PAGA and arbitration: It's déjà vu all over again

In Perez v. U-Haul Company of California, 2016 DJDAR 9659 (Sept. 16, 2016), the 2nd District Court of Appeal held that employees cannot be compelled to arbitrate whether they are "aggrieved" individuals with standing to bring a PAGA claim on behalf of fellow employees.

The plaintiffs, two U-Haul customer services representatives, filed a complaint seeking PAGA penalties against their employer for failure to pay overtime, missed meal periods, and other Labor Code violations. As a condition of their employment, they signed arbitration agreements which required them to arbitrate "any and all disputes ... related in any way to my employment" but at the same time waived the right to seek in arbitration relief "as a representative or as a member of a class or in a private attorney general capacity." The agreements also provided the Federal Arbitration Act applied.

Standing under the Private Attorneys General Act is extended only to an "aggrieved employee," who is defined as "any person who was employed by the alleged violator and against whom one or more of the alleged [Labor Code] violations was committed." Labor Code Section 2699(c). Accordingly, making out a PAGA claim requires an individualized showing that an employer violated the Labor Code with respect to a particular employee. Conceding that under Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), the waiver of representative relief "in a private attorney general capacity" was unenforceable, U-Haul argued that the plaintiffs were nevertheless obligated to arbitrate the threshold question of whether they had personally suffered any of the alleged Labor Code violations. U-Haul's argument was based on numerous FAA cases which hold that where a lawsuit presents both arbitrable and nonarbitrable issues, and the nonarbitrable issues cannot by themselves resolve the suit, the FAA requires that the arbitrable issues be severed and sent to arbitration. (State law is the same.)

The trial court, and then the 2nd District, disagreed.

First, it did away with all consideration of the principle of severing arbitrable from nonarbitrable issues by holding that the threshold issue of aggrieved status was not arbitrable under the terms of the agreement, notwithstanding the agreement's clear language that "any and all disputes ... related in any way to my employment" were subject to arbitration. The 2nd District reached this conclusion by holding that when the agreement provided that in such an arbitration the parties "agree to ... forego any right to bring claims as a representative or as a member of a class or in any private attorney general capacity," the agreement excluding from its scope any type of "representative" claim. Since PAGA actions - even those that seek penalties for a single employee are "representative" actions (because the employee acts on behalf of the state), they are not within the scope of the arbitration agreement.

This conclusion is not based on a fair reading of the arbitration agreement. The language on which the court relied was plainly aimed at limiting the scope of remedies available in arbitration proceedings, not restricting the types of "disputes ... related in any way to my employment" which are subject to arbitration. (In fact, the agreement provided that "any and all" such "disputes" were arbitrable.)

Second, the court held that even if the threshold issue of "aggrieved" status were arbitrable, the agreement would be unenforceable under California law. In doing so, it followed an earlier 2nd District decision, Williams v. Superior Court, 237 Cal. App. 4th 642 (2015), which held that Iskanian forbid the "splitting" of PAGA claims between arbitrable threshold issues and inarbitrable remedial issues because it would be contrary to the purposes of PAGA to force an employee to limit his or her PAGA claims to individual relief.

But Iskanian only held that an arbitration agreement that has the effect of depriving an employee of the opportunity to seek representative relief on behalf of similarly-aggrieved fellow employees undermined the purposes of PAGA and was not enforceable. The order sought be U-Haul would not have such an effect. It freely conceded that once the arbitration was over, the employees were free to continue litigating their PAGA claims. While the outcome of the arbitration would doubtless have collateral estoppel implications for the PAGA action, it does not deprive the employees of any opportunity to pursue the full scope of relief PAGA affords.

The style of reasoning in Perez (and Williams before it) is the sort of outcome-oriented analysis that characterized Gentry v. Superior Court, 42 Cal. 4th 443 (2007). Gentry brushed aside all consideration of FAA preemption, only to see the Supreme Court in Iskanian, a scant seven years later, reverse itself and concede the validity of the same preemption arguments presented to it the first time around. It's "déjà vu all over again." No sooner does the California Supreme Court correct Gentry, then courts embark on a new anti-arbitration lark. But for now, at least, Perez (and Williams) are the law.