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self-study / Administrative/Regulatory

Jan. 31, 2023

Questions about PAGA remain unanswered

State and federal courts in California regularly issue decisions that involve alternate dispute resolution (ADR). We discuss several decisions decided in the fourth quarter of 2022 below.

Private Attorneys General Act

In March, the United States Supreme Court decided Viking River Cruises, Inc. v. Moriana (2022) 142 S. Ct. 1906, wherein it held that the ruling by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles LLC (2014) 59 Cal. 4th 348 was preempted by the Federal Arbitration Act (FAA) insofar as it barred arbitration of individual claims alleging violation of the Private Attorneys General Act (PAGA), Lab. Code Section 2698 et. seq. However, the Court also held that a provision in an arbitration agreement barring filing of a representative or class action claim was invalid with respect to PAGA claims because it resulted in a wholesale waiver of PAGA claims. Thus, the portion of Iskanian that found representative PAGA claims non-arbitrable remains the law in California.

Although the Court found that class action waivers did not bar an employee from pursuing a representative PAGA claim, it ruled that plaintiff Moriana could not be one of those employees because PAGA does not provide a "mechanism" to enable a court to adjudicate representative PAGA claims once an individual claim has been committed to a separate proceeding, citing Kim v. Reins International California, Inc. (2020) 9 Cal. 5th 73. However, Kim provides such a "mechanism." In Kim, defendant argued that plaintiff could not pursue his representative claim because he lost standing when he settled his individual claim and hence was no longer an "aggrieved employee." The California Supreme Court rejected that argument, holding that an "aggrieved employee" is someone "who was employed by the alleged violator" and "against whom one or more of the alleged violations was committed," and thus plaintiff satisfied these requirements.

Federal courts, including the United States Supreme Court, are bound by a state court's interpretation of state law that does not conflict with federal jurisprudence. If the holding in Kim is an interpretation of state law that does not conflict with federal jurisprudence, then it will be up to California courts to determine whether an employee can pursue a representative claim after the individual claim is referred to arbitration or otherwise resolved.

In the last quarter of 2022, the Court of Appeal issued five decisions involving PAGA, but none of them directly addressed the question of whether resolution of the individual claim (in arbitration or otherwise) barred the employee from pursuing a representative claim. In Howitson v. Evans Hotels LLC (2022) 81 Cal. App. 5th 475 and Gavriiloglou v. Prime Healthcare Management, Inc. (2022) 83 Cal. App. 5th 595, the court did hold that an arbitrator's ruling in an individual claim did not bar the employee from pursuing the representative claim, but the decisions were based on the doctrine of claim preclusion, i.e., the representative claim could proceed because the State was the real party in interest while the employee was the real party in interest in the individual claim. In Mills v. Facility Solutions Group, Inc. (2022) 84 Cal. App. 5th 1035, the court declined to decide whether the plaintiff would have had standing to pursue his representative PAGA claim in the trial court had his individual PAGA claim been ordered to arbitration because the only question before it was whether the arbitration agreement's waiver of the representative PAGA claim was valid. The court in Navas v. Fresh Food Ventures LLC. (2022) 85 Cal. App. 5th 626 discussed Viking but did not reach the issue of the employee's ability to file a representative claim because it found the arbitration agreement to be unconscionable. And in Lewis v. Simplified Labor Solutions, Inc. (2022) 85 Cal. App. 5th 983, the court held that it need not decide whether an arbitration agreement could require that representative PAGA claims be arbitrated because the arbitration agreement incorporated the Employment Arbitration Rules & Procedures of the American Arbitration Association (AAA). Rule 6a of the AAA Employment Rules provides that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement." The court determined that this provision clearly left to the arbitrator to determine whether the agreement to arbitrate extended to the representative PAGA claims.

Oswald v. Murray Plumbing & Heating Corp., 82 Cal. App. 5th 938

Over the past few years, there have been dozens of cases decided in the appellate courts over the issue of whether claims filed under PAGA are arbitrable. However, there is one section of PAGA that has the effect of encouraging arbitration. Section2699.6(a) exempts construction workers from PAGA and, in effect, enforces an arbitration clause in a collective bargaining agreement (CBA) if the CBA contains certain provisions, including a proper waiver provision.

In 2020, Oswald, a construction worker, filed a PAGA claim against Murray alleging various Labor Code violations. Murray moved to compel arbitration, pursuant to an arbitration clause in the parties' CBA. The trial court denied the motion because there was no waiver provision in the CBA. Murray appealed. Shortly after the appeal was filed, the parties' labor union representatives executed a memorandum of understanding (MOU) which amended the arbitration clause in the CBA by inserting a PAGA waiver. The amendment was retroactive to 2017. Oswald asserted that the amendment was not applicable because it was created after the lawsuit commenced.

The Court of Appeal reversed. Oswald was not a signatory to the agreement or MOU. Instead, a union negotiated and signed them, on Oswald's behalf. As a union member, Oswald enjoyed the benefits of the union's bargaining power, but he was also subject to the burdens imposed by the CBA, which limited his remedy for Labor Code violations to an arbitral forum. The union's agreement to make the MOU retroactive negated Oswald's ability to pursue his PAGA claim in court.

Pacific Fertility Cases, 85 Cal. App. 5th 887

Plaintiffs sued Pacific Fertility arising out of the failure of a tank that contained their eggs and embryos. They also sued Chart, which manufactured the tank, and Praxair, which sold the tank to Pacific Fertility and helped install it. Plaintiffs charged Chart and Praxair with, inter alia, negligent failure to recall, strict products liability (based on product and design defects) and negligence.

Chart and Praxair moved to compel arbitration based on arbitration agreements between plaintiffs and Pacific Fertility. Although Chart and Proxair were not signatories to these agreements, they asserted that plaintiffs were equitably estopped from opposing their motion. In the context of arbitration, there are two circumstances in which equitable estoppel can apply. The first is when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the non-signatory. The second is when the claims against the non-signatory are founded in and inextricably bound up with the obligations imposed by the agreement containing the arbitration clause. In other words, allegations of substantially interdependent and concerted misconduct by signatories and non-signatories, standing alone, are not enough. The allegations of interdependent misconduct must be founded in or intimately connected with the obligations of the underlying agreement.

Chart and Proxair asserted that equitable estoppel applied because they would not have been involved in the litigation "but for" the execution of the agreements in which the arbitration agreements were contained. The trial court denied the motion and Chart and Praxair appealed.

The Court of Appeal affirmed. It held that Chart and Praxair confused the concept of claims founded in and intertwined with the agreement containing the arbitration clause with but-for causation. The doctrine of equitable estoppel does not bind non-signatories to the underlying action when the claims are not founded in the contract containing the arbitration provision and there is no preexisting relationship between the defendants on which to base an estoppel. The claims against Chart and Praxair were not premised on, nor did they arise out of, the plaintiffs' fertility services agreements with Pacific. To the contrary, these claims were based on an asserted defect in the failed tank, and on the alleged negligence and other acts or omissions of Chart and Praxair. Thus, the legal duties allegedly breached by Chart and Praxair did not arise from the agreements containing the arbitration clause.

Failure to Pay Forum Fees

In 2019, the Legislature enacted Senate Bill 707, later codified as Code of Civ. Proc. Sections 1281.97 through 1281.99, to deter employers and vendors from putting a complaint by an employee or consumer into limbo by not paying the arbitration fees. Sections 1281.97 and 1281.98 are virtually identical. Both allow an employee or consumer to withdraw from an arbitration if the drafting party does not pay required arbitration fees within thirty days after the due date. Section 1281.97 pertains to fees needed to initiate the arbitration and Section 1281.98 pertains to fees needed to continue the arbitration, such as arbitrator fees.

In 2022, the Court of Appeal decided four cases wherein it held that the statutes applied even if the failure to pay the fees were inadvertent. The rulings determined that there is nothing in the language of the statute that is ambiguous regarding the requisite circumstances to determine the existence of a statutorily defined material breach of an arbitration agreement. To the contrary, the statute's language established a simple bright-line rule that a drafting party's failure to pay outstanding arbitration fees within thirty days after the due date results in its material breach of the arbitration agreement. Under the plain language of the statute, the triggering event is nothing more than nonpayment of fees within the thirty-day period. See De Leon v. Juanita's Foods, Inc. (2022) 85 Cal. App. 5th 740. The statute specifies no other required findings, such as whether the nonpayment was deliberate or inadvertent, or whether the delay prejudiced the non-drafting party.

Faced with rejection of the defense of inadvertence, defendants tried different tactics. In Espinoza v. Superior Court, (2022) 83 Cal. App. 5th 761, the defendant argued that the plaintiff had waived Section 1281.98 because the arbitration agreement stated that the rules of the AAA would apply, and Rule 47 permitted the arbitrator to suspend the arbitration until the defaulting party made the payment. The Court of Appeal did not agree. It held Rule 47 concerns the actions the arbitrator or arbitration provider may take in the event of nonpayment while Section 1281.98, in contrast, concerns the actions the trial court may take upon nonpayment.

In Gallo v. Wood Ranch USA, Inc., (2022) 81 Cal. App. 5th 621, the Court of Appeal rejected an argument that the statute was preempted. Although sections 1281.97 and 1281.99 undeniably singled out arbitration insofar as they define procedures that apply only to arbitrated disputes, they did not commit the additional sin of outright prohibiting arbitration. Instead, they defined the procedures governing the date by which the party who drafted an agreement to arbitrate against an employee or consumer must pay the initial fees and costs to arbitrate and specified the consequences of untimely payment.

The defendant in Williams v. West Coast Hospitals, Inc., 2022 Cal App LEXIS 1049, argued that the trial court had no jurisdiction to lift the stay of litigation and terminate the arbitration proceeding because a trial court cannot dismiss an arbitration proceeding. But the Court of Appeal pointed out that after a court grants a petition to compel arbitration and stays the litigation, it nonetheless retains vestigial jurisdiction over the action at law. Defendant also asserted that the statute only applied to mandatory pre-dispute arbitration agreements, noting that its arbitration agreement stated that execution of the agreement was not a requirement for admission to defendant's facility. The Court of Appeal held that the focus of the statute was the fair and timely resolution of the dispute anticipated in the parties' arbitration agreement, not the means by which the drafting party secured the pre-dispute agreement in the first place. That an abusive practice is more acutely prejudicial in the context of a mandatory pre-dispute agreement than a voluntary one did not detract from the Legislature's broader purposes.

Villareal v. LAD-T LLC, 84 Cal. App. 5th 446

Plaintiff sued LAD-T, his former employer, and Lithia Motors, Inc., its parent company, alleging a FEHA violation. The defendants moved to compel arbitration. However, DT Los Angeles, not either of the defendants, was the employer party to the arbitration agreement. DT was a fictitious name used by defendants. At the time the motion was filed, the defendants had not filed a fictitious name statement for DT with the Los Angeles County Registrar as required by Bus. & Prof. Code Section 17910. The trial court, noting that Bus. & Prof. Code Section 17918 provides that where a party transacts business under a fictitious business name, the party cannot maintain any action upon or on account of any contract made under the fictitious business name until the fictitious business name statement is filed, denied the motion.

Defendants appealed. The Court of Appeal ruled that the trial court was correct. Although the requirement for a fictitious business statement ordinarily applies to bar a plaintiff from maintaining an action on a contract in the name of a fictitious business, the requirement similarly applies to motions to compel arbitration because a proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract. But that did not end the discussion because defendants filed the fictitious name statement while the appeal was pending. The Court observed that failure to comply with the fictitious-name statutes does not make the parties' promises, agreements, and transactions invalid as such. Noncompliance merely prevents a fictitiously named business from enforcing obligations owed to it until it places on record its true nature and ownership. Thus, the act of filing the fictitious name statement required a reversal of the lower court's holding. But the Court of Appeal questioned why defendants waited so long to file the statement. Hence, it remanded the matter to the trial court to determine whether defendants, by their dilatory conduct, waived their right to arbitration.

#1230

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