Case Name: Andres Alejandro Mercado v. Security Industry Specialists, Inc., et al.
Case No.: 17-CV-320059

This is a putative wage and hour class action by an employee of defendant Security Industry Specialists, Inc. Before the Court is defendant’s petition to compel arbitration and stay the action, which plaintiff opposes. Also at issue is plaintiff’s motion for leave to file a first amended complaint (“FAC”), which would omit all of the putative class claims alleged in the operative complaint in favor of a single claim under the Private Attorneys General Act (“PAGA”). Defendant opposes this motion, while plaintiff contends that granting it will moot the motion to compel arbitration.

I. Factual and Procedural Background

According to the complaint, defendant provides security services including executive protection, special event, investigation, risk/threat assessment, retail loss prevention, and uniformed services. (Complaint, ¶ 2.) Plaintiff has been employed by defendant as a non-exempt security guard since February 2016. (Id. at ¶ 3.) He alleges that defendant fails to compensate security guards for overtime hours and missed meal and rest periods. (Id. at ¶ 5.) In addition, wages paid pursuant to defendant’s non-discretionary incentive pay program are not included in employees’ pay rates for purposes of calculating overtime pay. (Id. at ¶ 11.)

On December 5, 2017, plaintiff filed the operative complaint, alleging five individual and class claims for Labor Code violations and unfair competition in violation of Business & Professions Code sections 17200 et seq. Defendant answered the original complaint on December 29. On January 24, 2018, plaintiff filed a motion for leave to file his proposed FAC, which would omit all of the claims in the original complaint and assert a single claim under PAGA based on the same factual allegations described above. Defendant subsequently moved to compel arbitration of the claims in the original complaint on January 25.

II. Motion for Leave to File the FAC

Plaintiff seeks leave to file an FAC converting this putative class action to one under PAGA and thereby dismissing the class claims, and his associated individual claims, without prejudice. Defendant opposes the motion on the grounds that it constitutes an attempt to circumvent a binding arbitration agreement and will allow the possibility that plaintiff will revive his individual claims in arbitration with the benefit of discovery obtained in this action, prejudicing defendant. In the event plaintiff’s motion is granted, defendant requests that he be required to dismiss his individual and class claims with prejudice, or that this action be stayed pending final resolution of these claims.

A. Legal Standard

Section 473, subdivision (a)(1) of the Code of Civil Procedure states in pertinent part: “[t]he court may … , in its discretion after notice to the adverse party, allow, upon any terms as may be just, an amendment to any pleading or proceeding in other particulars ….” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 76.) In considering a motion for leave to amend, “courts are bound to apply a policy of great liberality in permitting amendments to the complaint at any stage of the proceedings, up to and including trial.” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 761.) “[I]t is a rare case” in which a court will be justified in denying a party leave to amend his pleadings. (Morgan v. Superior Court (Morgan) (1959) 172 Cal.App.2d 527, 530.) “If the motion to amend is timely made and the granting of the motion will not prejudice the opposing party, it is error to refuse permission to amend and where the refusal also results in a party being deprived of the right to assert a meritorious cause of action or a meritorious defense, it is not only error but an abuse of discretion.” (Ibid.)

While often paramount, the policy of liberality in permitting amendments should be applied only where no prejudice is shown to the adverse party. (Atkinson v. Elk Corp., supra, 109 Cal.App.4th at p. 761.) Where an amendment would require substantial delay in the trial date and substantial additional discovery; would change not only the specific facts and causes of action pled, but the tenor and complexity of the complaint as a whole; and where no reason for the delay in seeking leave to amend is given, refusal of leave to amend is not an abuse of discretion. (See Magpali v. Farmers Group (1996) 48 Cal.App.4th 471, 486-488 [affirming denial of request to amend made during trial].) “Even if a good amendment is proposed in proper form, unwarranted delay in presenting it may – of itself – be a valid reason for denial,” which “may rest upon the element of lack of diligence in offering the amendment after knowledge of the facts, or the effect of the delay on the adverse party.” (Roemer v. Retail Credit Co. (1975) 44 Cal.App.3d 926, 939-940 [trial court appropriately denied request to amend answer made during trial]; see also P & D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1345 [plaintiff did not seek leave to amend until after the trial readiness conference, amendment would require additional discovery and might prompt a demurrer or other pretrial motion, and plaintiff’s explanation for the delay was inadequate].)

B. Analysis

With the proposed FAC offered less than two months after this action was filed and before any discovery or motion practice has occurred, the Court exercises its discretion to accept it in light of the policy of liberality in permitting amendments. Defendant characterizes the FAC as an attempt to circumvent a binding arbitration agreement, but California courts have held that PAGA claims, which are akin to qui tam actions brought on behalf of the State, are not subject to predispute arbitration agreements. (See, e.g., Betancourt v. Prudential Overall Supply (2017) 9 Cal.App.5th 439 (hereinafter, “Betancourt”), citing Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348 (“Iskanian”).) While defendant may view this as an “end run” around an arbitration agreement or as “forum shopping,” California law permits an employee whose claims are otherwise subject to binding arbitration to bring PAGA claims on behalf of the State, and the courts have rejected arguments like defendant’s in addressing this issue. (See Betancourt, supra, 9 Cal.App.5th at p. 443 [noting the defendant’s argument that the plaintiff “was attempting to evade arbitration by labeling his wage and hour claims as a PAGA case”].)

Defendant further speculates that plaintiff may attempt to re-assert individual or class claims in the future, making it defend PAGA litigation prior to arbitration, while a PAGA cause of action asserted together with claims subject to arbitration would likely be stayed until the arbitration concluded. However, the circumstances here are no different from those in an action asserting only PAGA claims as an initial matter. Any “prejudice” resulting from a plaintiff’s ability to pursue PAGA-only litigation despite having signed an arbitration agreement is inherent in the courts’ holdings that arbitration of a PAGA claim may not be compelled. The cases cited by defendant deal with waivers of the right to arbitrate and find prejudice to the party opposing arbitration where the party seeking it delayed as litigation proceeded. There has been no such delay here, and the Court is unaware of any authority suggesting that the type of prejudice defendant fears—essentially, the undesirable sequencing of this action relative to a potential arbitration—would justify refusing leave to amend a complaint.

Finally, defendant cites no authority supporting the proposition that the Court should refuse to hear a PAGA claim unless the plaintiff agrees to waive other, individual claims, and this result would be contrary to the public policy recognized in Iskanian. Critically, requiring plaintiff to dismiss his individual claims with prejudice might foreclose his ability to bring a PAGA action in the first place, again in conflict with California policy. (See Kim v. Reins Internat. Cal., Inc. (2017) 18 Cal.App.5th 1052 [employee who settled and dismissed with prejudice his individual Labor Code claims forfeited his standing to bring a PAGA claim since he was no longer an “aggrieved employee”].)

The Court will accordingly grant plaintiff’s motion for leave to file the FAC without the conditions defendant requests.

III. Motion to Compel Arbitration
In light of the above, the motion to compel arbitration will be denied without prejudice as moot. While defendant argues in its reply brief that plaintiff’s PAGA claim is also subject to arbitration, its moving papers and plaintiff’s opposition are directed to individual and class claims that are no longer at issue. It would be inappropriate for the Court to rule on a motion based on arguments raised for the first time in reply papers. (See Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764 [points raised for the first time in reply brief will not ordinarily be considered, because such consideration would deprive respondent of an opportunity to counter the argument].)

However, because defendant anticipates the issue, the Court notes that if a motion to compel arbitration of the PAGA claim is filed, it will likely be influenced by

Betancourt, Lawson v. ZB, N.A. (2017) 18 Cal.App.5th 705, Julian v. Glenair, Inc. (2017) 17 Cal.App.5th 853, Tanguilig v. Bloomingdale’s, Inc. (2016) 5 Cal.App.5th 665, Hernandez v. Ross Stores, Inc. (2016) 7 Cal.App.5th 171, Perez v. U-Haul Co. of Cal. (2016) 3 Cal.App.5th 408, and Williams v. Superior Court (Pinkerton Governmental Services, Inc.) (2015) 237 Cal.App.4th 642, which held that various aspects of PAGA claims were not subject to predispute arbitration agreements.

IV. Conclusion and Order

Plaintiff’s motion for leave to file the FAC is GRANTED. The FAC, attached as Exhibit 2 to the Declaration of Kyle Nordrehaug supporting plaintiff’s motion, shall be deemed filed as of the date the Court’s order is filed.

Defendant’s motion to compel arbitration is DENIED WITHOUT PREJUDICE AS MOOT. The Court’s order as stated herein will serve as its statement of decision.

The Court will prepare the order.