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

This is a representative action under the Private Attorneys General Act (“PAGA”) by an employee of defendant Security Industry Specialists, Inc. Before the Court is defendant’s motion to compel arbitration and stay the action, which plaintiff opposes. The present motion follows the denial as moot of defendant’s previous motion to compel arbitration, which was directed to a prior version of the complaint.

I. Factual and Procedural Background

According to the operative First Amended Complaint (“FAC”), defendant provides security services including executive protection, special event, investigation, risk/threat assessment, retail loss prevention, and uniformed services. (FAC, ¶ 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 missed meal and rest periods. (Id. at ¶¶ 8-14.) 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. (Ibid.)

On December 5, 2017, plaintiff filed the original complaint in this action, alleging claims for (1) unfair competition in violation of Business & Professions Code section 17200 et seq.; (2) failure to pay overtime in violation of Labor Code sections 204, 510, 1194, and 1198; (3) and (4) failure to provide meal and rest periods in violation of Labor Code sections 226.7 and 512; and (5) failure to provide accurate itemized wage statements in violation of Labor Code section 226. Defendant answered the original complaint on December 29.

On January 24, 2018, plaintiff moved for leave to file the FAC, which omits all of plaintiff’s original claims and sets forth a single PAGA claim based on the same factual allegations and Labor Code provisions underlying the original complaint. Defendant opposed plaintiff’s motion for leave to file the FAC and moved to compel arbitration of the claims in the original complaint. On February 23, the Court granted leave to file the FAC and denied as moot defendant’s motion to compel arbitration. The FAC was deemed filed on that date.

Since then, the parties have engaged in discovery, including participating in an informal discovery conference with the Court and distributing a Belaire-West notice to aggrieved employees. On August 10, defendant filed a second motion to compel arbitration addressed specifically to the FAC. Pursuant to the parties’ stipulation, the Court stayed all other proceedings herein pending the resolution of the instant motion.

II. The Court’s Prior Order

As discussed in the Court’s February 23rd order, defendant opposed the filing of the FAC “on the grounds that it constitute[d] an attempt to circumvent a binding arbitration agreement and [would] allow the possibility that plaintiff will revive his individual claims in arbitration with the benefit of discovery obtained in this action, prejudicing defendant.” Based on these arguments, defendant requested that, if the Court did permit the FAC to be filed, plaintiff “be required to dismiss his individual and class claims with prejudice, or that this action be stayed pending final resolution of these claims.”

Responding to defendant’s arguments, the Court wrote:

Defendant characterizes the FAC as an attempt to circumvent a binding arbitration agreement, but PAGA claims are simply not subject to predispute arbitration agreements pursuant to controlling California authorities. (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 serve as a PAGA plaintiff 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 a case where a plaintiff filed a PAGA-only action 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. … [T]he 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. Analysis

In support of its present motion to compel arbitration, defendant contends that Esparza v. KS Industries, L.P. (2017) 13 Cal.App.5th 1228 requires the severance and arbitration of plaintiff’s potential claim for unpaid wages under Labor Code section 558 as a component of PAGA relief, unless plaintiff expressly agrees to waive any such claim. Plaintiff urges that he is not seeking any unpaid wages, as reflected on the face of the FAC and in a stipulation he offered to defendant in an attempt to avoid this motion. He also contends that the parties’ arbitration agreement does not cover representative claims, defendant has waived any right to compel arbitration by filing its motion months after the Court’s February 23rd order, and defendant’s motion constitutes an improper request for reconsideration of that order.

A. Plaintiff’s Preliminary Arguments

As an initial matter, defendant’s motion is not an improper motion for reconsideration. As discussed above, defendant’s prior motion to compel arbitration was addressed to a different version of the complaint asserting different claims, and was denied as moot after the Court authorized the filing of the FAC. While defendant raised some similar-sounding arguments at the time to those it raises now, the arbitratibility of any portion of the FAC was never squarely addressed by the Court, Esparza was never raised by either party, and the Court’s order specifically denied defendant’s motion without prejudice.

As to waiver, the party invoking this doctrine bears a heavy burden of proof in light of the policy favoring arbitration, and “[t]he fact that the party petitioning for arbitration has participated in litigation, short of a determination on the merits, does not by itself constitute a waiver.” (Iskanian v. CLS Transportation Los Angeles, LLC, supra, 59 Cal.4th at p. 375.) Consequently, “courts will not find [the] prejudice” required to effectuate a waiver “where the party opposing arbitration shows only that it incurred court costs and legal expenses,” but will instead require a showing that “the petitioning party’s conduct has … substantially impaired the other side’s ability to take advantage of the benefits and efficiencies of arbitration.” (Id. at p. 377, quoting St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1203-1204.)

Here, defendant’s prior motion to compel arbitration was denied without prejudice, and, although it waited several months to renew its motion, it has continued to maintain in its filings (i.e., its answer and its case management statements) that the action is subject to arbitration. There is no indication that defendant told plaintiff it had decided to forgo arbitration or that plaintiff sought confirmation that it had. Unlike in the cases cited by plaintiff, defendant did not raise this issue out of the blue after months of active litigation or take actions wholly inconsistent with arbitration. On the other hand, defendant’s justification for the delay in renewing its motion is unpersuasive, and plaintiff has incurred time and expense seeking discovery regarding other aggrieved employees—including during an informal discovery conference and while negotiating and implementing a Belaire-West process—that would likely be wasted if arbitration were compelled.

Ultimately, while it views the issue as a relatively close one, the Court does not find a waiver here. (See Iskanian v. CLS Transportation Los Angeles, LLC, supra, 59 Cal.4th at p. 378 [distinguishing cases where “substantial expense and delay were caused by the unreasonable or unjustified conduct of the party seeking arbitration” and finding no waiver, although plaintiff’s deposition and a modest document production had been completed], italics original.) As discussed below, it is not immediately clear whether Esparza is implicated by the FAC from the face of that pleading, and the law on this point is actively evolving. It is not unreasonable that defendant took some time to re-evaluate its position on arbitration under these circumstances. Defendant has consistently claimed a right to arbitration, and the parties appear to have both elected to proceed with discovery while leaving unresolved the possibility of a renewed motion to compel arbitration. Though some discovery beyond what would take place in arbitration may have occurred, the benefits and efficiencies of arbitration have not yet been “substantially impaired” (id. at p. 375), and the delay and expenses at issue are not shown to be substantial. Consequently, plaintiff has failed to satisfy his heavy burden of proof on this issue.

The Court accordingly turns to the merits of defendant’s position regarding Esparza.

B. Esparza’s Holding and Status

As explained in Esparza, PAGA “authoriz[es] aggrieved employees, acting as private attorneys general, to recover … any civil penalty under the Labor Code that may be collected by the Labor and Workforce Development Agency ….” (Esparza v. KS Industries, L.P., supra, 13 Cal.App.5th at p. 1240.) “When these civil penalties are recovered, 75 percent goes to the Labor and Workforce Development Agency and the remaining 25 percent goes to the aggrieved employees.” (Id. at pp. 1240-1241.) “Where the Labor Code had not [previously] specified a monetary penalty for a particular violation, the PAGA impose[s] penalties for each aggrieved employee of $100 per pay period for the initial violation and $200 per pay period for each subsequent violation.” (Id. at p. 1240.)

Labor Code section 558 is one provision that already specified a monetary penalty for certain violations, prior to the enactment of PAGA. Subdivision (a) of that section provides:

Any employer or other person acting on behalf of an employer who violates, or causes to be violated, a section of this chapter or any provision regulating hours and days of work in any order of the Industrial Welfare Commission shall be subject to a civil penalty as follows:

(1) For any initial violation, fifty dollars ($50) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.

(2) For each subsequent violation, one hundred dollars ($100) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.

(3) Wages recovered pursuant to this section shall be paid to the affected employee.

Esparza held that the unpaid wages portion of the remedy established by section 558, despite its label as a “penalty,” is in reality a form of statutory damages to which employees may be entitled in their individual capacities. Esparza held that, as such, PAGA claims for unpaid wages under section 558 are beyond the scope of Iskanian and are subject to arbitration.

Following Esparza, a different Court of Appeal came to the opposite conclusion on this point in Lawson v. ZB, N.A. (2017) 18 Cal.App.5th 705, review granted March 21, 2018, S246711. The California Supreme Court granted review in Lawson to consider the arbitrability of a PAGA claim for unpaid wages. Under the Rules of Court, only Esparza remains binding precedent while the issue is under review. (See Cal. Rules of Court, 8.1115(e) [“Pending review and filing of the Supreme Court’s opinion, unless otherwise ordered by the Supreme Court under (3), a published opinion of a Court of Appeal in the matter has no binding or precedential effect, and may be cited for potentially persuasive value only.”].)

C. Esparza’s Application to This Case

As urged by plaintiff, the FAC contains no request for relief under Labor Code section 558 or for unpaid wages. Nevertheless, defendant urges that such relief is the “penalty” specified for certain of the Labor Code violations alleged by plaintiff: namely, violations of Labor Code sections 510 and 512. Defendant further contends that Esparza requires plaintiff to “waive” any entitlement to such relief, rather than merely decline to pursue it, in order to defeat a motion to compel arbitration. Plaintiff is willing to stipulate that he is not currently pursing unpaid wages, but the stipulation he proposes reflects that he does not wish to waive his entitlement to change his position should the Supreme Court affirm Lawson and overrule Esparza. Plaintiff also fears that such a waiver could be used to attack his standing as a PAGA representative. (See Kim v. Reins Internat. Cal., Inc., supra, 18 Cal.App.5th 1052, review granted March 28, 2018, S246911.)

Esparza specifically addressed the potential for the plaintiff in that case to choose to proceed only with true PAGA penalty claims in order to avoid being compelled to arbitration. The Court of Appeal affirmed the trial court’s denial of arbitration only with regard to true penalty claims, and remanded the case for further proceedings to address the treatment of plaintiff’s PAGA claims for unpaid wages. Notably, in Esparza, demands for unpaid wages under section 558 were specifically and repeatedly asserted in the complaint. (Esparza v. KS Industries, L.P., supra, 13 Cal.App.5th at p. 1236.) The appellate court directed that, following remand, plaintiff must “unambiguously state his intention” with regard to those claims. It explained that if plaintiff intended “(1) to limit the claims pursued to PAGA representative claims seeking [true] civil penalties … and (2) to waive the claims for individualized relief, then the litigation can proceed because the only claims being pursued will not be subject to arbitration.” (Id. at p. 1235, fn. 2.) The court found a statement in the trial court’s order that plaintiff “only seeks PAGA civil penalties and no individual damages” to be ineffective as a waiver because it was based on a misunderstanding of the applicable law, namely, that unpaid wages under section 558 were PAGA penalties not subject to arbitration. (Id. at p. 1247.) The Esparza court did not specifically address whether the unpaid wages claims must be dismissed with prejudice for litigation to proceed, but did define the “waiver” it had in mind as a “knowing and intentional relinquishment of the right to pursue the recovery of unpaid wages.” (Ibid.)

Thus, Esparza did specifically require a waiver of any claim for unpaid wages as opposed to a mere dismissal without prejudice to avoid arbitration. By contrast, Betancourt v. Prudential Overall Supply, supra, 9 Cal.App.5th 439 endorsed a different procedure where a PAGA complaint arguably encompasses arbitrable claims. There, as in this case and in Esparza, the plaintiff asserted only PAGA claims, including for violations of Labor Code sections 510 and 512. (Id. at p. 442.) The defendant argued that because the plaintiff sought non-PAGA remedies, including unpaid wages, the action was subject to arbitration despite Iskanian. (Id. at p. 443.) The Court of Appeal disagreed. It held that plaintiff’s complaint, on its face, asserted only a PAGA claim that was not subject to arbitration, and emphasized that “[t]here has been no challenge to the pleadings, such that the nature of the case has been clarified or changed.” (Id. at p. 445.) The court held that if the defendant believed the complaint set forth arbitrable, non-PAGA claims, “then [defendant] needs to challenge the pleadings. A motion to compel arbitration is not the proper procedural vehicle for sorting through alleged defects in the complaint.” (Id. at p. 446.) The opinion did not suggest that a waiver of unpleaded claims, as opposed to a mere clarification of the scope of the complaint, would be appropriate. It simply affirmed the denial of defendant’s motion to compel arbitration.

The Court finds the approach directed by Betancourt to be appropriate here, and follows Betancourt to the extent it conflicts with Esparza. While the complaint in Esparza clearly and repeatedly sought unpaid wages under Labor Code section 558, the complaint here is at most uncertain in this regard. For this reason, the best course of action is to clarify the scope of the complaint through a stipulation substantially similar to the one proposed by plaintiff. It would be improper for the Court to compel arbitration of a claim not even asserted by plaintiff in the first place, particularly where (as plaintiff points out) the parties’ agreement expressly provides that such a claim cannot be arbitrated. (See Decl. of Jeff Venturini ISO Mot., Ex. A, Employment Arbitration Agreement and Procedure, Article 2.7 [“To the fullest extent permitted by law … Employer and the individual Employee will not assert class action or representative claims against the other in arbitration or otherwise; and … shall only submit their own, individual claims in arbitration ….”].) On both points, Esparza is distinguishable from this case. (See Esparza v. KS Industries, L.P., supra, 13 Cal.App.5th at p. 123 [reproducing arbitration provision reflecting no bar to arbitrating representative claims].)

Although it was specifically discussed in the Court’s prior order, defendant did not address Betancourt in its moving papers. On reply, it simply concludes that the case is inapposite because it was “premised on the Iskanian rule,” which does not apply to a PAGA claim for unpaid wages under Esparza. However, Betancourt did address the proper treatment of a complaint that on its face asserts only non-arbitrable PAGA claims but could arguably be construed to include arbitrable claims for relief. The claims at issue there were identical to those asserted here. While Betancourt did not specifically decide whether a PAGA claim for unpaid wages is subject to arbitration, that is because the court found it improper to address this issue until the scope of the complaint was clarified. The Court agrees with this approach and will adopt it here.

IV. Conclusion and Order

The motion to compel arbitration is DENIED. The parties shall continue to meet and confer about the execution of a stipulation similar to the one proposed by plaintiff, to avoid the need for any further motion practice to clarify the relief requested by the FAC. To be clear, if the parties stipulate that plaintiff does not seek relief through the FAC in the form of individualized unpaid wages or unpaid wages as a civil penalty under Labor Code section 558, the Court’s view is that this will resolve any uncertainty in the FAC.

The stay of the proceedings in this case is hereby lifted.

The Court will prepare the order.