No. D066682.

TABATHA O'KELLY, Plaintiff and Respondent, v. IN-N-OUT BURGERS, INC., Defendant and Appellant.

Court of Appeals of California, Fourth District, Division One.

Filed April 30, 2015.

Attorney(s) appearing for the Case

Littler Mendelson, Fermin H. Llaguno , James E. Hart and Muizz K. Rafique for Defendant and Appellant.

Gleason & Favarote, Torey J. Favarote and Brandyn E. Stedfield for Plaintiff and Respondent.


California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

Tabatha O'Kelly sought to bring a representative action under the Labor Code Private Attorney General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.) against her former employer, In-N-Out Burgers, Inc. (In-N-Out). In-N-Out moved to compel arbitration of O'Kelly's claims based on an arbitration agreement O'Kelly signed in conjunction with her employment. The trial court denied the motion.

In-N-Out appeals, arguing the Federal Arbitration Act (FAA) requires arbitration in this case and preempts any state laws barring arbitration of representative PAGA claims. In-N-Out also suggests we should reject our high court's recent decision in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 360, 383 (Iskanian), holding that an arbitration agreement requiring an employee to waive the right to bring a representative PAGA action before any dispute arises is contrary to public policy and the FAA does not preempt a state law that prohibits waiver of representative PAGA actions. We are bound to follow the principles set forth in Iskanian. Thus, we affirm the trial court's order.


The Arbitration Agreement

O'Kelly worked at In-N-Out's restaurant in Barstow, California. In connection with her employment, O'Kelly received and electronically acknowledged receipt of a Dispute Resolution Agreement (Agreement). Under the Agreement, In-N-Out and O'Kelly agreed to arbitrate disputes arising out of their employment relationship, including all state statutory and common law claims except worker's compensation, state disability insurance and unemployment insurance claims. The Agreement also provided that O'Kelly and In-N-Out "agree to bring any dispute in arbitration on an individual basis only, and not on a class, collective, or private attorney general basis. Accordingly, it is expressly understood that: [¶] . . . [¶] There will be no right or authority for any dispute to be brought, heard or arbitrated as a private attorney general action ("Private Attorney General Waiver"). The Private Attorney General Waiver shall be severable from this Agreement in any case in which (1) the dispute is filed as a private attorney general action and (2) a civil court of competent jurisdiction finds the Private Attorney General Waiver is unenforceable. In such instances, any private attorney general claim must be litigated in a civil court of competent jurisdiction."

Trial Court Proceedings

O'Kelly filed a representative action under the PAGA for unpaid changing time, unpaid overtime, failure to reimburse business expenses, failure to provide adequate seating, and other Labor Code violations. In-N-Out moved to compel arbitration based on the Agreement. It argued the FAA governed the arbitration agreement and preempted any state laws that exempted O'Kelly's PAGA claims from arbitration.

The trial court denied In-N-Out's motion, finding that although the parties had an arbitration agreement, PAGA claims were not waivable, as set forth in Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489 (Brown). The court noted that "[t]he law is in flux," but at the time of its decision, Brown supported O'Kelly's position that her claims were properly before the trial court.


In-N-Out argues O'Kelly's claims are subject to arbitration based on the Agreement, which is governed by the FAA. Specifically, it contends our high court's decision in Iskanian, supra, 59 Cal.4th 348, is not controlling in this case because the ruling is limited to mandatory PAGA representative action waivers and despite the holding in Iskanian, any rejection of PAGA representative action waivers is preempted by the FAA. As we shall explain, Iskanian guides our resolution of this case and compels us to affirm the trial court's order.

I. Guiding Legal Principles

A. FAA Preemption

Congress long ago enacted the FAA "in response to widespread judicial hostility to arbitration agreements" (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740] (Concepcion)) and to "ensure that private arbitration agreements are enforced according to their terms." (Id. at p. ___ [131 S.Ct. at p. 1750, fn. 6]; see CompuCredit Corp. v. Greenwood (2012) 565 U.S. ___, ___ [132 S.Ct. 665, 668-669] (CompuCredit).) The FAA "incorporates a strong federal policy of enforcing arbitration agreements, including agreements to arbitrate statutory rights." (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 96-97 (Armendariz).) California law similarly reflects a strong policy in favor of arbitration. (Id. at p. 97; Epitech, Inc. v. Kann (2012) 204 Cal.App.4th 1365, 1371.) The FAA provides that state laws inconsistent with the federal act's provisions and objectives are preempted. (Perry v. Thomas (1987) 482 U.S. 483, 489.)

In Concepcion, supra, 563 U.S. at p. ___ [131 S.Ct. at p. 1744], the United States Supreme Court invalidated the California Supreme Court's decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), which had restricted consumer class action waivers in arbitration agreements. The Concepcion court held that although the FAA's "saving clause 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, at p. ___ [131 S.Ct. at p. 1748].) The "overarching purpose of the FAA," the Concepcion court explained, "is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings." (Ibid.) Because "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration," a rule such as the one established in Discover Bank "creates a scheme inconsistent with the FAA." (Concepcion, at p. ___ [131 S.Ct. at p. 1748.) However, because Congress has not completely displaced state regulation in the area of arbitration, state laws regarding arbitration are enforceable to the extent they are not in conflict with the FAA.


In Iskanian, supra, 59 Cal.4th at pp. 378-389, the court examined whether waivers of representative actions under the PAGA are permissible under state law and if the FAA preempts a state law rule prohibiting such waivers. The plaintiff in Iskanian was a driver for a transportation company who signed an employment agreement containing an arbitration provision. (Id. at pp. 360-361.) The arbitration provision provided that plaintiff waived his right to bring a class or representative action in arbitration or otherwise. (Ibid.) Plaintiff asserted class action and PAGA representative claims against his employer for alleged Labor Code violations. (Iskanian, at p. 361.)

The California Supreme Court first found that the arbitration agreement was valid and enforceable, even though it waived the plaintiff's right to pursue class action claims for damages on his own behalf and for other similarly situated employees. (Iskanian, supra, 59 Cal.4th at pp. 362-378.) The court accepted the employer's argument that, in light of Concepcion, supra, 563 U.S. ___ [131 S.Ct. 1740], arbitration agreements could properly include class action waivers. (See Iskanian, at pp. 365-366.) However, relying on its earlier holding in Arias v. Superior Court (2009) 46 Cal.4th 969, 980-986, the court found that PAGA claims are fundamentally different from class actions brought as a means of recovering damages suffered by individuals. (Iskanian, at pp. 379-382.) The court noted the Legislature enacted the PAGA as a means of recovering penalties for the state for labor law violations and that it gave individual employees the right to act on behalf of the state because the state lacked the resources to do so itself. (Iskanian, at p. 379.) The court stated, "[a] PAGA representative action is therefore a type of qui tam action. `Traditionally, the requirements for enforcement by a citizen in a qui tam action have been (1) that the statute exacts a penalty; (2) that part of the penalty be paid to the informer; and (3) that, in some way, the informer be authorized to bring suit to recover the penalty.' [Citation.] The PAGA conforms to these traditional criteria, except that a portion of the penalty goes not only to the citizen bringing the suit but to all employees affected by the Labor Code violation. The government entity on whose behalf the plaintiff files suit is always the real party in interest in the suit. [Citation.]" (Id. at p. 382.)

In light of its purpose as a means of enforcing labor laws and collecting penalties on behalf of the state, the court found that the right of an employee to bring a representative PAGA claim was not subject to waiver. (Iskanian, supra, 59 Cal.4th at pp. 382-384.) The court found that a contractual waiver of the right to bring a representative PAGA action was void as against public policy. (Iskanian, at. p. 383; see Civ. Code, §§ 1668, 3513.) "The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state's interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations." (Iskanian, at p. 383.) In particular, the court found that an employee could not be compelled to waive his right to bring a representative action, as opposed to an individual one: "[W]hether or not an individual claim is permissible under the PAGA, a prohibition of representative claims frustrates the PAGA's objectives. As one Court of Appeal has observed: `[A]ssuming it is authorized, 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. That plaintiff and other employees might be able to bring individual claims for Labor Code violations in separate arbitrations does not serve the purpose of the PAGA, even if an individual claim has collateral estoppel effects. [Citation.] Other employees would still have to assert their claims in individual proceedings.' [Citation.] [¶] We conclude that where, as here, an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law." (Id. at p. 384.)

II. Analysis

A. Nonmandatory Arbitration Waivers

In-N-Out contends Iskanian, supra, 59 Cal.4th 348, is not controlling in this case because it was limited to arbitration agreements that are a mandatory condition of employment and, here, O'Kelly could have opted out of the Agreement. We reject In-N-Out's narrow reading of Iskanian.

In Iskanian, supra, 59 Cal.4th at p. 360, our high court concluded 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." (Italics added.) The court went on to explain, "Of course, employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. (See Armendariz, supra, 24 Cal.4th at p. 103, fn. 8 [waivers freely made after a dispute has arisen are not necessarily contrary to public policy].) But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises." (Id. at p. 383, italics added.)

Here, although O'Kelly had the ability to opt out of the Agreement within thirty days of receiving it, the dispute likely had not arisen at that time. It is not completely clear from the record, but it appears O'Kelly received the Agreement when she was hired and acknowledged its receipt shortly thereafter. Under the principles of Iskanian, supra, 59 Cal.4th at p. 383, it is contrary to public policy to require O'Kelly to waive her right to bring a representative PAGA action before she was aware of the alleged Labor Code violations. Accordingly, we reject In-N-Out's argument that Iskanian's holding is limited to mandatory PAGA waivers that are a condition of employment.

B. Alleged Conflict with United States Supreme Court Precedent

In-N-Out argues Iskanian, supra, 59 Cal.4th 348, was wrongly decided and conflicts with the United States Supreme Court's decisions holding the FAA preempts state law rules that are inconsistent with the FAA's objective to enforce arbitration agreements as written. Accordingly, In-N-Out urges us to reject Iskanian. We are bound to follow our high court's holding in Iskanian.

In Iskanian, supra, 59 Cal.4th at pp. 384-389, our high court specifically addressed the question of whether its rule prohibiting waiver of representative claims under the PAGA as contrary to public policy was preempted by the FAA. It "conclude[d] that the rule against PAGA waivers does not frustrate the FAA's objectives because . . . the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state [Labor and Workforce Development] Agency." (Iskanian, at p. 384.) Relying on the fact that PAGA is a mechanism by which the state seeks to enforce its labor laws and collect monetary penalties that largely go into its coffers, the court stated, "the FAA aims to promote arbitration of claims belonging to the private parties to an arbitration agreement. It does not aim to promote arbitration of claims belonging to a government agency, and that is no less true when such a claim is brought by a statutorily designated proxy for the agency as when the claim is brought by the agency itself. The fundamental character of the claim as a public enforcement action is the same in both instances. We conclude that California's public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the [Labor and Workforce Development] Agency's interest in enforcing the Labor Code, does not interfere with the FAA's goal of promoting arbitration as a forum for private dispute resolution." (Iskanian, at pp. 388-389.)

In-N-Out cites to several United States Supreme Court cases that it claims are contrary to Iskanian, supra, 59 Cal.4th 348. (See Concepcion, supra, 563 U.S. at p. ___ [131 S.Ct. at p. 1748]; CompuCredit, supra, 565 U.S. ___ [132 S.Ct. 665]; Marmet Health Care Center, Inc. v. Brown (2012) 565 U.S. ___ [132 S.Ct. 1201].) However, none of the cases In-N-Out cites pertain to PAGA or qui tam actions. Further, we note that in Iskanian, the United States Supreme Court denied the employer's petition for writ of certiorari. (CLS Transportation Los Angles, LLC v. Iskanian (Jan. 20, 2015, No. 14-341) ___ U.S. ___ [2015 WL 231976].)

It is not for this court to choose to follow the decision of our Supreme Court by assessing whether it conflicts with United States Supreme Court decisions that do not address the particular issue before us, especially where our high court considered relevant United States Supreme Court authority and nevertheless concluded "the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract." (Iskanian, supra, 59 Cal.4th at p. 360.) It is sufficient that the high court majority established a rule of law. Once established, it is our duty to follow that principle until that court retreats from or overrules its decision. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450.)


The trial court's order denying In-N-Out's motion to compel arbitration is affirmed. O'Kelly is entitled to costs on appeal.

McCONNELL, P. J. and AARON, J., concurs.


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