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June 2013

California Court of Appeal Rules That Quasi-Class Actions Cannot Be Waived Through Contract

Employment and Commercial Litigation Update

The California Court of Appeal recently ruled, in Milton Brown v. Superior Court (Morgan Tire & Auto, LLC), that the Federal Arbitration Act (FAA) does not require enforcement of an arbitration agreement prohibiting an individual from bringing representative claims against his or her employer under the Private Attorneys General Act (PAGA) for Labor Code violations. This decision appears to contradict the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which held that the FAA pre-empts state statutes or court decisions refusing to honor contractual bans on classwide arbitrations.

In the wake of Concepcion, many employers began to insert class waiver provisions in their dispute resolution agreements and consumer contracts. While Milton Brown recognizes the general validity of such waivers, it specifically exempts waivers of private attorney general claims.

Predictably, the increased use of class action waivers in employment and consumer settings has led to considerable change in court rulings. In California, the Court of Appeal ruled in Caron v. Mercedes-Benz Financial Services USA LLC. et al., that a consumer contract containing a class action waiver is enforceable, despite the Consumers Legal Remedies Act’s prohibition against such waivers.

In the employment context, the main area of contention has been the applicability of Concepcion to quasi-class actions under PAGA. Different Courts of Appeal have alternatively held that Concepcion does or does not apply to employment agreements that include explicit or implicit waivers of PAGA actions. In Milton Brown, the Court of Appeal held Concepcion inapplicable to PAGA claims.

The decision in Milton Brown stemmed from claims brought against an employer for violations of California wage and hour laws. The plaintiffs not only sought damages and restitution but also sought civil penalties under PAGA on behalf of all aggrieved employees. During the plaintiffs’ employment, they signed an agreement with the employer to be bound by its “Employee Dispute Resolution Plan,” which required all disputes to be submitted to mediation or arbitration and included a waiver of any rights to pursue claims on a class or representative action basis. Therefore, the Milton Brown defendant argued that, in accordance with Concepcion’s reasoning, this agreement was enforceable and thereby disallowed the plaintiffs from pursuing a representative action under PAGA.

While the Milton Brown court recognized that, under Concepcion, an arbitration agreement should be enforced according to its agreed upon terms, it also noted that Concepcion did not address an employment contract or, with respect to the enforcement of statutory rights, the validity of a class action waiver in an arbitration agreement. The court explained that PAGA functions primarily as an action of law enforcement for the benefit of the public, not private parties, which serves the public by deterring employers from engaging in Labor Code violations. Additionally, when a PAGA case is brought, the employee brings such claims in lieu of the Labor and Workforce Development Agency and cannot bring such action in his or her individual capacity. Instead, the employee “must bring [the] PAGA claim as a representative action on behalf of himself or herself and other aggrieved employees.” Accordingly, the Court of Appeal reasoned that disallowing an employee from bringing a PAGA claim in such capacity “effectively extinguishes the claim and insulates the employer from liability for the penalties called for. . . .”

The Milton Brown court ultimately ruled that any provision in an arbitration agreement waiving the right to pursue representative actions under PAGA is unenforceable since the waiver would be one of an unwaivable statutory right “established for a public reason” and would subsequently allow employers who violated labor laws to evade liability. However, the appellate court upheld the remainder of the arbitration agreement and simply severed the unlawful provision, allowing the arbitration of the individual claims to proceed first, followed by litigation of the PAGA claims. As the court noted, “the employee retains his or her individual claim for damages or restitution separate from the right to pursue civil penalties under the PAGA. To be sure, the PAGA provides only a remedy; it confers no substantive rights of its own.”

Severance of a PAGA waiver from the remainder of an arbitration agreement raises an interesting practical matter. By allowing the arbitration of the underlying individual claims to proceed first, the Court of Appeal has established a procedure that essentially bifurcates the individual claims and their likely smaller damages from the representative PAGA claims and their larger potential damages. Whether matters decided at arbitration, such as the existence of individual Labor Code violations, would be binding or subject to re-examination in the subsequent PAGA litigation, is an open question. Arguably, the appellate court in Milton Brown has created further confusion about the continued vitality of PAGA and class action waivers.

Clarity, however, may be soon approaching. As the Milton Brown court noted, the California Supreme Court is hearing arguments in Iskanian v. CLS Transportation of Los Angeles, where the Court of Appeal had ruled that PAGA claims were waivable by employment contract. Until the court decides Iskanian, employers should understand that class action waivers included in arbitration agreements may not prevent quasi-class actions or class actions based on the above referenced line of cases. Ultimately, the best protection against class action litigation continues to come from sound employment practices and mindful attention to employee morale.

To read the opinion in Milton Brown v. Superior Court (Morgan Tire & Auto, LLC) (June 4, 2013, H037271) ___ Cal.App.4th. ___, click here.

To read the opinion in AT&T Mobility LLC v. Concepcion (2011) __ U.S. __ [131 S. Ct. 1740], click here.

Kimberly D. Howatt
Justin M. Michitsch