Saturday, September 26, 2009

The Pursuit of PAGA: Does the Named Plaintiff Have an Obligation to Bring PAGA Claims on Behalf of an Employment Class After Arias v. Superior Court?

For some time a proposition has been bandied about the California class action community concerning whether counsel in a wage and hour class action litigation should assert PAGA (“Private Attorney General Act of 2004”) penalty claims on behalf of the class as a matter of course. Proponents of this position have maintained that litigation of the underlying wage violation itself bars subsequent litigation of PAGA claims under principles of res judicata, and as such, the named plaintiff in wage and hour class litigation should affirmatively plead and prosecute PAGA penalty claims on behalf of the class to preserve the right to recover penalties.

This view was seemingly gaining traction earlier this year when the Second District Court of Appeal held that PAGA penalty claims may be barred on res judicata grounds, even if not pled in the prior litigation. (Deleon v. Verizon Wireless, 170 Cal. App. 4th 519, 531 (2008), rev. granted by Deleon v. Verizon, 94 Cal.Rptr.3d 322 (Cal., May 13, 2009)). As reasoned by the Deleon Court, a PAGA penalty claim is not an action on behalf of the State, and as such, may be waived by an employee if not affirmatively pled and litigated.

However, Deleon’s analysis seems to have taken a major hit in light of the California Supreme Court’s recent ruling in Arias v. Superior Court, 46 Cal. 4th 969 (2009). While the Arias Court concluded that actual litigation of a PAGA claim is binding on all interested parties (including both employees and the State), the Arias Court seemingly knocked out the fundamental premise of the Deleon Court’s holding by concluding that “an action to recover civil penalties ‘is fundamentally a law enforcement action designed to protect the public and not to benefit private parties.’” (Arias, 46 Cal. 4th at 986). This conclusion – which is supported by the fact an employee plaintiff may bring the action only after giving written notice to the Workforce Development Agency – draws into doubt whether a PAGA action and the underlying wage violation involve the same “primary right.” If this is the case, then it logically follows that a PAGA claim would not be subsequently barred if not asserted on behalf of the class in the complaint.

Putting this issue aside, however, the premise that PAGA penalty claims will increase overall recovery to class members is currently a dubious proposition. For example, in the context of a class settlement, the requirement that 75% of PAGA penalties recovered be paid to the State paradoxically places pressure on class counsel to minimize the amounts apportioned to a PAGA claim to fulfill his or her fiduciary duty of maximizing recovery to the class. As no definitive standards currently exist to evaluate the subsequent apportionment of settlement funds between compensation for PAGA penalties and wages paid to the class for the underlying wage violations (Cal. Lab. Code § 2699(l)), counsel in many cases have successfully obtained approval of settlements allocating only a nominal fraction of the overall recovery to a PAGA claim. Were a mechanical pro-rata apportionment between the value of the penalty claims and the value of the underlying wage claims at issue applied, inclusion of a PAGA claim in many cases could stand as a losing proposition for members of the class – especially in settlements where only limited funds are on the table to resolve all claims. Under such circumstances, it is conceivable that the class may benefit more by not mixing PAGA claims with claims to recover wages.

In sum, even if the Deleon Court’s res judicata analysis can survive Arias – which seems unlikely – the ultimate impact of including a PAGA claim in light of the statue’s vague enabling provisions presents more questions than answers. As such, the issue of whether inclusion of a PAGA claim will ultimately benefit the class in the long run remains an open question.

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