California Court Holds AT&T Does Not Bar PAGA Class Suits

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The Supreme Court held that the Federal Arbitration Act trumped state law that voided arbitration contracts barring class actions. Now a California court has held that the FAA does not trump California's PAGA statute.

On April 27, 2011, the US Supreme Court held in AT&T Mobility v. Concepcion that an agreement requiring arbitration and prohibiting class wide arbitration was enforceable under the 1925 Federal Arbitration Act (FAA), which preempts California's unconscionability rules. A California court of appeal now confirmed in Brown v. Ralphs Grocery Co. that the AT&T Mobility decision does not bar "representative actions" under California's Private Attorney General Act of 2004.

After AT&T Mobility v. Concepcion, which applied to cell phone contracts, many employment law experts disagreed whether the case would allow employers to avoid all class action suits by simply requiring employees to sign arbitration agreements barring civil suits, class action suits and class wide arbitration.

Listen to the 11/09/2010
Supreme Court Oral Argument in
AT&T Mobility v. Concepcion

While the reach of AT&T Mobility in many ways has yet to be determined, in California the goal of deputizing citizens to assist the State of California in collecting civil penalties is a public purpose that parties cannot nullify by an arbitration agreement.

California's PAGA Statute

California enacted the Private Attorney General Act (PAGA) in 2004, which, among other things, allows employees to seek civil penalties from employers found to have violated California employment laws.  PAGA began as Proposition 64, which appeared on the November 2, 2004 statewide California ballot.  It won by a wide margin 6,571,694 (59.0%) votes in favor to 4,578,725 (41.0%) against.  PAGA was primarily funded by business to reduce suits brought under California's unfair business practices statute (Cal. B&P Code § 17200) and unfair advertising statute (Cal. B&P Code § 17500).  Before Proposition 64, anyone could sue on behalf of the public under §§ 17200 and 17500.  Proposition 64 limited class representative standing to those who can demonstrate that they suffered an actual injury and lost money or property as a result of the unfair or misleading business practice.

PAGA provides that the civil penalty for violations is the penalty listed in the underlying labor code provision.  PAGA also provides civil penalties for violations of of the Labor Code that carry no other penalty: $100 for an initial violation and $200 for each subsequent violation.  Cal. Lab. Code § 2699(f)(2).  PAGA provides that 75% of civil penalties awarded go to the Labor and Workforce Development Agency to fund the enforcement of labor laws and 25% goes to aggrieved employees. PAGA authorizes these civil penalties for each aggrieved employee per pay period and also allows the prevailing party to recover attorney's fees and costs.  Cal. Lab. Code § 2699(g).

PAGA requires employees to notify the Labor Workforce Development Agency (LWDA) and the employer before filing a PAGA suit.  PAGA also has a safe harbor provision that protects employers that abate and cure alleged violations before the employees file suit.  PAGA's notice period gives employers about a month to accomplish this and an employer may sometimes move to bar a suit by abating and curing the violation and notifying LWDA and the employees before the waiting period expires.

PAGA "representative" actions are not class action lawsuits and therefore do not need to meet the difficult class certification requirements that other types of representative suits must meet.  Arias v. Superior Court, 46 Cal.4th 969 (2009).

Brown v. Ralphs Grocery Co.

In Brown v. Ralphs Grocery Co., the California Court of Appeal considered two issues: (1) whether AT&T Mobility preempted California law holding that arbitration agreements barring class actions in employment were unenforceable where the plaintiff met a specified test, and (2) whether the Federal Arbitration Act (FAA) preempted PAGA suits.

The court did not decide whether the FAA preempts California decisional law that invalidates arbitration clauses in employment agreements when the class meets certain requirements because here, the court said, the employees did not demonstrate those requirements.

In 2007 the California Supreme Court set forth four factors for courts to consider when determining if an arbiration clause barring class actions in an employment agreement is enforceable:

  1. The modest size of the potential individual recovery
  2. The potential for retaliation against members of the class
  3. The fact that absent members of the class may be ill informed about their rights, and
  4. Other real world obstacles to the vindication of class members' rights to overtime pay through individual arbitration

Gentry v. Superior Court, 42 Cal.4th 443 (2007).

But the Brown court wrote that because the plaintiff did not demonstrate that the class met the Gentry requirements, the court could not decide whether the FAA preempted the rule in Gentry invalidating "no class action" provisions in arbitration agreements.

As regards PAGA suits, the Brown court was clear noting that AT&T Mobility did not address whether the FAA trumped state PAGA statutes and that so far as it was concerned, the FAA did not allow arbitration agreements to bar PAGA suits.  The Brown court wrote,

If the FAA preempted state law as to the unenforceability of the PAGA representative action waivers, the benefits of private attorney general actions to enforce state labor laws would, in large part, be nullified.

In Brown's 2-1 split decision, California court of appeals Justice Sandy R. Kriegler dissented noting that AT&T Mobility did not distinguish between private and public rights, but instead confirmed the FAA’s broad applicability to all private agreements.  Where the express terms of an agreement waive PAGA claims, Justice Kriegler wrote, the FAA should trump state law.

Many plaintiffs' employment lawyers cheered Brown in the belief that it held that AT&T Mobility does not apply to arbitration agreements in the employment context.  But Brown held much more narrowly that AT&T Mobility does not apply to arbitration agreements barring PAGA suits and left open the question of class action suits.  Also unclear is whether the California Supreme Court, or US Supreme Court will overturn Brown.

So What's the Difference Between a
Class Action and a PAGA Suit Anyway?

There are significant differences between class action suits and PAGA suits, mostly relating to damages and procedures.  PAGA provides damages of $100 for an initial violation and $200 for each subsequent violation for each aggrieved employee for each pay period.  These civil penalties are without regard to actual damages, which may be more or less than $100 or $200 per employee per pay period.  At $200 per pay period per employee, assuming biweekly pay, PAGA provides roughly $5,200 in damages per employee per year.  A suit seeking overtime for a group of misclassified software engineers, for example, might result in actual damages of four to six times that amount per year.

On the other hand, violations regarding pay periods, information employers list on pay stubs and other violations with unclear actual damages, PAGA's statutory civil penalties may exceed actual damages.

As regards attorney's fees, a common benchmark in class action cases involving a general fund is 25% for class counsel's attorney's fees, although courts may significantly depart from this benchmark depending on the facts of the case.  In PAGA suits it is unclear if attorneys representing the prevailing party may recover a percentage of the total recovery, or are limited to hourly compensation as reasonable attorney's fees.

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