PAGA claims: Still room for uncertainty

When the California Supreme Court decided Adolph v. Uber Technologies, Inc. in July 2023, it answered one big question but left many others unanswered. Now a decision from the Ninth Circuit may provide a possible answer to one of those questions.

The state's highest court held in Adolph that, as long as certain conditions were satisfied, an employee forced to arbitrate an individual PAGA claim was not barred from pursuing a representative action in court. The employee only needed to establish his or her employment with the alleged violator and the occurrence of one or more Labor Code violations.

The Adolph decision failed, however, to provide clarity regarding the preclusive effect of an arbitrator's decision in the individual PAGA action and whether any form of settlement or judgment could put an employee's representative PAGA standing to rest. Might other findings by an arbitrator, such as a finding that one or more of the employer's policies were unlawful, have a preclusive effect on the trial court?

Ninth Circuit decision

On Feb. 13, 2024, the Ninth Circuit offered a second look at the issue decided in Adolph. The three-judge panel affirmed the earlier holding that representative PAGA actions could be brought in court even when the individual PAGA claim was subject to arbitration. Its decision in Johnson v. Lowes Home Centers, LLC (No. 22-16486 D.C. No. 2:21-cv00087-TLN-JDP) kept open the door for representative PAGA actions to proceed even when an individual plaintiff had signed an arbitration agreement.

The Ninth Circuit overturned a lower court ruling from September 2022 that sided with the employer. The district court had issued an order compelling arbitration of the individual PAGA claims and dismissing the non-individual claims. At the time, the then-current state of PAGA law reflected the U.S. Supreme Court's June 2022 Viking River Cruises, Inc. v. Moriana decision, which called for arbitration of individual claims when an arbitration agreement was in place but deferred ruling on representative actions (596 U.S. 639 (2022)).

After the state's highest court decided Adolph, however, the plaintiff in Johnson appealed, and the Ninth Circuit granted review. The appellate judges found Adolph required the district court's ruling to be overturned to correspond with the corrected Viking River interpretation of PAGA. A PAGA plaintiff, they said, could arbitrate an individual PAGA claim while simultaneously maintaining non-individual PAGA claims in court.

The Ninth Circuit recognized "a state court may not interpret state law in such a manner that it conflicts with supreme federal law," but found that "the California Supreme Court in Adolph did not so interpret state law." Nothing in Adolph, the court said, was inconsistent with the federal law articulated in Viking River. Under PAGA, plaintiffs could not be required to waive the right to pursue non-individual claims in court, but they must first prevail on their own claims: "if the plaintiff lost on the merits of his individual PAGA claims in arbitration, he no longer had standing to pursue his non-individual PAGA claims in court."

By confirming the Adolph holding, the Ninth Circuit made it clear the ability to maintain representative PAGA actions in tandem with private arbitration agreements was not inconsistent or incompatible with Viking River or the Federal Arbitration Act (FAA). But this was not the end of the story.

Concurring opinion

In a separate concurring opinion, Circuit Judge Kenneth K. Lee went one step further. While finding no irreconcilable conflict between California law and the FAA in Johnson, Judge Lee saw "a lurking tension" between Adolph and the FAA that posed a potential conflict for future cases.

In Judge Lee's opinion, the procedure set forth in Adolph, under which a plaintiff's individual PAGA claim may go to arbitration while the non-individual PAGA claims are stayed and remain in court, "might blunt the efficiency and informality of arbitration in some cases." An arbitration decision in "a low-stakes individual PAGA claim could have a preclusive effect -- at least for the statutory standing issue of who is an 'aggrieved employee' -- on the high-stakes non-individual PAGA claim in federal court."

Arbitrations for individual claims, he noted, are often low stakes for companies, but if legal conclusions or factual findings from an individual PAGA arbitration might become binding in a nonindividual PAGA action, companies could feel compelled to devote substantial resources to the individual arbitration. According to Judge Lee, such an outcome "could tilt the stakes of arbitration for defendants and undermine the benefits of arbitration for everyone." The result, he wrote, "would undermine an arbitration's efficiency, which is the 'point' of enforcing arbitration agreements according to their terms." (Citing AT&T Mobility LLC v. Concepcion, 563 U.S. at 344.) Behind the concern over efficiency, the concurring opinion can also be read as expressing concern generally over the potential impact of arbitration rulings in individual PAGA claims on non-individual PAGA claims.

Notwithstanding these concerns, Judge Lee saw no conflict between Adolph and the FAA in the Johnson case because plaintiffs with non-individual PAGA claims must still satisfy Article III standing in federal court, and there may be no issue preclusion if the arbitration failed to give the employer a full and fair opportunity to litigate the issue.

What does it mean?

The Ninth Circuit made clear in Johnson that representative PAGA actions can proceed in parallel with individual arbitrations, but Judge Lee's concurring opinion suggests the arbitrator's decision might not be the final word. Even when an individual plaintiff does not prevail at arbitration, the non-individual action might still proceed. Another plaintiff may have a much stronger individual case, and courts will not necessarily consider themselves bound by an arbitrator's ruling.

When there are conflicting arbitration decisions in multi-plaintiff cases against the same employer, nothing prevents a court from moving forward without regard to the arbitrator's rulings. If other findings have been made by the same arbitrator in a single case, those findings may not necessarily be deemed to have a preclusive effect on the trial court.

For attorneys representing PAGA litigants, this poses a quandary. What will the court ultimately decide? Although a Labor Code violation must be shown to sustain a PAGA action, a judge could still find grounds for a representative case despite the absence of an individual violation. And given the amount of variation that can exist across individual PAGA claims, the judge might decide it would be prejudicial to shut down a representative action because of a single arbitration decision. Is the gamble worth it?

Conclusion

The bottom line is parties should assume their case could go either way, and they should act accordingly. Because they cannot count on the outcome of the individual arbitration, both sides should have a strong interest in reaching a settlement rather than rolling the dice in court.

For PAGA claims that go to mediation, the parties have generally already done their homework. They have made a commitment to look for a mutually agreeable resolution. They have chosen to take the guesswork out of the equation, and they are ready to reach a full and complete settlement of their issues. Employers who want to put a PAGA matter behind them will look to settle all related PAGA claims through mediation. Plaintiffs who mediate their PAGA claims want to remove any risk that an arbitrator will rule against them. For both sides, a bird in the hand may be priceless.