California Supreme Court Rules on Class Certification Issues Regarding Unfair Competition Law and Labor Code Private Attorneys General Act Claims

July 13, 2009

The California Supreme Court has ruled in Arias v. Superior Court (Angelo Dairy) that for claims brought as “representative” actions under California’s Unfair Competition Law (UCL), Business & Professions Code Section 17200, et seq., a plaintiff seeking relief on behalf of others must satisfy class action requirements, but a plaintiff seeking civil penalties for alleged California Labor Code violations in a representative capacity under the Labor Code Private Attorneys General Act (PAGA) does not have to meet class requirements.  In a companion case, Amalgamated Transit Union, et al. v. Superior Court (First Transit, Inc.), the California Supreme Court held that an injured party may not assign his claims under the UCL or PAGA to a third party, such as a labor union.

The Arias Decision

The lead case was brought by Plaintiff Jose Arias, a former Angelo Dairy employee who alleged that he and other dairy workers did not receive overtime and were not provided with meal and rest breaks.  Arias sought penalties and lost wages both in an individual capacity and on behalf of other current and former employees under both the UCL and PAGA.  The trial court granted Angelo Dairy’s motion to strike the UCL and PAGA causes of action based on Arias’s failure to comply with the class action pleading requirements.  Arias petitioned for writ of mandate in the Court of Appeal, which agreed that the UCL provisions require compliance with class action requirements, but that those requirements need not be met for an employee’s representative action seeking PAGA penalties.  Arias petitioned for review by the California Supreme Court.

In a partial victory for employers, the California Supreme Court confirmed that a plaintiff who wishes to pursue a representative UCL claim on behalf of others must meet formal class action requirements in order to do so.  Prior to 2004, any person, regardless of whether he suffered any injury as a result of alleged violations of the Labor Code (or other predicate statutes), could assert representative claims under the UCL.  That changed with the passing of Proposition 64, which imposed heightened standing requirements and amended the UCL to require compliance with California Code of Civil Procedure Section 382 (generally interpreted to authorize class actions).  The Court reviewed the statute and ballot materials, including an official summary which confirmed for voters that the initiative “[r]equires private representative claims to comply with procedural requirements applicable to class action lawsuits.”  The Court found this to be strong evidence of voter intent that a plaintiff must comply with class action requirements to pursue a representative UCL claim and held accordingly. 

Overshadowing this positive development for California employers, however, was the Court’s treatment of the PAGA claim.  PAGA allows “aggrieved employees” to step into the shoes of the government as private attorneys general for the purpose of pursuing civil penalties for Labor Code violations.  As such, an “aggrieved employee,” after meeting certain notice requirements, may bring a lawsuit on behalf of himself and other current and former employees to recover penalties for the violation of many Labor Code sections, including, for example, the sections governing meal periods and rest breaks and the payment of overtime.  PAGA provides for an award of civil penalties, but unlike the UCL, does not provide for recovery of unpaid wages.  Where the Labor Code does not specifically provide for a civil penalty, PAGA establishes a statutory penalty of $100 per pay period for the initial violation for each aggrieved employee and $200 per pay period for each aggrieved employee for subsequent violations. 

The Supreme Court in Arias held that plaintiffs do not need to meet the formal class action requirements in order to pursue a PAGA claim on behalf of other “aggrieved employees.”  In so holding, the Court rejected numerous arguments, including the key argument that maintaining a representative action without meeting class action procedural requirements violates a defendant’s right to due process.  In rejecting the due process argument, the court found that because the PAGA plaintiff is proceeding as the proxy or agent of the State, a judgment awarding penalties in connection with a PAGA claim binds nonparty “aggrieved employees” with respect to claims for penalties for the same alleged conduct.  As such, the Court reasoned, employers will not have to repeatedly defend against PAGA claims if they prevail the first time.  Despite this seemingly positive aspect of the Court’s ruling, the Court went on to accept a troubling proposition that tends to undercut this ruling.  Specifically, the defendants argued that because recovery of PAGA penalties requires proof of a Labor Code violation, an employer who loses a PAGA claim could be bound, under the doctrine of collateral estoppel, by that adverse judgment in a subsequent lawsuit seeking unpaid wages for the same underlying Labor Code violation while an employee would not be bound by a judgment in the employer’s favor.  This, the defendants argued, would violate the defendant’s due process rights.  However, the Court disagreed and concluded that such an outcome would not violate the employer’s right to due process because the situation is not unique” to PAGA as it would also exist if a government agency sued the employer to recover penalties and because the potential impact on remedies other than civil penalties is ancillary to the action’s primary objective.”    

Practical Implications

The California Supreme Court’s decision in Arias on the PAGA issue opens the door to a host of procedural and practical issues, the most difficult of which is how a plaintiff suing in a representative capacity will establish who are “aggrieved employees.”  Because a PAGA claim requires the plaintiff to prove a violation of the Labor Code, a plaintiff presumably will be required to establish that all of the employees on whose behalf the action is brought were similarly situated and affected by the alleged violation, or prove such violations on an employee-by-employee basis in order to recover penalties on behalf of those employees.  The potential burden on the parties and the courts that such mini-trials would present may lead to attempts to  use sampling techniques to establish violations.  However, it is unclear whether that would be permissible under the statute.  Given the lack of published decisions construing the PAGA statute (as these claims generally have been secondary to plaintiffs’ efforts to obtain class certification on the underlying Labor Code claims), there likely will be considerable litigation as parties seek guidance as to how to proceed with such claims.  

In addition, employers are likely to see an increase in PAGA claims, particularly in cases where class certification may be viewed by plaintiffs’ attorneys as difficult to achieve.  For example, the California Supreme Court is expected to clarify, in the highly anticipated decision in Brinker Restaurant Corp. v. Superior Court of California, what an employer’s obligation is with regard to “providing” meal breaks and the standards for certifying meal period claims.  Even if the Supreme Court determines in Brinker that an employer need only make meal periods available to its employees, as opposed to ensuring employees take the meal periods, and thus makes class certification more difficult for plaintiffs to achieve, plaintiffs may attempt to use Arias as a basis to pursue these same alleged violations without having to obtain class certification.  Moreover, while unions are precluded from bringing UCL or PAGA claims under Amalgamated Transit Union, Arias makes it easier for unions to find a single aggrieved employee to seek penalties  without having to satisfy class action requirements.  What mechanisms will be viable to establish violations as to other aggrieved employees absent class certification remains an open question. 

If there is any silver lining to the PAGA aspect of the Court’s ruling in Arias, it may be that plaintiffs who fear an uphill battle on certification and thus want to include PAGA claims in their lawsuit will have to give the statutorily required notice to employers and the State before pursuing the penalties in a civil case.  This will give employers a brief window of opportunity to examine their practices and cure any violations, if feasible.  In the event of a cure, the employees cannot pursue PAGA penalties and may also be left with no basis to pursue damages.  It will thus be critical for employers who receive a violation notice to act quickly to investigate the claim.

Given the likelihood of increased PAGA claims and the stiff penalties that may be imposed under the statute, it remains critically important for California employers to have legally compliant wage and hour policies.  We would be happy to assist you with any issues you may have in this area.

Gibson, Dunn & Crutcher LLP

  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  For more information, please contact the Gibson Dunn attorney with whom you work or any of the following members of the Labor and Employment Practice:

William D. Claster – Practice Co-Chair, Orange County (949-451-3804, [email protected])
Eugene Scalia – Practice Co-Chair, Washington, D.C. (202-955-8206, [email protected])
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])
Michele L. Maryott – Orange County (949-451-3945, [email protected])

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