Only the Injured Are Left Standing
Two California laws have created litigation migraines for employers: the Unfair Competition Law1 ("UCL") and the Private Attorneys General Act2 ("PAGA"). But in two recent companion cases, the California Supreme Court has just provided some relief by clarifying and restricting who can bring UCL and PAGA claims.3 The answer is refreshingly straightforward: plaintiffs must be actually injured. This means that labor unions and other membership groups cannot bring UCL or PAGA claims on behalf of their members unless the union or group itself has been harmed.
The broadly drafted UCL allows people to bring suit against "any unlawful, unfair or fraudulent business act or practice." Before 2004, anyone could bring a UCL claim, including a noninjured person acting on behalf of the general public. However, in 2004, California voters passed Prop. 64, which restricted access to the courts under the UCL. It provided that private plaintiffs (i.e., not state agencies) who represent the interests of others must have "suffered injury in fact."
The PAGA permits an "aggrieved employee" to file suit on his or her own behalf, as well as on behalf of other employees, to recover civil penalties for Labor Code violations. It defines an "aggrieved employee" as an employee "against whom one or more of the alleged violations was committed."
Fortunately, the California Supreme Court read those restrictions at face value. In Amalgamated Transit Union, the Court concluded that both laws "require a plaintiff to have suffered injury resulting from an unlawful action." The Court also blocked the union’s attempted end-runs around this standing-to-sue requirement. First, the union claimed that its members had assigned their own rights under the statutes to the union. The Court concluded that claim assignment would nullify Prop. 64, and held that rights under PAGA may not be assigned. Second, the union claimed "associational standing," a concept borrowed from federal standing doctrine. The Court also rejected this theory, reiterating the plain language of the UCL and the PAGA.
In Arias, the Court further narrowed the range of litigation by insisting that private representative actions under the UCL must also satisfy class action requirements. This, too, was a product of Prop 64. Technically, Prop 64 only required compliance with Section 382 of the Code of Civil Procedure, a provision commonly interpreted to allow class actions. Based on official Prop. 64 election literature, the Court determined that the voters meant to impose class action requirements.
The Court rejected a similar claim for private representative claims under PAGA, but in a manner that might help employers. The employer in Arias mounted a strong due process argument that PAGA representative claims should meet class action requirements. Otherwise, employers are caught in a one-way "issue preclusion" trap, which works like this. An employee brings suit, claiming penalties for Labor Code violations, and loses. When another employee brings the same claim, the employer cannot seek refuge in the first judgment, because employee #2 was not a party in case #1. So the employer has to keep relitigating the issue, again and again. Finally, one employee wins. Now, because the employer was a party in that case, the issue is precluded, and all future plaintiffs prevail on that issue. In other words, "[o]ne plaintiff could sue and lose; another could sue and lose; and another and another until one finally prevailed; then everyone else would ride on that single success."4 5
The Court acknowledged this constitutional problem, but solved it by holding that judgments against PAGA plaintiffs who sought Labor Code penalties would actually bind future employees and government agencies. In other words, issue preclusion under PAGA is now at least partially a two-way street. If an employer wins the first time around on a claim for penalties, it can use that judgment to block future claims for those penalties.
Unfortunately, the Court narrowed the "issue preclusion trap" only for claims seeking Labor Code penalties. That "trap" is still alive and well concerning the non-penalty remedies for wage and hour violations, such as back pay for unpaid minimum wage or overtime, and the one hour’s additional pay for a missed meal or rest period. A claim for penalties requires proof of a Labor Code violation, and some violations have remedies in addition to civil penalties, such as back pay. As the Court noted:
"Therefore, if an employee plaintiff prevails in an action for civil penalties by proving that the employer committed a Labor Code violation, the defendant employer will be bound by the resulting judgment. Nonparty employees may then, by invoking collateral estoppel, use the judgment against the employer to obtain remedies other than civil penalties for the same Labor Code violations. If the employer had prevailed, however, the nonparty employees, because they were not given notice of the action or afforded any opportunity to be heard, would not be bound by the judgment as to remedies other than civil penalties."
Consequently, plaintiffs must incur actual injury under both statutes, and representative cases under the UCL (but not PAGA) must meet class action requirements. Employers can use favorable PAGA judgments for Labor Code penalties against future claimants, but might still be caught in an "issue preclusion trap" concerning non-penalty remedies for Labor Code violations.
1 Labor Code Section 2698, et seq.
2 Business and Professions Code Section 17200, et seq.
3 Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), No. S151615 (Cal. Supreme Court June 29, 2009); Arias v. Superior Court (Angelo Dairy), No. S155965 (Cal. Supreme Court June 29, 2009).
4 Arias, slip op. at 15 (quoting Fireside Bank v. Superior Court, 40 Cal. 4th 1069, 1080 (2007)).
5 Arias, slop op. at 18.
6 Note, "Businesses Beware: Chapter 906 Deputizes 17 Million Private Attorneys General to Enforce the Labor Code," 35 McGeorge L. Rev. 581, 581-582 (2004).
7 Farmers Ins. Exch. v. Superior Court, 2 Cal. 4th 377, 383 (1992).