Court of Appeal Reaffirms PAGA Claims Are Not Subject to Binding Arbitration

Roberto Betancourt sued Prudential, alleging a single cause of action under the Private Attorney Generals Act (Labor Code 2698 et seq.), in which he sought civil penalties on behalf of himself and other aggrieved Prudential employees for failure to pay overtime, failure to provide meal and rest periods, failure to pay minimum wage, failure to reimburse business expenses, and other claims. Prudential moved to compel arbitration under a 2006 agreement, whereby Betancourt agreed Betancourt agreed “to forego any right to bring claims on a representative or class member basis.” The Court of Appeal found that the trial court correctly denied the motion because, under settled law (Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 349), a defendant cannot compel arbitration in a PAGA case, which is brought on behalf of the state.

Prudential made several arguments attempting to limit Iskanian, the most creative being that although “Iskanian held predispute waivers of the right to bring a representative action are unenforceable,” it did not hold that where an employer has agreed to litigate the PAGA claim in arbitration, which Prudential agreed to do here (despite contrary language in the agreement), “the agreement on the forum for the PAGA claim is enforceable.” The Court disagreed, holding again that becaue PAGA claims are brought on behalf of the state, “the fact that Betancourt may have entered into a predispute agreement to arbitrate does not bind the state to arbitration.”

Perhaps the most legally significant argument should a PAGA case ever get before the U.S. Supreme Court is that “if Iskanian is interpreted as prohibiting arbitration of all PAGA claims, then that state law prohibiting arbitration is preempted by the Federal Arbitration Act (FAA).” The Court of Appeal sidestepped that question — basically saying that if Betancourt had AGREED to arbitrate, then it could have done so, or at least that question isn’t before the Court. However, since employees rarely agree to arbitrate (where recovery is often lower), it remains true that for all intents and purposes a PAGA case will never be arbitrated, which a conservative SCOTUS could find to be an FAA violation. But that remains to be seen.

The takeaway for employees is that, once again, a published opinion harshly dismantled the arguments of an employer attempting to enforce an arbitration of PAGA claims. For employers, it will more often be the case that, where an employee has signed an arbitration agreement, they will find themselves on the receiving end of a one-count lawsuit seeking only PAGA penalties as was done here.

Betancourt v. Prudential Overall Supply, 2017 S.O.S. 1202
(Cal. Ct. App., 4th Dist. Mar. 7, 2017)

Non-Severability Clause Dooms Arbitration Agreement

A case that was published two years after it was decided is an unusual turn of events, but that’s the situation in Montano v. Wet Seal. The holding is straightforward, and should be instructive to employers and their counsel drafting arbitration provisions: Do not under any circumstances include a non-severability clause. Here, the arbitration agreement barred arbitration of representative claims, including claims under the Labor Code Private Attorney Generals Act, contrary to the state’s public policy per Iskanian. This need not have been fatal except that the agreement also contained a non-severability clause that prevented the offending PAGA waiver from being severed: “In terms of severing the PAGA waiver provision, the paragraph in which it is contained states that if the waiver is found to be unenforceable for any reason by a court, then the entire arbitration agreement is void and unenforceable by the parties.” Under these circumstances, the Court of Appeal held that trial court correctly ruled that the agreement was unenforceable as to all of the plaintiff’s claims, not just PAGA. Bad news for Wet Seal.

The case also confirms another point — that unless there is a formal stay of proceedings, the parties can conduct discovery and the court can rule on a discovery motion at the same time it rules on the petition to compel arbitration. Wet Seal had objected to responding to discovery pending the hearing on its motion. Plaintiff moved to compel, and the court heard that motion immediately after denying the motion to compel arbitration: “When the court ruled on the discovery motion, the motion to compel arbitration was no longer pending, and the request for arbitration had been denied.” Moreover, regardless of the outcome of the motion to compel arbitration, the discovery motion was not moot in light of Montano’s intention to pursue her representative PAGA action, which could not be arbitrated. Plaintiff’s counsel in this case (Scott Cole & Associates) certainly deserve a round of applause on all counts.

Montano v. The Wet Seal Retail, Inc. (Cal. Ct. App., 2nd Dist. Jan. 30, 2017) 2017 S.O.S. 482. Click here for full opinion.