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January 22, 2012

Elizabeth D. Diaz, Esq.

Employers have a strong interest in enforcing arbitration provisions of employment agreements.  However, California has a strong public policy of protecting the rights of employees in a class action so that employees may have their day in court.  The recent case of Brown v. Ralphs Grocery Store reaffirms this strong public policy, even in light of the recent U. S. Supreme Court ruling.

In Brown, the Appellate District went to great lengths to distinguish the specific facts of Brown and avoid enforcing the U.S. Supreme Court ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (“AT&T”).  AT&T rejects the well-established California rule that use of class action waivers in consumer arbitration agreements is prohibited.  The Supreme Court held that the Federal Arbitration Act (“FAA”) preempts the California rule.  The FAA confirms that agreements to arbitrate are valid, irrevocable, and enforceable.  According to the court, the FAA reflects both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract.  Brown is the first California case to apply the holding in AT&T.

In Brown, Plaintiff Terri Brown began working for Ralphs Grocery as a security guard in 2005. Plaintiff filed a class action against her employer asserting four Labor Code violations and a violation of Business and Professions Code section 17200, et seq. based on the alleged Labor Code violations.  Plaintiff also alleged that she satisfied the administrative prerequisites to pursue a representative action under the state Private Attorney General Act of 2004 (PAGA) and sought civil penalties pursuant to PAGA.

Defendants petitioned to compel arbitration based upon the Mediation and Binding Arbitration Policy (“arbitration policy”) in Plaintiff’s employment application.  The arbitration policy included both a class action waiver and a PAGA waiver.  The trial court denied defendants’ petition.  The trial court found that the class action waiver and the PAGA waiver were unconscionable and therefore unenforceable.  Plaintiff filed a notice of appeal.

The Court of Appeal for the Second District reversed the trial court’s order denying defendants’ petition to compel arbitration.  However, the court did not directly address the issue of whether the AT&T holding applied in the employment-related context.  Instead, the court relied on the fact that Plaintiff failed to meet her evidentiary burden in the trial court to invalidate the class action waiver.  The appellate court ruled that Plaintiff failed to make a factual showing under a four factor test to invalidate the class action waiver provision.  Thus, the court said “we do not have to determine whether, under AT&T … the invalidity of class action waivers in employee-employer contract arbitration clauses is preempted by the FAA.”

As to the PAGA waiver in the arbitration policy, the court of appeal declined to extend AT&T to waivers of PAGA representative actions.  The Brown court circumvented AT&T by distinguishing waivers of PAGA representative actions.  The court indicated that AT&T dealt with the private individual right of a consumer to pursue class action remedies whereas PAGA actions protect the public.  The appellate court held that the FAA did not preempt state law regarding the unenforceability of a PAGA waiver in an employment contract.  Thus, the court found the PAGA waiver unenforceable.  The court noted, “Until the United States Supreme Court rules otherwise, we continue to follow what we believe to be California law.”

The appellate court remanded the case to determine whether to sever the PAGA waiver from the agreement or to refuse to enforce the entire agreement or portions thereof.  Currently, the severance issue has not yet been decided by the trial court.  A status conference is scheduled for January 31, 2012.

It is still too early to tell how the AT&T case will affect class action waivers in an employee-employer contract arbitration clause.  For the time being, there may be a surge of PAGA actions that will rely on Brown to circumvent arbitration.  Therefore, employers should routinely evaluate whether its labor and employment practices conform to the California Labor Code to avoid PAGA actions.

By: Elizabeth D. Diaz, Esq.

Cochran, Davis & Associates, P.C.


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