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)

9th Circuit Finds Arbitration Agreement Enforceable Where Unconscionable Clauses Are Severable

Plaintiff Poublon filed suit in state court against her employer, C.H. Robinson. Robinson removed to federal court. Likely anticipating a motion to compel arbitration, Poublon filed a First Amended Complaint, which added a claim on under the Private Attorneys General Act (PAGA), which are non-arbitrable under settled law because a PAGA claim is filed on behalf of the State of California.

The Ninth Circuit reversed the district court’s finding of unconscionability. First, the fact that the arbitration rules were not attached to the agreement and were simply incorporated by reference may, at most, gave rise to a “greater degree of procedural unconscionability” under Baltazar, 62 Cal. 4th at 1246. And the 9th Circuit further held that “parties may validly incorporate by reference into their contract the terms of another document” provided certain conditions are met.

Interestingly, the Court also disputed that language requiring Plaintiff’s signature “In consideration for Your continued employment” to not indicate that signing was a condition of employment, as it was merely “boilerplate.” This is a somewhat difficult holding, as contracts are supposed to mean what they say, boilerplate or not. Yet the Ninth Circuit did not find oppression here. Moreover, the existence of representative claim waivers, a carve-out allowing the company (but not Plaintiff) to go to court to seek injunctive relief, and a venue provision setting arbitration in Minnesota were not enough to tip the balance to substantive unconscionability. Those that were one-sided could be severed, preserving the remainder.

It seems to us that were this case decided by the California Court of Appeal, it would likely have been decided in favor of the employee given the number of arguably unconscionable or one-sided provisions. The Ninth Circuit, however, generally displays a greater degree of deference to the preemptive quality of the Federal Arbitration Act. This is likely a case that will be cited to by employer defendants for some time, particularly in federal court, while plaintiffs will look to distinguish it with inconsistent state appellate authority.

One thing is certain: The arbitration morass is unlikely to leave us anytime soon.

Poublon v. C.H. Robinson Company (9th Cir. Feb. 3, 2017)
2017 S.O.S. 15-55143,

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.