The following was written collectively by our Labor & Employment Department.

1. Excluding claims arising from Confidentiality provision from the arbitration clause was substantively unconscionable

In Farrar v. Direct Commerce, Inc., 9 Cal. App. 5th 1257, review filed 4/28/17, a successful entrepreneur, Farrar, negotiated with Direct Commerce (“Direct”) a contract to become its VP of Business Development. The contract excluded claims arising from the confidentiality provision from the arbitration clause. The Court of Appeal agreed with the trial court that the arbitration provision was substantively unconscionable, because it carved out more than provisional remedies and was therefore too “one-sided.” The Court of Appeal, however, found the offending provision could be severed so that the arbitration provision could be enforced.

2. California Court of Appeal Split Develops on Arbitrability of Claims Brought Under Labor Code Section 558

In late December 2017, in Lawson v. ZB, N.A. et al., and ZB, N.A., et al. v. Superior Court of San Diego, D071279 & D071376 (Dec. 19, 2017) , District Four of the California Court of Appeals held that the trial court erred in bifurcating and ordering arbitration of the underpaid wages portion of a PAGA claim brought pursuant to Labor Code section 558.

Section 558 of the Labor Code requires payment of underpaid wages, and also provides for civil penalties of $50 for a first violation and $100 for further violations. The employer argued that the underpaid wages portion of the claim was subject to arbitration because it was a private claim belonging to the employee, unlike PAGA penalties which are obtained on behalf of the State. The Court of Appeals held that the underpaid wages were also a penalty and, therefore, the claim for underpaid wages is a claim that the employee cannot waive as a representative action and cannot be forced to arbitrate.

The Lawson decision creates a split among California’s Appellate Court Districts, as the Fifth District, in Esparza v. KS Industries, 13 Cal. App. 5th 1228 (2017), held this year that section 558 wage claims are not representative, and therefore can be arbitrated. Esparza held that section 558 claims actually involve claims for “statutory damages,” rather than “civil penalties.” In PAGA claims for civil penalties, 75 percent of the penalty goes to the State of California while only 25 percent goes to the aggrieved employees. Section 558 penalties go the employee alone.

The Court noted that under Iskanian, claims belonging to the state are not arbitrable, but claims belonging to individuals may be arbitrated. Thus, under Esparza, PAGA claims for civil penalties, when seeking money allocated primarily to the State, are not subject to arbitration while claims for victim-specific “statutory damages” can be subjected to arbitration pursuant to an enforceable arbitration agreement.

3. Employees Cannot Agree to Arbitrate PAGA Claim Until They Meet Statutory Requirements to Bring a PAGA Claim

In Julian v. Glenair, Inc., 17 Cal. App. 5th 853, the California Court of Appeal clarified when an arbitration agreement becomes a post-dispute agreement that can require arbitration of a PAGA claim. The Court determined that an arbitration agreement is a post-dispute agreement if it is entered into after the employee is authorized to commence a PAGA civil action as an agent of the state, i.e., after the employee has satisfied the statutory requirement for commencing a PAGA action. Prior to that, not only does the employee not know which alleged violations, if any, they are authorized to assert in the action, but the state retains control of the right underlying the employee’s PAGA claim. Enforcing an arbitration agreement that was entered into before the employee met the statutory requirements would contravene the state’s control over that right as the employee is not authorized at that point to waive the state’s right to a judicial forum.

In Julian, after a different employee initiated a PAGA civil action, the plaintiffs entered into an arbitration agreement that waived their right to bring PAGA cases in court. The plaintiffs later initiated their own PAGA case, and the defendant moved to compel arbitration. The Court determined that the arbitration agreement was a pre-dispute agreement because the plaintiffs had not satisfied the requirements to act as agents of the state at the time they agreed to arbitration.

4. California Supreme Court Finds Another Exception to Enforcing Arbitration Agreement As Written

In McGill v. Citibank, N.A., 2 Cal. 5th 945, the California Supreme Court was faced with a consumer pre-dispute arbitration agreement which, as conceded by the parties, waived the right to seek, in any forum, “public injunctive relief.” Public injunctive relief is relief that is meant to stop unlawful acts from continuing in the future and is intended to primarily benefit the general public rather than the plaintiff singularly. Previous case law held that agreements requiring arbitration of claims for public injunctive relief, including under the California’s Consumers Legal Remedies Act (“CLRA”), unfair competition law (“UCL”), or false advertising law, were unenforceable.

The Court ruled that the waiver in McGill was unenforceable as against California public policy because it sought to entirely waive the plaintiff’s statutory right under the UCL and other laws to seek public injunction relief. It did not address the previous case law discussing the arbitrability of claims for public injunctive relief, leaving that issue for another day.

The ruling in McGill is important to employers because the language that created the impermissible waiver is likely similar to language many employers have included in their pre-dispute arbitration agreements to ensure the permissible waiver of class actions in any forum. For example, the McGill plaintiff cited provisions such as “the arbitrator may award relief only on an individual (non-class, nonrepresentative) basis,” “[a]n award in arbitration shall determine the rights and obligations between the named parties only, and only in respect of the Claims in arbitration, and shall not have any bearing on the rights and obligations of any other person, or on the resolution of any other dispute,” and “neither you, we, nor any other person may pursue the Claims in arbitration as a class action, private attorney general action or other representative action,” as creating the waiver of public injunctive relief ultimately struck down by the Court.