California Court Limits Impact of Recent U.S. Supreme Court Decision Regarding Class Action Waivers

In April of this year the United States Supreme Court decided AT&T Mobility LLC v. Concepcion et ux. (2011) 131 S.Ct. 1740, in which the Court held that California case law invalidating class action waivers in consumer arbitration agreements is preempted by the Federal Arbitration Act. Based on the Concepcion decision, California employers reasonably assumed that contractual arbitration provisions will now be enforced with respect to not only individual claims, but also class and representative claims brought by employees.

But earlier this week a California appellate court held that the Supreme Court’s decision in Concepcion does not apply to representative actions brought under California’s Private Attorney General Act of 2004 (PAGA), and that an employee’s waiver of the right to pursue a PAGA representative action remains unenforceable under California law. Brown v. Ralphs Grocery Co. (July 12, 2011) No. B222689. In that same decision the court specifically declined to decide whether the FAA preemption rule announced in Concepcion applies to class action waivers in the employment context, suggesting that at least one California appellate court considers this an open question.

Plaintiff Terri Brown filed a complaint against her employer, Ralphs Grocery Company, asserting a class action alleging four Labor Code violations and a violation of California’s Unfair Competition Law based on the alleged Labor Code violations. Brown’s complaint also asserted a right to civil penalties under the PAGA, which authorizes an employee to bring a private civil action for certain Labor Code violations against her employer on behalf of herself and other current and former employees. The PAGA provides for an award of civil penalties, 75% of which go to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education, with the remaining 25% going to the aggrieved employees. In addition to the civil penalties, a prevailing plaintiff may be awarded reasonable attorney’s fees and costs. California courts have held that PAGA actions can proceed as “representative actions,” which means that class action certification rules are not applicable.

Ralphs petitioned the trial court to compel Brown to submit her individual claims to arbitration based on Brown’s employment agreement, in which she expressly waived her right to bring class and representative actions. The trial court denied the petition, ruling that the waiver provisions in Brown’s employment agreement were unenforceable under California case law. Ralphs appealed. While the appeal was pending, the U.S. Supreme Court issued its decision in Concepcion.

The appellate court first examined the class action waiver, and reversed the trial court’s ruling that the waiver was unenforceable on the ground that Brown had failed to establish the unconscionability of the agreement as required by applicable law. It directed the trial court to consider this issue. Because the trial court still needed to decide whether the agreement was potentially unconscionable, the court declined to decide whether Concepcion required the trial court to enforce the class action waiver based on FAA preemption. However, the court included a (seemingly unnecessary) discussion of this issue, hinting that if it were to reach the issue, the court might decide that Concepcion does not require the enforcement of class action waivers in the employer-employee context.

The court next examined the PAGA waiver and, in a 2-1 split, affirmed the trial court’s ruling that the waiver was unenforceable under California law. The majority held that Concepcion does not apply to PAGA waivers. The majority distinguished class actions, which seek to recover damages or restitution on behalf of class members, from PAGA actions, which “deputize” private individuals as deputy attorneys general to enforce the Labor Code on behalf of the public at large. The majority concluded that since Concepcion did not address the PAGA, the Concepcion decision does not apply to the PAGA and therefore previous California case law on the subject controls. The dissenting opinion found the class action vs. PAGA distinction unpersuasive in light of a series of cases going back to the 1980s in which the U.S. Supreme Court has held that the FAA preempts California statutory and decisional law impeding the enforcement of contractual arbitration agreements.

The impact of the Concepcion decision on employment litigation continues to generate much debate, and this decision does little to clarify the situation. Employers should expect the continued uncertainty in this area to generate a substantial amount of litigation in the next few years. In the meantime, this new decision will likely encourage employees to include PAGA claims in virtually all wage and hour actions in an effort to defeat arbitration provisions that seek to bar class and representative actions.

Aaron Buckley and Fred Plevin – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, California

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