Esparza v. KS Indus., L.P.

Decision Date02 August 2017
Docket NumberF072597
Citation13 Cal.App.5th 1228,221 Cal.Rptr.3d 594
CourtCalifornia Court of Appeals Court of Appeals
Parties Richard ESPARZA, Plaintiff and Respondent, v. KS INDUSTRIES, L.P., Defendant and Appellant.

Call & Jensen, John T. Egley, Newport Beach, and Jamin S. Soderstrom for Defendant and Appellant.

Justice Law Corporation, Douglas Han, Los Angeles, Shunt Tatavos-Gharajeh and Daniel J. Park for Plaintiff and Respondent.

OPINION

FRANSON, J.

Defendant KS Industries, L.P. appeals from an order denying its motion to compel arbitration of a dispute with a former employee. The employee contends the lawsuit is a representative action under the Private Attorneys General Act of 2004 (PAGA). ( Lab. Code, § 2698 et seq. ) He argues the trial court properly applied the rule adopted in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 173 Cal.Rptr.3d 289, 327 P.3d 129 ( Iskanian ) and concluded the lawsuit was a PAGA representative action not subject to arbitration.

KS Industries contends the trial court's failure to order arbitration of some of the claims violated the Federal Arbitration Act ( 9 U.S.C. § 1 et seq. ) because those claims sought individualized (i.e., victim-specific) relief and were covered by the parties' arbitration agreement. KS Industries contends the rule adopted in Iskanian prevents the arbitration of claims only in representative actions that seek "civil penalties," a term of art that is limited to monetary relief allocated 75 percent to the Labor and Workforce Development Agency and 25 percent to the aggrieved employees. In KS Industries' view, "civil penalties" do not include unpaid wages payable solely to the aggrieved employee. We agree.

The Federal Arbitration Act plays a central role in this appeal. If the act requires a claim to be arbitrated, a contrary rule of state law must give way because of federal preemption. The Federal Arbitration Act requires the enforcement of arbitration agreements covering private disputes. Here, the arbitration agreement is worded to cover claims arising from the employment relationship, which includes the employee's claims for unpaid wages and other types of victim-specific relief. The State of California is not a party to the agreement and, thus, claims brought by it or on its behalf are not subject to arbitration. Therefore, under the Federal Arbitration Act, the claims that are private disputes between the employee and KS Industries must be arbitrated and the claims brought on behalf of the State of California need not be arbitrated. The rule adopted in Iskanian attempted to define the boundary between the two types of claims by stating that PAGA representative claims for civil penalties are not subject to arbitration.1 We conclude that, for purposes of the Iskanian rule, PAGA representative claims for civil penalties are limited to those where a portion of the recovery is allocated to the Labor and Workforce Development Agency. Claims for unpaid wages based on Labor Code section 558 are not allocated in this manner and, therefore, the Iskanian rule does not exempt such claims from arbitration.

Applying the foregoing interpretation of the Iskanian rule and its term of art, civil penalties , to this litigation, we conclude some of the claims the employee is pursuing are PAGA representative claims that seek civil penalties . Under the Iskanian rule, those claims are not subject to arbitration. Our analysis does not end with that conclusion because the employee intended to pursue private claims for victim-specific relief, such as claims to recover wages under Labor Code section 558. The Iskanian rule does not exempt such claims from arbitration. This intention was based on the employee's misinterpretation of the Federal Arbitration Act, the PAGA and Iskanian . Before this litigation proceeds, the employee shall be required to clearly state whether he will continue to pursue the claims to recover wages under Labor Code section 558 that are subject to arbitration. Accordingly, we remand for further proceedings to allow the employee to unambiguously state his intention. Once his intention is clear, the trial court shall enter an appropriate order.2

We therefore affirm the order insofar as it denies arbitration of the representative claims for civil penalties and remand for further proceedings.

FACTS AND PROCEEDINGS

In January 2012, plaintiff Richard Esparza (Employee) completed an application for employment with defendant KS Industries, L.P. The application included the following arbitration provision:

"I hereby agree to submit to binding arbitration all disputes and claims arising out of the submission of this application. I further agree, in the event that I am hired by the company, that all disputes that cannot be resolved by informal internal resolution which might arise out of my employment with the company, whether during or after that employment, will be submitted to binding arbitration. I agree that such arbitration shall be conducted under the rules of the American Arbitration Association. This application contains the entire agreement between the parties with regard to dispute resolution, and there are no other agreements as to dispute resolution, either oral or written."

In February 2015, Employee filed a complaint against KS Industries as an aggrieved employee on behalf of himself and other current and former aggrieved employees. The complaint stated the lawsuit was a representative action brought pursuant to the PAGA for violations of 16 sections of the Labor Code. The violations were based on allegations that KS Industries failed to (1) pay minimum and overtime wages, (2) provide meal periods and rest breaks, (3) pay wages in a timely manner, (4) provide complete and accurate wage statements, and (5) reimburse business expenses.

In March 2015, Employee filed a first amended complaint, which is the operative pleading in this lawsuit. The amended complaint continued to list the same 16 sections of the Labor Code, asserted essentially the same failures by KS Industries, and presented a single cause of action for violation of PAGA. The amended complaint also alleged written notice of KS Industries' alleged violations of the Labor Code had been provided to the Labor and Workforce Development Agency in February and the 33-day notice period had expired on March 24, 2015, without the Labor and Workforce Development Agency responding to the notice. Thus, Employee alleged he had exhausted the available administrative remedies and could pursue the claims in a lawsuit.

As to damages, the amended complaint alleged Employee, individually and on behalf of other aggrieved employees, was entitled to recover "unpaid wages, civil penalties, interest, attorneys' fees and costs" as well as statutory penalties for each aggrieved employee calculated on the number of pay periods in which a violation occurred. Employee also alleged the right to recover "[a]n amount sufficient to recover unpaid wages under Labor Code § 558 [and] under Labor Code § 1197.1." The prayer for relief sought costs, attorney fees and "civil penalties and wages" pursuant to the PAGA for the violations of the listed Labor Code sections.

In July 2015, KS Industries filed a motion to compel arbitration and stay the proceedings. The motion stated Employee was trying to circumvent his arbitration agreement by filing a single, nonarbitrable cause of action under PAGA and stylizing the relief sought as civil penalties under PAGA. KS Industries argued the label "civil penalties" could not disguise the true nature of the relief sought, which was individualized damages, wages, reimbursement and statutory penalties. In KS Industries' view, these victim-specific types of relief are not "civil penalties" that the PAGA and Iskanian rule precludes from being arbitrated.

Employee's opposition to the motion to compel arbitration argued that a claim for civil penalties under the PAGA is not subject to arbitration and, for purposes of this rule, the civil penalties recoverable under the PAGA include the recovery of wages. Employee argued the plain language of Labor Code sections 558 and 1197.1 identifies wages as part of the civil penalties that are recoverable under the PAGA. Employee also contended some of KS Industries' arguments were not appropriate for a motion to compel, but might be presented in a motion to strike.

KS Industries' reply argued that Employee's interpretation of the PAGA conflicted with the Federal Arbitration Act and its directive for the enforcement of an arbitration agreement covering claims for victim-specific relief. KS Industries argued that federal directive preempted any contrary rule of state law. KS Industries also argued that a motion to strike was not appropriate because when arbitrable claims are combined with inarbitrable claims, courts may sever them and send the arbitrable claims to arbitration and stay further judicial proceedings on the other claims until the arbitration is completed.

In August 2015, the trial court held a hearing on the motion to compel. In September 2015, the court issued a minute order and directed Employee's counsel to prepare a ruling. The October 1, 2015, written ruling denied the motion to compel, denied the request for a stay of proceedings, and struck the words "statutory penalties" from paragraph 30 of the amended complaint "based on [Employee's] contention that he only seeks PAGA civil penalties and no individual damages." KS Industries appealed.

DISCUSSION
I. THRESHOLD MATTERS
A. Standard of Review

KS Industries contends the trial court's order denying arbitration was based primarily on the court's resolution of questions of law and, consequently, the order is subject to de novo review on appeal. ( Performance Team Freight Systems, Inc. v. Aleman (2015) 241 Cal.App.4th 1233, 1239, 194 Cal.Rptr.3d 530.) KS Industries also contends, to the extent the trial court made findings to resolve conflicts in the evidence, the findings are reviewed under the...

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