California Court Holds that Representative PAGA Claims Are Not Subject to Mandatory Arbitration

In a 2-1 decision, the California Court of Appeal held that representative actions under California’s Private Attorney General Act (PAGA) may not be waived in mandatory, pre-dispute employment arbitration agreements. (Brown v. Ralphs Grocery Co., Cal. Ct. App., No. B222689 [pdf]). This decision comes as something of a surprise in light of the U.S. Supreme Court’s recent ruling in AT&T Mobility, LLC v. Concepcion (2011) 563 U.S. __, 131 S. Ct. 1740 [pdf], which held that the Federal Arbitration Act (FAA) preempts state law and that class-action waiver provisions in California consumer arbitration agreements are generally enforceable (see prior blog post).

In Brown, plaintiff brought a representative action (i.e., filed his claim as a private attorney general) against Ralphs under the PAGA, alleging various violations of the Labor Code and seeking the recovery of civil penalties on behalf of herself and other allegedly aggrieved employees. In response, Ralphs filed a petition to compel arbitration, based on an arbitration agreement that expressly prohibited Brown from bringing claims “as a private attorney general.”

The trial court found this provision unconscionable and unenforceable under the principles set forth in Gentry v. Superior Court (2007) 42 Cal.4th 443. However, in light of the U.S. Supreme Court’s subsequent ruling in Concepcion, the Court of Appeal ordered additional briefing on the applicability and effect of Concepcion in this context.

The Court of Appeal held that Concepcion does not apply to the claims at issue, stating that “representative actions under the PAGA do not conflict with the purposes of the FAA.” Specifically, the court narrowly construed Concepcion’s FAA preemption analysis as applying to private rights in consumer cases, whereas the PAGA governs public rights in matters that “otherwise would be sought by state labor law enforcement agencies.” Because Concepcion did not address the validity of waivers involving “a public right, such as that created under the PAGA,” the Brown court held that Concepcion does not apply to – and therefore the FAA does not preempt – California’s prohibition on waivers of PAGA representative actions in mandatory, pre-dispute employment arbitration agreements. Whether such a purported waiver can be severed from an agreement is an open issue that was remanded to the trial court for determination.

In his partial dissent, Justice Kriegler viewed Concepcion not as distinguishing between private and public rights, but rather as affirming the FAA’s broad applicability to all private agreements. Where the express terms of an agreement provide for waiver of PAGA claims, the FAA should therefore control. The Brown decision also failed to acknowledge that PAGA plaintiffs stand to directly recover substantial sums of money in the form of civil penalties and attorneys’ fees, which represents a significant private interest that seemingly should be subject to Concepcion.

Despite its surprising result, Brown represents the state of the law in California as of this moment. However, Brown may be ripe for review by the California Supreme Court and/or U.S. Supreme Court, especially given the U.S. Supreme Court’s track record of finding statutory and decisional law that impedes contractual arbitration agreements to be preempted by the FAA. Until then, employers are well advised to consult counsel in reviewing the language of their existing and future arbitration agreements.