Placido Valdez v. Terminix International Company Limited Partnership

Filing 24

ORDER by Judge Dean D. Pregerson: re 20 MOTION to Dismiss. The Court hereby orders the parties to engage in arbitration under the terms of the arbitration agreement, with the exception of the PAGA claim, which remains before the Court and is not stayed. The affirmative defense clause, however, is unconscionable and unenforceable and severed from the agreement. (shb)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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PLACIDO VALDEZ,

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Plaintiff,

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v.
TERMINIX INTERNATIONAL
COMPANY LIMITED PARTNERSHIP,
a Delaware limited
partnership dba ANTIMITE
TERMITE AND PEST CONTROL,
Defendants.
___________________________

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Case No. CV 14-09748 DDP (Ex)
ORDER RE MOTION TO DISMISS OR
COMPEL ARBITRATION
[Dkt. No. 20]

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Presently before the Court is Defendant’s motion to dismiss

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the First Amended Complaint (“FAC”) and compel arbitration.

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heard oral arguments and considered the parties’ submissions, the

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Court adopts the following order.

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I.

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Having

BACKGROUND
Plaintiff is Defendant’s former employee; he worked as a

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Termite Technician from March 1994 to November 2013.

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Plaintiff alleges that Defendant did not allow its employees to

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take rest and meal breaks as required by California law.

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¶¶ 13, 24-33.)

(FAC, ¶ 12.)

(Id. at

Plaintiff further alleges that Defendant failed to

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pay wages due and failed to maintain accurate wage records.

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at ¶¶ 34-38, 48-52.)

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hour violations are unfair business practices under California’s

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Unfair Competition Law (“UCL”),

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compensatory damages, penalties, and injunctive relief on his own

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behalf and on behalf of a class of employees as to the above,

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Plaintiff also seeks penalties on behalf of the state under the

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Private Attorneys General Act of 2004 (“PAGA”).

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(Id.

Plaintiff also argues that these wage and

(Id. at ¶¶ 39-47.)

In addition to

(Id. at ¶¶ 53-60.)

Defendant alleges, and Plaintiff does not argue otherwise,

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that Plaintiff signed an arbitration agreement that formed part of

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his employment contract.

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agreement states that it is a “mutual agreement to arbitrate

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covered Disputes which is the exclusive, final, and binding remedy

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for both the Company and me and a class action waiver.”

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B, § 1.)

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company

(Mot. at 2; id., Exs. A & B.)

That

(Id., Ex.

In the agreement, the employee agrees that he and the

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mutually consent to resolution under the [agreement] and to

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final and binding arbitration of all Disputes, including, but

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not limited to, any preexisting, past, present or future

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Disputes, which arise out of or are related to . . . my

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employment, [or] the termination of my employment . . . on-

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duty or off-duty, in or outside the workplace . . . .

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(Id. at § 3.)

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employment related laws,” including state laws.

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“Disputes” are specifically defined to include “all
(Id.)

The agreement contains a class action waiver and a waiver of
(Id. at § 10.)

The

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the right to bring a “representative action.”

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class action waiver is not severable.

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“representative action” waiver is severable, “if it would otherwise
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(Id.)

However, the

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render this [agreement] unenforceable in any action brought under a

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private attorneys general law.”

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(Id.)

The agreement also contains a choice of law provision that

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requires that it be “construed, interpreted and its validity and

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enforceability determined,” under the Federal Arbitration Act

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(“FAA”) and Tennessee law, “unless otherwise required by applicable

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law.”

(Id. at § 13.)

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With the exception of the class action waiver, provisions of

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void or unenforceable provisions of the agreement may be modified

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or severed.

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(Id. at § 18.)

Defendant moves to dismiss the FAC and compel arbitration

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under the terms of the agreement.

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II.

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LEGAL STANDARD
Under the FAA, 9 U.S.C. § 1 et seq. , a written agreement

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that controversies between the parties shall be settled by

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arbitration is “valid, irrevocable, and enforceable, save upon such

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grounds as exist at law or in equity for the revocation of any

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contract,” and a party to the agreement may petition a district

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court with jurisdiction over the dispute for an order directing

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that arbitration proceed as provided for in the agreement.

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U.S.C. §§ 2, 4.

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favoring arbitration agreements” and creates a “body of federal

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substantive law of arbitrability.”

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Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).

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preempts state laws that “stand as an obstacle to the

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accomplishment of the [statute]'s objectives.”

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v. Concepcion, 131 S. Ct. 1740, 1748 (2011).

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“defenses that apply only to arbitration or that derive their

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The FAA reflects a “liberal federal policy

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Moses H. Cone Mem. Hosp. v.
The FAA therefore

AT&T Mobility LLC
This includes

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meaning from the fact that an agreement to arbitrate is at issue,”

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as well as state rules that act to fundamentally change the nature

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of the arbitration agreed to by the parties.

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(California rule allowing consumers to invoke class arbitration

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post hoc was neither “consensual” nor the kind of arbitration

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envisioned by the FAA).

Id. at 1746, 1750

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On the other hand, “[t]he principal purpose of the FAA is to

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ensure that private arbitration agreements are enforced according

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to their terms.”

Id. at 1748 (emphasis added) (internal quotation

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marks and brackets omitted).

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agreement cannot bind non-parties.

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534 U.S. 279, 293-94 (2002).

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away the government’s right to enforce its laws, even if the

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government seeks to recover “victim-specific” remedies such as

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punitive damages.

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individual victim may have the ability to limit the relief the

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government can obtain in court.

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III. DISCUSSION

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Moreover, parties to an arbitration
E.E.O.C. v. Waffle House, Inc.,

Thus, an individual cannot contract

Id. at 294-95.

This is true even where the

Id. at 296.

Plaintiff does not dispute the existence of the arbitration

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agreement.

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Tennessee, law applies; that Defendant has violated the agreement

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by failing to initiate mediation; that the agreement is both

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procedurally and substantively unconscionable; and that in any

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event the agreement cannot apply to his claims for injunctive

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relief or his claims under PAGA.

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addresses each argument in turn.

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///

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///

However, he does argue that California, rather than

(Opp’n generally.)

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The Court

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A.

Applicable Law
California courts apply the law of the state designated by the

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contract “unless (1) the chosen state has no substantial

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relationship to the parties or transaction; or (2) such application

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would run contrary to a California public policy or evade a

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California statute.”

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Corp., 66 F.3d 1500, 1506 (9th Cir. 1995).

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Gen. Signal Corp. v. MCI Telecommunications

Plaintiff argues that the state designated in the arbitration
agreement, Tennessee, has “no substantial relationship to the

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parties,” although Defendant is headquartered there, because

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Plaintiff has “never stepped foot in Tennessee.”

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However, in the sentence immediately after the one quoted above,

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Gen. Signal Corp. makes clear that only one party need have a

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substantial relationship with the designated state.

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1506 (“The fact that GSX is incorporated in New York is sufficient

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to establish a ‘substantial relationship.’”).

(Opp’n at 4.)

66 F.3d at

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Plaintiff also argues (albeit under the unconscionability

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analysis) that the agreement evades California statutes by applying

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“Tennessee substantive law.”

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however, read the agreement as precluding substantive wage and hour

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claims under California law.

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the contract be interpreted under Tennessee law: “I expressly agree

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that this Plan shall be construed, interpreted and its validity and

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enforceability determined strictly in accordance with . . . the

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laws of Tennessee.”

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by the agreement include “all employment related laws,” including

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state laws.

(Opp’n at 7.)

Rather, the agreement requires that

(Mot., Ex. B at § 13.)

(Id. at § 3.)

The Court does not,

The disputes governed

Thus, the substantive law governing the

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claims is (in this case) California law, while the law to be

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applied in interpreting the arbitration agreement is Tennessee law.

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The Court therefore concludes that the agreement is to be

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interpreted and analyzed under Tennessee law, unless doing so as to

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a specific provision would “run contrary to California public

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policy” or deprive Plaintiff of a California statutory right.

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B.

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Mediation
Plaintiff argues that Defendant cannot compel arbitration,

because it has not yet attempted mediation.

Defendant, however,

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argues that the plain terms of the agreement only require Plaintiff

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to mediate.

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The arbitration agreement lays out a three-stage process by

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which an employee may attempt to resolve “disputes” with the

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company.

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complaint with the human resources department through one of

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several channels.

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prepare a “Final Response” to the complaint.

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not satisfied, he or she may, first, have the Ombudsman’s response

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reviewed by a panel of “senior executives”; second, initiate

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mediation; and third, initiate arbitration.

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sequential and cumulative, and “failure to exhaust these

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contractual remedies may be raised as an affirmative defense in

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arbitration.”

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bypass the executive review stage and proceed directly to

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mediation.

(Mot., Ex. B at §§ 5-6.)

The employee first initiates a

An “Ombudsman” is appointed to investigate and

(Id. at § 5.)

If the employee is

These steps are

However, California employees may

(Id. at § 7.)

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According to Defendant:

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Plaintiff argues that Defendant should have initiated

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mediation before seeking arbitration, ignoring that the
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agreement requires Plaintiff to first pursue mediation on his

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claims.

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Plaintiff. Only Plaintiff has violated his arbitration

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agreement.

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Defendant Terminix did not bring a claim against

(Reply at 1.)

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Defendant’s argument, as phrased, is ambiguous.

If Defendant

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argues that it is not bound by the same requirements as Plaintiff

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in resolving disputes, that would seem to make the contract so one-

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sided as to be unconscionable.

Taylor v. Butler, 142 S.W.3d 277,

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286 (Tenn. 2004).

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Defendant merely means to argue that because Plaintiff initiated

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this complaint, it is Plaintiff’s responsibility, rather than

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Defendant’s, to seek out mediation, that is a correct reading of

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the contract.

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process is such that the party initiating the process – which can

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include the filing of an arbitrable claim in court (id. at § 5) —

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is responsible for escalating from filing a request to initiate the

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process with the human resources department, to mediation, and

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finally to arbitration.

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On the other hand, if, as seems more likely,

The structure of the agreement’s dispute resolution

Defendant is therefore not barred from seeking to compel

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arbitration because it has not sought to mediate.1

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C.

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Unconscionability
In Tennessee, “enforceability of contracts of adhesion

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generally depends upon whether the terms of the contract are beyond

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the reasonable expectations of an ordinary person, or oppressive or

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But see Part III.C.2.b., infra, discussing unconscionability
of the use of the mediation requirement as an affirmative defense
in arbitration.
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unconscionable.”

Taylor, 142 S.W.3d at 286.

“Unconscionability

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may arise from a lack of a meaningful choice on the part of one

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party (procedural unconscionability) or from contract terms that

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are unreasonably harsh (substantive unconscionability).”

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Indus., Inc. v. McKinnon Bridge Co., 77 S.W.3d 159, 170-71 (Tenn.

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Ct. App. 2001).

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the two together . . . .”

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inequality, whether procedural or substantive, in light of “all the

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facts and circumstances of a particular case,” including relative

Trinity

However, “[i]n Tennessee we have tended to lump
Id.

Thus, in Tennessee the focus is on

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bargaining power.

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App. 1984).

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bargain is so manifest as to shock the judgment of a person of

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common sense, and where the terms are so oppressive that no

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reasonable person would make them on the one hand, and no honest

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and fair person would accept them on the other.”

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to put this is that the provisions, and the circumstances under

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which the contract is signed, are “so one-sided that the

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contracting party is denied any opportunity for a meaningful

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choice.”

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contracts which are oppressive to the weaker party or which serve

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to limit the obligations and liability of the stronger party.”

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Buraczynski v. Eyring, 919 S.W.2d 314, 320 (Tenn. 1996).

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1.

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Haun v. King, 690 S.W.2d 869, 872 (Tenn. Ct.

A contract is unconscionable if “the inequality of the

Id.

Id.

Another way

In general, “[c]ourts will not enforce adhesion

Procedural Unconscionability
In the context of employment agreements, the inequality of

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bargaining power between employers and employees (at least in the

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absence of collective bargaining) can be quite stark – especially

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when the employees have little education and are unlikely to have

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legal representation.

A federal district court in Tennessee

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described the problem as follows:

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[M]any of the hallmarks of procedural unconscionability are

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present.

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have limited education, while attorneys for EDSI, a

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corporation, have tailored the Agreement to its needs.

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does not permit potential employees to modify any portion of

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the Agreement or Rules . . . .

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to meaningfully consider the Agreement for any period of time,

The applicants are seeking low-wage jobs and many

Ryan's

[E]mployees are not permitted

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as they are required to sign it on the spot or forfeit the

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opportunity to be considered for employment.

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employees may confer with an attorney before signing the

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Agreement, but this is an empty opportunity, given the time

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constraints on signing and the perceived bad impression that

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consulting an attorney might engender in the potential

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employer. Also, there is no provision for employees to

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unilaterally revoke consent to the agreement after signing it,

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even if they do not obtain a position at Ryan's.

Potential

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Walker v. Ryan's Family Steak Houses, Inc., 289 F. Supp. 2d 916,

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933 (M.D. Tenn. 2003).

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On the other hand, this procedural unconscionability analysis,

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if read at a high level of abstraction, in many ways simply mirrors

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the definition of a contract of adhesion – that is, a “take-it-or

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leave it,” non-negotiable offer by a party that substantially

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controls access to something desirable.

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better or worse, become somewhat routine in American life.

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Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1750 (2011) (“[T]he

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times in which consumer contracts were anything other than adhesive
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Such contracts have, for
AT&T

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are long past.”).

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is drafted by an employer and may be non-negotiable likely does not

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suffice to make it unconscionable.

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evaluated in terms of both the conditions under which it is signed

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and the harshness of its substantive provisions.

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Thus, the mere fact that an employment contract

Rather, the contract must be

As noted by the Tennessee federal court above, conditions

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showing unequal bargaining power or a coercive environment

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affecting an employment contract include: the educational

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background and likely job prospects of the individual; whether the

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arbitration agreement must be signed before or after the hiring

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process; whether, if it must be signed beforehand, it may be

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revoked if the employee is not hired; and whether the employee is

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able to take the contract away and read it privately – or consult

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an attorney – before signing.

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Plaintiff argues that he was “not provided reasonable notice

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of his opportunity to negotiate or reject the terms of the

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Arbitration Agreements, nor did he have an actual, meaningful, and

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reasonable choice to exercise that discretion.”

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He also cites a case in which a “job applicant [was] required to

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sign [an] arbitration agreement before being considered for

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employment.”

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facts that would show that he was required to sign an arbitration

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agreement to be considered for a job, and indeed it appears that

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this was not the case.

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Defendant from 1994 to 2013); Mot., Ex. A & B (Plaintiff signed

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initial arbitration agreement in 2010 and current arbitration

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agreement in 2011).

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or even concrete allegations, as to whether he was given an

(Id. at 6.)

(Opp’n at 6-7.)

However, he does not present specific

(FAC, ¶ 12 (Plaintiff was employed by

He also does not present any particular facts,

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opportunity to read the agreement privately or consult an attorney.

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He also does not describe his educational level.

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Plaintiff does allege that he was a non-exempt, hourly worker

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making $21.75 an hour.

(FAC, ¶ 12.)

This militates slightly in

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favor of a finding of unconscionability.

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there are few specific facts pointing to shockingly unfair or

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unequal circumstances, for the Court to find the agreement

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unconscionable, the substantive terms of the agreement must be

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oppressive or egregiously one-sided.

Nonetheless, because

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2.

Substantive Unconscionability

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a.

Ability to Bring Claims Under California Law

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Plaintiff’s primary argument for substantive unconscionability

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– the contention that the agreement deprives him of the right to

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bring claims under California law – has already been dealt with

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above.

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that way, nor do the assumptions undergirding the FAA about the

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operation of arbitration agreements support such a reading.

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agreeing to arbitrate a statutory claim, a party does not forgo the

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substantive rights afforded by the statute; it only submits to

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their resolution in an arbitral, rather than a judicial, forum.”

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Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

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614, 628 (1985).

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b.

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The Court does not read the plain language of the contract

“By

“Affirmative Defense” Clause and Mediation
Plaintiff’s argument does raise one small issue of

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unconscionability, however.

Defendant, as noted above, asserts

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that Plaintiff has “violated” the terms of the arbitration

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agreement by not seeking to mediate the issue.

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that the agreement provides that “I must follow the steps of the
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The Court observes

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Plan in order and the failure to exhaust these contractual remedies

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may be raised as an affirmative defense in arbitration.”

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Ex. B, § 5.)

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Defendant will attempt to bar Plaintiff from obtaining relief on

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his statutory claims based on a procedural default under the terms

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of the agreement.

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(Mot.,

Thus, it would appear there is some danger that

The Court finds that the “affirmative defense” mechanism, if

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so applied, would be unconscionable.

Allowing an employer to set

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up a cumbersome procedural mechanism for its employees to follow,

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in order to increase the likelihood of procedural default, would

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undermine the principle that a party who signs an arbitration

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agreement “does not forgo the substantive rights afforded by the

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statute.”

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“substantive rights” afforded by a statute include a limitation of

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affirmative defenses to be applied against the statutory claim to

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those envisioned by the legislature, against the background of the

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state’s statutory and common law scheme, as well as the

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constitutional right to due process.

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arbitration agreement can never set its own procedures, of course.

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But it is to say that such procedures are not vetted by either a

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democratic process or judicial solicitude for the rights of

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litigants, and a court should be cautious about allowing the more

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powerful party to a contract to create procedural pitfalls for the

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weaker party.

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Mitsubishi Motors, 473 U.S. at 628.

Presumably, the

This is not to say that an

Nor does the contract clearly spell out, for an

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unsophisticated party, the consequences of the “affirmative

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defense,” so that he could reasonably be said to assent to what

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amounts to a potential waiver of rights.
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Walker v. Ryan's Family

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Steak Houses, Inc., 289 F. Supp. 2d 916, 933 (M.D. Tenn. 2003)

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(finding unconscionable arbitration agreement that stated employees

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gave up their right to “litigation in state or federal court,”

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because “‘litigation’ is not as recognizable a term as ‘trial’ or

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‘jury’ to persons of limited education”) aff'd, 400 F.3d 370, 382

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(6th Cir. 2005) (“[M]ost of the plaintiffs lack even a high school

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degree and, therefore, were at a disadvantage when attempting to

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comprehend the Arbitration Agreement's legalistic terminology.”).

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An employee of ordinary reason, but lacking in legal education,

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would be surprised to learn that he could unwittingly waive the

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right to vindicate his statutory rights at all by failing to

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carefully hew to the three-process.

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This is particularly the case when two of the steps do not

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involve binding arbitration and are essentially mere opportunities

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for the company to delay resolution of an employee’s claim in the

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hope that he will give up.

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131 S. Ct. 1740, 1749 (2011) (purpose of FAA is to promote

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arbitration, in part, in order to achieve “streamlined proceedings

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and expeditious results”).

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unconscionability precluded by the FAA; the purpose of the FAA is

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to encourage arbitration, not mediation or “senior executive

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review” or investigations by ombudsmen.

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policy favoring arbitration under a certain set of procedural

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rules” – much less a federal policy favoring in-house, multi-step

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procedures prior to arbitration.

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of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 476

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(1989).

See AT&T Mobility LLC v. Concepcion,

Nor is this finding of

“There is no federal

Volt Info. Sciences, Inc. v. Bd.

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Finally, the “affirmative defense” provision, in conjunction

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with other provisions of § 5, creates anomalies that are not easily

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resolved.

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in court” will “be considered as a request to Initiate the Plan.”

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(Mot., Ex. B, § 5.)

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simply one of many acceptable paths for initiating the process?

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does it mean that an employee has, as Defendant argues, “violated”

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the agreement?

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to go through the preliminary step of notifying a manager or human

For example, the agreement states that filing “a claim

Does that means that filing a lawsuit is
Or

Under such circumstances, is he also still required

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resources representative?

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Defendant, once a claim is filed in court, to initiate the

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Ombudsman process, because there has been a “request”?

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an employee files a claim in court and the employer successfully

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moves to compel arbitration, does the court’s order place the

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parties at the arbitration stage of “the Plan,” or merely at the

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preliminary stage?

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exhaust . . . contractual remedies,” so as to trigger the

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affirmative defense provision?

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employee to untangle these questions while filling out new-hire

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paperwork, so that he can realistically consent to a provision that

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waives his substantive claims if he fails to “follow the steps of

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the Plan,” is not reasonable.

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Or does it become the responsibility of

And where

If the former, has the employee “fail[ed] to

Asking an employee or prospective

The Court therefore concludes that the “affirmative defense”

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provision in § 5 of the agreement is unconscionable, at least

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inasmuch as it might be applied to prevent Plaintiff from

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vindicating his claims in arbitration.2

It is also severable,

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2

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If following the steps of “the Plan” was a material term of
(continued...)
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under § 18 of the agreement.

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provision unenforceable and severed from the agreement.

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c.

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The Court therefore holds the

Statute of Limitations
Plaintiff argues that the agreement is unconscionable because

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it deprives him of the benefit of the statutes of limitations as to

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his state claims, bringing them all under a single one-year

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limitation by contract.

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specifically disavows any intent to interfere with the California

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statutes of limitations.

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(Opp’n at 9.)

Defendant, however,

(Reply at 4-5.)

Plaintiff’s quotation of an alleged “Arbitration Agreement” in

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the Opposition is not supported by any documentation.

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similar, but not identical to, the language found in Defendant’s

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Exhibit A.

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superseded by the 2011 agreement, Defendant’s Exhibit B.

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Ex. B, § 21.)

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that “Disputes must be Initiated with the Plan prior to the end of

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the applicable statute of limitations.”

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Plaintiff’s right to bring a California statutory claim within the

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applicable California statute of limitations is therefore not

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prejudiced.

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It is

Exhibit A, an agreement signed in 2010, is explicitly
(Mot.,

The 2011 agreement says of statutes of limitations

(Id. at § 11.)

The Court concludes that the arbitration agreement is

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therefore enforceable against all claims within its ambit, with the

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exception of the “affirmative defense” clause as discussed above.

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D.

Claims for Injunctive Relief

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2

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(...continued)
the contract, of course, Defendant might still have a breach of
contract claim against Plaintiff, to the degree that it can show
damages.
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1

Plaintiff, citing Cruz v. PacifiCare Health Sys., Inc., 30

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Cal. 4th 303 (2003), argues that claims for injunctive relief under

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the UCL are not arbitrable.

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Circuit has overruled earlier cases relying on Cruz in the wake of

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Concepcion, on the ground that state laws shielding entire types of

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claims from arbitration are preempted by the FAA.

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Corinthian Colleges, Inc., 733 F.3d 928, 935 (9th Cir. 2013);

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Kilgore v. KeyBank, Nat. Ass'n, 673 F.3d 947, 960 (9th Cir. 2012).

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Plaintiff’s UCL claim is therefore arbitrable.

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E.

(Opp’n at 10.)

However, the Ninth

Ferguson v.

PAGA Claims

11

The arbitration agreement in this case contains a waiver of

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“representative actions,” apparently including private attorneys

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general laws like PAGA.

14

that his PAGA claim, which is on behalf of the state and resembles

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a qui tam action in that regard, cannot be the subject of an

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arbitration agreement, because the state is not a party to the

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arbitration agreement and because subjecting such claims to

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limitation by private agreement would undermine the statutory

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scheme, per Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th

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348 (2014) cert. denied, 135 S. Ct. 1155 (2015).

21

that Iskanian is not binding on this Court and that the Court

22

should decline to follow it even as persuasive authority because

23

after Concepcion it is clear that the FAA “displaces” a state’s

24

“policy concerns” about enforcement of its labor laws.

25

6.)

26

(Mot., Ex. B, § 10.)

Plaintiff argues

Defendant argues

(Reply at

As an initial matter, California law applies to the

27

determination of the validity of the waiver, because, to the extent

28

that Tennessee law differs, it would be contrary to the public
16

1

policy of California, as embodied in Iskanian and other cases

2

described below, to apply Tennessee law.

3

California’s PAGA law provides that, as an alternative to

4

direct enforcement actions on labor code violations by the Labor

5

and Workforce Development Agency (LWDA), an “aggrieved employee”

6

may bring a “civil action” “on behalf of himself or herself and

7

other current or former employees” to collect penalties on the

8

violations.

9

75/25, with the state taking the larger share and the plaintiff

Cal. Lab. Code § 2699(a).

The penalties are split

10

taking the smaller.

Cal. Lab. Code § 2699(i).

California courts

11

have noted that it was the state legislature’s intent that

12

individual plaintiffs act as proxies for the state:

13

The Legislature has made clear that an action under the PAGA

14

is in the nature of an enforcement action, with the aggrieved

15

employee acting as a private attorney general to collect

16

penalties from employers who violate labor laws.

17

action is fundamentally a law enforcement action designed to

18

protect the public and penalize the employer for past illegal

19

conduct.

20

action, as it is in most class actions.

Such an

Restitution is not the primary object of a PAGA

21

Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277, 1300 (2009)

22

(emphasis added).

23

separate from so-called “statutory penalties” that might arise

24

under the Labor Code in individual cases.

25

Inc., 189 Cal. App. 4th 562, 579 (2010).

26

enacted, an employee . . . could not collect civil penalties.

The

27

Labor and Workforce Development Agency (LWDA) collected them.

The

28

PAGA changed that.”

These civil penalties, it should be noted, are

Villacres v. ABM Indus.
“Before the PAGA was

Franco, 171 Cal. App. 4th at 1300.
17

1

A question that frequently arises, in the wake of the United

2

States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion,

3

131 S. Ct. 1740 (2011), is whether employees may enter into

4

arbitration agreements as to claims made under PAGA, and if so,

5

what agreements they may make.

6

questions: is a blanket waiver of PAGA claims in an employment

7

contract possible under California law, and if not, is the claim

8

nonetheless subject to the arbitration agreement?

9

1.

10

Specifically, there are two

Waiver of PAGA Claims
Distinguishing Concepcion, the California Supreme Court in

11

Iskanian answers the first question in the negative.

12

held that a California common law rule, prohibiting as

13

unconscionable certain class action waivers, was preempted by the

14

FAA, because the federal statute preempts not just outright

15

prohibitions on arbitration, but also general contract defenses

16

that are “applied in a fashion that disfavors arbitration.”

17

Ct. at 1747.

18

disfavored arbitration, because class actions require cumbersome

19

procedures to protect the rights of absent parties, “sacrific[ing]

20

the principal advantage of arbitration – its informality.”

21

1751.

22

arbitration agreement achieve their contractual goals --

23

streamlining dispute resolution and reducing costs and delay.

24

Congress has determined that the enforcement of contracts as the

25

parties intended simply outweighs state public policy

26

considerations.

27

that is inconsistent with the FAA, even if it is desirable for

28

unrelated reasons.”).

Concepcion

131 S.

The Court held that the rule against class waivers

Id. at

A class action waiver therefore helps parties to an

Id.

Id. at 1753 (“States cannot require a procedure

18

1

Iskanian points out, however, that the PAGA claim waiver is

2

different from a class action waiver, because a PAGA claim is not a

3

private dispute; it is “a dispute between an employer and the state

4

Labor and Workforce Development Agency.”

5

court noted that the rule only applies to waivers of the right to

6

sue for civil penalties on behalf of the state, “where any

7

resulting judgment is binding on the state and any monetary

8

penalties largely go to state coffers,” and not to waivers of any

9

sort of collective or representative action on private damages.

59 Cal. 4th at 384.

The

10

Id. at 387-88.

11

because it is not a dispute between an employer and an employee

12

arising out of their contractual relationship.”

13

Thus, “a PAGA claim lies outside the FAA's coverage

Id. at 386.

Defendant points out that Iskanian’s interpretation of the FAA

14

is not binding on this Court, which is true.

15

supreme court’s characterization of the state’s statutory scheme

16

and whether the government is the real party in interest in a

17

particular claim are, to say the least, deserving of a great deal

18

of deference.

19

only does the state take the lion’s share of the statutory penalty

20

(suggesting an individual plaintiff’s share is really more of a

21

“finder’s fee” than any sort of individual award), and not only is

22

the state bound by the result in the qui tam action, but an

23

individual plaintiff must give notice to the LWDA of his intent to

24

pursue a PAGA claim and may only bring the claim if the LWDA

25

declines to pursue the action itself.

26

2699(h).

27

availability of such claims.

Nonetheless, a state

Moreover, Iskanian’s reasoning is compelling.

Cal. Lab. Code §§ 2699.3,

That is, the state agency effectively controls the

28
19

Not

1

Additionally, contrary to the holdings of some federal

2

district courts finding PAGA waivers enforceable,3 under California

3

law a plaintiff may not bring an “individual” PAGA claim at

4

arbitration – the claim is always a representative claim on behalf

5

of the state.

6

cannot be brought on an individual basis); Reyes v. Macy's, Inc.,

7

202 Cal. App. 4th 1119, 1123 (2011) (“[T]he claim is not an

8

individual one. A plaintiff asserting a PAGA claim may not bring

9

the claim simply on his or her own behalf but must bring it as a

Brown, 197 Cal. App. 4th at 503 n.8 (PAGA claim

10

representative action and include ‘other current or former

11

employees.’”); Machado v. M.A.T. & Sons Landscape, Inc., No.

12

2:09-CV-00459JAMJFM, 2009 WL 2230788, at *3 (E.D. Cal. July 23,

13

2009) (same).

14

enforcement action against the employer for its behavior as to all

15

employees, and not the individual’s remedy for personal wrongs.4

16

This, too, suggests that the claim is the state’s

The PAGA claim therefore belongs primarily to the state; the

17

right to bring it cannot be waived by a contract to resolve private

18

disputes.

19

2.

Whether the PAGA Claim May Be Submitted to Arbitration

20
21
22
23
24

3

E.g., Quevedo v. Macy's, Inc., 798 F. Supp. 2d 1122, 1141
(C.D. Cal. 2011) (“Nothing in the arbitration Plan Document would
appear to preclude Plaintiff from pursuing this individual claim
for civil penalties in arbitration . . . .”).
4

25
26
27
28

The fact that a PAGA claim cannot be brought on an individual
basis also helps to distinguish this type of waiver from the class
action waivers at issue in Concepcion – to the Court’s knowledge,
the Supreme Court has never approved an arbitration agreement that
would deprive the individual plaintiff of a certain type of claim
altogether, and this seems contrary to the teaching of, e.g.,
Mitsubishi Motors that an arbitration agreement does not eliminate
“substantive rights afforded by the statute.” 473 U.S. at 628.
20

1

Courts that have found that the rule against PAGA waivers is

2

not preempted by the FAA have split on whether the claims may be

3

submitted to arbitration.5

4

approaches.

5

the state has not waived the judicial forum.

6

underpinning of Iskanian – lack of state consent to modification of

7

the state’s claim – suggests that an individual plaintiff also

8

cannot impose a particular forum on the state’s claim, either.

9

the other hand, the state may have somewhat less interest in the

There are good arguments for both

On the one hand, the claim belongs to the state, and
The logical

On

10

specific choice of forum than it does in enforcement and recovery

11

of some kind, and even a government agency prosecuting the state’s

12

claim may be to some degree constrained by the actions of an

13

individual plaintiff.

14

279, 296, 122 S. Ct. 754, 765-66 (2002) (“Baker's conduct may have

E.E.O.C. v. Waffle House, Inc., 534 U.S.

15
16
5

17
18
19
20
21
22
23
24
25
26
27
28

Compare Plows v. Rockwell Collins, Inc., 812 F. Supp. 2d
1063, 1070 (C.D. Cal. 2011) (denying motion to compel arbitration
of PAGA claim); Urbino v. Orkin Servs. of California, Inc., 882 F.
Supp. 2d 1152, 1167 (C.D. Cal. 2011) (holding arbitration agreement
unenforceable because “the PAGA arbitration waiver . . . taints the
entirety of the Agreement with illegality”) vacated on other
grounds, 726 F.3d 1118 (9th Cir. 2013), with Hernandez v. DMSI
Staffing, LLC., No. C-14-1531 EMC, 2015 WL 458083, at *6 (N.D. Cal.
Feb. 3, 2015) (PAGA claim does not require procedures “inconsistent
with the FAA,” because it does not require class certification,
notice, or opt-out, and its preclusive effect is limited); Zenelaj
v. Handybook Inc., No. 14-CV-05449-TEH, 2015 WL 971320, at *8 (N.D.
Cal. Mar. 3, 2015) (“Defendant in this case has not shown that
arbitration of these claims would be particularly complex,
cumbersome, time-consuming, or expensive.”); Mohamed v. Uber
Technologies, Inc., No. C-14-5200 EMC, 2015 WL 3749716, at *25
(N.D. Cal. June 9, 2015) (“PAGA imposes no procedural requirements
on arbitrators . . . beyond those that apply in an individual labor
law case.”). In some cases, there is a nonseverability clause
requiring the entire agreement to be thrown out if the waiver is
invalid. E.g., Montano v. The Wet Seal Retail, Inc., 232 Cal. App.
4th 1214, 1224 (2015). However, in this case, the waiver clause is
explicitly severable; thus, the issue is simply whether the claim
is within the scope of the arbitration agreement at all.
21

1

the effect of limiting the relief that the EEOC may obtain in

2

court.”).

3

The Court finds that the PAGA claim should not be submitted to

4

arbitration.

As a matter of logic, if the claim belongs primarily

5

to the state, it should be the state and not the individual

6

defendant that agrees to waive the judicial forum.

7

statute, the Legislature has explicitly selected a judicial forum

8

as the default forum.

9

(“[W]henever the Labor and Workforce Development Agency . . . has

In the PAGA

E.g., Cal. Lab. Code § 2699(e)(1)

10

discretion to assess a civil penalty, a court is authorized to

11

exercise the same discretion, subject to the same limitations and

12

conditions, to assess a civil penalty.”) (emphasis added).

13

both federalism and separation-of-powers concerns are at their apex

14

here.

15

of traditional, if not preeminent, state regulation.

16

it should not be understood to be preempted or superseded by a

17

federal statute absent very clear evidence of congressional intent.

18

United States v. Locke, 529 U.S. 89, 108 (2000).

19

such evidence here, and in the absence of guidance from a higher

20

court, the Court will not presume to deprive a state of the

21

mechanism chosen by its legislature to enforce its civil laws.

22

Thus,

Moreover, civil enforcement of state labor laws is a matter
Accordingly,

The Court sees no

The PAGA claim remains before this Court.6

23
6

24
25
26
27
28

This issue of the application of arbitration agreements to
PAGA claims has been contentious and is currently before the Ninth
Circuit on a consolidated set of appeals. See Sakkab v. Luxottica
Retail N. America, No. 13-55184 (9th Cir., June 30, 2015) (oral
arguments). But the Court notes that even if the FAA could apply
to PAGA claims, the practical benefit of streamlined dispute
resolution is not necessarily thwarted by including a PAGA claim in
the arbitration. As a California appellate court has noted,
arbitration of a PAGA claim “would not have the attributes of a
(continued...)
22

1
2

IV.

CONCLUSION
The Court hereby orders the parties to engage in arbitration

3

under the terms of the arbitration agreement, with the exception of

4

the PAGA claim, which remains before the Court and is not stayed.

5

The “affirmative defense” clause, however, is unconscionable and

6

unenforceable and severed from the agreement.

7
8

IT IS SO ORDERED.

9
10

Dated: July 14, 2015
DEAN D. PREGERSON
United States District Judge

11
12
13
14
15
16
17
18
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20
21
22
23
24
25
26
27
28

6

(...continued)
class action that the AT&T case said conflicted with arbitration,
such as class certification, notices, and opt-outs.” Brown v.
Ralphs Grocery Co., 197 Cal. App. 4th 489, 503 (2011). See also
Arias v. Superior Court, 46 Cal. 4th 969, 981 (2009) (PAGA action
need not meet the requirements of a class action). Thus,
Concepcion does not require the finding that the FAA preempts the
Iskanian rule, because it is not a rule “demanding procedures
incompatible with arbitration.” Concepcion, 131 S. Ct. at 1747.
Thus, at most, an arbitration agreement could force a PAGA
representative claim to arbitration; there is no reason to think
the state could not declare waivers of such claims unlawful as a
matter of contract. However, absent a ruling to the contrary by
the Ninth Circuit, the logic of Iskanian compels this Court to find
that PAGA claims are simply beyond the scope the arbitration
agreement altogether and are therefore not subject to a motion to
compel arbitration.
23