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Arbitration — General

SCOTUS limits federal court jurisdiction to confirm or vacate an arbitration award.

In Badgerow v. Walters, the United States Supreme Court held that federal courts have jurisdiction only to hear post-arbitration motions to confirm or vacate an arbitration award when federal jurisdiction – typically either diversity or federal question jurisdiction – is presented by the petition to confirm or vacate the award itself. Thus, federal jurisdiction over a motion to confirm or vacate an award will typically exist only where there is complete diversity of citizenship between the parties (all petitioners citizens of different states than all respondents), or when the petition claims a federal law requires confirmation or vacatur of the award. The fact that federal law claims were adjudicated in the underlying arbitration does not provide a basis for federal court jurisdiction.

As a result of this opinion, parties that engage in non-judicial, voluntary arbitration of claims should only invoke the federal courts to confirm or vacate the award if there is underlying federal court jurisdiction for the matter. So, if the parties are citizens of the same state (i.e. no diversity jurisdiction) and the matter does not involve a federal statute (i.e. no federal question jurisdiction), only the proper state court can entertain a motion to vacate or modify the award.

US Supreme Court rules that a party can waive arbitration by first litigating its claims in state court, even if there is no prejudice to the other party.

In Morgan v. Sundance, Inc., the United States Supreme Court held that a party can waive arbitration by first litigating its claims in state court—even if the other party was not prejudiced by that conduct. Thus, it is now easier to oppose arbitration on waiver grounds. The Court noted that outside the context of arbitration, determining whether a party has waived a contractual right typically focuses solely on the conduct of that party – i.e., whether they have engaged in conduct that suggests an intentional decision to relinquish a known right – and does not turn on harm to the other party.

So, too, for the right to compel arbitration, the Court ruled. Thus, a party who initially litigates a case in court for some period of time before seeking to compel arbitration may have waived its right to compel arbitration, whether or not the delay caused any prejudice to the opposing party.

This opinion is consistent with opinions by the California Supreme Court on the issue of waiver. Thus, for parties seeking to compel arbitration in state court or federal court, it is crucial to file the necessary motion to compel arbitration as soon as practicable after the underlying complaint is filed. A significant delay in doing so will likely result in a denial of the motion based on waiver, even if the other side has not been prejudiced by the delay.

US Supreme Court limits District Court’s authority to order discovery for use in private, international arbitration proceedings

In ZF Automotive US, Inc. v. Luxshare, Ltd., the United States Supreme Court ruled that 28 U.S.C. section 1782(a) only permits a district court to order the production of evidence for use in proceedings before a governmental or intergovernmental adjudicative body. The Court held that the statute does not grant district courts the authority to order discovery for use in private arbitration proceedings. As a result, parties to private foreign arbitration proceedings may no longer invoke section 1782 to obtain testimony and evidence in U.S. district courts.

In holding that a “foreign or international tribunal” is one that exercises governmental authority, the Court resolved a longstanding split between the circuit courts. In the past, district courts in the Ninth Circuit have generally permitted parties to invoke section 1782 to obtain discovery from witnesses located or found in the United States to aid cases in private foreign arbitrations. Following the ZF Automotive case, district courts no longer have authority under that statute to order discovery in aid of a private foreign arbitration.

This ruling is important because for years some circuit courts approved the use of section 1782 to allow parties to have broad discovery to support their case in a private international arbitration. Under the Court’s ruling, the ability to obtain discovery is curtailed significantly in arbitration proceedings. However, section 1782 remains a viable tool for international proceedings unrelated to arbitrations.

Court of Appeal rules that trial court improperly amended an arbitrator’s award by eliminating set-off to a party who was not involved in the arbitration

In E-Commerce Lighting, Inc. v. E-Commerce Trade LLC, an arbitrator determined that a borrower and lender were liable to each other for similar amounts, roughly $2,500,000. The arbitrator then offset the awards against each other, resolving the disputed issue of whether a setoff was proper. A bank, however, had also lent money to the borrower. The bank was not a party to the arbitration, but believed the setoff effectively circumvented the agreement among it, the borrower, and the other lender that the bank’s loan had priority and would be paid back first. Instead of being offset against the other lender’s award, the bank believed, the borrower’s award should have gone toward satisfying the bank’s loan. It thus convinced the trial court to correct the arbitrator’s award by eliminating the setoff.

The Court of Appeal held that on the facts presented, the correction affected the merits of the arbitrator’s decision. Accordingly, the correction was improper, and the Court reversed.

The relevant statute at issue is Code of Civil Procedure section 1286.6 which permits a trial court to correct an arbitration award in three circumstances: “(a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy.”

A party filing a petition with a trial court to correct or modify an arbitration award must make sure that one of the three circumstances in section 1286.6 applies. Most importantly, if a trial court ruling with “affect the merits of the controversy” the court may not rule on the petition.

Rejecting equitable estopped argument, Court of Appeal denies motion to arbitrate by companies who did not have arbitration agreements with plaintiffs, although plaintiffs had such agreements with co-defendant

In Pacific Fertility Cases, the Court of Appeal affirmed the denial of a motion to compel arbitration since the plaintiffs did not sign the arbitration agreement. On engaging services from Pacific Fertility Center (“Pacific”), the plaintiffs signed “ ‘Informed Consent and Agreement to Perform Egg Cryopreservation” forms, providing that medical malpractice disputes were subject to arbitration. The plaintiffs signed separate arbitration agreements with Pacific. Chart, which manufactures Pacific’s cryogenic storage tanks, and Praxair, which sold those tanks to Pacific and assisted with installation, were not signatories to either the informed consent or arbitration agreements.

Following the failure of a tank, the plaintiffs in 54 coordinated cases filed suit. As to Chart and Praxair, the complaint alleged negligent failure to recall the tank, strict products liability, general negligence, and violation of the Unfair Competition Law. After the plaintiffs agreed to arbitrate their claims against Pacific, Chart and Praxair moved to compel arbitration, citing equitable estoppel. The trial court denied the motion.

The court of appeal affirmed the denial of their motions. The plaintiffs’ claims are not premised on, nor did they arise out of, the plaintiffs’ fertility services agreements with Pacific. The issue of comparative fault and joint liability on certain issues does not inform the equitable estoppel analysis; the joint liability is not based on the same or similar legal theories and/or facts that underlie the obligations under the Pacific contracts.

In general, under California law, a non-signatory to an arbitration agreement may be compelled to arbitrate under two circumstances: (1) if its claims are “dependent on or inextricably intertwined” with the underlying contractual obligations of the agreement containing the arbitration clause; or (2) if it receives a “direct benefit” from the contract containing the arbitration clause. (Pillar Project AG v. Payward Ventures, Inc., 64 Cal.App.5th 671 (2021).) Thus, a party seeking to compel arbitration against a non-signatory should argue that one or both of these circumstances exist.

In trial preference action brought by 92-year old elder abuse victim, Court of Appeal finds that defendant waived the right to compel arbitration by waiting until after the motion for trial preference was granted

In Leger v. R.A.C. Rolling Hills, defendant ActivCare appealed an order denying a petition to compel arbitration in the elder abuse lawsuit filed by Mary Leger. ActivCare contended the trial court erred in concluding that it had waived its right to arbitration because it sought to compel arbitration less than 30 days after filing its answer.

The Court of Appeal concluded substantial evidence supported the trial court’s waiver finding and affirmed the order. The Court of Appeal relied on the fact that plaintiff was 92-years old and had moved for a trial preference, which ActivCare opposed. Only after the trial preference motion was granted, did ActivCare file the motion to compel arbitration.

Based on this case, if you have an arbitration agreement with a party who may be entitled to a trial preference (i.e. over the age of 70, under the age of 14, and/or unlikely to survive the next six months), do not wait to file a motion to compel arbitration. Certainly, do not wait until after a motion for trial preference is filed and/or granted.

Court of Appeal holds that an unlicensed attorney may enforce arbitration agreement in retainer agreement

In Brawerman v. Loeb & Loeb LLP, Plaintiffs sued Defendants asserting causes of action for professional negligence and breach of fiduciary duty. Defendants moved to compel arbitration pursuant to the Retainer Agreement and the trial court granted the motion. The arbitration hearing proceeded and the arbitrator found that Defendants were liable to Plaintiffs for their failure to protect Plaintiffs’ control over the business or to disclose to Plaintiffs such lack of control. However, the arbitrator found that this conduct did not harm Plaintiffs because they could not show that the contingency fee paid to the firm was caused by Defendants’ failings.

Plaintiffs moved the trial court to vacate the award. They argued that the Retainer Agreement, including its arbitration clause, was illegal and unenforceable because Defendant was unlicensed to practice law when he performed services for Plaintiffs pursuant to that agreement. The trial court denied the motion and confirmed the arbitration award.

The Court of Appeal affirmed the ruling finding that there was no error. The court wrote that Birbrower, Montalbano, Condon & Frank v. Superior Court (1998) 17 Cal.4th 119 (Birbrower) dictates that the unlicensed attorney’s illegal practice of law pursuant to the retainer agreement does not render the entire retainer agreement illegal. Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 30 (Moncharsh) holds that an arbitration provision is severable from an agreement that is not entirely illegal (unless the arbitration provision itself is illegal). There is no claim here of any illegality in the retainer agreement’s arbitration provision. Furthermore, the court held that even though one of defendant’s lawyers was unlicensed in California when he performed part of the work under plaintiff client’s retainer agreement, the agreement was not rendered wholly unenforceable as a result. Instead, the retainer agreement remained partially enforceable both as to its arbitration clause and as to the work performed by other of defendant’s attorneys who were licensed in California.

If you have a retainer agreement with a lawyer who is not licensed to practice law, it may still be enforceable, especially if some of the work is performed by other lawyers in the firm who are properly licensed.

Court of appeal refuses to enforce arbitration agreement in wrongful death action against treatment center

In Nelson v. Dual Diagnosis Treatment Center, Allen and Rose Nelson for themselves and on behalf of their deceased son, Brandon, sued Sovereign, a treatment center. The Nelsons alleged a cause of action for wrongful death, and on behalf of Brandon, negligence, negligence per se, dependent adult abuse or neglect, negligent misrepresentation, and fraud. According to the complaint, despite concluding that 26-year-old “Brandon requires 24 hour supervision ... at this time” after admitting him to its residential facility following his recent symptoms of psychosis, Sovereign personnel allowed him to go to his room alone, where he hung himself with the drawstring of his sweatpants.

The trial court denied Sovereign’s motion to compel arbitration because: (1) the court found Sovereign failed to meet its burden to authenticate an electronic signature as Brandon’s on Sovereign’s treatment center enrollment agreement; and (2) even assuming Brandon signed the agreement, it was procedurally and substantively unconscionable, precluding enforcement against Brandon or, derivatively, his parents.

Sovereign challenged the trial court’s authentication and unconscionability findings. Finding no reversible error, the Court of Appeal affirmed the trial court’s judgment.

This case establishes the difficulties in compelling arbitration when the agreement is in an electronic format. If possible, a “wet signature” on an arbitration agreement should be obtained.

Court of Appeal affirms denial of motion to arbitrate based on waiver when it was filed more than two years after the lawsuit commenced

In Kokubu v. Sudo, a dispute arose between investors who sought to exploit a Japanese tax incentive promoting wood frame construction. The Court of Appeal affirmed the trial court’s order denying defendants’ motion to compel arbitration, which they filed more than two years after the lawsuit began. The court found that substantial evidence supports the trial court's finding of waiver under the factors set forth by the California Supreme Court in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196. Specifically, the Court found that appellants took actions inconsistent with the right to arbitrate; appellants substantially invoked the litigation machinery and respondents had substantially invested in the lawsuit when arbitration was invoked; appellants delayed for a long period before seeking a stay; appellants filed a cross-complaint without pursuing a stay; appellants took advantage of judicial discovery procedures not available in arbitration; and appellants’ conduct prejudiced respondents.

This is one of several opinions holding that an unreasonable delay in moving to compel arbitration will result in a waiver of that right. A party seeking to enforce an arbitration agreement should file a motion immediately after the complaint is filed. Ideally, the motion will be filed as the initial appearance in the case.

Court of Appeals holds that online pop-up provides adequate notice of binding arbitration terms governing disputes involving online video game

In B.D. v. Blizzard Entertainment, a minor played Blizzard’s online video game and used “real money” to make in-game purchases of items to assist in playing the game. The minor and his father sued Blizzard, alleging the sale of in-game items with randomized values constituted unlawful gambling, and, thus, violated the California Unfair Competition Law (UCL). Blizzard moved to compel arbitration based on the dispute resolution policy incorporated into various iterations of the online license agreement that Blizzard presented to users when they signed up for, downloaded, and used Blizzard’s service. The trial court denied the motion, finding a “reasonably prudent user would not have inquiry notice of the agreement” to arbitrate because “there was no conspicuous notice of an arbitration” provision in any of the license agreements.

The Court of Appeal disagreed: the operative version of Blizzard’s license agreement was presented to users in an online pop-up window that contained the entire agreement within a scrollable text box.

This is a welcomed opinion for companies who utilize pop-up windows containing arbitration agreements. However, the opinion may be limited to instances where pop-up windows are used, such as on-line gaming and other internet programs. If you are able to obtain a wet signature on an agreement, that is always the preferred method.

Arbitration agreements may not be enforceable against poor plaintiffs

In Aronow v. Superior Court, Aronow sued Emergent for legal malpractice. Based on an arbitration provision in the retainer agreement, the trial court granted Emegent’s motion to compel arbitration after finding the agreement was valid. Aronow and Emergent agreed on an arbitrator. Aronow was required to make a $1,500 advance payment for the arbitrator’s fee. At the initial conference with the arbitrator, Aronow, currently receiving public assistance relief in Alaska, advised that he was unable to pay the arbitration fees. In the trial court, Aronow sought a waiver of arbitration fees and costs or alternatively to lift the court stay.

The court of appeal addressed a certified question and held that a trial court that granted a defendant’s petition to compel arbitration has jurisdiction to lift the stay of court proceedings where a plaintiff demonstrates financial inability to pay anticipated arbitration costs. Aronow must be allowed to attempt to demonstrate his inability to pay the arbitrator’s fees. If the trial court finds Aronow is unable to pay that fee, it should give Emergent the choice either to pay Aronow’s share of the fee or to waive the right to arbitrate.

If you are involved in a case involving an indigent party and there is a binding arbitration agreement, be prepared to volunteer to pay all fees associated with the arbitration. Absent such an arrangement, the request for arbitration may likely be denied.

Interim rulings by arbitrator are not appealable; there must be a final award

In Kirk v. Ratner, Kirk entered into a confidential settlement agreement in August 2017 with four entertainment industry executives. The agreement contained an arbitration clause. The executives filed a demand for arbitration in June 2020, asserting breach of contract, interference with contract, and civil extortion. The executives obtained from an emergency arbitrator a preliminary injunction prohibiting Kirk from disclosing confidential information as that term is defined in the settlement agreement, including any disclosures in court documents, and from initiating any lawsuit against the executives in violation of the arbitration provisions in the settlement agreement.

Kirk filed a petition in superior court to vacate the preliminary injunction. Because the emergency arbitrator’s ruling was not an “award” under Code of Civil Procedure section 1283.4,1 the court dismissed the petition for lack of jurisdiction.

The court of appeal dismissed their appeal as taken from a non-appealable order. Specifically, the court held that an arbitrator’s interim rulings are not reviewable until the final award is entered; no appeal is available from a court’s dismissal of a petition to vacate such an interim ruling.

If you are involved in an arbitration and the arbitrator makes a pre-award ruling that is unfavorable, you cannot file a motion with the court to challenge the ruling. Rather, when faced with an unfavorable pre-award ruling by an arbitrator, make the proper objection in the arbitration proceeding which will preserve your right to challenge the ruling (and the award, if applicable) after a final award is made by the arbitrator.

Court of Appeal finds that equitable issues in lawsuit were outside scope of arbitration agreement, and that arbitrable claims could be stayed pending result of the equitable issues in court

In Eminence Healthcare, Inc. v. Centuri Health Ventures, LLC, the trial court granted the motion to compel arbitration in part and denied in part in a lawsuit alleging tort, contractual and statutory causes of action. The court of appeal affirmed the order delaying arbitration until after the court resolves the nonarbitrable causes of action. In the published portion of this opinion, the court concluded that the arbitration agreement carve-out for claims seeking equitable relief is not ambiguous and such causes of action are plainly excluded from the agreement to arbitrate. Therefore, the trial court properly concluded that the six causes of action in plaintiffs’ complaint seeking equitable relief fall outside the agreement to arbitrate.

To avoid being forced to try certain matters in arbitration and other matters against the same party in court, the arbitration agreement should not include any exceptions to arbitration. Rather, the agreement should be comprehensive, covering all potential claims and disputes between the parties.

#employmentArbitration — Employment

US Supreme Court denies employer’s contractual right to arbitrate employment claims brought by airline ramp supervisors.

In Southwest Airlines Co. v. Saxon, the United States Supreme Court narrowed the scope of arbitration under the Federal Arbitration Act (“FAA”). The Court held that employment contracts for airline ramp supervisors, who assist in loading baggage and cargo onto planes, are excluded from the FAA. Section 1 of the FAA excludes “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The Court held that ramp supervisors were sufficiently similar to other classes of excluded workers (seamen and railroad employees), by virtue of their involvement with the interstate transportation of cargo, and thus fell within the FAA’s exclusion. The Court rejected the employee’s broad interpretation that anyone employed by an airline fell within the Section 1 exclusion, but also rejected the airline’s narrow interpretation that the exclusion applies only to those who work on board vessels transporting cargo.

This opinion is limited to cases involving employment claims by “seamen, railroad employees” and other workers involved in the interstate transportation of cargo. An employer of such employees should expect a motion to compel arbitration to be denied pursuant to the exception in the FAA.

US Supreme Court clarifies right to contractual arbitration of claims brought under California’s PAGA statute

In a long-awaited opinion, the United States Supreme Court in Viking River Cruises, Inc. v. Moriana, addressed the effect of arbitration clauses on plaintiffs’ rights to bring claims brought under California Labor Code’s Private Attorneys General Act (“PAGA”). PAGA allows private employees to step into the shoes of the California Labor and Workforce Development Agency and bring suit for civil penalties payable to the state for violations of state employment laws affecting the state employees, as well as for any violations affecting other, non-state employees.

States generally cannot require a party to submit to class action-style arbitrations that aggregate large numbers of nonparty claims. Thus, an arbitration clause that requires arbitration of a party’s individual claims, but does not include consent to arbitration of class claims, is enforceable. The Court addressed how this rule applied to California law concerning PAGA suits, which shared some of the attributes of class actions but not others.

The Supreme Court focused on two rules established by California case law: (1) a rule that declared unenforceable contractual provisions requiring parties to waive their rights to bring representative PAGA claims altogether; and (2) a rule that invalidates agreements by parties to litigate or arbitrate PAGA claims for an employee’s own injury separately from representative PAGA claims for injuries to other employees.

In an opinion by Justice Samuel Alito, the Court held that the first rule was not preempted by the Federal Arbitration Act (“FAA”), because the FAA only applies to the enforceability of arbitration agreements, not contractual waivers of substantive rights or remedies. However, the Court held that the second rule conflicted with the FAA (and was therefore preempted) because it interfered with parties’ rights to agree to arbitrate a particular type of claim (i.e., individual PAGA claims) and to limit their arbitration agreement to only that type of claim. Thus, California state law could invalidate contract provisions that waived representative PAGA claims altogether but could not preclude parties from agreeing to separately arbitrate an employee’s individual PAGA claims, apart from any representative claims on behalf of others.

This left the question of what to do with an employee’s representative PAGA claims for injuries to other employees, which were not arbitrable under the parties’ agreement, after compelling arbitration of an employee’s individual PAGA claims for her own injuries. The Court held that as a matter of California state law, a plaintiff who separately arbitrated their individual PAGA claims did not have statutory standing to continue to assert representative PAGA claims in separate litigation that did not include the plaintiff’s individual claims.

Justice Sonia Sotomayor concurred fully in the opinion but wrote separately to note that because the question of statutory standing was one of state law, it was ultimately up to the California courts and legislature if they disagreed with the Supreme Court’s analysis on this issue.

Following up on Viking River, the California Supreme Court is currently reviewing this issue in the case of Adolph v. Uber. A decision in the Adolph case should be published in the next 12-14 months. Until the California Supreme Court issues its ruling, or until the California Legislature acts, employers in California litigation should be able to compel arbitration of an employee’s claims (including his or her individual PAGA claims), and obtain a dismissal of the representative PAGA claims. However, this window is likely to shut soon.

Ninth Circuit Court of Appeals withdraws opinion upholding portions of California’s Assembly Bill 51

In Chamber of Commerce v. Bonta, the Ninth Circuit Court of Appeals withdrew its prior opinion upholding certain provisions of Assembly Bill 51 (“AB 51”). AB 51 is a California law that prohibits employers from requiring that employees sign an arbitration agreement as a condition of employment. AB 51 applies to any arbitration agreement entered into or modified on or after January 1, 2020, the date the law became effective. Under AB 51, it is unlawful for employers to require that employees or applicants sign an agreement to arbitrate claims under the California Fair Employment and Housing Act (“FEHA”) and/or the Labor Code as a condition of employment, continued employment, or receipt of employment-related benefits. Significantly, rather than invalidate the arbitration agreement, AB 51 instead subjects an employer to civil and criminal penalties.

After AB 51 took effect, the United States Chamber of Commerce filed a lawsuit to enjoin the law’s enforcement. On January 31, 2020, the U.S. District Court for the Eastern District of California granted the request for a preliminary injunction, thereby enjoining enforcement of AB 51 on arbitration agreements governed by the FAA. The basis for the District Court’s ruling was that AB 51 (1) violates the FAA by putting arbitration agreements on an unequal footing with other contracts by specifically targeting arbitration agreements and imposing a higher consent requirement on them; and (2) interferes with the FAA’s goal of promoting arbitration by subjecting employers who seek to enter into arbitration agreements to civil and criminal penalties. The State of California appealed the preliminary injunction to the Ninth Circuit.

The Ninth Circuit’s original opinion upheld certain portions of AB 51. However, following on the heels of the United States Supreme Court’s recent decision in Viking River Cruises, Inc. v. Moriana, the Ninth Circuit recently issued an order withdrawing its prior opinion and granting a panel rehearing.

Court of Appeal affirms denial of employer’s motion to compel arbitration on unconscionability grounds

In Beco v. Fast Auto Loans, Inc., plaintiff Bernell Beco filed suit against his former employer Fast Auto alleging 14 causes of action relating to the termination of his employment. Plaintiff alleged causes of action under FEHA, numerous wage and hour violations under the Labor Code, wrongful termination, unfair competition, and additional tort claims. Fast Auto moved to compel arbitration, arguing that Beco had signed a valid arbitration agreement at the time he was hired. The trial court found the agreement unconscionable in part because Beco was pressured to electronically sign a number of documents and threatened with termination if he did not do so. The trial court further held that severance of some portions of the agreement would not cure the defects. Thus, the trial court denied the motion, and declined to enforce the arbitration agreement. The Court of Appeal affirmed, and further rejected Fast Auto’s argument that the arbitrator, not the court, should have decided the issue of unconscionability. Additionally, because the agreement included numerous substantively unconscionable provisions, the Court of Appeal found no abuse of discretion in the trial court’s decision not to sever them.

This case illustrates the downfall of electronically-signed arbitration agreements, especially those presented to employees at the time of hiring. The better practice is to obtain a wet signature from the employee after providing him or her sufficient time to review the agreement.

In post-Viking River opinion, Court of Appeal reverses trial court order denying employer’s motion to compel arbitration of PAGA claims

In Lewis v. Simplified Labor Staffing Solutions, Inc., defendant Simplified appealed an order denying its motion to compel arbitration of Plaintiff’s PAGA claims. Simplified’s motion was based on Plaintiff’s agreement to arbitrate all claims arising from their employment relationship. The trial court denied the motion based on a rule followed by numerous California Courts of Appeal that pre-dispute agreements to arbitrate PAGA claims are unenforceable. The Second Appellate District reversed and held that this rule cannot survive the United States Supreme Court’s recent decision in Viking River Cruises. The court further held that the scope of the arbitration clause is to be determined by the arbitrator in accordance with the arbitration agreement. Specifically, the parties’ dispute about whether nonindividual PAGA claims are governed by the arbitration agreement, in the same way, individual PAGA claims are, is an issue for the arbitrator to address.

Following Viking River, employers have the upper hand in compelling arbitration of individual PAGA claims by an employee. However, following up to Viking River, the California Supreme Court is currently reviewing this issue in the case of Adolph v. Uber. A decision in the Adolph case should be published in the next 12-14 months. Until the California Supreme Court issues its ruling, or until the California Legislature acts, employers in California litigation should be able to compel arbitration of an employee’s claims (including his or her individual PAGA claims), and obtain a dismissal of the representative PAGA claims. However, this window is likely to shut soon.

Court of Appeal for Second Appellate District confirms trial court’s order granting employee’s motion to withdraw from contractual arbitration due to employer’s failure to timely pay arbitration fees despite lack of prejudice to the employee

In De Leon v. Juanita’s Foods, following the commencement of arbitration proceedings defendant Juanita’s Foods failed to pay its share of arbitration fees within 30 days after such fees were due. Based on that late payment, the trial court concluded that Juanita’s Foods was in material breach of the parties’ arbitration agreement and allowed plaintiff to proceed with his claims against Juanita’s Foods in court. Defendant argued that the trial court should have considered factors in addition to its late payment, i.e., whether the late payment delayed arbitration proceedings or prejudiced Plaintiff.

The Court of Appeal for the Second Appellate District affirmed, concluding that the trial court correctly declined to consider these additional factors. The court explained that Code of Civil Procedure sections 1281.97 and 1281.98 provide that if a company or business that drafts an arbitration agreement does not pay its share of required arbitration fees or costs within 30 days after they are due, the company or business is in “material breach” of the arbitration agreement. In the case of such a material breach, an employee or consumer can, among other things, withdraw his or her claim from arbitration and proceed in court. Accordingly, the court affirmed the order granting Appellant’s motion to vacate the order compelling arbitration as to Juanita’s Foods.

This is one of three 2022 appellate opinions (all from the Second Appellate District) strictly construing Code of Civil Procedure sections 1281.97 and 1281.98 requiring payment of arbitration fees within 30 days of the due date. Employers MUST make these payments timely and are further encouraged to wire the funds directly to the arbitration administrator to avoid any delays.

Court of Appeal confirms trial court’s order granting employee’s motion to withdraw from contractual arbitration due to employer’s failure to timely pay arbitration fees despite claim of inadvertence by employer

In Espinoza v. Superior Court, plaintiff filed claims for discrimination and retaliation against her former employer, a skilled nursing facility. The trial court granted Defendant’s motion to stay litigation and compel the parties to proceed in arbitration. When Defendant failed to pay its arbitration fees by a statutory deadline, Plaintiff moved the trial court to lift the stay of litigation and allow her to proceed in court. The trial court denied the motion, and Plaintiff appealed.

The Court of Appeal reversed based on the plain language as well as the legislative history of section 1281.97, the Legislature intended courts to apply the statute’s payment deadline strictly. Thus, under section 1281.97, subdivision (a)(1), Defendant was in material breach of the arbitration agreement even though, as the trial court found, the delay in payment was inadvertent, brief, and did not prejudice Plaintiff. Further, the court rejected Defendant’s argument that the FAA preempts section 1281.97.

This is one of three 2022 appellate opinions (all from the Second Appellate District) strictly construing Code of Civil Procedure sections 1281.97 and 1281.98 requiring payment of arbitration fees within 30 days of the due date. Employers MUST make these payments timely and are further encouraged to wire the funds directly to the arbitration administrator to avoid any delays.

Court of Appeal holds that California’s statute requiring payment of arbitration fees is not preempted by the FAA

In Gallo v. Wood Ranch USA, Inc., plaintiff sued her former employer, Wood Ranch, for compensatory and punitive damages on nine different causes of action. Wood Ranch moved to compel arbitration. The trial court granted the motion and stayed the pending court proceedings. Wood Ranch failed to pay the initiation fees on a timely basis. Plaintiff filed a motion to vacate the trial court’s prior order compelling arbitration. Invoking California Code of Civil Procedure sections 1281.97 and 1281.99, Plaintiff argued that Wood Ranch’s late payment of its share of the initiation fees constituted a material breach of the arbitration agreement. The trial court granted the motion.

The Court of Appeal affirmed, finding that the provisions of the California Arbitration Act are not preempted by the Federal Arbitration Act.

This is one of three 2022 appellate opinions (all from the Second Appellate District) strictly construing Code of Civil Procedure sections 1281.97 and 1281.98 requiring payment of arbitration fees within 30 days of the due date. Employers MUST make these payments timely and are further encouraged to wire the funds directly to the arbitration administrator to avoid any delays.

Despite the US Supreme Court’s holding in Viking River that waiver of representative PAGA claims are enforceable, Court of Appeal affirms denial of motion to compel arbitration of PAGA claims on grounds of unconscionability

In Navas v. Fresh Venture Foods, LLC, several FVF employees filed a class action lawsuit against the Defendant alleging, among other things, that the company did not pay minimum and overtime wages. They also alleged a PAGA claim for civil penalties “for themselves and other current and former employees” for “labor law violations.” Defendant sought to compel arbitration based on agreements each of the employees had signed. In response, the employees claimed they did not recognize the purported arbitration agreement or the signatures on them. Moreover, the agreement presented by FVF contained unconscionable provisions. The trial court found that FVF did not prove the employees entered into a valid arbitration agreement.

The Court of Appeal affirmed, finding that, while employment agreements that compel the waiver of representative claims under PAGA are no longer generally contrary to public policy per Viking River, the agreement in this case was unconscionable.

Thus, despite the opinion in Viking River, courts may still refuse to compel arbitration of individual PAGA claims if the underlying agreement is unconscionable.

Court of Appeal holds that arbitrator should decide whether New York or California law should apply to an employment dispute

In Zhang v. Superior Court, plaintiff was an equity partner in Dentons U.S. LLP, a law firm with offices throughout the United States. A dispute arose between them over a multimillion-dollar contingency fee from a client whom plaintiff brought to the firm. The partnership agreement contains a clause providing for arbitration of all disputes in Chicago or New York. The partnership agreement also contains a clause delegating all questions of arbitrability to the arbitrator. Dentons terminated Plaintiff for cause, asserting a breach of fiduciary duty, and initiated an arbitration in New York.

Thereafter, Plaintiff sued Dentons for wrongful termination and other causes of action in Los Angeles Superior Court. Plaintiff also obtained a temporary restraining order and then a preliminary injunction, enjoining the New York arbitration until the court could decide whether there was a clear and unmistakable delegation clause. Dentons filed a motion under Code of Civil Procedure section 1281.4 seeking a mandatory stay of the case based on its motion to compel arbitration that was then pending in a New York court, which the New York court later granted. The motion was granted, and Plaintiff appealed. The court of appeal agreed with the trial court that the parties delegated questions of arbitrability to the arbitrator. The arbitrability issues in this case include whether Plaintiff is an employee who may invoke Labor Code section 925 and require the merits of the dispute to be resolved by the arbitrator.

The Court held that Zhang’s status as an employee was an issue of arbitrability. Thus, the parties’ clear and unmistakable delegation clause, which provided that issues of arbitrability would be decided by the arbitrator, mandated that the arbitrator, not the court, must determine whether Zhang was an employee such that he could invoke Labor Code Section 925.

Beyond the threshold question of the employee status of a law firm’s equity partner, this ruling may provide some practical guidance to practitioners in drafting future arbitration agreements with out-of-state forum and choice of law provisions. An exception to Labor Code section 925 permits employees who are represented by legal counsel to select another state’s law to govern the parties’ agreement. Thus, in cases where an employee is represented by counsel and is covered by an arbitration agreement which has a delegation clause and an out-of-state choice of law provision, application of Labor Code section 925 and choice of law may ultimately be determined by an arbitrator outside of California.

Court of Appeal strictly construes statute preventing an arbitrator to amend the original award after 30 days from the date of the original award have lapsed

In Taska v. The RealReal, Inc., plaintiff Taska was hired by The RealReal (“TRR”) in 2017 but was terminated in 2018, allegedly based on her protest against the CEO’s discriminatory comments and her reports of workplace-related legal violations. After arbitration, Taska stated her intent to file a petition for attorney fees and costs under Government Code 12965(b), “upon a liability finding.” TRR also sought fees and costs, arguing Taska’s lawsuit should be deemed meritless, based on her “fabricated evidence.” TRR did not ask for any specific amount or offer supporting evidence. The arbitrator determined that Taska failed to prove her claims and was not entitled to fees or costs; TRR was not entitled to fees and costs because Taska’s claims were not frivolous. TRR later sought fees and costs, explaining that facts established by the arbitrator were not available at the time of the previous briefing. The arbitrator issued a new “Final Award,” awarding TRR $53,705.43 in costs and fees. The original award was later amended to increase the award based on a calculation error.

The trial court confirmed the liability determination but held that the arbitrator exceeded her authority by amending the original award.

The court of appeal affirmed holding that once the 30-day period for correction (Code of Civil Procedure section 1284) runs, the award is final and the arbitrator’s jurisdiction ends apart from specific statutory exceptions. The court rejected TRR’s “placeholder” argument that the award was not “final” because the issue of fees and costs was not ripe until the arbitrator determined the question of liability.

Here, the arbitrator issued an award that resolved all submitted issues, including denying the defendant’s motion for an attorney fee award, but then later issued a revised award granting $73,000 in attorney fees to defendant. The revised award was beyond the arbitrator’s powers, and the trial court properly refused to enforce it. Requests to modify or correct an arbitrator’s award should be done timely pursuant to statute and before a final award is made. Otherwise, any post-award correction by the arbitrator will not be permitted.

Court of Appeal refuses to “re-write” an arbitration agreement to render it enforceable

In Mills v. Facility Solutions Group, plaintiff filed a complaint against his former employer FSG for disability discrimination and related causes of action under FEHA. The same month plaintiff filed a class action against FSG for Labor Code violations, which also included a PAGA claim. The trial court denied FSG’s motion to compel arbitration finding unconscionability permeated the arbitration agreement because it had a low to moderate level of procedural unconscionability and at least six substantively unconscionable terms, making severance infeasible. On appeal, FSG contends claim and issue preclusion required the trial court in this action to enforce the arbitration agreement.

The Court of Appeal affirmed. Specifically, the Court of Appeal agreed with the trial court that the arbitration agreement is permeated with unconscionability, and the court cannot simply sever the offending provisions. Rather, the court would need to rewrite the agreement, creating a new agreement to which the parties never agreed. Moreover, upholding this type of agreement with multiple unconscionable terms would create an incentive for an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, the court would simply modify the agreement to include the bilateral terms the employer should have included in the first place.

The Court of Appeal focused on the fact the agreement had a small font, with over 60 lines of text on the first page. The plaintiff accessed the agreement on his cellphone and would have experienced difficulty in reading the small print. Furthermore, the agreement unfairly allocated the costs, and limited the statute of limitations.

When drafting an arbitration agreement, an employer should make the provisions as clear and concise as possible, in an easily-readable format. The employer should also be prepared to bear the burden of paying the arbitration fees. Finally, an arbitration agreement should not limit the statute of limitations for the underlying claims.

Court of Appeal holds that employer waived right to compel arbitration by delaying 17 months before filing motion to compel arbitration

In Davis v. Shiekh Shoes, LLC, Shiekh hired Davis in 2018 and both signed an agreement to resolve all disputes by binding arbitration. Davis resigned after three months, claiming she was subjected to sexual harassment by her co-worker and customers. In March of 2019 Davis filed a complaint under FEHA. In July, Shiekh, represented by counsel, answered Davis’s complaint, asserting the arbitration agreement as an affirmative defense, and filed a case management statement. In August, the court scheduled a trial for July 2020. Discovery ensued, without Shiekh asserting a right to arbitrate. The trial date was continued. In October 2020, 17 months after service of process and seven months before the trial date, Shiekh moved to compel arbitration, citing the Federal Arbitration Act and California Arbitration Act, asserting that its participation in the lawsuit had been de minimis and not inconsistent with an intent to arbitrate, and that the delay was excusable, citing its lack of counsel for several months, pandemic-related disruptions, and “the fact that [an employee] seemed to be the primary target of [the] complaint,” until July 2020. The trial court denied the motion.

The court of appeal affirmed. Although the Supreme Court recently held that a waiver of the right to arbitrate cannot be conditioned on a showing of prejudice, substantial evidence supports the denial based on relevant factors other than prejudice: Shiekh’s actions were inconsistent with the right to arbitrate.

This is one of several opinions holding that an employer waived its right to compel arbitration by delay in filing the motion to compel. Employers should file the motion to compel immediately after the complaint is filed, preferably as the initial appearance in the action.

Court of Appeal asks trial court to determine whether employer’s delay in filing a fictitious business statement constitutes waiver of right to compel arbitration

In Villareal v. LAD-T, LLC, Defendants appealed from an order denying their motion to compel arbitration of Plaintiff’s claims brought under FEHA. Defendants contended the trial court erred in finding Business and Professions Code section 17918 barred them from enforcing an arbitration agreement made in the name of an unregistered fictitious business, DT Los Angeles Toyota.

The court of appeal vacated the order denying Defendants’ motion to compel arbitration remanded for the trial court to address whether Defendants have waived their right to compel arbitration. The court ruled that if the trial court finds waiver, it should again deny the motion to compel arbitration; if it finds no waiver, it should grant the motion. The court explained that it agreed with Plaintiff that Defendants failed to act diligently in filing their fictitious business name statement. Accordingly, in the interests of justice the court vacated the court’s order denying the motion to compel arbitration and directed the court to again consider the motion to compel arbitration limited to the narrow issue of whether Defendants have waived their right to compel arbitration by their delay in filing the fictitious business name statement.

Delaying the filing of a motion to compel arbitrate can result in a waiver of the right to arbitrate. As illustrated by this case, a waiver can be found if an employer delays in filing a fictitious business statement which was required at the time the motion to compel was filed. Employers should make sure their “ducks are in a row” at the time the motion to compel arbitration is filed.

Court of Appeal refuses to apply findings adverse to employee in arbitration of her individual claims to her PAGA claims since she was acting in a different capacity and asserting different rights

In Gavriiloglou v. Prime Healthcare Management, Plaintiff Gavriiloglou brought an action against her former employer asserting individual claims for damages based on Labor Code violations, and a PAGA claim for civil penalties. Gavriiloglou had signed an arbitration agreement, so the trial court compelled her to arbitrate her non-PAGA claims and stayed her PAGA claim while she did. The arbitrator found that the alleged Labor Code violations had not occurred. The trial court then granted judgment on the pleadings against Gavriiloglou on her PAGA claim, ruling that the arbitrator’s findings established that she was not an “aggrieved employee” within the meaning of PAGA, and therefore that she lacked standing to bring a PAGA claim.

Gavriiloglou appealed, contending: (1) the trial court erred by denying her petition to vacate the arbitration award; and (2) the trial court erred by ruling that the arbitration award barred her PAGA claim.

The Court of Appeal found that the trial court properly denied the motion to vacate the arbitration award. However, the Court also held that the arbitration did not bar the PAGA claim because Gavriiloglou was acting in different capacities and asserting different rights. Accordingly, judgment was reversed and the matter remanded for further proceedings.

This case illustrates the nuances of PAGA claims. While the motion to vacate the arbitration award was properly denied, the Court of Appeal determined that the arbitration did not bar the representative PAGA claim. In particular, the arbitrator’s findings had no preclusive effect since the plaintiff was acting in different capacities and was asserting different rights. In the arbitration, the plaintiff was litigating her own individual right to damages for Labor Code violations. In the present PAGA action, she was litigating the state’s right to statutory penalties for Labor Code breaches.

So, even if an employer prevails in an arbitration against an employee, it does not mean that the PAGA action in court must be dismissed.

Court of Appeal upholds waiver of arbitration of PAGA claims in collective bargaining agreement

In Oswald v. Murray Plumbing & Heating Corp., Murray briefly employed Oswald as a journeyman pipefitter in 2019–2020. In 2020, Oswald sued for civil penalties under PAGA, alleging Murray did not provide meal and rest breaks or accurate wage statements; pay all wages in a timely manner; or reimburse business expenses. The employment relationship was governed by a collective bargaining agreement (“CBA”) between Oswald’s union and Murray. The CBA requires arbitration of disputes—including ones arising under PAGA—as the sole and exclusive remedy. Murray moved to compel arbitration, and the trial court denied the motion. Murray appealed.

The court of appeal held that the parties’ CBA clearly waives PAGA and satisfies the requirements of Labor Code section 2699.6, as a matter of law. Thus, the court of appeal determined that the parties’ dispute is exempt from PAGA and reversed the trial court’s denial of the motion to compel arbitration.

This opinion is limited to situations when the employment relationship is governed by a CBA. It has no relevance to non-CBA employment relationships.

Court of Appeal refuses to enforce arbitration agreement in action by California Department of Fair Employment and Housing against employer that was signed by the employee but not by the Department

In Department of Fair Employment and Housing v. Cisco Systems, Inc., Cisco hired John Doe in September 2015 to work as an engineer. Doe was required to sign an arbitration agreement as a condition of his employment. Under the agreement, Cisco and Doe had to arbitrate “all disputes or claims arising from or relating to” Doe’s employment, including claims of discrimination, retaliation, and harassment. Several years after signing the agreement, Doe filed a complaint with the California Department of Fair Employment and Housing (“Department”), alleging Cisco discriminated against him because of ancestry or race, as well as retaliation. The Department notified Cisco of Doe’s complaint, investigated it, and decided it had merit. Attempts at informal resolution were unsuccessful.

The Department then filed a lawsuit against Cisco and the two supervisors. The Department alleged five causes of action alleging multiple violations of FEHA, and sought a permanent injunction preventing Cisco from committing further violations, and mandatory injunctive relief requiring Cisco to institute policies to prevent employment discrimination. The complaint also requested an order that Cisco compensate Doe for past and future economic losses.

Cisco moved to compel arbitration pursuant to the agreement that Doe signed. The trial court denied the motion. On appeal, Cisco argued the Department was bound by the terms of Doe’s arbitration agreement. The Court of Appeal affirmed the order denying arbitration finding the Department acts independently when it exercises the power to sue for FEHA violations. “As an independent party, the Department cannot be compelled to arbitrate under an agreement it has not entered.”

If an employer is sued by a public entity for employment violations, it does not matter if the employees signed arbitration agreements. The matter will likely remain in Court since the public entity is not a signatory to the agreement.

Court of Appeal refuses to enforce arbitration agreement in misclassification action by State of California against employer that was signed by the employee but not by the State

In California v. Maplebear Inc., the San Diego City Attorney brought an enforcement action under the Unfair Competition Law codified in Business and Professions Code sections 17200, et seq. on behalf of the State of California against Instacart. In their complaint, the State alleged Instacart unlawfully misclassified its employees as independent contractors in order to deny workers employee protections, harming its alleged employees and the public at large through a loss of significant payroll tax revenue, and giving Instacart an unfair advantage against its competitors.

In response to the complaint, Instacart brought a motion to compel arbitration of a portion of the City’s action based on its agreements with the individuals it hires (“Shoppers”). The trial court denied the motion, concluding Instacart failed to meet its burden to show a valid agreement to arbitrate between it and the State.

Instacart challenged the trial court’s order, arguing that even though the State was not a party to its Shopper agreements, they were bound by its arbitration provision to the extent they seek injunctive relief and restitution because these remedies were “primarily for the benefit of” the Shoppers. The Court of Appeal rejected this argument and affirmed the trial court’s order denying arbitration.

If an employer is sued by a public entity for employment violations, it does not matter if the employees signed arbitration agreements. The matter will likely remain in Court since the public entity is not a signatory to the agreement.

Court of Appeal allows civil action by certain employees to proceed in court despite history of arbitration proceedings against employer

In Leenay v. Superior Court, plaintiff Leenay brought a PAGA action against her former employer, Lowe’s. The trial court granted a petition to coordinate her action with a number of other PAGA actions against Lowe’s. Lowe’s then moved to stay the coordinated actions under Code of Civil Procedure section 1281.4. Lowe’s based the motion on over 50 arbitration proceedings against it, but Leenay and the other plaintiffs in the coordinated actions were not parties in any of those arbitration proceedings. The trial court granted the motion to stay, and Leenay filed a petition for writ of mandate asking the Court of Appeal to vacate the order.

The Court of Appeal reversed: “[S]ection 1281.4 applies only when a court has ordered parties to arbitration, the arbitrable issue arises in the pending court action, and the parties in the arbitration are also parties to the court action. Under those circumstances, the court must stay the action (or enter a stay with respect to the arbitrable issue, if the issue is severable).” Those circumstances did not exist in this case since Leenay was not a party to the actions in arbitration.

This decision holds that the section 1281.4 does not apply unless the court has ordered parties in the judicial action to arbitration, the arbitrable issue arises in the pending court action, and the parties in the arbitration are also parties to the court action. A court may not stay a party’s court action merely because an issue in that action is being decided in one or more arbitrations involving only one of the two parties to the court action. Here, plaintiff brought a PAGA suit raising an issue that was being arbitrated by the defendant in 50 different arbitration proceedings. Nevertheless, since plaintiff was not a party to any of those arbitrations, the trial court had no authority to stay the plaintiff’s PAGA suit.

Since services provided by employees involve interstate commerce, Court of Appeal holds that the FAA applies and preempts the California rule that certain class action waivers are unenforceable

In Evenskaas v. California Transit, Inc., plaintiff worked as a driver for California Transit. After California Transit terminated his employment, Evenskaas filed this wage and hour class action against California Transit; its owner, and the company that administered California Transit’s payroll, Personnel Staffing Group, LLC. Because Plaintiff signed an arbitration agreement, in which he agreed to arbitrate all claims arising from his employment and waived his right to seek class-wide relief, defendants filed a motion to compel arbitration. The trial court denied the motion. Defendants appealed, contending the FAA applies to the arbitration agreement.

The Court of Appeal reversed and directed the trial court to enter a new order granting the motion and dismissing Plaintiff’s class claims. The court explained that because the paratransit services California Transit hired Plaintiff to provide involve interstate commerce for purposes of the FAA, the FAA applies to the arbitration agreement and preempts the rule that certain class action waivers in employment arbitration agreements are unenforceable.

Federal law allows for an arbitration agreement to exclude certain class actions (i.e. class action waivers). If an employer is faced with a class action that is subject to an arbitration agreement that includes a class action waiver, the employer should vigorously contend that plaintiffs’ work involved or related to interstate commerce, such that federal law (FAA) applies to uphold the class action waiver.

Employer’s motion to compel arbitration properly denied due to evidence that employee never saw the auto-generated arbitration provision and would not have signed it

In Trinity v. Life Ins. Co. of North America, Plaintiff sued her employer, Life Insurance Company of North America for discrimination, harassment and wrongful termination. In response, the employer moved to compel arbitration based on a 2014 arbitration agreement. However, the employer did not present a copy of the agreement. Instead, the employer presented an auto-generated acknowledgment indicating Plaintiff read and consented to the terms of the agreement. The trial court denied employer’s motion to compel arbitration, finding that it did not establish an agreement to arbitrate and, even if an agreement existed, it was both procedurally and substantively unconscionable.

The court of appeal affirmed. The trial court had the authority to review the “gateway” issue of arbitrability because Plaintiff claimed to have never seen or agreed to the arbitration agreement. Further, the fact that the employer’s system created an auto-generated acknowledgment that Plaintiff consented to the agreement did not overcome Plaintiff’s claim that she was not presented with the agreement and never would have agreed to it.

This is another case illustrating the difficulties employers face when attempting to compel arbitration based on an electronic or, in this case, an auto-generated acknowledgement. The better practice is to provide the employee with a hard copy of the arbitration agreement, allow him or her sufficient time to review the agreement, and then secure a wet signature.

Court of Appeal determines that a finding of prejudice is required to establish waiver of the right to compel arbitration

In Quach v. California Commerce Club, Plaintiff was a floor supervisor at the Defendant hotel and casino. In 2015, Defendant required all employees to sign a new arbitration policy as a condition of employment. Plaintiff signed the new policy. The following year, Defendant fired Plaintiff after Plaintiff accepted counterfeit $100 bills during his shift. In 2019, Plaintiff obtained a right-to-sue letter from DFEH and brought causes of action under wrongful termination, age discrimination, retaliation and harassment.

In 2020, Defendant responded to Plaintiff's claim, but failed to move to compel arbitration. However, on December 23, 2020, 13 months after Plaintiff filed his lawsuit, Defendant moved to compel arbitration. The trial court denied Defendant’s motion, finding that the 13-month wait prejudiced Plaintiff and that Defendant had waived its right to compel arbitration.

The Court of Appeal reversed, finding Plaintiff’s allegations of prejudice were insufficient. Waiver does not occur merely by participating in litigation; the case must reach the point of judicial litigation before a court will find a party waived the right to compel arbitration. The court also rejected Plaintiff’s claim that the arbitration agreement was unconscionable.

The Quach opinion conflicts with the United States Supreme Court opinion in Morgan v. Sundance, Inc. which held that a showing of prejudice is not required to establish waiver. Courts will apply the Morgan rule when the Federal Arbitration Act (“FAA”) controls (i.e. the work involves interstate commerce). However, if the FAA does not control, California courts should follow the Quach rule.

In pre-Viking River opinion, Court of Appeal affirms denial of motion to compel arbitration of PAGA claims based on California precedent that PAGA claims are not subject to waiver

In Leshane v. Tracy VW, Inc., Plaintiffs sued defendants alleging several Labor Code violations. Plaintiffs brought suit on behalf of themselves as defendants’ former employees, on behalf of others similarly situated, and on behalf of the state pursuant to PAGA. After defendants filed a petition to compel arbitration, plaintiffs filed a first amended complaint alleging violations of the Labor Code solely as representatives of the state under PAGA. Defendants continued to seek arbitration of plaintiffs’ individual claims and dismissal of their class-wide claims pursuant to the arbitration agreements each plaintiff signed. The trial court denied defendants’ petition to compel arbitration finding plaintiffs’ claim under PAGA was not subject to arbitration citing Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).

Defendants appealed the trial court’s order. Finding no reversible error in the trial court's judgment, the Court of Appeal affirmed.

This result of this case would have been different if it was decided before Viking River which held that an employer may compel arbitration of an employee’s PAGA claims.

In pre-Viking River opinion, Court of Appeal affirms denial of motion to compel arbitration of PAGA claims based on California precedent that PAGA claims are not subject to waiver

In Wing v. Chico Healthcare & Wellness Centre, Plaintiff agreed to be bound by Defendant’s Alternative Dispute Resolution Policy (“ADR Policy”), which provided that “final and binding arbitration” would be the exclusive means for resolving “covered disputes” between the employee and employer. Plaintiff provided the required notice of alleged Labor Code violations to the appropriate state agency. The agency did not respond to her notice within the time provided by statute, allowing Plaintiff to file PAGA representative claims. Plaintiff’s lawsuit also alleged class claims. Relying on the ADR Policy, Defendant requested Plaintiff stipulate to arbitrate her individual claims, strike her class claims, and stay her PAGA claims pending the outcome of arbitration. Plaintiff refused; she instead amended her complaint to drop the class claims, leaving only the PAGA claims that were asserted on behalf of herself and all other similarly aggrieved employees.

After an unsuccessful mediation, Defendant moved to compel arbitration of Plaintiff’s PAGA claims. The trial court denied the motion. On appeal, Defendant argued that there is no distinction between the agent binding the principal to arbitration under a power of attorney as in Kindred Nursing Centers LP v. Clark, 137 S. Ct. 1421 (2017) and an employee binding the State of California in a PAGA action.

The Court of Appeal affirmed the Superior Court’s order denying Defendant’s motion to compel arbitration. The court reasoned that both Kindred Nursing and Wing involved private actions between private parties asserting private rights. It did not involve an action between an employer and a representative of the state to recover civil penalties on the state’s behalf to benefit the general public. Defendant filed a Petition for Review with the California Supreme Court. The petition was granted based on the Supreme Court’s pending ruling in Adolph v. Uber Technologies, Inc.

This result of this case would have been different if it were decided before Viking River which held that an employer may compel arbitration of an employee’s PAGA claims.

Court of Appeal affirms denial of employer’s motion to compel arbitration on grounds that the employer presented the plaintiff with an agreement in a language he cannot read, misrepresented the nature of the document, and denied him an opportunity to review it

In Nunez v. Cycad Management LLC, defendant hired the plaintiff as a gardener and required him to sign an employment agreement (“Agreement”), which mandates arbitration of “all disputes between Employee and Company relating, in any manner whatsoever, to the employment or termination” of the employee. Plaintiff sued his employer, and the employer demanded arbitration. Plaintiff argued that the defendant waived the right to arbitrate, that he did not sign the Agreement or signed without informed consent, and the Agreement is unconscionable. The trial court denied the employer’s motion to compel arbitration.

The Court of Appeal affirmed. The court reasoned that arbitration agreements are “valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” Code Civ. Proc., Sec. 1281. To declare an agreement unenforceable, a court must find procedural and substantive unconscionability. Here, the court found that defendant had superior bargaining power over the plaintiff. Further, the employer drafted the Agreement and presented it to the plaintiff as a condition of employment on a take-it-or-leave basis. The plaintiff claimed he had no opportunity to review the Agreement and was told the English-language Agreement involved a company change, not that it waived his right to a jury trial. The plaintiff was instructed to sign the Agreement or be fired.

The court found that the employer presented the plaintiff with an agreement in a language he cannot read, misrepresented the nature of the document, denied him an opportunity to review it, included unfair and onerous provisions, and chilled his ability to claim civil rights violations. Thus, the court denied the defendant’s motion to compel arbitration.

An employer should provide the employee with an arbitration agreement that can be read by the employee. If the employee does not read English, the employer should provide a certified translation of the agreement in the language chosen by the employee. In addition, the employer should provide the employee with sufficient time (perhaps 24 hours) to review and analyze the translated agreement.

Court of Appeal affirms denial of employer’s motion to arbitrate since the arbitration provision in the Employee Handbook was not a contract and was merely for informational purposes, did not create a binding agreement, and that any agreement was void for lack of mutual consent or voidable based on unilateral mistake

In Mendoza v. Trans Valley Transport, FTU hired Mendoza as a temporary, interstate truck driver. Mendoza cannot read English. A supervisor interviewed Mendoza in Spanish and filled out the application form, which Mendoza signed. All of the acknowledgments Mendoza signed were in English. FTU’s director of human resources later testified that it was his practice to review the FTU Employee Handbook, including an arbitration policy, in Spanish if appropriate, and to give Spanish-speaking employees a Spanish-language version of the Handbook. Mendoza denied receiving the Spanish-language Handbook. Mendoza filed a putative class action, alleging Labor Code violations: failure to pay minimum wages, to provide rest periods, to provide meal periods, to provide accurate wage statements, and to pay all wages owed upon termination.

FTU filed a motion to compel arbitration which was denied by the trial court on the grounds that the arbitration provision in the Handbook was not a contract and was merely for informational purposes, did not create a binding agreement and that any agreement was void for lack of mutual consent or voidable based on unilateral mistake.

The court of appeal affirmed the denial of the motion to compel arbitration. It was for a trial court to decide whether the parties had entered into an agreement to arbitrate. In these circumstances, the parties have not entered into either an express or an implied contract to arbitrate.

Employers should create a separate, stand-alone arbitration agreement that is signed by the employee, after providing him or her sufficient time to review. An arbitration provision in an employee handbook is not sufficient, even if the employee signs a document certifying that he or she read the handbook.

Court of Appeal affirms denial of employer’s motion to compel arbitration finding that the arbitration provision was substantively unconscionable because it shortened the statute of limitations for FEHA claims, among other grounds

In Ramirez v. Charter Communications, Inc., Charter created a program for resolving and ultimately arbitrating employment-related disputes. Individuals who received an offer from Charter were required to complete a web-based onboarding process as a condition of employment; they were prompted to review and accept various policies and agreements, including the arbitration agreement and the program guidelines. After agreeing to submit all employment-related disputes with Charter to arbitration, Ramirez was hired in July 2019. In May 2020, Charter terminated Ramirez. Ramirez filed suit, alleging multiple claims under FEHA and wrongful termination. Charter moved to compel arbitration and sought attorney fees in connection with its motion pursuant to the arbitration agreement. The trial court denied Charter’s motion to compel arbitration, finding that the requirement was substantively unconscionable because it shortened the statute of limitations for FEHA claims, failed to restrict attorney fee recovery to only frivolous or bad faith FEHA claims (contrary to FEHA), and impermissibly provided for an interim fee award for a party successfully compelling arbitration.

The court of appeal affirmed. The arbitration agreement was a contract of adhesion, which establishes a minimal degree of procedural unconscionability, and the agreement contained a high degree of substantive unconscionability. The arbitration agreement is permeated by unconscionability and cannot be enforced.

The Ramirez decision is yet another cautionary tale for employers looking to implement arbitration agreements. Such agreements must be implemented with care. The employer must not mandate that employees enter into arbitration agreements. Further, the terms of the agreement should not overly favor the employer and should not substantially alter the employees’ rights under state and federal laws.

The California Supreme Court accepted review of the Court of Appeal opinion. According to the Supreme Court, the opinion of the Court of Appeal may be cited, not only for its persuasive value, but also for the limited purpose of establishing the existence of a conflict in authority that would in turn allow trial courts to exercise discretion to choose between sides of any such conflict.

Employment — Wage and hour

Ninth Circuit holds that the time call center employees spent booting up their computers was compensable under the Fair Labor Standards Act (“FLSA”)

In Cadena v. Customer Connexx LLC, the United States Court of Appeals for the Ninth Circuit held that the time call center employees spent booting up their computers was compensable under the Fair Labor Standards Act (“FLSA”). The decision in the case is consistent with that in Peterson v. Nelnet Diversified Solutions, LLC, 15 F.4th 1033 (10th Cir. 2021), in which the Tenth Circuit also held that time call center representatives spent booting up computers was compensable. In both cases the appellate courts found that having a functioning computer was “integrally and indispensably” connected to the employees’ principal activities of receiving calls and interacting with customers over the phone.

Employers should take into consideration that the time spent by employees “booting up” their computers is technically compensable under the federal Fair Labor Standards Act, and advise human resources accordingly.

California Supreme Court holds that extra pay for missed breaks constitutes “wages” to be reported on wage statements during employment

In Naranjo v. Spectrum Security Services, Inc., Plaintiff, who was suspended from his job as a guard after leaving his post to take a meal break, filed a putative class action on behalf of employees of Defendant seeking an additional hour of pay, so-called “premium pay,” for each day on which Defendant failed to provide employees a legally-compliant meal break. The trial court determined that Defendant had violated the meal break laws for a certain period and that a failure to pay meal break premiums could support claims under the wage statement and timely payment statutes.

The court of appeal reversed in part and the California Supreme Court accepted a petition to review. The Supreme Court remanded the case, holding (1) the court of appeal erred in concluding that extra pay for missed breaks does not constitute “wages” to be reported on wage statements during employment; and (2) the seven percent default rate of prejudgment interest set by the state Constitution applies to amounts due for failure to provide meal and rest breaks.

Employers should take into consideration that the extra pay to who miss statutorily-required breaks are considered wages and must be reported on the employee’s wage statements, and advise human resources accordingly.

Court of Appeal holds that an employee working at a fixed site not owned or leased by the employer is not subject to the “outside salesperson exemption” where the employer controls the employee’s hours and working conditions

In Espinoza v. Warehouse Demo Services, Inc., a California Court of Appeal address the so-called “outside salesperson exemption” in wage claims. Under California regulations, an employee who (1) “customarily and regularly works more than half the working time away from the employer’s place of business” engaged in (2) “selling tangible or intangible items or obtaining orders or contracts” for his or her employer is exempt from overtime, minimum wage, reporting time, and meal-and-rest break requirements. This is called the “outside salesperson exemption.”

Demo Services (“Demo”) employs product demonstrators, who are classified as “part-time, nonexempt, hourly employees eligible for overtime pay according to state and federal law.” Demonstrators are generally assigned to a single Costco. There is office space within each Costco for demonstrators. Espinoza, employed as a demonstrator from 2011-2016, received a “Demonstrator Handbook.” Espinoza worked four days a week and her regular shift lasted for six hours. Upon arriving at Costco, Espinoza went to the office, clocked in, reviewed her assignment, got her supplies, set up her cart, went to the floor near the product, and started demonstrating the product. Espinoza could only leave her demonstration area to take a break when an assigned “breaker” relieved her. At the end of her shift, Espinoza had 15 minutes to return her cart to the office, wash her dishes, store her supplies, then clock out, entering her lunch break time. Espinoza filed a class action, alleging Demo failed to pay her overtime, failed to provide her with meal and rest breaks, and violated other California wage laws.

The trial court granted Demo’s summary judgment, reasoning that the “outside salesperson” exemption applied because Espinoza did not work at a site owned or controlled by her employer.

The court of appeal reversed. An employee working at a fixed site not owned or leased by the employer is not subject to the outside salesperson exemption where the employer controls the employee’s hours and working conditions. Demo assigned Espinoza to work a fixed site, within a small, designated area, and controlled her conditions of work.

If an employer requires a salesperson/employee to work at another site not owned or leased by the employer, the employer must abide by the California wage laws if the employer controls and the employee’s hours and working conditions.

Court of Appeal clarified the proper test to be applied to determine whether a real estate agent is an independent contractor or employee for purposes of the Labor Code’s wage and hour provisions

In Whitlach v. Premier Valley, Inc., Plaintiff pursued a PAGA claim against Defendants Premier Valley, Inc. (doing business as Century 21 MM) and Century 21 Real Estate LLC, to enforce civil penalties for violations of the Labor Code. The trial court sustained Defendants’ demurrer to the operative complaint without leave to amend. Plaintiff appealed.

The appeal involved issues of statutory interpretation with regard to the following question: What is the applicable test or governing standard for determining whether a real estate salesperson is an “employee” or an “independent contractor” for purposes of the Labor Code’s wage and hour provisions? The resolution of this question turned on interpreting recently enacted Labor Code section 2778, subdivision (c)(1), and other provisions incorporated therein.

The court of appeal affirmed the trial court’s judgment. The court concluded that the applicable test for the purpose at hand is the test set forth in Unemployment Insurance Code sections 650 and 13004.1, as incorporated in Business and Professions Code section 10032(b), which is itself incorporated in Labor Code section 2778(c)(1). The trial court reached the same conclusion and applied the correct test in ruling on the Defendants’ demurrer.

The court held that under Labor Code Section 2778(c)(1), Plaintiff was an independent contractor as a matter of law. Further, the court held that Labor Code Section 2778(c)(1) is constitutional. Finally, the court found that Plaintiff’s separate employment agreement for his sales manager position is not relevant for purposes of his representative PAGA cause of action.

As background, in Dynamex, the California Supreme Court adopted the so-called “ABC test” to determine whether one is an employee or independent contractor for the purpose of wage claims. “The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and(c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” Under the ABC test, “[t]he hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of wage claims.

In 2019, the California Legislature passed Assembly Bill 5 which codified the Dynamex ABC test. However, that bill included certain exemptions, including real estate salespersons. Rather than the ABC test, the court held that the test set forth in Unemployment Insurance Code section 650 test, as incorporated in Business and Professions Code section 10032(b), has long provided, and continues to provide, the controlling test for resolving the employee or independent contractor question for real estate salespersons, for purposes of the wage and hour provisions of the Labor Code.

Based on the foregoing, this ruling applies specifically to real estate salespersons who make wage claims against the employer. Unless exempted by the statute, all other cases will be decided by the ABC test.

In wage claim, Court of Appeal refuses to apply “rounding” where accurate timekeeping records exist

In Camp v. Home Depot U.S.A., Inc., a court of appeal discussed the “rounding” requirement relating to wages. A decade ago, a California Court of Appeal held that employers lawfully could round employees’ time punches if the rounding policy was neutral on its face and as applied. See See’s Candy Shops, Inc. v. Superior Court, 210 Cal.App.4th 889 (2012). In arriving at this conclusion, the See’s Court relied on regulations under the federal Fair Labor Standards Act (“FLSA”) and the California Division of Labor Standards Enforcement’s (“DLSE”) enforcement position, as no Labor Code provision or Wage Order addressed the issue. And, in the years since See’s, it was generally accepted that rounding was permissible, so long as the policy conformed to the standard set forth in See’s. However, things started to change, first in 2021.

In February 2021, in Donohue v. AMN Services, LLC, 11 Cal.5th 58 (2021) the California Supreme Court held that rounding was not permissible with respect to meal periods. Although the Donohue court did not rule that all time rounding was unlawful, it questioned whether the practice could be justified given technological advances in timekeeping and payroll.

On October 24, 2022, the Court of Appeal for the Sixth Appellate District took the next step toward dismantling rounding altogether in Camp v. Home Depot U.S.A., Inc. Specifically, the Court reversed summary judgment for an employer that had a facially neutral quarter hour rounding policy where the employer “could and did track the exact time in minutes that an employee worked each shift and [where] those records showed that [the employee] … was not paid for all the time he worked.”

The Camp Court limited its ruling to the facts of the case, and explicitly stated it was not addressing whether: (1) neutral rounding was permissible due to an inability to capture the actual minutes an employee worked; or (2) whether an employer who has the ability to capture an employee’s minutes would be required to do so. However, the Court of Appeal “invited” the California Supreme Court to provide guidance on the propriety of time rounding by employers.

In light of Camp, employers with timekeeping systems that record time worked to the minute should promptly cease any rounding practices that result in potential underpayment of wages.

Court of Appeal refuses jury verdict in favor of employee in misclassification case citing improper jury instruction which prevented employer from proving “executive exemption” defense

In Rodriguez v. Parivar, Inc., Rodriguez sued Parivar under California’s labor laws, alleging that Parivar misclassified her as an exempt employee, while she “spent the majority of her time performing the exact same duties as non-exempt employees” at Parivar's restaurant. As an affirmative defense, Parivar argued that under wage order 5-2001’s “executive exemption” Rodriguez was exempt from overtime, meal period, and rest period requirements. A jury rejected Parivar’s executive exemption defense; finding, by a 9-3 vote, Parivar failed to prove that, as the special verdict question put it, “Rodriguez performed exempt duties more than half of the time.” The jury found that Rodriguez was owed $26,786.54 in overtime pay. The court awarded $11,570.21 in prejudgment interest and $932,842.63 in attorney fees and litigation costs.

The court of appeal reversed. The narrow framing of the special verdict question effectively barred Parivar from proving its executive exemption defense, allowing the jury to find liability without addressing Parivar’s realistic expectations for how Rodriguez should have allocated her time. Given the 9-3 vote that Parivar did not prove Rodriguez spent more than half of her time performing exempt duties and given the heavily-contested question of whether she spent that time performing duties that meet the test of the executive exemption, it is reasonably probable that the jury would have reached a result more favorable to Parivar absent the special verdict error.

Court of Appeal increases potential employer exposure by allowing recovery of attorney’s fees in meal and rest break actions

In Betancourt v. OS Restaurant Services, LLC, a court of appeal held that employees are entitled to recover attorney’s fees and costs stemming from a claim for failure to provide uninterrupted rest periods. In her complaint, plaintiff Betancourt also alleged that she was retaliated against and wrongfully terminated for reporting these repeated rest break and food safety violations. The trial court granted Betancourt’s motion for attorney’s fees, finding that she had submitted evidence that established that those claims were also premised on timekeeping and payroll schemes, for which Betancourt was entitled to attorney’s fees pursuant to Labor Code Section 218.5. The employer appealed.

In line with the longstanding principle that an employee cannot recover attorney’s fees in a meal or rest break action, the Court of Appeal reversed the trial court’s decision. Betancourt appealed the decision to the California Supreme Court. In May of 2022, while the appeal was still pending, the California Supreme Court issued its opinion in Naranjo v. Spectrum Security Services, Inc., 13 Cal.5th 93 (2022) which held that premium pay for missed breaks does, in fact, constitute wages. The Court sent the Betancourt case back down to the Court of Appeal.

Relying on Naranjo, the Court of Appeal held that the Supreme Court’s finding in Naranjo fully justified the trial court’s attorney’s fee award under section 218.5 for meal and rest period violations.

This decision provides yet another channel of potential exposure for employers. In light of Betancourt they could now also get hit with significant attorney’s fees and costs stemming from the action in addition to being “on the hook” for statutory penalties for missed meal and rest breaks. Employers are reminded to shore up their meal and rest period policies and wage and hour practices as a measure of protection against such lawsuits.

Court of Appeal held that individual corporate director can be held personally liable for failure to pay wages

In Seviour-Iloff v. LaPaille, a court of appeal held that an individual—the CEO and CFO of the defendant—could be held personally, individually liable for the plaintiffs’ alleged unpaid wages.

In reaching this conclusion, the court analyzed Labor Code section 558.1, which provides that “any employer or other person acting on behalf of an employer who violates, or causes to be violated” certain provisions of the Labor Code “may be held liable as the employer for such violation.” Section 558.1 defines a “person acting on behalf of an employer” as “a natural person who is an owner, director, officer, or managing agent of the employer.” The term “managing agent” includes corporate employees who exercise substantial independent authority and judgment in their corporate decision making and whose decisions ultimately determine corporate policies.

The court did not reach the question of whether the CEO/CFO actually caused the Labor Code violations at issue in the case. Relying on precedent, the court concluded that the individual must either (1) have been personally involved in the alleged violation, or (2) had sufficient participation in the activities of the employer such that they may be deemed to have contributed to the violation.

The California Supreme Court granted the petition for review. The issues to be briefed and argued are limited to the following:

1. Must an employer demonstrate that it affirmatively took steps to ascertain whether is pay practices comply with the Labor Code and Industrial Welfare Commission Wage Orders to establish a good faith defense to liquidated damages under Labor Code section 1194.2, subdivision (b)?
2. May a wage claimant prosecute a paid leave sick claim under section 248.5, subdivision (b) of the Healthy Workplaces, Healthy Families Act of 2014 (Lav. Code, § 248 et seq.) in a de novo wage claim trial conducted pursuant to Labor Code section 98.2?

Newly passed federal regulation that California meal and rest break rules are preempted by federal statute does not apply retroactively to dismiss lawsuit filed before the federal regulation

In Garcia v. Superior Court, Plaintiffs were truck drivers previously employed by Haralambos. They filed a putative wage and hour class action alleging, among other things, that Haralambos failed to provide meal and rest breaks in violation of Labor Code sections 226.7 and 512 and the Industrial Welfare Commission’s Wage Order No. 9-2001. Nearly two years later, on December 28, 2018, the FMCSA issued an order concluding that California’s meal and rest break rules are laws “‘on commercial motor vehicle safety,’” are preempted pursuant to title 49 United States Code section 31141 (section 31141).

Thereafter, Haralambos filed a motion to strike the class allegations on federal preemption grounds, which the parties agreed was a request to strike plaintiffs’ causes of action for failure to provide meal and rest breaks. The trial court granted the motion and struck the two causes of action. The Second Appellate District reversed finding that the preemption decision does not apply retroactively.

Court of Appeal holds that California wage statements not required to include hourly rates for prior pay periods

In a ruling favorable to California employers, a Court of Appeal in Meza v. Pacific Bell Telephone Co. confirmed that employers are not required to include hourly rates for prior pay periods on wage statements. The Court agreed with the 9th Circuit’s recent ruling in Magadia v. Wal-Mart Associates, Inc., that Labor Code section 226(a)(9), which requires the listing of hourly rates on wage statements, did not require the reporting of rates and hours from prior periods in connection with overtime adjustment payments.

The Court’s ruling should have a significant impact on California employers’ ability to negotiate, settle and dismiss currently pending wage statement claims related to failure to list hourly rates for prior pay periods. Moreover, the ruling should hopefully act as a deterrent to the filing of any such similar claims going forward.

The California Supreme Court denied the petition to review; however, it issued an order to de-publish the Court of Appeal opinion which means that the opinion cannot be relied upon or cited in future actions.

Court of Appeal holds that employees do not need to establish they were hired before ABC test can be applied

In Mejia v. Roussos Construction, Inc., Plaintiffs, unlicensed flooring installers, installed floors on behalf of Roussos Construction, a general contractor. There were three individuals working between plaintiffs and Roussos whom plaintiffs called “supervisors” and Roussos called “subcontractors.” At trial, Roussos maintained that it used independent contractors (the three individuals) who were licensed to perform work not permitted by Roussos’ contractor’s license and that those subcontractors hired and paid plaintiffs and were responsible for complying with the applicable labor laws.

At trial, the parties disagreed as to the appropriate jury instruction to be given, with Roussos contending the “ABC test” for determining employee vs. independent contractor status can only be applied if the workers first established they were actually hired by Roussos or its agent. Plaintiffs countered that there is no hiring test articulated in Dynamex, the California Supreme Court opinion that adopted the ABC Test in California. The trial court ultimately agreed with Roussos: “This jury does need to make the predicate finding of whether or not Roussos Construction was the hiring entity.”

After being so instructed, the jury returned a verdict in Roussos’ favor on all counts. In this opinion, the Court of Appeal reversed the judgment on the four wage and hour counts involving the ABC Test, holding that a “threshold hiring entity test” was not intended by the Dynamex court.

As in the Mejia case, contractors are well-advised to hire independent contractors who, in turn, hire laborers to perform the work on a project. As such, a misclassification claim brought by the laborers against the contractors may be defeated on the grounds that the laborers were not hired by the contractor.

In reversing denial of employer’s summary judgment, Court of Appeal finds that the Federal Motor Carrier Safety Act’s preemption determination applies to short haul drivers

In Espinoza v. Hepta Run, Inc., Plaintiff filed suit against his former employer, Hepta Run, and its owner, alleging Labor Code wage and hour violations, unfair business practices in violation of California’s unfair competition law, as well as PAGA claims. The trial court denied defendant’s motion for summary adjudication.

The Court of Appeal concluded that the trial court erred by denying the motion for summary adjudication where the Federal Motor Carrier Safety Act’s preemption determination applies to short haul drivers. The court also concluded that the trial court did not err in finding the owner personally liable under section 558.1; substantial evidence supports the finding that the owner caused the Labor Code violations; and defendants have forfeited their challenges as to the sufficiency of the evidence and damages. Accordingly, the court reversed as to the fifth and sixth causes of action and reversed the order denying summary adjudication on those causes of action. The court affirmed in all other respects.

This case applies specifically to short-haul drivers who bring wage and hour claims against their employer.

Employment — Whistleblower/discrimination

California Supreme Court holds that Labor Code section 1102.6 applies to whistleblower retaliation claims as opposed to framework proposed by Ninth Circuit

2022 case review:

In Lawson v. PPG Architectural Finishes, Inc., the California Supreme Court held that the framework in Labor section 1102.6 applies to whistleblower claims. Since 2003, Labor Code section 1102.6 has prescribed a framework for presenting and evaluating retaliation claims brought under section 1102.5. Regardless, courts continued to apply the burden-shifting framework borrowed from the decision in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). The trial court in Lawson granted summary judgment for Defendant on Plaintiff’s whistleblower retaliation claim in this case, concluding that Plaintiff could not satisfy the third step of the McDonnell Douglas test. The Ninth Circuit Court of Appeal certified a question regarding the correct standard to the California Supreme Court. The California Supreme Court answered that section 1102.6 provides the governing framework for the presentation and evaluation of whistleblower retaliation claims brought under section 1102.5.

As a result, a plaintiff-employee who puts forth a claim for retaliation under California Labor Code section 1102.5 may prevail by showing a retaliatory motive was merely a “contributing factor” behind an adverse employment action. Plaintiffs/employees are now not required to meet the burden shifting McDonnell Douglas test which is more onerous.

Court of Appeal holds that school district employee may have been subject to disability discrimination, but affirms dismissal of retaliation claim

In Price v. Victor Valley Union High School Dist., La Vonya Price worked as a part-time substitute special education aide at the Victor Valley Unified School District before applying for a full-time position. Although she received an offer for a full-time position, it was contingent upon her passing a physical exam, which she failed.

Price sued for disability discrimination and related claims. The trial court granted the District’s motion for summary judgment, but the Court of Appeal reversed in part. The appellate court rejected the District’s argument that Price was not qualified to perform the job because she failed the physical examination and was unable to perform the essential functions of the job, such as running after students. The Court disagreed that running after students was an essential function of a full-time instructional assistant’s job especially given that Price worked in the same position in a part-time capacity before being offered a full-time position. Price also established that she could have been placed in a setting where special needs students do not require any physical assistance or supervision. Further, the Court determined that the comment (repeated four times) from the District’s Director of Classified Personnel that Price was “a liability” created a triable issue of material fact as to whether the District’s stated reasons for rescinding the job offer were pretextual.

In addition, The Court also held that the District was under no obligation to engage in the interactive process with Price because her disability, resulting limitations, and necessary reasonable accommodations were not open and obvious (she denied having a disability or any limitations), which meant that she had the initial burden to initiate the interactive process and request a reasonable accommodation. Finally, the Court held that the retaliation claim was properly dismissed because the decision to terminate her employment was made before she allegedly engaged in any protected activity.

Court of Appeal holds that investigation leading to termination of a captain of Sheriff’s Office did not violate the Public Safety Officer’s Bill of Rights

In Shouse v. County of Riverside, Petitioner Andrew Shouse was terminated from his employment as a captain of the Riverside County Sheriff’s Office (“Department”), following an administrative hearing. Findings on the record reflected petitioner engaged in improper sexual relationships with subordinates under his command, misappropriated county equipment and electronic mail for his personal use, was insubordinate in violating a direct order prohibiting him from contacting any person with whom he had had a personal relationship during the pendency of the investigation, and unbecoming conduct discrediting the Department. Following an administrative appeal, the findings were sustained. Petitioner petitioned for writ of mandate seeking review of his dismissal, and, upon denial of that petition, he appealed.

The sole legal issue presented was whether petitioner’s rights pursuant to the Public Safety Officer’s Bill of Rights (“POBRA”) were violated where the investigation into his alleged improper conduct was not completed within one year of discovery. Finding no reversible error, the Court of Appeal affirmed.

This case is specifically limited to termination claims brought by public safety officers.

Court of Appeal holds that at-will Police Chief’s employment agreement gave him a right to an evidentiary administrative appeal of his termination under POBRA

In Joseph v. City of Atwater, Joseph alleged that Atwater terminated his employment as chief of police in violation of the Public Safety Officers Procedural Bill of Rights Act (POBRA) which provided that “no chief of police may be removed from office without being provided written notice of the reasons “and an opportunity for administrative appeal.” Joseph claims the hearing offered by Atwater was not mutually scheduled, was not before a mutually selected neutral hearing officer, did not require the city to bear the burden of proof as to just cause for his termination, and did not require Atwater to present witnesses and allow them to be cross-examined. The trial court denied Joseph’s petition, concluding he was an at-will employee. Joseph’s employment agreement stated he could be removed as police chief for any reason; if the removal was not for willful misconduct, he had the option of continuing his employment by returning to the position of police lieutenant.

The court of appeal reversed. Joseph was an at-will employee only as police chief and had rights to employment as a lieutenant that could be terminated only for cause. Before Atwater could terminate his right to employment as a lieutenant, it was required by POBRA to provide him with the type of administrative appeal afforded public safety officers who are terminable only for cause, including a full evidentiary hearing before a neutral fact-finder.

This case is specifically limited to termination claims brought by public safety officers.

Employee’s evidence that she was paid less than a single male colleague wins Equal Pay Act wage claim, but not FEHA sex discrimination claim

In Allen v. Staples, Inc., Joyce Allen worked at Staples as a field sales director (FSD) reporting to area sales vice president Bruce Trahey; FSD Charles R. Narlock also reported to Trahey. As part of a corporate reorganization in February 2019, Trahey informed Allen and several other FSDs of his decision to eliminate their positions and terminate their employment. In her lawsuit, Allen alleged violation of the Equal Pay Act (EPA); gender discrimination and sexual harassment under the Fair Employment and Housing Act (FEHA); failure to prevent discrimination and harassment under FEHA; retaliation and wrongful termination in violation of public policy. The trial court granted defendants’ motion for summary judgment and, in the alternative, summary adjudication of each cause of action. The Court of Appeal affirmed dismissal of all claims except Allen’s EPA claim, including her claim for punitive damages.

Allen’s EPA claim was based on evidence showing a pay disparity between her starting salary as an FSD and, before that, an area sales manager (ASM) and Narlock’s salary when he started in those positions. When Allen became an ASM, her base salary was set at $84,999.96; more than Allen’s starting salary in the position). When Allen was promoted to FSD, her annual salary was set at $86,912.46 (the same salary she was earning as an ASM); Narlock’s base salary as an FSD was $135,000 ($48,087.54 more than Allen’s salary). Staples argued that the salary differentials between Narlock and Allen are explained by bona fide factors other than gender, namely Narlock’s time with the company and his experience before taking both the ASM and FSD positions. However, because Staples relied on evidence of its general practices to set salaries based on factors such as seniority and merit, Staples failed to set forth the “specific factors on which Narlock’s base salary, in either position, was premised or the factors on which plaintiff’s base salaries were premised.” Accordingly, summary adjudication of Allen’s EPA claim had to be reversed.

Court of Appeal held that workers’ compensation determination does not govern outcome of discrimination case

In Kaur v. Foster Poultry Farms LLC, Plaintiff appealed from the trial court’s grant of summary judgment in favor of her former employer, Defendant Foster Poultry Farms LLC (“Foster Farms”), on her claims of discrimination based on disability and race/national origin, and retaliation, under FEHA and Labor Code section 1102.5. The principal issue on appeal was whether a decision by the Workers’ Compensation Appeals Board (“WCAB”) denying Plaintiff’s claim for disability discrimination under Labor Code section 132a has res judicata or collateral estoppel effect in the instant action.

The court of appeal reversed the trial court’s judgment. The court held that the trial court’s grant of summary judgment was based on giving collateral estoppel effect to the WCAB decision. The court found that Foster Farms is not entitled to summary adjudication, based on application of the collateral estoppel doctrine, on Plaintiff’s claims for disability discrimination, failure to provide reasonable accommodation, and failure to engage in an interactive process. Foster Farms’ argument that summary adjudication is warranted, in light of the WCAB decision, on Plaintiff’s remaining claims for failure to take all reasonable measures to prevent discrimination under FEHA, retaliation for asserting FEHA rights, and retaliation under Labor Code section 1102.5, is unavailing.

In light of this case, even if an employee is unsuccessful in making a workers compensation claim, the employee may still file a separate civil action for discrimination. Furthermore, a decision by the WCAB, one way or the other, will have no impact on the separate civil action.

BART workers fail to establish they were passed over on promotions due to racial discrimination

Bay Area Rapid Transit District (“BART”) Cash Handlers are supervised by Foreworkers. A labor agreement describes the selection of Foreworkers by an Evaluation Committee, comprised of three union representatives and three management representatives. Eight criteria, with assigned point values, are used. Each qualified applicant takes a written test and completes an oral interview with the Committee.

In Arega v. Bay Area Rapid Transit District, Plaintiffs sued BART in 2014 alleging racial discrimination under FEHA by not promoting them to Foreworker in favor of less experienced non-African-Americans. Under a 2016 settlement, Plaintiffs released their employment-related claims; BART paid them a certain sum, admitting no liability. In the following years, the Evaluation Committee appointed four new Foreworkers each of whom had received the highest total point scores. No Plaintiff was promoted. Plaintiffs again sued BART under FEHA, alleging disparate treatment and disparate impact race discrimination.

The court of appeal affirmed summary judgment in favor of BART. There was evidence of a non-discriminatory reason for not promoting Plaintiffs (selection process scores). Plaintiffs failed to submit evidence that BART’s stated reason for not promoting them was untrue or that racial bias against African-Americans drove the promotion decisions. Plaintiffs did not present evidence of a statistically significant disparity between the percentage of qualified African-American applicants for the Foreworker position and the percentage of African-Americans promoted to Foreworker.

Court of Appeal affirms dismissal of retaliation claim against County, and clarifies the standard for pursuing whistleblower claims

In Vatalaro v. County of Sacramento, after being released on probation from her position with Sacramento County, Cynthia Vatalaro sued the County for unlawful retaliation under Labor Code section 1102.5. Vatalaro alleged that her discharge was retaliation against her for reporting that she was working below her service classification. The superior court granted summary judgment for the County. Vatalaro appealed. The California Court of Appeal affirmed and simultaneously clarified the precise standard for evaluating Labor Code Section 1102.5 claims.

Until recently, courts evaluated section 1102.5 claims using a three-part framework. However, the California Supreme Court held in 2022 (Lawson) that instead, courts are required to use the framework outlined in Labor Code section 1102.6. Labor Code section 1102.6 places the burden on the employee to establish that retaliation for the employee’s protected activities was a contributing factor in a contested employment action. In other words, an employee must show a prima facie claim of retaliation under Labor Code section 1102.5. Once the employee has made this showing, the burden shifts to the employer to demonstrate, by clear and convincing evidence, that it would have taken the employment action for legitimate, independent reasons even if the employee had not engaged in protected activity.

Labor Code Section 1102.5 states that “An employer . . . shall not retaliate against an employee for disclosing information . . . to a person with authority over the employee or another employee who has the authority to investigate, discover, or correct the violation or noncompliance . . . if the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation….”

The Court held that Vatalaro could not satisfy the “reasonable cause to believe” component of the prima facie case of retaliation because she admitted in a deposition that she did not have the belief that the content of her job description violated civil service rules.

The Court then found that the trial court’s decision could be upheld on another ground: whether the employer can demonstrate that it would have taken the contested action for a legitimate, independent reason even had the employee not engaged in protected activity. The Court held that the County had clearly established that it would have taken the action in question for legitimate reasons, even if Vatalaro had not complained she was doing low-level duties. In doing so, the Court relied heavily on the evidence that Vatalaro had been insubordinate, disrespectful, and dishonest. The Court found that Vatalaro was unable to rebut any of the three charges and the County was entitled to summary judgment.

The Lawson standard for proving retaliation is a relaxed one that is pro-employee. However, this case shows that an employer can still defeat a retaliation claim even under the more relaxed standard.

Court of Appeal confirms plaintiff-friendly McDonnell-Douglas burden shifting analysis applies to whistleblower claims by employees in the healthcare industry brought under Health & Safety Code section 1278.5

In Scheer v. Regents of the University of California, a Court of Appeal reversed the district court’s grant of summary judgment in favor of defendants in a whistleblower retaliation action brought by plaintiff, a health care worker. Plaintiff brought his whistleblower claims alleging violations of three statutes: Labor Code section 1102.5, Government Code section 8547 et seq., and Health and Safety Code section 1278.5 (discrimination claims by healthcare employees).

In Lawson v. PPG Architectural Finishes, Inc. (2022) 12 Cal.5th 703, the California Supreme Court clarified the legal framework that applies to claims under Labor Code section 1102.5 (retaliation). The Court in Scheer stated that, while Lawson did not discuss Government Code section 8547.10, that statute contains nearly identical language to the language analyzed by the state Supreme Court. Therefore, the court concluded that Lawson’s legal framework also applies to plaintiff’s Government Code claim.

But, the Court held that Lawson did not change the legal framework for plaintiff’s third claim under Health and Safety Code section 1278.5 (discrimination). Rather, the “plaintiff-friendly” McDonnell-Douglas test applies. Under this test, the plaintiff makes a prima facie case of discrimination by demonstrating that:

1. he is a member of a protected class;
2. he was qualified for and applied for an available position;
3. despite being qualified, he was rejected for the position; and
4. the position remained available after the plaintiff’s rejection, and the defendant employer continued to seek applicants from persons of plaintiff’s qualifications.

If plaintiff establishes the above, the burden of production shifts to the defendant employer to articulate a legitimate, nondiscriminatory reason for the employment action. The plaintiff must then demonstrate that the employer's reason was pretext for discrimination.

The ruling is a win for health care employers in that it will give them the opportunity to present legitimate, non-retaliatory reasons for employee disciplinary actions, then again shift the burden to plaintiffs to show evidence that their decisions were pretextual. Still, when it comes to Labor Code 1102.5 and California Whistleblower Protection Act matters, we recommend employers remain vigilant and clearly document their handling of adverse employment actions like firings involving whistleblowers. Employers especially need to be ready to argue in court that any actions taken against whistleblowers were not due to the worke’'s whistleblowing activity.

African-American physician proves State agency discriminated by failing to interview her and by revoking her credentials

In Department of Corrections & Rehabilitation v. State Personnel Bd., the California Personnel Board (Board) sustained a complaint brought by Vickie Mabry-Height, M.D., against the Department of Corrections and Rehabilitation (Department) alleging discrimination based on age, race, and gender in violation of FEHA. The Board concluded that Dr. Mabry-Height established a prima facie case of unlawful discrimination based on certain conduct, and the Department failed to rebut the presumption of discrimination by offering evidence that it had a legitimate, nondiscriminatory reason for this conduct. The Department petitioned the trial court for a writ of administrative mandamus seeking an order setting aside the Board’s decision. The petition was denied, and judgment was entered in favor of Dr. Mabry-Height.

The Department appealed, but finding no reversible error, the Court of Appeal affirmed the trial court. The court concluded there was no abuse of discretion when the Board concluded the Department did not satisfy its burden of producing substantial evidence of legitimate, nondiscriminatory reasons for the challenged conduct. Indeed, the Court noted that the Department failed to present any evidence explaining why Mabry-Height was not interviewed for the positions that others filled. Further, the Department could not meet its burden as to its decision to revoke Mabry-Height’s credentialing. The reasons the Department provided at the time to Dr. Mabry-Height were later contradicted by the testimony offered at the hearing. No one from the credentialing unit testified as to the actual reasons for revoking her credentialing.

Trial court’s 75% reduction of FEHA attorney’s fees was reversed by Court of Appeal because “limited success analysis” was flawed

In Vines v. O’Reilly Auto Enterprises, LLC, Vines sued his former employer O’Reilly under FEHA, alleging he was a 59-year-old black man who had been subjected during his employment with O’Reilly to discriminatory treatment and harassment by his supervisor and others because of his age and race. His supervisor allegedly created false and misleading reviews of Vines, yelled at him, and denied his requests for training given to younger, non-black employees. Although Vines repeatedly complained to management, O’Reilly took no remedial action.

A jury awarded damages on his claims for retaliation and failure to prevent retaliation, Vines moved for an award of $809,681.25 in attorney fees. The trial court awarded only $129,540.44 in fees, based in part on its determination the unsuccessful discrimination and harassment claims were not sufficiently related or factually intertwined with the successful retaliation claims.

The court of appeal reversed the post-judgment fee order and remanded for recalculation of Vines’s fee award. The Court found that the trial court erred in finding the claims not sufficiently related or factually intertwined. Evidence of the facts regarding the alleged underlying discriminatory and harassing conduct about which Vines had complained was relevant to establish, for the retaliation cause of action, the reasonableness of his belief that conduct was unlawful.

This decision holds that the trial court’s reasoning and result were an abuse of discretion because it was necessary for plaintiff to prove his discrimination and harassment claims in order to show that he had reason to make the complaint that led to the retaliation. Evidence of the facts regarding the alleged underlying discriminatory and harassing conduct about which plaintiff had complained was relevant to establish, for the retaliation cause of action, the reasonableness of his belief that conduct was unlawful.

Employment — Class action

Court of Appeal affirms denial of motion for class certification by former employee of public agency because defendant had established as a matter of law that it was a public entity not subject to the Labor Code provisions plaintiff alleged it had violated

In Allen v. San Diego Convention Center Corp., Inc., Petitioner Sharlene Allen was a former employee of the San Diego Convention Center Corporation (“SDCCC”). After SDCCC terminated Allen, she filed a class action lawsuit against SDCCC alleging various violations of the California Labor Code. The trial court largely sustained SDCCC’s demurrer to the complaint on the grounds that the corporation was exempt from liability as a government entity. The trial court, however, left intact one claim for untimely payment of final wages under Labor Code sections 201, 202, and 203.1 and derivative claims under the Unfair Competition Law and the Private Attorneys General Act (“PAGA”). Allen then moved for class certification for her surviving causes of action. The trial court denied the motion based on Allen’s concession that her claim for untimely final payment was not viable because it was derivative of the other claims dismissed at the demurrer stage. Allen appealed the denial of the motion for class certification, which she claimed was the “death knell” of her class claims and thus, the lawsuit. She argued the trial court’s ruling on the demurrer was incorrect because SDCCC did not establish as a matter of law that it was exempt from liability.

The Court agreed that class certification was properly denied by the trial court due to defendant’s status as a public agency, and affirmed the order.

This decision applies on in cases where the defendant is a public agency.

Court of Appeal holds that trial court properly denied class certification for wage and hour claims involving rounding

In Cirrincione v. American Scissor Lift, Cirrincione filed a putative class action lawsuit against his former employer for various wage and hour violations, including failure to pay overtime and minimum wages, meal and rest breaks, waiting time penalties. These claims were predicated on the employer’s policy and/or practice of rounding the work time of its employee, which allegedly resulted in the systematic underpayment of wages. The trial court denied Cirrincione’s motion to certify seven subclasses of employees, holding that certification was not warranted because plaintiff had failed to establish that common questions of fact or law would predominate over individual questions.

The Court of Appeal affirmed, holding that “an employer in California is entitled to round its employees’ work time if the rounding is done in a ‘fair and neutral’ manner that does not result, over a period in time, in the failure to properly compensate employees for all the time they have actually worked.” The Court further held that “simply alleging the existence of a uniform policy or practice (or unlawful lack of a policy) is not enough to establish predominance of common questions required for class certification.”

The California Supreme Court granted the petition to review and issued the order to de-publish the Court of Appeal opinion which means that the opinion cannot be relied upon or cited in future actions.

Employment — Unemployment benefits

Terminated employee was entitled to unemployment benefits since she left her job in emergency circumstances with the employer’s approval and, thus, is presumed to have not voluntarily quit as claimed by the employer

In Johar v. California Unemployment Insurance Appeals Board, with the agreement of her supervisor, Johar, a salesperson, left work for about a week to care for a terminally ill relative. While she was away her employer, SWS, decided she had quit. Upon her return, SWS stated business was slow and gave her no new sales appointments. Johar sought unemployment benefits, citing a “temporary layoff.” SWS denied laying Johar off. While conceding that she left with her supervisor’s approval, SWS claimed that Johar’s failure to provide a return date or otherwise communicate with her supervisor while she was away amounted to a voluntary quit. The Employment Development Department agreed, found Johar ineligible for unemployment benefits, ordered reimbursement of benefits improperly paid, and imposed a penalty for willful misrepresentation. The California Unemployment Insurance Appeals Board (“CUIAB”) affirmed.

After Johar sought judicial review, CUIAB confessed error for failing to consider new evidence discovered by Johar while the administrative appeal was pending. The court dismissed the case without reaching the merits. The court of appeal reversed. Johar was entitled to relief on the existing record. She left her job in emergency circumstances with the employer’s approval, thus for good cause; an employee who leaves work for good cause is presumed to have not voluntarily quit. SWS’ evidence did not establish that Johar positively repudiated her obligation to return in clear terms.

Although this case involves an employee’s claim for unemployment benefits, the lesson here is clear: employers should use caution when terminating an employee who, with permission, takes leave of work for a legitimate reason.

Employment — PAGA

Court of Appeal rules that a trial court cannot strike a PAGA claim based on manageability, creating a split in the appellate courts which will be decided by the California Supreme Court

In Estrada v. Royalty Carpet Mills, Inc., Plaintiffs, employees at carpet manufacturing facilities, brought an action against their employer alleging representative claims under the PAGA and class claims for purported meal and rest period violations, derivative claims for wage statement and waiting time penalties and violation of the Unfair Competition Law, and a claim for declaratory relief. The trial court initially certified two classes (i.e., one class of workers in Porterville, California and a second class of workers in Dyer and Derian, California) with multiple subclasses. After trial, the court, decertified the Dyer/Derian meal period subclass because there were too many individualized issues to support class treatment and then dismissed the portion of the PAGA claim based on meal period violations at Dyer/Derian “because the individualized issues made it unmanageable.”

The Court of Appeal for the Fourth District reversed, in relevant part, finding that the trial court improperly dismissed the PAGA claim as unmanageable. In doing so, the court expressly stated that the purpose of publishing its opinion was to discuss concerns regarding so-called “unmanageable PAGA claims.”

The decision in Estrada creates a split of authority between the Fourth District and Second District which held, in Wesson v. Staples the Office Superstore, LLC, 68 Cal. App. 5th 746 (2021), that “courts have inherent authority to ensure that PAGA claims can be fairly and efficiently tried and, if necessary, may strike a claim that cannot be rendered manageable.”

The California Supreme Court granted review of Estrada in order to resolve the conflict in the courts of appeal. In its order granting review, the Supreme Court noted: “Estrada may be cited, not only for its persuasive value, but also for the limited purpose of establishing the existence of a conflict in authority that would in turn allow trial courts to exercise discretion . . . to choose between sides of any such conflict.”

Where Plaintiff compromises individual wage-and-hour claims, claim preclusion does not bar subsequent representative PAGA claims

In Howitson v. Evans Hotels, a court of appeal addressed the following issues: (1) the legal issue of whether an employee who settled individual claims against the employer for alleged Labor Code violations was subsequently barred by claim preclusion from bringing a PAGA enforcement action against the employer for the same Labor Code violations when, prior to settlement, the employee could have added the PAGA claims to the existing action; and (2) whether the doctrine of collateral estopped (or claim preclusion) applied to the claims.

The Court of Appeal determined that because the two actions involved different claims for different harms and because the State, against whom the defense was raised, was neither a party in the prior action nor in privity with the employee, the requirements for claim preclusion were not met.

If an employer settles an individual PAGA claim brought by an employee, the settlement does not necessarily bar a later representative PAGA claim brought by the same employee but for the benefit of the State. If possible, the settlement agreement should include a provision whereby the plaintiff agrees to waive any representative PAGA claims against the employer.

Court of Appeal reverses order granting summary judgment in PAGA action in light of evidence that employer may not have “provided” suitable seating to employees

In Meda v. Autozone, Meda worked as a sales associate at an AutoZone for approximately six months before quitting and suing for violation of PAGA asserting AutoZoners (the operating company for AutoZone) had failed to provide suitable seating to employees at the cashier and parts counter workstations. AutoZoners obtained summary judgment in the trial court on the ground that Meda had no standing to bring a PAGA action because it satisfied the seating requirement by making two chairs available to its associates. However, the two chairs were not placed at the cashier or parts counter workstations (they were outside the manager’s office), and Meda contended no one told her the chairs were available for use at the front counter workstations, and she never saw anyone else use a chair at those workstations.

The Court of Appeal reversed the summary judgment and held that “where an employer has not expressly advised its employees that they may use a seat during their work and has not provided a seat at a workstation,” the inquiry as to whether the employer has “provided” suitable seating may be “fact-intensive and may involve a multitude of job- and workplace-specific factors,” making resolution at the summary judgment stage “inappropriate.”

This case illustrates how far courts of appeal will bend to help employee’s PAGA claims. Even though the employer provided two chairs for the associates to use, summary judgment in favor of the employer was reversed because the associates were not expressly told that they can use the chairs at their workstation.

Court of Appeal affirms dismissal of PAGA claims by plaintiff who died after Complaint was filed, refusing to allow a different employee to intervene

In Hargrove v. Legacy Healthcare, Inc., a PAGA suit, the original plaintiff died while the suit was pending. This decision holds that the trial court correctly denied a different employee’s motion to intervene in the action in place of the deceased plaintiff because the would-be plaintiff was not an employee at the time the original plaintiff sent her complaint to the DLSE and therefore would not have standing to pursue claims relating back to the filing of the original complaint.

In 2016, plaintiff Stephanie Hargrove filed a PAGA action against her employers, the owners of a skilled nursing center. Approximately four years later, in 2020, Hargrove died. Her attorneys requested leave to file an amended pleading to substitute Makiya Cornell in place of Hargrove to prosecute the PAGA claims. The trial court denied the request, dismissed the action, and stated that Cornell “is free to file her own claim and her own causes of action.”

Cornell appealed contending that she had standing to appeal the trial court’s order denying her request to substitute herself in place of Hargrove as an order effectively denying a motion to intervene. Alternatively, Cornell argued the Court of Appeal could treat her appeal as a petition for writ of mandate. Assuming the Court concluded Cornell had standing to appeal, she argued the trial court abused its discretion in refusing to permit her to amend Hargrove’s complaint to substitute Cornell as the representative plaintiff such that her PAGA claim related back to the original complaint. The Court of Appeal concluded Cornell did not have standing to appeal the judgment. The Court treated the order denying to motion to amend as an order denying an implicit motion to intervene, and concluded the trial court did not abuse its discretion in denying the motion.

Court of Appeal re-affirms that the PAGA statute is constitutional

In California Business & Industrial Alliance v. Becerra, Plaintiff, a lobbying group for small and midsized businesses in California, filed this action against the California Attorney General seeking a judicial declaration that PAGA was unconstitutional under various theories, and an injunction forbidding defendant from implementing or enforcing PAGA. The trial court sustained defendant’s demurrer without leave to amend. On appeal, plaintiff asserted a single theory: that PAGA violated California’s separation of powers doctrine by allowing private citizens to seek civil penalties on the state’s behalf without the executive branch exercising sufficient prosecutorial discretion. The Court of Appeal affirmed and rejected this theory for two reasons: (1) the California Supreme Court found in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), that “PAGA does not violate the principle of separation of powers under the California Constitution;” and (2) even if Iskanian did not require this result, the Court would reach it anyway through application of California’s preexisting separation of powers doctrine.

Court of Appeal approves staying PAGA claims under exclusive concurrent jurisdiction doctrine

In Shaw v. Superior Court of Contra Costa County, a Court of Appeal held that trial courts have discretion to apply the doctrine of exclusive concurrent jurisdiction to stay a later-filed PAGA action when there are two or more pending PAGA actions arising from the same facts and theories.

Plaintiffs claimed that BevMo’s policy, requiring the presence of two persons in any store while open, regularly requires employees to forgo off-duty, uninterrupted meal and rest periods, or, alternatively, premium pay for non-compliant meal and rest periods. In their Contra Costa County representative suit PAGA, the plaintiffs gave notice to the Labor and Workforce Development Agency. More than a year before that suit, Paez had filed a PAGA representative action against BevMo in Los Angeles, concerning the same two-person policy. While their petition for judicial coordination (Code Civ. Proc. 404) with the Los Angeles PAGA suit was pending, the Contra Costa trial court stayed the suit. After the petition for coordination was denied, the court denied a motion to lift the stay, concluding that the stay was warranted under the doctrine of exclusive concurrent jurisdiction.

The court of appeal denied finding the trial court did not err in applying the exclusive concurrent jurisdiction rule to this dispute. If that rule is mandatory, PAGA does not clearly abrogate the rule; if the court had discretion to weigh policy concerns in deciding whether to apply the rule, the court did not abuse its discretion.

Before the ruling in this case, no definitive authority existed allowing application of the exclusive concurrent jurisdiction rule to stay later-filed PAGA actions. This ruling should strengthen employers’ arguments when trying to stop and streamline duplicative PAGA actions.

Court of Appeal affirms trial court’s ruling that employer not required to provide workplace seating to grocery cashiers

In LaFace v. Ralphs Grocery Co., LaFace, a cashier at a Ralphs, brought a PAGA action alleging that Ralphs violated an Industrial Welfare Commission (IWC) order that required employers to provide seating when the nature of the work reasonably permitted the use of seats, or, for a job where standing was required, to provide seating for employee use when their use did not interfere with an employee’s duties. The trial court held that PAGA actions were equitable in nature and not triable to a jury and that Ralphs had not violated the order. Specifically, the trial court found that Ralphs had not violated the applicable wage order because the evidence showed that even when lulls occurred in a cashier’s primary duties, they were still required to move about the store fulfilling various other tasks, including cleaning and restocking shelves.

The court of appeal affirmed, first holding that there is no right to a jury trial in a PAGA action. PAGA is an administrative enforcement hybrid. If tried to a jury, the parties would gain a jury trial right not otherwise available to either the agency or employers. Many violations would be based on rights that did not exist at common law.

On the merits, the Court affirmed, noting that “sitting at or near the checkstands instead of cleaning, restocking, and fishing for customers, would have interfered with the active duties of the cashiers.” The Court further held that a PAGA claim is an “administrative hybrid” and that employees are not entitled to a jury.

This decision highlights that the suitable-seating provisions under the IWC’s wage orders are subject to important limitations, including limits based on employers’ reasonable work expectations. Moreover, employers may enjoy significant advantages when PAGA claims proceed to trial before judges, rather than juries.

Court of Appeal applies “relation-back” doctrine to substitute PAGA plaintiffs’ claims deadline

In Hutcheson v. Superior Court, a court of appeal discussed application of the “relation back” doctrine in PAGA claims. PAGA authorizes “aggrieved employees” to file lawsuits on behalf of the state seeking civil penalties for Labor Code violations, and allocates 75 percent of the recovered penalties to the California Labor and Workforce Development Agency (LWDA) and 25 percent to all employees affected by the violation. Before filing suit, the PAGA plaintiff must submit notices of the alleged violations to LWDA and the employer.

The first aggrieved employee submitted a notice of alleged Labor Code violations by his employer, UBS, to the LWDA and subsequently filed a complaint. That employee later sought to amend his complaint to substitute in as the named plaintiff another aggrieved employee who had worked for the same employer. The trial court granted the employer summary judgment, concluding that the amended PAGA complaint cannot relate back to the original PAGA complaint where the second employee submitted his PAGA notice after the original complaint was filed, reasoning that allowing relation back grants the employee “more time to recover civil penalties than the LWDA itself would have.”

The court of appeal reversed. Relation back would not grant the LWDA or any aggrieved employees the potential for any more than they had under the original complaint; if relation back does not apply, UBS avoids exposure to potential liability for civil penalties over some period of time.

The Court further emphasized that a substitute plaintiff must still comply with each of the notice, standing, and timeliness requirements of PAGA to pursue a PAGA representative action. Namely, a PAGA representative-action plaintiff must: (1) be an aggrieved employee (meaning, an employee of the defendant company who alleges that he or she personally suffered one or more violations of the Labor Code); (2) have provided pre-lawsuit notice to LWDA and to the defendant before commencing the action; and (3) have provided the pre-lawsuit notice and initiated the lawsuit within one year and sixty-five days of filing the notice.

The effects of the Hutcheson ruling are limited to a narrow set of circumstances, including situations in which a second PAGA plaintiff timely seeks intervention in an existing lawsuit. Employers facing a similar scenario should scrutinize the substitute plaintiff’s compliance with each of the requirements. Moreover, Hutcheson does not affect an employer’s existing right to challenge the sufficiency of the pre-lawsuit PAGA notice and seek to strike some or all of the PAGA claims based on inadequate notice. Nor does this decision affect a trial court’s inherent power to strike or limit unmanageable PAGA lawsuits that would require an overly burdensome trial process to adjudicate.

Employment — Relocation claims

At-will employee can proceed with Complaint for violation of Labor Code section 970 which prohibits an employer from inducing an employee to relocate and accept employment under false pretenses

In White v. Smule, Inc., Plaintiff White alleged that while he was interviewing for a job with Smule, Smule told him it “was planning aggressive expansion over the course of the next few years and needed an experienced project manager to lead in building out and managing teams of project managers” in the San Francisco area. Relying on the employer’s representations, White accepted the position and relocated from Washington to San Francisco. White signed an acknowledgement that his employment with Smule was terminable at will. Five months later, Smule eliminated White’s position after deciding to move the position to its Bulgaria office.

White file a complaint alleging a violation of California Labor Code section 970 which prohibits an employer from inducing an employee to relocate and accept employment with knowingly false representations regarding the kind, character, existence, or duration of work. The trial court granted Smule’s motion for summary judgment on the ground that White was an at-will employee.

The Court of Appeal reversed, holding that an employer may not rely upon at-will employment alone as a defense to an employee’s claim under section 970. Even in the context of at-will employment, an employer may still violate section 970 by mischaracterizing job duties, job title, reporting structures, compensation, working hours, benefits, or other terms and conditions of employment.

This case should serve as a reminder to employers to proceed with caution when relocating new workers. Under the ruling, even at-will employers could now be held liable for influencing workers to relocate for work if they mislead them regarding the kind or character of their job. Although the opinion is based on a specific provision of the California Labor Code, its rationale will be familiar to employers and practitioners nationwide—and serves as an important reminder to take care with all recruiting outreach efforts.

Automotive

California Supreme Upholds $170,000 Award of Attorney’s Fees in Lemon Law Case even though Damages are only $22,000

In Pulliam v. HNL Automotive, Inc., the California Supreme Court affirmed a trial court judgment granting plaintiff’s post-trial motion for attorney’s fees in the amount of $169,602 under the Song-Beverly Consumer Warranty Act, after awarding her $21,957.25 in damages on her claim for breach of the implied warranty of merchantability, holding that there was no error. The Supreme Court held that recovery under the Federal Trade Commission’s Holder Rule does not limit the award of attorney’s fees where, as a here, a buyer seeks fees from a holder under a state prevailing party statute.

This case illustrates the dangers of litigating Lemon Law cases facing vehicle manufacturers.

Court of Appeal Permits Car Buyer to Pursue Fraud Claim Against Nissan Under Exception to Economic Loss Rule

In Dhital v. Nissan North America, Inc., Plaintiffs sued Nissan, alleging the transmission in a 2013 Nissan Sentra they purchased was defective, bringing statutory claims under the Song-Beverly Consumer Warranty Act and a common law fraud claim alleging that Nissan, by fraudulently concealing the defects, induced them to purchase the car. The trial court dismissed the fraudulent inducement claim as barred by the “economic loss rule” which prohibits a party from recovering in tort when the negligence of others results in purely economic loss.

The Court of Appeal reversed. Under California law, the economic loss rule does not bar the fraudulent inducement claim since the fraudulent inducement exception to the economic loss rule applies. The plaintiffs adequately pleaded that the transmissions installed in numerous Nissan vehicles (including the one they purchased) were defective; Nissan knew of the defects and the hazards they posed; Nissan had exclusive knowledge of the defects but intentionally concealed and failed to disclose that information; Nissan intended to deceive plaintiffs by concealing known transmission problems; plaintiffs would not have purchased the car if they had known of the defects; and plaintiffs suffered damages in the form of money paid to purchase the car.

In California, the economic loss rule prevents a plaintiff from recovering tort damages when the plaintiff has not suffered personal injury or property damage. This case establishes that the economic loss rule does not apply to claims involving fraudulent concealment. If fraudulent concealment is established, the party can recover tort damages, including emotional distress damages. As such, manufacturers and retailers must use caution when making representations regarding the products they are selling, and fully disclose and warn, preferably in writing, all known risks and defects.

Court of Appeal Holds that Motorcycle Manufacturer and Distributor are Liable for Dealer’s Negligent Assembly Motorcycle

In Defries v. Yamaha Motor Corporation, U.S.A., Plaintiff Chad Defries suffered injuries while riding a Yamaha dirt bike. He sued the United States distributor, defendant Yamaha Motor Corporation, U.S.A. (“Yamaha”), among others, asserting that the accident was caused by a throttle assembly that fell off the handlebar as he was riding. The jury found in Yamaha’s favor, and the trial court later awarded Yamaha costs.

On appeal, Defries contended, among other things, that the trial court erroneously denied his request to instruct the jury that Yamaha was liable for its dealer’s negligent assembly of the dirt bike, a ruling that limited Defries’s negligence cause of action to Yamaha’s own negligence. The Court of Appeal found that California law, however, placed “responsibility for defects, whether negligently or non-negligently caused, on the manufacturer of the completed product . . . regardless of what part of the manufacturing process the manufacturer chooses to delegate to third parties.” The same principle applied to distributors. And as the distributor of a completed product, Yamaha “cannot delegate its duty . . . [and thus] cannot escape liability on the ground that the defect in [Defries’s bike] may have been caused by something one of its authorized dealers did or failed to do.” If the dealer negligently assembled the product, Yamaha was jointly liable for damages caused by that negligence. Because the requested instruction should have been given, the Court of Appeal reversed the judgment on the negligence cause of action, and affirmed in all other respects.

The Defries case may result in a sea change in California’s product liability landscape. Upstream entities, including manufacturers and distributors, could be found negligent for the improper assembly of their products by an authorized dealer. The case also stands for the proposition that a plaintiff does not have the burden of discovering and proving which entity in the supply chain is responsible for the defective product. For example, when it is alleged that an authorized dealer improperly assembled a consumer product, it would be up to the manufacturer, distributor, or another upstream entity to argue that it did more than just provide a non-defective unassembled product. As a result, manufacturers and distributors will certainly require retailers and assemblers to defend and indemnify against all claims arising out of alleged negligent assembly.

Court of Appeal holds that a manufacturer in a Song-Beverly (Lemon Law) claim is not entitled to a credit for money earned by consumer from resale of defective vehicle

In Figueroa v. FCA US, Plaintiff purchased a new pickup truck manufactured by FCA US LLC (“FCA”). Within 900 miles the truck engine overheated and the truck had to be towed to the dealership for repair. The dealership replaced a defective radiator hose clamp, and visually inspected the cylinder heads for cracks that are often caused by overheating. The dealership did not undertake a standard dye test for leaks. The engine continued to overheat and after a few thousand miles the water pump failed. The dealership replaced the water pump under warranty.

Plaintiff filed a complaint against FCA alleging causes of action for breach of express warranty and breach of implied warranty. FCA made an offer of settlement of $30,000. Plaintiff refused the offer, and the matter went to jury trial. The jury found FCA breached its express warranty and awarded $20,154 in compensatory damages plus a $10,000 civil penalty, for a total of $30,154. The jury also found FCA breached its implied warranty and awarded $30,154 in compensatory damages.

The court of appeal affirmed. The court reasoned that FCA failed to show that any of the damages the jury awarded included registration renewal fees or insurance premiums. The jury simply awarded a lump sum of damages. With such an undifferentiated award, there is no way to determine what portion, if any, of the verdict was rewarded on an improper basis. Further, FCA refused to repurchase the truck or even investigate whether it was a lemon. That is more than sufficient to show a willful violation.

The Court further warned that providing manufacturers a resale offset would undercut the Song-Beverly Act’s statutory scheme by rewarding manufacturers who consider their statutory obligation – to promptly repurchase, repair, label as a lemon, and sell the vehicle at a deep discount with a one-year warranty – a losing proposition, and who therefore “would much rather force the owner of a defective vehicle to sell it on the open market, or trade it in without a label or warning, and use the cash back on trade-value as an offset.”

The California Supreme Court granted FCA’s petition for review and ordered briefing deferred pending decision in Niedermeier v. FCA US LLC, S266034 (#21-50) which presents the following issues: (1) Does the statutory restitution remedy under the Song-Beverly Act (Civ. Code, § 1790 et seq.) necessarily include an offset for a trade-in credit? (2) If the amount that a consumer has received in a trade-in transaction must be subtracted from the consumer’s recovery, should that amount be subtracted from the statutory restitution remedy or from the consumer’s total recovery?

In Lemon Law action, Court of Appeal affirms jury award in favor plaintiff of $120,000 (compensatory damages), $250,000 (punitive damages) and almost $1 million in attorney’s fees and costs

In Bowser v. Ford Motor Company, Ralph and Heidi Bowser bought a 2006 Ford F-250 Super Duty truck, with a 6.0-liter diesel engine (6.0L engine). They had owned a 2004 model of the same truck that turned out to be a lemon. The dealership, however, assured them that Ford had “fixed” the problems. After the purchase, the truck required repair after repair. After the truck had about 100,000 miles on it, the Bowsers largely stopped driving it; it mostly sat in their driveway. The Bowsers’ expert testified that, in his opinion, the 6.0L engine had defective fuel delivery and air management systems. Over Ford’s objections, the Bowsers introduced a number of internal Ford emails and presentations showing that Ford was aware that certain parts of the 6.0L engine, including fuel injectors, turbochargers, and EGR valves, were failing at excessive rates, and that Ford was struggling to find the root cause of some of these failures.

Ford conceded liability under the Song-Beverly Act. Over Ford’s objections, the Bowsers introduced a number of internal Ford emails and presentations which showed that Ford was aware that certain parts of the 6.0L engine, including fuel injectors, turbochargers, and EGR valves, were failing at excessive rates, and that Ford was struggling to find the root cause of some of these failures. Some of the emails said that this information should be kept secret. A jury found for the Bowsers on all causes of action, and awarded compensatory and punitive damages. It awarded compensatory damages ($42,310.17 under the Song-Beverly Act; $43,084.68 for fraud), $84,620.34 as a statutory penalty under the Song-Beverly Act, and $253,861.02 in punitive damages. The trial court awarded them $836,528.12 in attorney fees plus $94,264.99 in costs.

Ford appealed, raising a number of alleged evidentiary errors at trial, including introduction of the internal documents, and challenged the jury’s award of damages. Finding no reversible error, the Court of Appeal affirmed.

Court of Appeal holds that a manufacturer’s warranty does not extend to buyers of used cars under California Lemon Law

In Rodriguez v. FCA US, LLC, a Court of Appeal discussed whether in a Song-Beverly (“Lemon Law”) claim, the manufacturer’s warranty extends to a purchaser of a used car.

The Song-Beverly Consumer Warranty Act defines “new motor vehicle” as a new vehicle purchased primarily for personal purposes, but also specified that the term included “a dealer-owned vehicle and a ‘demonstrator’ or other motor vehicle sold with a manufacturer’s new car warranty.” The “refund-or-replace” provision requires a manufacturer to replace a defective “new motor vehicle” or make restitution if, after a reasonable number of attempts, the manufacturer (or its representative) is unable to repair the vehicle to conform to the applicable express warranty. Plaintiffs Everardo Rodriguez and Judith Arellano purchased a two-year-old Dodge truck from a used car dealership. The truck had over 55,000 miles on it and, though the manufacturer’s basic warranty had expired, the limited powertrain warranty had not. After experiencing electrical defects with the truck, plaintiffs sued the manufacturer for violation of the refund-or-replace provision. FCA moved for summary judgment, arguing the truck was not a “new motor vehicle,” and the trial court agreed.

On appeal, the sole issue was whether the phrase “other motor vehicle sold with a manufacturer’s new car warranty” covered sales of previously owned vehicles with some balance remaining on the manufacturer’s express warranty. The Court of Appeal concluded it did not, and that the phrase functioned instead as a catchall for sales of essentially new vehicles where the applicable warranty was issued with the sale. Judgment was therefore affirmed for Plaintiffs.

The California Supreme has granted review of the Court of Appeal’s opinion. An opinion from the Supreme Court is not expected for at least 12 months.

Court of Appeal holds that a vehicle manufacturer’s offer to make good can preclude restitution claim under CLRA

In DeNike v. Mathew Enterprise, Inc., DeNike purchased a 2014 hardtop Jeep Wrangler from SCJ. DeNike subsequently discovered that, contrary to a salesman’s representation, the vehicle was originally manufactured as a soft top. The hardtop was improperly installed after it left the factory. DeNike filed suit. A jury found in favor of DeNike on his claims under the Consumers Legal Remedies Act (“CLRA”), the Song-Beverly Consumer Warranty Act, and for intentional misrepresentation. The trial court issued a permanent injunction against SCJ and, in a post-judgment order, awarded DeNike attorney fees.

The court of appeal reversed with respect to restitution under the CLRA. Having found that SCJ’s response to DeNike’s CLRA demand letter was “reasonable and appropriate,” the trial court erred in allowing DeNike’s claim for restitution under the CLRA to proceed to the jury. The court rejected arguments that there was insufficient evidence of reasonable reliance to support the verdict on the intentional misrepresentation cause of action and that the trial court misinstructed the jury on the Song-Beverly Act cause of action and erred in granting DeNike’s request for injunctive relief under the CLRA.

If the buyer’s claims are reasonable, a manufacturer should timely respond to a CLRA letter in order to prevent a later claim for restitution. Sales personnel should be intimately familiar with every vehicle on the lot. No representations should be made unless there is prior confirmation of the truth of the matter being represented.

In Lemon Law case, Court of Appeal affirms jury award of $77,000 in damages and penalties, $150,000 in punitive damages, and $650,000 in attorney’s fees

In Anderson v. Ford Motor Co., Plaintiffs bought a Ford Super Duty F-250 6.0 liter diesel pickup truck containing an engine sourced from nonparty Navistar. Plaintiffs chose the Ford for its power, towing capacity, and other qualities as represented by defendant Ford Motor Company in brochures and advertisements and by Ford dealership sales agents. Plaintiffs began experiencing issues with the truck during their second year of ownership. After numerous attempts to have the vehicle repaired so it could perform the functions for which they purchased it, plaintiffs effectively gave up, rendering the truck a “driveway ornament.”

After opting out as putative members of a class action involving the 6.0 liter diesel engine, plaintiffs sued Ford. The jury found in favor of plaintiffs on their causes of action pursuant to the Song-Beverly Consumer Warranty Act, CLRA, and their fraud in the inducement–concealment cause of action. The jury awarded plaintiffs $47,715.60 in actual damages, which was the original purchase price of the truck, $30,000 in statutory civil penalties under the Song-Beverly Act, and $150,000 in punitive damages. The trial court granted plaintiffs’ motion for attorney fees in the amount of $643,615.

Ford appealed, but finding no reversible error in the judgment and damages awards, the Court of Appeal affirmed. The Court of Appeal held that there was substantial evidence that the truck was objectively worth $0 at the time of purchase, and that the civil penalty and punitive damages were not an impermissible double recovery because they were awarded to remedy two different types of wrongful conduct that occurred at different times.

This case illustrates the danger of California’s Lemon Laws. Plaintiff purchased a new truck from Ford for $47,000. In the end, Ford was liable for almost $900,000 due to defects in the truck that could not be repaired. It is unclear whether Ford was given the opportunity to “buy back” the vehicle prior to litigation. If it did, and chose not to, this is the kind of result that was expected from judges and juries in California.

Court of Appeal holds that “Holder Rule” allows attorney fees, and other amounts against assignees

In Melendez v. Westlake Services, Inc., Melendez purchased a used 2015 Toyota from Southgate under a retail installment sales contract. Southgate assigned the contract to Westlake. Weeks later, Melendez sent a notice alleging Southgate violated the CLRA and demanded rescission, restitution, and an injunction. Melendez later sued Southgate and Westlake, alleging violations of the CLRA, the Song-Beverly Consumer Warranty Act, Civil Code 1632 (requiring translation of contracts negotiated primarily in Spanish), the unfair competition law, fraud, and negligent misrepresentation. Westlake assigned the contract back to Southgate. Default was entered against Southgate. Westlake agreed to pay $6,204.68 ($2,500 down payment and $3,704.68 Melendez paid in monthly payments). Melendez would have no further obligations under the contract.

The parties agreed Melendez could seek attorney fees, costs, expenses, and prejudgment interest. Westlake was entitled to assert all available defenses, “including the defense that no fees at all should be awarded against it as a Holder”

The regulation in which the Holder Rule is contained (16 C.F.R. § 433.2 (2022)) makes it an unfair or deceptive act or practice for a seller to take or receive a consumer credit contract which does not contain the following provision in large, boldface type:

“Notice [¶] Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.”

The FTC’s “Holder Rule” makes the holder of a consumer credit contract subject to all claims the debtor could assert against the seller of the goods or services but caps the debtor’s recovery from the holder to the amount paid by the debtor under the contract. The trial court awarded attorney fees ($115,987.50), prejudgment interest ($2,956.62), and costs ($14,295.63) jointly and severally against Westlake, Southgate, and other defendants.

The court of appeal affirmed finding that the Holder Rule does not preclude the recovery of attorney fees, costs, non-statutory costs, or prejudgment interest.

Court of Appeal agrees that plaintiff who is awarded $1 in nominal damages in a Song-Beverly trial is not necessarily the “prevailing buyer” for purposes of awarding attorney’s fees

In Duff v. Jaguar Land Rover North America, LLC, Plaintiff Ken Duff prevailed at a bench trial on one claim under the Song-Beverly Consumer Warranty Act, but was only awarded $1 in nominal damages. The trial court awarded Duff $684,250 in attorney fees. Defendant Jaguar appealed the order awarding Duff attorney fees, arguing the trial court applied the incorrect legal standard in finding that Duff was the prevailing buyer under California Civil Code section 1794(d).

The Court of Appeal agreed and thus, reversed the order and remanded the matter to the superior court to reconsider the issue.

Anti-SLAPP

In anti-SLAPP case, California Supreme Court holds that an agreement for parties not to disparage each other in a public place does not bar a later civil lawsuit arising from the same alleged incident

In Olson v. Doe, Doe and Olson each owned units in the same condominium building. Doe brought a civil harassment restraining order against Olson and, as a result of court-ordered mediation, the parties agreed if they encountered each other in a public or common place “not to disparage one another.” Doe later filed a civil lawsuit against Olson seeking damages. Olson cross-complained for breach of contract and specific performance, and Doe moved to strike Olson’s cross-complaint under the anti-SLAPP statute. The trial court granted Doe’s motion.

The Supreme Court affirmed with respect to statements in Doe’s civil complaint, holding that Doe had no obligation under the contract to refrain from making disparaging statements in litigation, and therefore, Olson could not defeat Doe’s anti-SLAPP motion.

Court of Appeal rules that employment termination letter is not protected speech for purposes of anti-SLAPP motion

In Bishop v. The Bishop’s School, the Bishop’s School (“School”) terminated Chad Bishop’s (“Bishop”) employment as a teacher after it became aware of an improper text exchange between Bishop and a former student. Bishop filed a lawsuit asserting a breach of contract claim against the School and defamation claims against the School and Ron Kim, the Head of the School, based on the termination letter they sent to Bishop and a statement Kim made that was published in the student newspaper. Defendants filed an anti-SLAPP motion to strike the first amended complaint as well as a demurrer. The trial court granted defendants’ anti-SLAPP motion as to the defamation claims but denied it as to the contract claim against the School. The trial court also overruled the School’s demurrer to the contract claim. Bishop appealed the anti-SLAPP ruling. On cross-appeal, the School challenged the court’s order denying anti-SLAPP protection for the contract claim. The School also sought a writ of mandate directing the trial court to sustain its demurrer to the contract claim.

After review, the Court of Appeal concluded: (1) defendants did not meet their burden to show that Bishop’s allegations regarding the termination letter, which supported the defamation claim, or the termination itself, which supported the contract claim, involved protected activity; (2) defendants met their burden to show that Kim’s statement was protected activity, and Bishop failed to show that the defamation claim as based on that activity had minimal merit; and (3) without having filed a writ petition, there was no basis for the School to seek writ relief from the court’s order overruling its demurrer ruling on the contract claim. The Court therefore affirmed in part and reversed in part the trial court’s order and remanded the matter with directions.

Court of Appeal denies anti-SLAPP motion by debt collector in Rosenthal Fair Debt Collection Practices action finding that debtor would probably prevail on the merits

In Young v. Midland Funding, LLC, Young claimed her employer told her that it had received a wage garnishment order in 2019. Young then discovered the existence of a 2010 default judgment against her, in favor of Midland, for a purported debt of $8,529.93 plus interest. Young sued to set aside the 2010 default judgment, based on extrinsic mistake or fraud. She sought damages, penalties, and reasonable attorney fees and costs under the Rosenthal Fair Debt Collection Practices Act (Civ. Code, 1788), arguing that Midland was a debt collector of consumer debt and had engaged in false and deceptive conduct in attempting to collect that debt, citing her contention that she was never served with process. Midland filed an anti-SLAPP motion (section 425.16) to strike Young’s claims. The trial court granted the anti-SLAPP motion, finding Young did not show she would probably prevail on the merits of her claims and awarded Midland attorney fees and costs.

The court of appeal vacated holding that Young showed she would probably prevail on the merits of her Rosenthal Act claim, producing prima facie evidence that Midland falsely represented substituted service on her was accomplished. She was not required to show that Midland knowingly made this false representation.

Court of Appeal decision expands anti-SLAPP protections for medical staffs and hospitals

In Bonni v. St. Joseph Health System, Plaintiff, surgeon Aram Bonni sued his employers, defendants Mission Hospital Regional Medical Center and St. Joseph Hospital of Orange, as well several other related entities and physicians for retaliation under California Health and Safety Code section 1278.5. Bonni alleged he made whistleblower complaints, which caused the Hospitals to retaliate against him by, among other things, suspending his medical staff privileges and initiating peer review proceedings to evaluate his privileges. In response, the Hospitals filed an anti-SLAPP motion, arguing Bonni’s retaliation cause of action arose from the peer review proceedings, which were protected activity, and that his claims had no merit. The trial court agreed and granted the motion in its entirety. Bonni appealed.

The Court of Appeal reversed, finding Bonni’s retaliation claim did not arise from protected activity. The California Supreme Court then granted review, determining Bonni’s retaliation cause of action was composed of 19 distinct retaliation claims. Of these claims, it found eight arose from protected activity while the remainder did not. It remanded the matter back to the Court of Appeal to determine whether Bonni had shown a probability of prevailing on those eight claims. On remand, the appellate court concluded Bonni had not met the requisite burden because the eight claims at issue were all precluded by the litigation privilege. Based on this finding and the Supreme Court’s ruling, the Court of Appeal reversed the trial court’s order granting the Defendants’ anti-SLAPP motion in its entirety.

The Court of Appeal decision, together with the California Supreme Court’s earlier decision in this matter, more clearly defines the landscape of peer review activities protected by California’s anti-SLAPP statute. The decisions make it clear that statements and other communications made in the peer review process are broadly protected from retaliation claims.

Court of Appeal imposes sanctions for frivolous appeal of anti-SLAPP ruling

In Clarity Co. Consulting v. Gabriel, Plaintiff Clarity Co. Consulting LLC, a consulting company, alleged causes of action for breach of contract and other related claims against defendant ONclick, a health care start up company (and other individuals associated with the company) arising out of a failure to pay for services. ONclick’s general counsel, Gabriel, acting in his individual capacity filed an anti-SLAPP motion, arguing that plaintiff’s cause of action for intentional misrepresentation and concealment arose from “freedom of speech in representing his client.” He argued that he engaged in certain settlement negotiations, which he claimed amounted to protected activity under the anti-SLAPP statute. However, the trial court found–and the Court of Appeal agreed–that the settlement discussions had nothing to do with the causes of action that were actually alleged. The trial court denied the anti-SLAPP motion and issued sanctions in the amount of $3,300. Defendant filed a notice of appeal which was affirmed.

On top of affirming the appeal, and the trial court’s sanctions, the Court of Appeal granted plaintiff’s motion for sanctions for taking a frivolous appeal. Under section 907, “When it appears to the reviewing court that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just.” The court granted the motion on the basis that the appeal did not involve a unique issue, was amenable to easy analysis based on existing law, was not complex, and that any reasonable attorney “would have understood that the allegedly injury-producing conduct was defendants’ fraudulent, unprotected misrepresentations (fifth cause of action) and concealment (sixth cause of action) that preceded litigation-related settlement discussions over respondents’ unpaid invoices.”

Court of Appeal California permits a cannabis distributor’s extortion claim to proceed against the attorney representing a former employee, based on threats she made as part of settlement demands which were not protected speech under the anti-SLAPP laws

In Falcon Brands, Inc. v. Mousavi & Lee, LLP, the Court of Appeal was asked to determine when and if a lawyer’s settlement demand crosses the line and becomes professional misconduct. Falcon appealed an order granting a law firm’s anti-SLAPP motion as to Falcon’s cross-complaint which alleged extortion and intentional interference with a contract against the law firm. Falcon argued the lawyer’s e-mail settlement demands, which were the focus of Falcon’s cross-complaint, were not entitled to protection under the anti-SLAPP law because they constituted illegal to force Falcon into settling the underlying matter. The trial court rejected this argument and granted the firm’s anti-SLAPP motion.

The Court of Appeal reversed as to the first cause of action for extortion because it concluded the e-mail settlement demands, when considered in context, were not protected speech in light of the California Supreme Court’s ruling in Flatley v. Mauro, 39 Cal.4th 299 (2006), but rather amounted to extortion.

Although forceful language in settlement communications can be effective, one must be careful not to cross the line where the forceful language is tantamount to extortion. If that occurs, the First Amendment may not protect you in a subsequent extortion action.

Consumer product safety — Proposition 65

Class action relating to partially hydrogenated oils in Tootsie Products preempted by the Food, Drug & Cosmetic Act

In Beasley v. Tootsie Roll Industries, Inc., Beasley alleged that, during the proposed class period Tootsie Roll manufactured, distributed, and sold products that contained artificial trans fats in the form of partially hydrogenated oils (PHOs) and that trans fats are harmful and cause cardiovascular disease, type 2 diabetes, cancer, Alzheimer’s disease, and organ damage. Beasley alleged she purchased Tootsie Roll products containing PHOs during the class period. She sought to represent a class defined as: “All citizens of California who purchased Tootsie Products containing partially hydrogenated oil in California” during the class period. Beasley asserted the use of PHOs was unlawful and unfair under the Unfair Competition Law (UCL) (Bus. & Prof. Code, 17200) and breached the implied warranty of merchantability. The trial court dismissed the complaint.

The court of appeal affirmed the dismissal of the complaint. Beasley failed to allege cognizable injury and some of her claims were preempted by federal law (specifically a congressional enactment providing the use of PHOs is not to be deemed violative of food additive standards until June 18, 2018). The claim for breach of warranty is also preempted. Permitting the use of broad state statutory provisions governing “adulterated” foods to impose liability for PHO use before the federally established compliance date would create an obstacle to the achievement of Congress’s evident purpose of confirming the 2018 compliance date.

Court of Appeal rules that a Prop 65 warning is not required for a water pipe which may expose users to marijuana smoke, a listed carcinogen

In Environmental Health Advocates, Inc. v. Sream, Inc., Sream was a manufacturer of water pipes (bongs). According to Sream, its packaging and labels have long included the statement that such products “should be sold, marketed or used for legal, non-prohibited use only.” Since July 2020, Sream has also placed the following label on its products as a “purely defensive” measure: “WARNING: This product can expose you to chemicals including arsenic, which is known ... to cause cancer.”

EHA filed a private enforcement action, alleging Sream had failed to provide a warning that its products exposed consumers to marijuana smoke in violation of Proposition 65. Section 25249.6 provides: “No person in the course of doing business shall knowingly and intentionally expose any individual to a chemical known to the state to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such individual.” “Marijuana smoke” was added to the list of carcinogens in 2009.

The trial court granted Sream judgment on the pleadings, finding EHA had not alleged that Sream’s products require marijuana to function or can only be used with marijuana. The court of appeal affirmed. EHA does not allege direct contact, but instead that individuals “may be exposed to marijuana smoke” if they use Sream’s water pipes with marijuana. Requiring a warning for possible indirect contact, depending on how a consumer chooses to use the product, would introduce confusion into that decision-making process.

Although this ruling is specific to water pipes and cannabis, it could be applied to other situations in which a product (which does not contain a listed Prop 65 chemical) can be used with listed chemicals. The safe route is to include a warning if the most probable use of the product involves exposure to a listed chemical.

Under Proposition 65, constructive knowledge of the presence of a listed chemical is sufficient to trigger obligation to warn of dangers posed by chemical

In Lee v. Amazon.com, Inc., the court addressed two key questions: (1) whether constructive knowledge of hazardous chemicals and potential exposure is sufficient under the statute, or if actual knowledge is required; and (2) what level of specificity is required in a Proposition 65 Notice of Violation.

Before the Lee decision, it was an open question whether the phrase “knowingly and intentionally” in Proposition 65 requires actual knowledge of the presence of hazardous chemicals and potential for exposure or whether constructive knowledge is sufficient. “Constructive” knowledge generally is defined as “knowledge that one using reasonable care or diligence should have.” The Lee court found that constructive knowledge alone is sufficient to trigger a seller’s Proposition 65 obligation because requiring anything more would create incentives for businesses to deliberately avoid information alerting them to the presence of hazardous chemicals and potential exposure.

The court also provided much-needed guidance on the specificity required in a Proposition 65 Notice of Violation. Proposition 65 requires that a pre-litigation Notice of Violation be served on the alleged violator identifying the allegedly offending product “with sufficient specificity” to inform the recipient of the nature of the items allegedly sold. The California Environmental Protection Agency’s Office of Environmental Health Hazard Assessment had previously offered guidance that it would be sufficient to identify the category of products at issue, such as “aerosol spray paint,” “car wax,” or “paint thinner.” The Lee court relied on this guidance to conclude that the plaintiff’s notice—identifying the broad category of “skin-lightening creams”—was sufficiently specific, particularly given that it also identified, albeit under a different name, at least one allegedly offending product.

In false advertising action, Court of Appeal rules that reasonable consumer could reasonably believe that Target’s White Baking Morsels contained white chocolate

In Salazar v. Target Corp., after Plaintiff Salazar bought Target Corporation’s White Baking Morsels incorrectly thinking they contained white chocolate, he filed this class action against Target for false advertising under various consumer protection statutes. Salazar claimed he was reasonably mislead to believe the White Baking Morsels had real white chocolate because of the product’s label, its price tag, and its placement near products with real chocolate. To support his position, Salazar alleged that the results of a survey he conducted showed that 88 percent of consumers were deceived by the White Baking Morsels’ advertising and incorrectly believe they contained white chocolate. He also alleged that Target falsely advertised on its website that the “‘chocolate type’” of White Baking Morsels was “‘white chocolate,’” and placed the product in the “‘Baking Chocolate & Cocoa’” category.

Target demurred to all three claims on the ground that no reasonable consumer would believe the White Baking Morsels contained real white chocolate. Target also argued that Salazar lacked standing to assert claims based on Target’s website because he did not view the website and did not rely on its representations. The court sustained Target’s demurrer without leave to amend and entered judgment for Target. “California courts . . . have recognized that whether a business practice is deceptive will usually be a question of fact not appropriate for decision on demurrer. ... These are matters of fact, subject to proof that can be tested at trial, even if as judges we might be tempted to debate and speculate further about them.”

The Court of Appeal determined that a reasonable consumer could reasonably believe the morsels had white chocolate. As a result, the Court found Salazar plausibly alleged that “‘a significant portion of the general consuming public or of targeted consumers, acting reasonably in the circumstances, could be misled’” by the White Baking Morsels’ advertising. Judgment was reversed and the matter remanded for further proceedings.

In a separate action brought by plaintiff against Walmart (Salazar v. Walmart, Inc.), the Court of Appeal made the same findings with respect to Walmart’s White Baking Morsels.

Consumer product safety — Asbestos

Court of Appeal reverses punitive damages award in talc case since there was no evidence that defendant’s executives knew there were “probable dangerous consequences” from trace levels of asbestos in its talc, and deliberately did nothing to avoid them, at the time manufacturing the produce

In McNeal v. Whittaker, Clark & Daniels, McNeal was exposed to asbestos from several sources. He was diagnosed with mesothelioma in 2017. The jury found his asbestos exposure included the use of Old Spice talcum powder on a daily basis, from 1958 to 1980, except for one year while he was in Vietnam. Talc is a naturally occurring mineral with cosmetic uses. Asbestos, a known carcinogen when inhaled, is also a naturally occurring mineral. When talc is mined, it sometimes contains asbestos.

A jury awarded McNeal punitive damages. The defendant, the supplier of the talc in Old Spice that contained asbestos fiber, did not contest the finding it was negligent and otherwise responsible for McNeal's harm but argued that the evidence was insufficient to establish that any officer, director, or managing agent acted with the malice, oppression or fraud necessary for an award of punitive damages.

The court of appeal agreed and reversed the award of punitive damages. The evidence does not show that defendant’s executives knew there were “probable dangerous consequences” from trace levels of asbestos in its talc, and deliberately did nothing to avoid them. It was not known until 1994 that the contamination of talc with trace amounts of asbestos could cause mesothelioma or other asbestos-related diseases.

Court of Appeal broadly reads statute to allow belated Doe Amendment in asbestos case

In Hahn v. New York Air Brake LLC, Hahn filed suit in 2015, alleging that his mesothelioma was caused by exposure to asbestos at his job with the San Francisco Municipal Transportation Agency. During a deposition, the Agency’s representative testified that Boeing manufactured the light rail vehicles the Agency used during Hahn’s employment and that Air Brake “designed, developed and built the braking system.” for those vehicles. He did not testify that any Air Brake product contained asbestos. About two months after Richard’s August 2016 death, his heirs sued the Agency and Boeing. Air Brake was not initially named as a defendant; the plaintiffs named “Doe defendants,” Later, Boeing produced documents indicating that Air Brake designed and supplied the brakes for Boeing’s light rail vehicles and that Air Brake specified the use of asbestos-containing brake pads. Within a month, plaintiffs filed an amended complaint substituting Air Brake for a Doe defendant, under Code of Civil Procedure section 474.1

The trial court granted Air Brake’s summary judgment concluding that plaintiffs could not invoke Code of Civil Procedure section 474 because they “knew or should have known” facts establishing a cause of action against Air Brake when they filed their complaint; their action was thus untimely.

The court of appeal reversed. Compliance with section 474 is determined by the facts that a plaintiff actually knew at the time she filed the complaint, not the facts she should have known.

Corporations — Alter ego liability

Court of Appeal holds that a defendant’s due process rights do not protect the sole shareholder of a corporation from an alter ego action

In Lopez v. Escamilla, Plaintiff appealed a summary judgment entered in favor of Defendant in her lawsuit for damages against Defendant based on his alter ego liability for a $157,370 judgment against a corporation. Plaintiff claimed that Magnolia Funding, Inc., the subject of a prior lawsuit that provided the original loan, and Magnolia Home Loans, Inc. “were the same company”; and that Defendant was “the sole owner, officer, and director of each.” Magnolia Funding closed when Magnolia Home Loans got up and running.

The Court of Appeal reversed finding that (1) the trial court erred by granting summary judgment in favor of the corporation; there are triable issues of fact concerning Defendant’s alter ego liability, and (2) Plaintiff’s civil action does not violate Defendant’s right to due process.