Santa Clara County Super. Ct. No. 110-CV178451, Hon. Peter H. Kirwan
Initiative Legal Group Melissa Grant Glenn A. Danas Katherine W. Kehr
Klatte, Budensiek & Young-Agriesti E.W. Klatte, III Summer Young Agriesti, Heikaus Weaver Christopher Michael HeikausWeaver
No appearance for respondent
The question presented in this case is whether the Federal Arbitration Act (9 U.S.C. §§ 1-16) (FAA) permits arbitration agreements to override the statutory right to bring representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA). (Lab. Code, § 2698 et seq.) We conclude that the FAAdoes not demand enforcement of such an agreement. A plaintiff suing for PAGA civil penalties is suing as a proxy for the State. A PAGA claim is necessarily a representative action intended to advance a predominately public purpose. When applied to the PAGA, a private agreement purporting to waive the right to take representative action is unenforceable because it wholly precludes the exercise of this unwaivable statutory right. AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740 (Concepcion)does not require otherwise.
I.Factual and Procedural Background
Plaintiffs Milton Brown and Lee Moncada were employed by defendant Morgan Tire & Auto, LLC, doing business as Wheel Works. Both plaintiffs were nonexempt hourly employees. Brown was a general automotive service technician who had worked for defendant just under two years. Moncada was employed as a head mechanic for nine months.
On July 29, 2010, plaintiffs filed a putative class action lawsuit against defendant alleging violation of California’s wage and hour laws. The first amended complaint alleges that defendant did not pay its hourly employees for all hours worked, did not pay overtime, failed to provide meal and rest periods, did not issue complete and accurate wage statements, did not issue pay on time, and delayed final paychecks to discharged employees. Plaintiffs also allege one cause of action under the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.). Plaintiffs seek restitution and damages. In addition, plaintiffs claim civil penalties on behalf of themselves and all other aggrieved employees as allowed by the PAGA.
In the course of their employment plaintiffs had signed an agreement to be bound by defendant’s Employee Dispute Resolution Plan (EDRP). The EDRP provides that all employment related disputes will be submitted to mediation and arbitration “rather than to the courts or to governmental agencies.” The EDRP further specifies: “Parties to the [EDRP] waive any right they may otherwise have to pursue, file, participate in, or be represented in Disputes brought in any court on a class basis or as a collective action or representative action. This waiver applies to any Disputes that are covered by the [EDRP] to the full extent such waiver is permitted by law. All Disputes subject to the [EDRP] must be mediated and arbitrated as individual claims. The [EDRP] specifically prohibits the mediation or arbitration of any Dispute on a class basis or as a collective action or representative action.”
Notwithstanding the EDRP, defendant did not raise arbitration as an affirmative defense in its answer. Defendant participated in discovery and negotiated the terms of a stipulated protective order relating to the class members. Defendant took the deposition of plaintiff Brown. Defendant also agreed to produce the names and contact information of all putative class members and agreed to participate in private mediation on a class-wide basis.
At the time plaintiffs filed this case, California law made arbitration agreements containing class action waivers unenforceable in virtually all consumer cases. (Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 162-163 (Discover Bank).) Gentry v. Superior Court (2007) 42 Cal.4th 443 (Gentry) made class action waivers unenforceable in wage and hour cases if the trial court found that a class action would be more effective in vindicating the employees’ statutory rights. On April 27, 2011, the United States Supreme Court filed Concepcion, supra, 131 S.Ct. 1740, overruling Discover Bank. Although Concepcion did not mention Gentry, defendant promptly filed a motion to compel arbitration, arguing that Concepcion impliedly overruled Gentry as well as Discover Bank. Plaintiffs opposed the motion, arguing that defendant had waived its right to arbitrate and, in any event, Concepcion did not affect the Gentry rule. The superior court concluded that Gentry was no longer good law, found that defendant had not waived its right to arbitrate, and granted the “motion to compel individual arbitration.” Plaintiffs filed a notice of appeal from that order.
Ordinarily, an order compelling arbitration is not appealable and may be reviewed only after the parties complete arbitration and appeal from the judgment. (Muao v. Grosvenor Properties, Ltd. (2002) 99 Cal.App.4th 1085, 1089.) Writ relief is available in exceptional circumstances. (United Firefighters of Los Angeles v. City of Los Angeles (1991) 231 Cal.App.3d 1576, 1581.) Since plaintiffs’ arguments involve a rapidly developing area of the law, we notified the parties that we would consider the notice of appeal as a petition for writ of mandate. The matter proceeded as such and we issued an order to show cause. We now conclude that plaintiffs are entitled to some of the relief they requested.
In its most generic form an arbitration agreement merely requires the parties to resolve their disputes by way of arbitration, a process that is intended to be simpler, less formal, and more expeditious than the process of resolving disputes in court. (See Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 628 (Mitsubishi).) As arbitration agreements have evolved, they have added features to further simplify the process. One such feature is the class action waiver, which typically binds the parties to arbitrate their disputes on an individual basis, prohibiting collective or representative actions.
Congress enacted the FAA to overcome widespread judicial antipathy to arbitration agreements. (Concepcion, supra, 131 S.Ct. at p. 1745.) Under the FAA arbitration agreements must be enforced according to their terms. Specifically, the FAA provides: “A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The FAA reflects both a policy favoring arbitration and fundamental principles of contract. (Concepcion, supra, at p. 1745.) “[C]ourts must place arbitration agreements on an equal footing with other contracts, [citation] and enforce them according to their terms.” (Id. p. 1745.) The parties agree that the FAA applies in this case.
The final phrase of 9 United States Code section 2, the so-called savings clause, permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” “This saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability, ’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” (Concepcion, supra, 131 S.Ct. at p. 1746.)
Until 2011, Discover Bank, supra, 36 Cal.4th at pages 162 through 163 made class action waivers unenforceable if the arbitration agreement of which it is a part is a “consumer contract of adhesion, ” disputes between the parties will likely “involve small amounts of damages, ” and “it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.” And Gentry, supra, 42 Cal.4th at page 463, had held that in the case of alleged systematic, class-wide Labor Code violations, a class action waiver may be unenforceable given the existence of specified factors and a trial court’s conclusion that class arbitration “is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration” and that “disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations....” (Ibid.)
This state of the law changed in April 2011, when the United States Supreme Court filed Concepcion, supra, 131 S.Ct. 1740 at page 1753, explicitly overruling Discover Bank. Concepcion held that the Discover Bank rule was preempted by the FAA because Discover Bank stood as an obstacle to the overall purpose of the FAA. (Id. at pp. 1748, 1751.) Notwithstanding the FAA’s savings clause, courts may not invalidate an arbitration agreement based upon generally applicable contract principles, such as unconscionability, if those principles are applied in a fashion that disfavors arbitration. (Id. at p. 1747.) Concepcion reasoned that, despite the Discover Bank requirements that the case involve a contract of adhesion, modest individual damages, and allegations of cheating, the rule would apply to virtually all consumer arbitration agreements. Thus, Discover Bank effectively inserted, retroactively, the requirement that all consumer arbitration agreements permit class-wide arbitration. (Id. at p. 1744.) Class-wide arbitration is fundamentally different than individual arbitration because it sacrifices the informality of the arbitration process, requires extensive procedural formality to protect absent class members, and greatly increases the risk to defendants by magnifying the potential liability in proceedings that are largely insulated from judicial review. (Id. at p. 1751.) Thus, requiring the parties to include class-wide arbitration in all ...