September 9, 2009 actions by the California Supreme Court

With no conference last week, September 9, 2009 was an active day for the California Supreme Court.  Some notable actions include:

• A Petition for Review was granted in Loeffler v. Target Corporation [standing to sue for recovery of sales tax]
• After the lead case of Arias was resolved, Deleon v. Verizon Wireless was dismissed to the Second Appellate District, Division Three
• A Petition for Review was denied in Chau v. Starbucks Corporation [concerned judgment on discrete tip pooling issue]

In Rutti v. Lojack Corporation, Inc., a divided Ninth Circuit panel examines compensability of pre and post-workday activities

The whole business of "preliminary" and "postliminary" is a bit perplexing.  Under the Fair Labor Standards Act, 29 U.S.C. §§ 201-19 ("FLSA"), employers need not pay for "activities which are preliminary to or postliminary to said principal activity or activities, which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities."  29 U.S.C. § 254(a)(2).  In Rutti v. Lojack Corporation, Inc. (August 21, 2009), the Ninth Circuit examined this admittedly "ambiguous" language in an attempt to discern whether "preliminary" and "postliminary" work by Lojack technicians was compensable.

The Court summarized the essential facts:

Rutti was employed by Lojack as one of its over 450 nationwide technicians who install and repair vehicle recovery systems in vehicles. Most, if not all of the installations and repairs are done at the clients’ locations. Rutti was employed to install and repair vehicle recovery systems in Orange County, and required to travel to the job sites in a company-owned vehicle. Rutti was paid by Lojack on an hourly basis for the time period beginning when he arrived at his first job location and ending when he completed his final job installation of the day.

In addition to the time spent commuting, Rutti sought compensation for certain “off-the-clock” activities he performed before he left for the first job in the morning and after he returned home following the completion of the last job. Rutti asserted that Lojack required technicians to be “on call” from 8:00 a.m. until 6:00 p.m. Monday through Friday, and from 8:00 a.m. until 5:00 p.m. on Saturdays. During this time, the technicians were required to keep their mobile phones on and answer requests from dispatch to perform additional jobs, but they were permitted to decline the jobs.  Rutti also alleged that he spent time in the morning receiving assignments for the day, mapping his routes to the assignments, and prioritizing the jobs. This included time spent logging on to a handheld computer device provided by Lojack that informed him of his jobs for the day.  In addition, it appears that Rutti may have completed some minimal paperwork at home before he left for his first job.

Slip op., at 11455.  The district court disposed of all federal claims through a motion for partial summary judgment.  The district court subsequently issued an order dismissing the remaining state law claims for lack of subject matter jurisdiction.

The majority first dealt with the claim for commuting time compensation, applying the Employee Commuting Flexibility Act ("ECFA"), 29 U.S.C. § 254(a)(2):

The ECFA’s language states that where the use of the vehicle “is subject to an agreement on the part of the employer and the employee,” it is not part of the employee’s principal activities and thus not compensable.

Slip op., at 11459.  Evidently, all an employer needs to do is narrowly define principal duties, and the rest is gravy.  The Court then rejected Rutti's contention that the heavy restriction on the use of the Lojack vehicle transformed the use of the vehicle from "incidental" to "integral."

The Court reached the same conclusion under California law.  Despite the more flexible "control" standard set forth in Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000).  The Court concluded that the use of the Lojack vehicle was more like a commute to a mandatory departure point than restricted time in an employer-controlled vehicle.

The Court then spent considerable time discussing the imprecise de minimis rule as it applied to Rutti's morning and evening activities.  The Court determined that Rutti had not supplied evidence that his morning activities consumed more than a couple of minutes or involved anything other than commute preparation, which was noncompensable.

The evening data transmission time was not so easily relegated to the de minimis woodshed.  Based on the evidence supplied in the District Court, the Ninth Circuit concluded that summary judgment was inappropriate.  The Court noted that the Ninth Circuit had no fixed time standard under the rule:  "Furthermore, we have not adopted a ten or fifteen minute de minimis rule."  Slip op., at 11474.  The evidence was also sufficient to overcome summary judgment:

Rutti asserts that the transmissions take about 15 minutes a day. This is over an hour a week. For many employees, this is a significant amount of time and money. Also, the transmissions must be made at the end of every work day, and appear to be a requirement of a technician’s employment. This suggests that the transmission “are performed as part of the regular work of the employees in the ordinary course of business,” Dunlop, 527 F.2d at 401, and accordingly, unless the amount of time approaches what the Supreme Court termed “split-second absurdities,” the technician should be compensated. See Anderson, 328 U.S. at 692.

Slip op., at 11476.

Circuit Judge Hall would have gone further, finding the postliminary data transmission by Rutti to be de minimis as well, despite the conflicting evidence.  Slip op., at 11479.

Circuit Judge Silverman dissented with the majority analysis of whether Rutti was controlled by his employer during his commute:

The majority attempts to distinguish Morillion by summarily concluding that “Rutti’s use of Lojack’s automobile to commute to and from his job sites is more analogous to the ‘home to departure points’ transportation in Morillion than to the employees’ transportation on the employer’s buses.” Aside from the lack of factual analysis to support this ipse dixit, the majority also utterly ignores the relevant question under California law, which is whether Rutti was “subject to the control of an employer” during his mandatory travel time. A straightforward application of Morillion easily answers that question in the affirmative. Rutti was required not only to drive the Lojack vehicle to the job site, but was forbidden
from attending to any personal business along the way. Because he was obviously under the employer’s control in these circumstances he was, under California law, entitled to be paid.

Slip op., at 11483.

As an aside, I've noticed that when Ninth Circuit Judges dissent, they really dissent.  No punches pulled.  It just confirms that the Ninth Circuit is far from the monolith it supposedly presents.

New study concludes that low-income workers are routinely the victims of unlawful employment practices

Anecdotally, it seems that wage & hour class actions are a subject of incresingly polarized views, both in and out of court.  Proponents of wage & hour class actions champion the need for private enforcement of wage & hour laws to protect workers.  Opponents decry the burdens they impose on businesses, describing wage & hour class actions as an "epidemic."  (I'm working on a detailed analysis of the "epidemic" charge and will have more to say on that subject at a later date.)  But a newly released study of wage-law violations in major U.S. cities provides fresh ammunition to the advocates of employee rights.

Broken Laws, Unprotected Workers, a report by the UCLA Institute for Research on Labor and Employment, the National Employment Law Project and the Center for Urban Economic Development, summarizes findings of a 2008 study in which 4,387 workers in low-wage industries in the three largest U.S. cities — Chicago, Los Angeles, and New York City — were surveyed to identify wage & hour violations.  The survey found that:

Finding 1: Workplace Violations Are Severe and Widespread in Low-Wage Labor Markets

We found that many employment and labor laws are regularly and systematically violated, impacting a significant part of the low-wage labor force in the nation’s largest cities. The framework of worker protections that was established over the last 75 years is not working.

Finding 2: Job and Employer Characteristics Are Key to Understanding Workplace Violations

Workplace violations are ultimately the result of decisions made by employers—whether to pay the minimum wage or overtime, whether to give workers meal breaks, and how to respond to complaints about working conditions. We found that workplace violations are profoundly shaped by job and employer characteristics.

Finding 3: All Workers Are at Risk of Workplace Violations

Workplace violations are not limited to immigrant workers or other vulnerable groups in the labor force — everyone is at risk, although to different degrees.

Report (excerpts from Executive Overview), at 2-5.  The New York Times ran one of the earliest articles about this Study, but since they couldn't be bothered to give me timely permission to quote any portion of their article, I can't be bothered to link to it.  The study's authors discovered what has been known by plaintiffs' attorneys in the wage & hour field for years - violations of wage & hour laws are at pandemic levels:

We found that there are significant, pervasive violations of core workplace laws in many low-wage industries. Workers are being paid less than the minimum wage and not receiving overtime pay. They are working off the clock without pay, and not getting meal breaks. When injured, they are not receiving workers’ compensation. And they are retaliated against when they try to assert their rights or attempt to organize.

Report (Introduction), at 9.

California Supreme Court activity for the week of August 17, 2009

The California Supreme Court held its (usually) weekly conference today. Notable results include:

• A transfer Order issued in Pfizer, Inc. v. Superior Court (Galfano) following the decision in the lead case, In re Tobacco II Cases, 46 Cal. 4th 298 (2009).  See also, additional comments in this post at The UCL Practitioner.
• A transfer Order issued in McAdams v. Monier following the decision in the lead case, In re Tobacco II Cases, 46 Cal. 4th 298 (2009).
• A Petition for Review was denied in Olvera v. El Pollo Loco (arbitration agreement found unconscionable; no lucky for clucky).

Brinker news, and other California Supreme Court activity

This blog's last post on Brinker Restaurant v. Superior Court (Hohnbaum) indicated that the Reply Brief would be filed on July 6, 2009.  After a few unexpected bumps, the Reply Brief was filed on July 20, 2009.  The case is fully briefed.  Now the amicus bloodbath may commence.

In other Supreme Court news, today the Supreme Court denied review in Gomez v. Lincare (April 28, 2009).  See this prior post for information about Gomez.

And in Miller v. Bank of America, 46 Cal. 4th 630 (2009), the Supreme Court denied a Petition for Modification of the opinion.

Borello employment test influences areas outside workers' compensation law in Messenger Courier Association of the Americas, et al. v. California Unemployment Insurance Appeals Board

The Court of Appeal (Fourth Appellate District, Division One) issued an interesting opinion today that may have some employment class action implications. In Messenger Courier Association of the Americas, et al. v. California Unemployment Insurance Appeals Board (July 15, 2009), the Court considered the validity of NCM Direct Delivery v. Employment Development Department, Precedent Tax Decision No. P-T-495 (2007). The Court of Appeal affirmed the Trial Court's Order that upheld the validity of the Precedent Tax Decision. The interesting twist is that the Precedent Tax Decision applied the employment test of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 to an unemployment insurance assessment matter. The class action angle comes into play if developments in the definition of employment conclusively govern actions alleging misclassification of independent contractors. Specifically, Messenger noted that the right to control is the first test for employment, but if that test of control is not dispositive, the "secondary" factors may be applied to determine the correct nature of a service relationship. Slip op., at 6.

In Amalgamated, the companion opinion to Arias, the Supreme Court analyzes whether PAGA and UCL claims can be assigned by individuals to their labor union

June 29, 2009 was a busy day for California Supreme Court news.  In Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.) (June 29, 2009), the California Supreme Court issued the second of companion opinions addressing aspects of California’s unfair competition law (“UCL”) and the Labor Code Private Attorneys General Act of 2004 (“PAGA”) (Cal. Lab. Code § 2698, et seq.). See previous post on Arias.  Because the decisional authority analyzing the recently-passed PAGA is sparse, Amalgamated is important to understanding the reach of PAGA and its role in securing civil penalties for California employees.

Amalgamated addressed two issues. First, the Supreme Court rhetorically asked whether “a plaintiff labor union that has not suffered actual injury under the unfair competition law, and that is not an ‘aggrieved employee’ under the Labor Code Private Attorney General Act of 2004, nevertheless bring a representative action under those laws (1) as the assignee of employees who have suffered an actual injury and who are aggrieved employees, or (2) as an association whose members have suffered actual injury and are aggrieved employees.” Slip op., at 2. Second, the Supreme Court asked whether “a representative action under the unfair competition law be brought as a class action.” Slip op., at 2.

As to the second issue, the Supreme Court noted that Arias sufficiently addressed that issue, holding that an action under the unfair competition law must be brought as a class action.

Before turning to the first issue, the procedural background of Amalgamated touches on a procedural practice recently the subject of appellate consideration.  If you have practiced in the Civil Central West courthouse in Los Angeles, you may be familiar with that Court’s former practice of allowing parties to obtain early determinations of “threshold” issues. See post on Magana Cathcart McCarthy v. CB Richard Ellis, Inc. (May 21, 2009) (holding that early determination of "threshold issues" is not a substitute for the summary adjudication procedural requirements). As in Magana, the parties in Amalgamated briefed threshold issues. The trial court found that plaintiff unions lacked standing under the unfair competition law because the union had not suffered any injury themselves. The trial court further found that the unions lacked standing under PAGA because they were not “aggrieved employees.” The unions appealed and a divided Court of Appeal denied the petition.

The Supreme Court, however, granted the Petition and affirmed the trial court’s ruling. The unions could not be assigned the right to sue under the unfair competition law as a result of amendments passed as part of Proposition 64. The Supreme Court reasoned that the new requirement of “injury in fact” would be undermined by allowing non-injured assignees to stand in the shoes of the injured parties.

With direct standing through assignment precluded, associational standing was next considered.  The Supreme Court found that the post-Proposition 64 UCL was at odds with the doctrine of associational standing: In proposing the amendment to the unfair competition law, section 1 of Proposition 64 sets forth its findings and declarations of purpose. Subdivision (e) of section 1 states: “It is the intent of California voters in enacting this act to prohibit private attorneys from filing lawsuits for unfair competition where they have no client who has been injured in fact under the standing requirements of the United States Constitution.” (Voter Information Guide, Gen. Elec. (Nov. 2, 2004) text of proposed law, p. 109, italics added.) That intent is reflected in the amended statutory language stating that an unfair competition law action can be brought only by a person who has suffered “injury in fact.” (Bus. & Prof. Code, § 17204, italics added.) This standing requirement is inconsistent with the federal doctrine of associational standing. That doctrine applies only when the plaintiff association has not itself suffered actual injury but is seeking to act on behalf of its members who have sustained such injury.

Slip op. at p. 10.  Hence, the unions could neither be assigned the right to sue or bring suit as an association whose members had suffered actual injury.

Regarding PAGA, the Supreme Court repeated comments from Arias, observing:

In bringing such an action, the aggrieved employee acts as the proxy or agent of state labor law enforcement agencies, representing the same legal right and interest as those agencies, in a proceeding that is designed to protect the public, not to benefit private parties. (Arias v. Superior Court, supra, ___ Cal.4th ___, ___ [pp. 16-17]; see People v. Pacific Land Research Co. (1977) 20 Cal.3d 10, 17.)

Slip op. at p. 8.  Keeping with the theme from Arias, it is interesting that the Supreme Court has again pointed out that, under PAGA, an aggrieved employee acts like a “proxy or agent” of the state labor law enforcement agencies.

Because PAGA created neither a property right nor any other substantive right, and because it did not create any legal obligations, PAGA claims cannot be assigned. That prohibition on assignment is not new; rather, it is consistent with previous Supreme Court holdings that preclude the assignment of a right to collect statutory penalties.  Further, because PAGA allows only an aggrieved employee to bring an action to recover civil penalties, unions are foreclosed from asserting PAGA claims on behalf of their members. In effect, there is no associational standing available for a claim uniquely assigned to the employee by the State.

[Editor’s Note: A Contributing Author byline has been added for Shawn Westrick, given that he did not flake after one post.]

Ninth Circuit makes overtime misclassification cases a little bit tougher with opinions in Vinole v. Countrywide Home Loans, Inc. and In re: Wells Fargo Home Mortgage

Overtime misclassification cases were first out of the blocks when wage & hour employment class actions surged in the last decade or so.  Misclassification cases, when successful, usually generate larger per-class member recoveries than other wage & hour class actions.  But their early success was eventually met with more sophisticated defense tactics in the perpetual chess match of move and counter-move.  For those misclassification cases unfortunate enough to end up in federal court, the Ninth Circuit has just made them a bit harder than they were a few days ago.

The first of this duo, In re: Wells Fargo Home Mortgage (July 7, 2009), considered whether the trial " court abused its discretion in finding that the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) was satisfied, based — in large part — on an employer’s internal policy of treating its employees as exempt from overtime laws."  Slip op., at 8328.  The Trial Court though that Wells Fargo was unfairly trying to have its cake and eat it too:

Wells Fargo’s uniform policies regarding HMCs weigh heavily in favor of class certification. As numerous courts have recognized, it is manifestly disingenuous for a company to treat a class of employees as a homogenous group for the purposes of internal policies and compensation, and then assert that the same group is too diverse for class treatment in overtime litigation.

Slip op., at 8330.  The Ninth Circuit focused its review on whether the Trial Court's treatment of that classification policy was correct:

District courts within this circuit have split on the relevance of exemption policies. The district court relied primarily on Wang v. Chinese Daily News, Inc., 231 F.R.D. 602, 612-13 (C.D. Cal. 2005), which found predominance of common issues based on an employer’s policy of treating all employees in a certain position as uniformly exempt from overtime compensation requirements. In contrast, another district court has expressed doubt about Wang, and found that uniform exemption policies are merely a minor factor in the predominance analysis. See Campbell v. PricewaterhouseCoopers,, 253 F.R.D. 586, 603-04 (E.D. Cal. LLP 2008) (rejecting “estoppel” position of Wang).

Slip op., at 8333.  The Ninth Circuit concluded that the approach in Wang went too far, but then emphasized that employer policies remain very important in the majority of certification analyses in this area of law:

Of course, uniform corporate policies will often bear heavily on questions of predominance and superiority. Indeed, courts have long found that comprehensive uniform policies detailing the job duties and responsibilities of employees carry great weight for certification purposes. Damassia v. Duane Reade, Inc., 250 F.R.D. 152, 160 (S.D.N.Y. 2008) (“Where . . . there is evidence that the duties of the job are largely defined by comprehensive corporate procedures and policies, district courts have routinely certified classes of employees challenging their classification as exempt, despite arguments about ‘individualized’ differences in job responsibilities.”).  Such centralized rules, to the extent they reflect the realities of the workplace, suggest a uniformity among employees that is susceptible to common proof.

Slip op., at 8334-35.  So too much Wang is no good, but some Wang is okay.  Got it.  The Ninth Circuit concluded that exemption policies, in particular, are less likely to have a "transformative" power that turns an otherwise individual issue into a common one.

In Vinole v. Countrywide Home Loans, Inc. (July 7, 2009), the Ninth Circuit considered two primary issues, one of which matters.  Countrywide filed a motion to deny class certification before the plaintiffs could file their motion for class certification.  The defendant's motion was granted.  As an issue of first impression, the Ninth Circuit was asked to determine whether it was per se improper for the trial court to hear defendant's motion.  The Ninth Circuit concluded that it was not per se improper:

Rule 23(c)(1)(A) addresses the timing of a district court’s class certification determination, and states: “Time to Issue: At an early practicable time after a person sues or is sued as a class representative, the court must determine by order whether to certify the action as a class action.” Fed. R. Civ. P. 23(c)(1)(A). Nothing in the plain language of Rule 23(c)(1)(A) either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question. The only requirement is that the certification question be resolved “[a]t an early practicable time.”  The plain language of Rule 23(c)(1)(A) alone defeats Plaintiffs’ argument that there is some sort of “per se rule” that precludes defense motions to deny certification, and Plaintiffs have produced no authority to the contrary.

Slip op., at 8307-8.  That seems simple enough.  But these things rarely are.  The Ninth Circuit was particularly interested in the fact that the plaintiffs had (1) failed to bring their motion in almost a year, (2) admitted during a hearing that they didn't need additional discovery to file their motion, and (3) didn't request any sort of continuance of the hearing of defendant's motion:

First, at the time of the hearing Plaintiffs had conducted significant discovery and did not intend to propound any additional discovery seeking information from Countrywide regarding the propriety of class certification. Second, it is evident that Plaintiffs had made a strategic choice to limit the amount of evidence it presented to the district court in opposition to Countrywide’s motion; they proffered their class certification arguments through their “preview” declarations. Third, Plaintiffs’ real complaint is not that they were deprived of adequate time in which to complete discovery, but that they “didn’t want to be on defendants’ schedule.” But, again, this is just a variation on Plaintiffs argument in favor of a per se rule.

Slip op., at 8314.  I can only assume that Defendants will now race to be the first to file a motion related to certification.  Plaintiffs will need to be diligent in their litigation and discovery efforts to fend off this counter-assault.  One thing is certain - different trial courts will deal with this complication in a wide variety of ways.

The standards for adequate class settlement review received a confirmatory boost in Clark v. American Residential Services LLC, et al.

Last year, in Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008), the Court of Appeal held that a trial court reviewing a class action settlement must receive and independently consider information sufficient to assess the reasonableness of the terms of the settlement.  Id. at 130, 133.  In Kullar, the Court of Appeal vacated a trial court's approval of a class action settlement because the court was not "provided with basic information about the nature and magnitude of the claims in question and the basis for concluding that the consideration being paid for the release of those claims represents a reasonable compromise."  Id. at 133.  In Clark v. American Residential Services LLC, et al. (July 6, 2009), the Court of Appeal (Second Appellate District, Division Eight) articulated the same standard, to the same result.

Adopting the Kullar analysis, the Court said:

In Kullar, the court pointed out that "neither Dunk . . . nor any other case suggests that the court may determine the adequacy of a class action settlement without independently satisfying itself that the consideration being received for the release of the class members' claims is reasonable in light of the strengths and weaknesses of the claims and the risks of the particular litigation."

Slip op., at 14.  Elaborating on what the trial court must do to assess the validity of a class action settlement, the Court continued:

Kullar further explains that, while there is usually an initial presumption of fairness when a proposed class action settlement was negotiated at arm's length by counsel for the class, "'to protect the interests of absent class members, the court must independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished.'"  (Kullar, supra, 168 Cal.App.4th at p. 130.) To make that determination, "'the factual record before the . . . court must be sufficiently developed,'" and the initial presumption to which Dunk refers "'must then withstand the test of the plaintiffs' likelihood of success.'" (Ibid.) Again, "'"The most important factor is the strength of the case for plaintiffs on the merits, balanced against the amount offered in settlement."'"  (Ibid.)  In Kullar, because the trial court was not presented with data permitting it to review class counsel's evaluation of the sufficiency of the settlement, the order approving the settlement was vacated.  (Kullar, supra, 168 Cal.App.4th at p. 131.)  As we shall see, the same result is required here.

Slip op., at 15.  The Court of Appeal was particularly concerned about the absence of information in the record that would permit the trial court to independently assess whether an overtime claim in the case was essentially valueless:

When the objectors protested, at the fairness hearing, that overtime is to be calculated on the technician's actual commission wages, not on the minimum wage, and contended that class counsel's evaluation was thus based on a "staggering mistake of law," the trial court made no comment, and proceeded to approve the settlement. This, it seems to us, demonstrates the court made no independent assessment of the strength of the plaintiffs' case, simply accepting class counsel's assessment of value, including his assertion that the overtime claim – which "is what this [case] was about" – had "absolutely no" value. But if in fact there is a legitimate dispute on the appropriate way to calculate overtime, then the class's overtime claim obviously has some value, and if the objectors were correct on the law, the claim may have had considerable value. None of these possibilities was considered or evaluated when the trial court approved the settlement; instead, the trial court simply accepted class counsel's assessment. Without some kind of evaluation of this legal point – and in light of declarations from objectors stating they worked at least 10 hours of overtime every week without compensation – we cannot see how the trial court could "satisfy itself that the class settlement is within the 'ballpark' of reasonableness." (Kullar, supra, 168 Cal.App.4th at p.133.)

Slip op., at 17-18.  On a second issue in the appeal, the Court reversed class representative enhancement awards of $25,000, noting that they were approximately 44 times more than what the average class member received in the proposed settlement.

The consequences of this standard are likely to be seen first in the realm of mediation.  Parties interested in settling a class action are going to need to be a bit more forthcoming with concrete data that can then be provided, at least in summary form, to the trial court asked to give its blessing to a proposed class action settlement.

Arias v. Superior Court (June 29, 2009) analyzes certification obligations under two of California's representative action statutes

[Editor’s Note: This post was prepared by new Contributing Author, Shawn Westrick. Mr. Westrick is an attorney at Initiative Legal Group, LLP, and it is the Editor’s hope that this column is the first of many such posts. Mr. Westrick has spent considerable time in his career litigating PAGA issues, and the Arias decision was of particular interest as source material for a first blog post submission.]

By Shawn Westrick:

In Arias v. Superior Court (Angelo Dairy) (June 29, 2009), the California Supreme Court issued its long-anticipated opinion addressing when conventional class action procedural requirements must be met in representative actions filed against employers.

Plaintiff Jose Arias sued his employer Angelo Dairy, alleging, among other things, violations of the unfair competition law and under the Labor Code Private Attorneys General Act of 2004 (“PAGA”) (Cal. Lab. Code § 2698, et seq.). The trial court granted defendant’s motion to strike the causes of action based on the unfair competition law. The trial court’s reasoning was that claims brought under the unfair competition law and PAGA had to plead class action requirements.

In essence, the appellate court affirmed a portion of the trial court’s Order, directing the trial court to “issue a new order striking the representative claims alleged in the seventh through tenth causes of action, but not the eleventh cause of action” (slip op., at 3), the eleventh cause of action being the claim arising under PAGA.

The Supreme Court began its analysis with a thorough discussion of Proposition 64. Proposition 64 amended the unfair competition law to ensure that a plaintiff suffering injury in fact must comply with Code of Civil Procedure § 382. However, Proposition 64 did not specifically use the phrase “class action” in any of its statutory language. Nevertheless, the Supreme Court ruled that a literal construction would frustrate the purpose of Proposition 64. A review of the Voter Information Guide, the official summary of Proposition 64, and the ballot measure summary suggested that the purpose of Proposition 64 was to require plaintiffs to meet the requirements for a class action.

Turning to PAGA, the Supreme Court then analyzed the question of whether PAGA claims must be certified as class actions to proceed on a representative basis. As an important distinction to be aware of, it has already been determined that actions under the Labor Code Private Attorneys General Act of 2004 may be brought as class actions. (Amaral v. Cintas Corp. No. 2 (2008) 163 Cal.App.4th 1157, 1173.) At issue in Arias was whether such actions must be brought as a class action. Beginning its discussion, the Supreme Court noted that the statute was passed because of the lack of adequate financing for labor law enforcement. Employees would act as private attorneys general to collect civil penalties for violations of the Labor Code:

Before bringing a civil action for statutory penalties, an employee must comply with Labor Code section 2699.3. (Lab. Code, § 2699, subd. (a).) That statute requires the employee to give written notice of the alleged Labor Code violation to both the employer and the Labor and Workforce Development Agency, and the notice must describe facts and theories supporting the violation. (Id., § 2699.3, subd. (a).) If the agency notifies the employee and the employer that it does not intend to investigate (as occurred here), or if the agency fails to respond within 33 days, the employee may then bring a civil action against the employer. (Id., § 2699.3, subd. (a)(2)(A).) If the agency decides to investigate, it then has 120 days to do so. If the agency decides not to issue a citation, or does not issue a citation within 158 days after the postmark date of the employee‘s notice, the employee may commence a civil action. (Id., § 2699.3, subd. (a)(2)(B).)

Slip op., at 9.

The Supreme Court rejected the employer’s convoluted argument that permitting employees to proceed with representative actions that did not satisfy class action requirements would cause absurd results. Explaining the strange reasoning of the employer, the Supreme Court said:

Defendants read the Court of Appeal‘s decision as holding that class action requirements do not apply to actions under Labor Code section 2699, subdivision (a) only because class action requirements are "provisions of law" and subdivision (a) says that it applies regardless of, or notwithstanding, "any other provision of law." Defendants then argue that because Labor Code section 2699, subdivision (g) does not contain subdivision (a)'s "[n]otwithstanding any other provision of law" language, it follows that actions under that subdivision must comply with class action requirements. According to defendants, to conclude that subdivision (g) actions must satisfy class action requirements but subdivision (a) actions need not is "absurd" and therefore the Court of Appeal's statutory construction must be wrong. We disagree.

Slip op., at 11. According to the Supreme Court, Defendants' argument presupposed that class action requirements apply to all representative actions unless the Legislature affirmatively precludes their application by inserting the phrase "notwithstanding any other provision of law," or similar words, in the statute authorizing the representative action. The Court rejected that assumption.

The Supreme Court then turned to the employer’s argument that the legislative history required PAGA actions be brought as class actions. The Supreme Court noted that some committee reports expressed concerns that PAGA would allow employees to sue as a class action and some commentators were concerned that without a class action there could be no preclusive effects. The Supreme Court rejected committee report comments as insufficient to demonstrate any particular legislative intent regarding certification of PAGA claims.

The Court then turned to the due process issue of collateral estoppel. The employer argued that in the absence of class action requirements, employers would be subject to constant one-way intervention, violating their rights to due process. However an action under PAGA is binding not only on the named employee but also on the government agencies and any aggrieved employee not a party to the proceeding. An employee suing under PAGA does so as a “proxy or agent of the state’s labor law enforcement agencies.” Slip op., at p. 16. The employee can only bring a PAGA action after giving written notice pursuant to Section 2699.3. Id. An employee acts as a substitute for “the government itself” and a “judgment in an action binds all those ... who would be bound by a judgment in an action brought by the government.” Slip op., at p. 17.

Overall, the Court’s decision on the unfair competition law is straightforward. The long term effect of the Court’s foray into res judicata could have far reaching consequences for class actions in California. Taken as a whole, Arias should be a lesson to lawyers representing employers during settlements. Arias is clear that a PAGA action can only be commenced by adhering to the requirements under Section 2699.3. Slip op., at p. 16. In conjunction with the Supreme Court’s suggestion that the State of California has a vested interest in the civil penalties in PAGA, employers who settle class actions but do not settle PAGA actions with an employee who is authorized to file a PAGA action may find themselves liable for civil penalties owed to California (and, if authorized, other employees) for the same time period and the same class members who participated in a previous class action.

[Full Disclosure: Mr. Westrick is counsel in the matter of Deleon v. Verizon Wireless, in which the Supreme Court issued a “grant and hold” Order pending disposition of Arias. The Deleon matter directly raises the issue of whether settlement of wage & hour claims implicitly settles PAGA claims based upon the same underlying violations.]