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PAGA Suits

Calif. Cos. Face More PAGA Suits As Iskanian Rule Stands

Share us on: By Erin Coe

Law360, San Diego (June 01, 2015, 10:49 PM ET) — The U.S. Supreme Court’s refusal Monday to consider a case challenging Iskanian v. CLS Transportation’s prohibition on Private Attorneys General Act waivers in employment arbitration agreements opens the door for a wave of costly PAGA actions against California employers, lawyers say.

The high court rejected Bridgestone Retail Operations LLC’s January bid for a writ of certiorari claiming the state high court’s refusal to apply the Federal Arbitration Act to enforce its employment arbitration agreement with a waiver of representative claims conflicts with the Supreme Court’s 2011 AT&T Mobility LLC v. Concepcion ruling, which asserted federal preemption of state public policy favoring class proceedings.

The California Supreme Court based its order in the Bridgestone case on its June 2014 ruling in Iskanian v. CLS Transportation of Los Angeles, which held that CLS’ employment agreement compelling the waiver of representative PAGA claims was counter to public policy and unenforceable. The U.S. Supreme Court denied CLS’ bid to review that case in January.

“What the denial of review means can be summed up in four words: more stand-alone PAGA lawsuits,” said Matthew Sonne, a Sheppard Mullin Richter & Hampton LLP partner who represents employers.

The Iskanian decision created a loophole in the law that permits workers to defy the FAA and proceed on a representative basis even if they had agreed in an arbitration deal to resolve all claims on an individual basis only with the company, he said.

In light of the U.S. Supreme Court’s decision not to hear Bridgestone’s case, employers will face an uptick in PAGA-only cases being filed throughout the state as litigants attempt to continue to exploit the current loophole in the law, according to Sonne.

“The employer community believes that these PAGA actions are nothing but an artful end-run around the FAA and the Concepcion decision to the detriment of federal law and ultimately pose a great cost and burden on the court system,” he said.

The denied review signals there will be no slowing of the filing and prosecution of PAGA cases, according to Christian Schreiber, a partner at Chavez & Gertler who represents employees.

“PAGA lives to see yet another day in California, which is great news for employees,” he said. “To the extent that lawyers were watching the Bridgestone case with cautious optimism, we have a pretty resounding answer at this point, and employers may be reluctant in the future to continue testing the California Supreme Court’s Iskanian ruling.”

With the U.S. Supreme Court’s Concepcion and other pro-arbitration rulings clearing the way for more class actions to be sent to arbitration, PAGA-only cases are a natural response by workers to assert their rights, according to Schreiber.

“The purpose of an arbitration provision and the accompanying class action waiver that almost always comes with an arbitration provision is to make cases impossible to bring, and so PAGA gives workers at least some hope of the ability to join forces in order to have their day in court,” he said.

Under PAGA, employees can sue on behalf of themselves and current and former employees over workplace violations. Private citizens who bring a PAGA case are acting on behalf of California’s Labor and Workforce Development Agency to enforce the state’s Labor Code, and if a claim is successful, 75 percent of any recovered penalties go to the agency, while the remaining 25 percent is distributed to the aggrieved workers.

Many attorneys say they have seen a rise in suits asserting PAGA, particularly PAGA-only cases, following the Iskanian decision, and that trend appears to be reflected in the increasing payout amounts that the state collects from PAGA litigation. From the inception of PAGA in July 2004 to April 2013, the LWDA received a total of $24.5 million in PAGA penalties, according to agency data obtained by Schreiber.

After the Iskanian decision, the agency received nearly $7.9 million between July 2014 and June 1, a state representative told Law360. That figure is more than three times the average annual amount received over the nine-year period.

“We’ve seen an uptick in PAGA cases and an interest in using PAGA cases as an enforcement mechanism,” said Xinying Valerian, senior litigation counsel at Sanford Heisler Kimpel LLP, which represents employees. “PAGA will continue to be a vital avenue for redressing Labor Code violations that affect not just [plaintiffs] but other similarly aggrieved employees in their workplaces. Labor Code violations are not merely private disputes between private parties, but a matter of sufficient public interest that led California to adopt a unique mechanism to encourage employee whistleblowers to come forward.”

Because PAGA penalties are assessed by pay periods with no maximum limit, they can add up quickly for employers, according to Sonne. When a Labor Code section doesn’t provide for a civil penalty, the PAGA penalty amounts to $100 per employee per pay period for the first violation and $200 per employee per pay period for each subsequent violation.

“PAGA is really a financially brutal statute on California employers,” he said. “The only real control is it allows a judge to reduce penalties at his or her discretion, but that’s a very uncertain stopgap, and parties have to go all the way through trial before a reduction is a meaningful reality.”

In addition, case law remains murky on whether plaintiffs bringing PAGA cases are required to satisfy class action standards under Federal Rule of Civil Procedure 23, which include numerosity and commonality requirements.

“The statute purports to heap penalties atop of penalties for hypertechnical violations,” Sonne said. “The incentives for employers to settle are extremely high, which creates a perverse incentive on businesses to submit to this type of legalized extortion.”

The Supreme Court’s denial of Bridgestone’s petition also means that the gulf between federal and state court PAGA jurisprudence will likely continue to widen. State courts are generally unwilling to move PAGA claims to arbitration in light of the Iskanian decision, while at least six federal courts since the Iskanian decision have held that the FAA requires individual arbitration of an employee’s PAGA claims, according to Sonne.

“Sooner or later, the U.S. Supreme Court will have to grant review of the right case to finally pronounce the correct interplay between the Federal Arbitration Act and state public policy,” he said.

Despite the denial in the Bridgestone case, high court review of PAGA may not be far off. The Ninth Circuit is set to hear oral arguments in three cases this week that raise the question of whether PAGA waivers must be enforced under the FAA. The cases are Sakkab v. Luxottica Retail North America, Sierra v. Oakley Sales Corp. and Hopkins v. BCI Coca-Cola Bottling Co.

“The Ninth Circuit will decide the issue, and the Supreme Court is likely waiting to see what the Ninth Circuit does with the issue before weighing in,” said Paul Cane Jr., a Paul Hastings LLP partner who represents employers. “If the Ninth Circuit agrees with the numerous district court cases that have declared Iskanian to be incorrectly decided, then Supreme Court review is a certainty.”

Because PAGA is not subject to a long-standing body of case law, it remains untested in many ways, according to Schreiber. He predicted that employees and employers in PAGA cases are going to continue to battle over limits on discovery, the process for trying PAGA-only cases and the claims that are going to be the most commonly pursued under the PAGA statute.

“There are cases working their way through litigation and trial right now that are going to end up shaping what PAGA looks like,” he said.

Another big question is how employers should draft arbitration agreements in light of uncertainty over whether Iskanian is the last word on FAA preemption, Cane said.

In the meantime, employers should take a fresh look at their arbitration agreements, according to Charles Jung of Nassiri & Jung LLP, which represents both defendants and plaintiffs in complex litigation.

“Employers should make sure that any PAGA waivers are severable from the rest of the agreement in case a court finds them unenforceable,” he said. “One of the risks is if they are not severable, the entire agreement may be determined to be unenforceable.”