California Court of Appeal Deals One-Two Punch to Employers Seeking to Compel Arbitration
Orange County, Calif. (June 19, 2020) - In Jarboe v. Hanlees Auto Group, et al, California’s First District Court of Appeal recently handed employees two lifelines in their battle against being compelled to arbitrate employment disputes. The appellate court found that the trial court did not abuse its discretion when it declined to stay a plaintiff’s representative claim for penalties under the Private Attorneys General Act of 2004 (PAGA), even though the trial court compelled the plaintiff’s individual wage and hour claims to arbitration. The court also prevented affiliated dealerships (who were non-signatories to the arbitration agreement) from relying on allegations in the operative complaint to compel the plaintiff’s claims to arbitration under the doctrine of equitable estoppel.
PAGA Claims and Contractual Arbitration: To Stay, or Not to Stay, That is the Question.
PAGA authorizes “aggrieved employees” to sue their employers to recover civil penalties on behalf of themselves, other “aggrieved employees,” and the State of California for Labor Code violations. To have standing under PAGA, an employer must have subjected the employee to at least one Labor Code violation. Otherwise, the employee is not an “aggrieved employee” within the meaning of PAGA. Because PAGA deputizes aggrieved employees to recover penalties on behalf of the State, it is not simply a dispute between employer and employee arising out of their employment relationship. As a result, claims for civil penalties under PAGA may not be compelled to contractual arbitration.
In Franco v. Arakelian Enterprises, Inc., the California Court of Appeal stayed a PAGA claim under Code of Civil Procedure section 1281.4 pending arbitration of the plaintiff’s individual Labor Code claims. In doing so, the court appeared to recognize that lawsuits involving individual claims for damages under the Labor Code coupled with claims for civil penalties under PAGA could have conflicting results if only the Labor Code claims were compelled to arbitration. To account for the possibility of conflicting results, the appellate court in Franco stayed the PAGA claim pending arbitration.
In Jarboe v. Hanlees Auto Group, et al., the plaintiff-employee brought a putative class action against his former employer, alleging numerous Labor Code violations, including a representative claim for civil penalties under PAGA. The employer moved to compel arbitration under an arbitration agreement the plaintiff signed during the hiring process, and the trial court found that the plaintiff’s Labor Code violations were properly subject to arbitration. However, rather than staying the PAGA claim pending arbitration, the trial court permitted the PAGA claim to proceed notwithstanding the arbitration.
On appeal, the employer cited Franco to argue that the trial court abused its discretion in denying a stay of the PAGA claim. In rejecting this argument, the Court of Appeal reasoned that “[w]hen there is a severance of arbitrable from inarbitrable claims, the trial court has the discretion to stay proceedings on the inarbitrable claims pending resolution of the arbitration.” The appellate court further stated that “ecause a PAGA claim is representative and does not belong to an employee individually, an employer should not be able to dictate how and where the representative action proceeds.” The Court of Appeal found that the trial court did not abuse its discretion by declining to stay the PAGA claim.
When determining whether to stay PAGA claims pending arbitration, trial courts will now have to decide whether to follow Franco or Jarboe. Plaintiffs will, of course, request the trial court follow Jarboe, and argue that the employer cannot dictate when and how the employee litigates claims brought on behalf of the State. On the other hand, employers will cite to Franco to argue there is a risk of inconsistent results if claims brought under PAGA are permitted to proceed while the underlying claims are arbitrated.
Equitable Estoppel: What is it Good For?
The plaintiff in Jarboe was originally hired by DKD of Davis, Inc., doing business as Hanlees Davis Toyota (Davis Toyota). When the plaintiff was hired, he entered into an arbitration agreement with Davis Toyota, which provided all employment-related disputes would be submitted to arbitration.
After a short period at Davis Toyota, the plaintiff was transferred to an affiliated dealership, Leehan of Davis, Inc., doing business as Hanlees Chrysler Dodge Jeep Ram Kia (Leehan Davis). After his termination, the plaintiff filed a lawsuit against the Hanlees Auto Group (Hanlees), its 12 affiliated dealerships, including Davis Toyota and Leehan Davis, and three individual defendants. Hanlees and the dealerships moved to compel arbitration under the agreement between the plaintiff and Davis Toyota. The trial court denied the motion to compel arbitration, except as to Davis Toyota, reasoning “the defendants failed to establish that the [arbitration agreement] applied to entities other than [Davis Toyota].”
On appeal, Hanlees and the affiliated dealerships raised the doctrine of equitable estoppel, which permits claims against non-signatories to be compelled to arbitration if they are "based on the same facts and are inherently inseparable from arbitrable claims against signatory defendants." The Court of Appeal agreed with the trial court and found Hanlees and its affiliated dealerships had not properly established the doctrine of equitable estoppel. In reaching this conclusion, the court noted that Hanlees and the non-signatory dealerships merely relied on the plaintiff’s “allegations in the operative complaint that the defendants were ‘joint employers,’” and clarified that “[t]hese boilerplate allegations are not sufficient to support defendants’ equitable estoppel claim.”
In light of this decision, employers seeking to compel arbitration of an employee’s claims against both signatories and non-signatories to the arbitration agreement should explain, with evidentiary support, the nature of any existing relationship among the defendants (i.e., parent/subsidiary). Employers may no longer merely rely on the plaintiff’s allegations that all defendants are “joint employers.”
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Drake A. Mirsch, Associate
Jade McKenzie, Associate