PAGA and Arbitration: The Growing Conflict between State and Federal Court

by Hunter Pyle on Apr. 28, 2017

Employment 

Summary: PAGA and Arbitration: The Growing Conflict between State and Federal Court

In earlier posts, we have explored the question of whether arbitration agreements that are broad enough to include claims under California’s Private Attorneys General Act (Labor Code section 2698), or PAGA, should be enforced.  As of March 2017 there is a growing split between state and federal courts on this issue.  As a result, which court a case winds up in may very well determine how the court rules on this critical question.

In California state courts, it is clear that arbitration agreements will not be enforced with respect to PAGA claims.  The most recent case to reach this conclusion is Betancourt v. Prudential Overall Supply, Case No. E064326 (4th App. Dist. March 7, 2017.  There, the trial court denied the defendant’s motion to compel arbitration of the plaintiff’s PAGA claims.  The defendant claimed that the plaintiff had improperly included in his prayer for relief damages that could not be recovered under PAGA.  In response, the trial court held that the proper remedy for the defendant was to file a motion to strike the allegedly improper allegations.

The court of appeal affirmed.  The court’s reasoning is simple and straightforward:  the defendant in a PAGA action cannot rely on a predispute waiver by a private employee to compel arbitration because PAGA claims are brought on behalf of the state, and the state is not bound by a private employee’s agreement to arbitrate.  The court’s conclusion is thus consistent with the holding in Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348, 386-387:

Simply put, a PAGA claim lies outside of 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…that the employer has violated the Labor Code.

However, federal courts are moving in the opposite direction.   In cases in which there is an arbitration agreement that does not prohibit representative actions, courts have compelled the aggrieved employees to arbitrate their PAGA claims.  See, e.g., Wulfe v. Valero Refining Co. (9th Cir March 1, 2016) 641 Fed. Appx. 758 (upholding district court order compelling arbitration of PAGA claims where the order did not prevent the plaintiff from bringing his representative PAGA claims in arbitration, but leaving it to the arbitrator to interpret the scope of the arbitration agreement); Bui v. Northrop Grumman Systems Corp. (SD Cal, December 10, 2015, No. 15-cv-1397-WQH-WVG) 2015 US Dist LEXIS 165878 (compelling plaintiff to arbitrate representative PAGA claims where the arbitration agreement covered such claims).

Most recently, on March 3, 2017, in Valdez v. Terminix International Co. (9th Cir. March 3, 2017)  No. 15-56236, the Ninth Circuit held that the district court erred by denying a motion to compel arbitration of a PAGA claim.  The court reasoned that both Iskanian and Sakkab v. Luxottica Retail N. Am., Inc. (9th Cir. 2015) 803 F.3d 425 contemplated that private employees could bind the state to an arbitral forum for PAGA claims.  The court reached this conclusion because, it found, Iskanian does not require that PAGA claims proceed in court, and Sakkab makes reference to arbitration of PAGA claims.

The court then concluded that the arbitration clause at issue, which covered all claims “relating to [the plaintiff’s] employment” was broad enough to cover PAGA claims.  Thus, the court held that the district court had erred in denying the motion to compel arbitration of the PAGA claims.

It should be noted that neither Iskanian nor Sakkab explicitly holds that PAGA claims may be arbitrated.  Nor did the Ninth Circuit address the argument relied upon in Betancourt, as described above.  Finally, Valdez is an unpublished opinion that may not be relied upon.

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