Demarinis v. Heritage Bank of Com.

317 Cal.Rptr.3d 1

Nicole DEMARINIS et al., Plaintiffs and Respondents,

v.HERITAGE BANK OF COMMERCE, Defendant and Appellant.

A167091

Court of Appeal, First District, Division 3.

Filed December 11, 2023

Trial Court: Alameda County Superior Court, Trial Judge: Hon. Evelio Grillo (Alameda County Super. Ct. No. RG20080970)

Womble Bond Dickinson (US) LLP, Christopher J. Mead, Edward L. Seidel and Scott M. Mcleod, San Francisco, for Defendant and Appellant.

Torres & Tolman, Benjamin J. Tolman and James J. Torres for Plaintiffs and Respondents.

Fujisaki, J.

This is a putative class action and representative action brought by plaintiffs Nicole DeMarinis and Kelly Patire under the California Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.) (PAGA) against defendant Heritage Bank of Commerce (Heritage Bank) for wage and hour and other Labor Code violations. Heritage Bank unsuccessfully moved to compel arbitration of plaintiffs’ individual PAGA claims pursuant to a "representative" action waiver in the parties’ arbitration agreement. Relying principally on Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. 639, 142 S. Ct. 1906, 213 L.Ed.2d 179 (Viking River), Heritage Bank contends the denial of arbitration was erroneous because the waiver provision is not, as the trial court ruled, an unenforceable "wholesale" waiver of plaintiffs’ PAGA claims, but instead is an enforceable waiver pertaining only to plaintiffs’ "nonindividual" PAGA claims. We reject Heritage Bank’s contentions and affirm.

Factual and Procedural Background

Plaintiffs are current and former employees of Heritage Bank. Upon their hiring, plaintiffs purportedly executed a "MUTUAL AGREEMENT TO ARBITRATE CLAIMS" (arbitration agreement) reflecting the parties’ "mutual[] consent to the resolution by arbitration of all claims, arising out of my employment (or its termination) that the Company may have against me, or that I may have against the Company." The arbitration agreement covers claims for wages and other compensation, and for violations of any federal, state, or other law, statute, regulation, or ordinance.

A section of the arbitration agreement entitled "Waiver of Right to File Class, Collective, or Representative Actions" (waiver provision) contains two paragraphs. The first paragraph states, in relevant part: "The Company and I may bring claims against the other only in its or my individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding. There shall be no right or authority for any dispute to be brought, heard, or arbitrated on a class, collective, or representative basis and the Arbitrator may not consolidate or join the claims of other persons or Parties who may be similarly situated."

The second paragraph of the waiver provision includes a nonseverability clause stating: "The Company and I acknowledge and agree that the conditions set forth in [the waiver] provision are material terms of this Agreement and may not be modified or severed, in whole or in part. If this specific provision is found to be unenforceable, then the entirety of this Agreement shall be null and void." Plaintiffs refer to this last sentence as a "poison pill," and we do likewise. (See, e.g., Westmoreland v. Kindercare Education LLC (2023) 90 Cal. App.5th 967, 972, 307 Cal.Rptr.3d 554 (Westmoreland) [referring to clause invalidating agreement upon unenforceability of waiver as "poison pill"].)

In 2020, plaintiffs filed the instant action against Heritage Bank, asserting nine causes of action for (1) failure to reimburse business-related expenses; (2) failure to provide meal periods; (3) failure to provide rest periods; (4) failure to pay minimum wages; (5) failure to pay overtime compensation; (6) failure to provide accurate itemized wage statements; (7) failure to pay all wages due at separation of employment; (8) violation of the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200); and (9) violation of PAGA. In the PAGA cause of action, plaintiffs allege they are "aggrieved employees" as defined in Labor Code section 2699, subdivision (a), and bring the PAGA action on behalf of the State of California with respect to themselves and all persons employed by Heritage Bank in California during the relevant time period.

In 2022, the United States Supreme Court issued its much-anticipated decision in Viking River, which held the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts the ruling of Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 173 Cal.Rptr.3d 289, 327 P.3d 129 (Iskanian) "insofar as [Iskanian] precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate." (Viking River, supra, 569 U.S. at p. 662, 142 S. Ct. at p. 1924.)

Relying on Viking River, Heritage Bank moved to compel arbitration of plaintiffs’ "individual claims (including individual PAGA claims)" and to dismiss "any class or non-individual PAGA claims." The trial court denied the motion. Observing that the waiver provision includes an improper waiver of the right of employees to bring "an action in court as proxy or agent of the LWDA und[er] the PAGA," and that the nonseverability clause and poison pill preclude severance of that unenforceable waiver, the court determined the entire agreement to arbitrate is null and void and provides no basis for compelling arbitration of plaintiffs’ individual PAGA claims. This timely appeal followed.

Discussion

I. Governing Law

A. Standard of Review

This case requires that we focus on the language of the parties’ arbitration agreement as it relates to plaintiffs’ PAGA claims, not their individual causes of action directly under the Labor Code and the UCL.

[1] "In evaluating an order denying a motion to compel arbitration, ‘"‘we review the arbitration agreement de novo to determine whether it is legally enforceable, applying general principles of California contract law.’"’" (Nielsen Contracting, Inc. v. Applied Underwriters, Inc. (2018) 22 Cal.App.5th 1096, 1106, 232 Cal.Rptr.3d 282.)

B. FAA Preemption

[2, 3] Under the FAA and California law, an arbitration agreement is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2; OTO, LLC v. Kho (2019) 8 Cal.5th 111, 125, 251 Cal.Rptr.3d 714, 447 P.3d 680.) Section 2 of the FAA reflects "both a ‘liberal federal policy favoring arbitration,’ and the ‘fundamental principle that arbitration is a matter of contract.’" (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339, 131 S.Ct. 1740, 179 L.Ed.2d 742 (Concepcion), internal citations omitted.)

[4] Although the FAA "preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives." (Concepcion, supra, 563 U.S. at p. 343, 131 S.Ct. 1740.) In Concepcion, the United States Supreme Court held the FAA preempts California’s Discover Bank rule that class action waivers in adhesive consumer arbitration agreements are unconscionable under California law. As Concepcion explained, to the extent class arbitration is compelled through the Discover Bank rule rather than the consent of the contracting parties, the rule interferes with fundamental attributes of arbitration. Specifically, class arbitration sacrifices the informality and efficiency of arbitration; increases risks to defendants; and is poorly suited to the higher stakes of class litigation due to the lack of multilayered review. (Concepcion, at pp. 348–352, 131 S.Ct. 1740.)

C. PAGA and Iskanian

[5–7] PAGA was enacted "to augment the limited enforcement capability of the [Labor and Workforce Development Agency (LWDA)] by empowering employees to enforce the Labor Code as representatives of the [LWDA]." (Iskanian, supra, 59 Cal.4th at p. 383, 173 Cal.Rptr.3d 289, 327 P.3d 129.) The statute "deputizes an ‘aggrieved’ employee to bring a lawsuit ‘on behalf of himself or herself and other current or former employees’ to recover civil penalties for Labor Code violations that would otherwise be assessed and collected by the state…. Although an aggrieved employee is the named plaintiff in a PAGA action, an employee suing under PAGA ‘"does so as the proxy or agent of the state’s labor law enforcement agencies."’ [Citations.] Thus, ‘[e]very PAGA claim is "a dispute between an employer and the state."’" (Seifu v. Lyft, Inc. (2023) 89 Cal.App.5th 1129, 1137, 306 Cal.Rptr.3d 641 (Seifu).)

In Iskanian, the California Supreme Court held that an "arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy" because such an agreement seeks to exempt employers from responsibility for their legal violations and violates the statutory rule that "‘a law established for a public reason cannot be contravened by a private agreement.’" (Iskanian, supra, 59 Cal.4th at pp. 360, 383, 173 Cal.Rptr.3d 289, 327 P.3d 129, italics added.) The court emphasized that public policy prohibits such agreements "whether or not an individual claim is permissible under the PAGA" because "‘a single-claimant arbitration under the PAGA for individual penalties will not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the Labor Code.’" (Iskanian, at p. 384, 173 Cal.Rptr.3d 289, 327 P.3d 129.)

Iskanian further held its rule was not preempted by the FAA because a PAGA action is not a private dispute, but "a dispute between an employer and the state [LWDA]." (Iskanian, supra, 59 Cal.4th at p. 384, 173 Cal.Rptr.3d 289, 327 P.3d 129.) As such, a prohibition against PAGA waivers "does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution." (Iskanian, at pp. 388–389, 173...