state and an employer – in concluding that a rule invalidating waivers of representative PAGA actions does not frustration the strong federal policy in favor of arbitration.

The most interesting aspect of the Franco III decision – and the aspect likely to have the greatest impact on future cases – was delivered with little discussion in the “Conclusion” of the court’s opinion: The appeals court returned the case to the trial court, with instructions to “enforce[e] the parties’ contractual agreement to forego any right to make claims in arbitration as a representative or as a member of a class or in a private attorney general capacity, except that the [arbitration agreement] cannot be enforced to preclude Franco from prosecuting claims against [the employer] under the PAGA in a non-arbitration forum.

Thus, while the employer dodged the class-action bullet, it still was faced with litigating a representative PAGA claim in court – or at least the possibility of doing so. Allowing the employer a small silver lining, the court stayed the litigation of the PAGA claim pending arbitration of the plaintiff’s individual claims. “The stay’s purpose is to preserve the status quo until the arbitration is resolved, preventing any continuing trial court proceedings from disrupting and rendering ineffective the arbitrator’s jurisdiction to decide the issues that are subject to arbitration.”

In short, whether viewing the Franco III decision from the perspective of an employer or an employee, it’s a bit of a mixed bag. At a minimum, though, the decision provides some clarity on the enforceability and applications of employment arbitration agreements after Iskanian.

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