State appellate panel says PAGA is waiver-proof despite US Supreme Court’s Epic Systems ruling

Private Attorneys General Act claims remain waiver-proof despite a U.S. Supreme Court decision last year upholding class action waivers under the Federal Arbitration Act, a state appeals panel ruled Monday.

In Epic Systems Corp. v. Lewis, the high court last year upheld such waivers under federal law. That left PAGA claims, which are not subject to any such waiver, as the favored route for employment class actions in California.

The California Supreme Court carved out the exception from otherwise broad Federal Arbitration Act preemptions for PAGA actions via the 2014 ruling in Iskanian v. CLS Transportation Los Angeles LLC (2014) 59 Cal. 4th 348.

In the case decided Monday, Correia v. NB Baker Electric, Inc., 2019 DJDAR 1455, Baker Electric argued that a trial court erred in holding the plaintiff's PAGA claim could not be compelled into arbitration under Iskanian, citing (2018) 138 S. Ct. 1612.

"We remain bound by Iskanian," Justice Judith L. Haller wrote for a unanimous 4th District Court of Appeal panel. "Although the Epic court reaffirmed the broad preemptive scope of the Federal Arbitration Act, Epic did not address the specific issues before the Iskanian court involving a claim for civil penalties brought on behalf of the government and the enforceability of an agreement barring a PAGA representative action in any forum."

Haller pointed to the qui tam nature of PAGA suits as a key factor in the decision. PAGA allows litigants to sue employers on behalf of themselves and the state, effectively deputizing them in exchange for the state claiming 75 percent of winnings.

Justices Judith McConnell and Gilbert Nares concurred.

"When a worker stands in the shoes of the state of California, prosecuting wage violations under PAGA, that representative plaintiff cannot be forced into arbitration, because the state did not agree to arbitrate," said Michelle Baker of Baker Law Group LLP, who argued for the plaintiff-respondent.

"The [Federal Arbitration Act] does not and cannot strip the state of its enforcement authority, or strip employees of their non-waivable, substantive state law right to pursue vital workplace protections," she added, calling the opinion "spot on."

Marlene C. Nowlin of Finch, Thornton & Baird LLP argued for the defendant-appellant and did not respond to a request for comment.

The plaintiff signed a broad arbitration agreement that included waiving "representative actions," which his employer argued includes PAGA lawsuits. In the trial court, Baker Electric argued this barred the claim in any court. The company altered its argument to state Epic Systems> undermines Iskanian on appeal. But the appeals panel held that Iskanian remains good law, and is not necessarily incompatible with Epic Systems.

"The Iskanian court found that a predispute employment agreement in which an employee agrees to waive his or her right to bring representative claims under PAGA in any forum is contrary to public policy and thus unenforceable under state law," Haller wrote.

The Iskanian court reconciled the decision with federal law by deciding the latter applies to private disputes, whereas PAGA claims are "fundamentally a law enforcement action," Haller said.

Glenn Danas of Robins Kaplan LLP, who argued Iskanian for the plaintiffs before the state Supreme Court, said that concluding Epic Systems has no bearing on Iskanian "should have been obvious," as the former has little to do with preemption or state qui tam laws, calling the ruling "very well-reasoned." The latter part of the opinion about whether PAGA claims could be arbitrated at all is the most interesting part of the decision, he added.

"I have always maintained that PAGA claims are arbitrable, but only after the dispute has arisen. As the court noted, an employee is not yet deputized ... at the time he or she executes an arbitration agreement," Danas said. "Therefore, he or she cannot bind the state to arbitrate its future claim."

After the dispute has arisen and administrative prerequisites are fulfilled, Danas continued, the plaintiff could choose to arbitrate.

Haller and Danas noted that federal courts have reached a different conclusion on the arbitrability of PAGA claims. The decision recognized that and disagreed. Danas said he thinks the misalignment between the state appellate court and federal courts might fuel a trip to the 9th U.S. Circuit Court of Appeals, and even the U.S. Supreme Court.

If Epic Systems had been meant to affect PAGA, the court would have said so since it cited the case, Baker said. Forcing those claims into arbitration carries heavy implications, she said.

"If the state's PAGA penalty provisions forcing restitution to victims of wage theft can be shunted to individual arbitration, it will undermine PAGA's goal to strengthen the state's enforcement power against wage law violators who steal from workers and unfairly compete against law-abiding businesses," she said.