Adverse Adjudication On The Merits Deprives Plaintiffs Of PAGA Standing

Seyfarth Synopsis: In Rocha v. U-Haul Co. of Cal., the California Court of Appeal held that a plaintiff asserting a PAGA claim does not have standing to pursue a PAGA claim on behalf of others, if an arbitrator denies the plaintiff's individual claims on the merits and finds no underlying Labor Code violations.

The California Court of Appeal, Second Appellate District, recently handed employers a powerful tool to combat claims brought under California's Private Attorneys General Act ("PAGA"). PAGA authorizes "aggrieved employees" to file representative lawsuits to recover civil penalties on behalf of themselves, other current and former employees, and the State of California for violations of the California Labor Code. Cal. Lab. Code § 2699(a).

In Rocha v. U-Haul Co. of Cal., the plaintiffs brought individual retaliation claims against their former employer under Labor Code § 1102.5. They later sought leave to add a PAGA claim based in part on the same alleged conduct and Labor Code provision underlying their individual retaliation claims. The trial court denied them leave and compelled the individual retaliation claims to arbitration. The arbitrator ruled in favor of U-Haul, finding that it had not retaliated against the plaintiffs by violating Labor Code § 1102.5.

After the trial court affirmed the arbitration award, the plaintiffs appealed. In assessing whether leave to add the PAGA claim should have been given, the Court of Appeal first considered whether the plaintiffs had standing to pursue the proposed PAGA claim. After all, only "aggrieved employees" have standing to bring PAGA claims, and those individuals are defined as "any person who was employed by the alleged violator [of the Labor Code] and against whom one or more of the alleged violations was committed." Cal. Labor Code § 2699.

The Court of Appeal found that "[o]nce the Labor Code violations based on which a plaintiff seeks to qualify for PAGA standing have been finally adjudicated, the extent to which that adjudication prevents a plaintiff from qualifying for [PAGA] standing will depend on general principles of issue preclusion." Applying this principle, the Court held that the plaintiffs "cannot establish PAGA standing to bring a claim based on Labor Code violations by U-Haul already alleged in the [current] complaint, because the arbitrator found no such violations occurred, and that finding has issue preclusive effect. It would thus have been futile to allow the [plaintiff]s to allege such a PAGA claim." In other words, "the arbitrator's finding that the [plaintiff]s did not suffer a section 1102.5 violation as alleged in the [current] complaint precludes them from qualifying as 'aggrieved employees' based on that same alleged [Labor Code] violation."

The Rocha Court distinguished the California Supreme Court's decision in Kim v. Reins Int'l Cal., Inc., 9 Cal. 5th 73 (2020), which held that plaintiffs who settle their individual Labor Code claims against an employer may still be "aggrieved employees" with standing to assert a PAGA claim based on the same alleged employer conduct. The Kim Court reasoned that a settlement does not obviate the possibility that Labor Code violations may have occurred. By contrast, the Rocha Court reasoned that an adjudication on the merits in favor of an employer definitively means none of thoseLabor Code violation(s) occurred, so issue preclusion bars these plaintiffs from being "aggrieved employees."

Rocha is particularly useful after the U.S. Supreme Court's decision in Viking River Cruises v. Moriana. As discussed here, in Viking River, the Court first held that the individual portion of PAGA claims—as distinct from the group portion of PAGA claims asserted on behalf of others—can be compelled to arbitration under the Federal Arbitration Act. Second, the Court held that after plaintiffs' individual PAGA claims are compelled to arbitration, their group PAGA claims should be dismissed for lack of standing.

Unfortunately, California state courts have consistently followed only the first holding of Viking River—individual PAGA claims may be compelled to arbitration. That holding was based on federal law, so no state court may override it. But the second holding of Viking River—plaintiffs lack of standing to pursue group PAGA claims after their individual PAGA claims are compelled to arbitration—was based on the U.S. Supreme Court's interpretation of California law. This latter holding may therefore be undone by California state courts, and this precise issue is before the California Supreme Court in Adolph v. Uber Technologies, Inc., No. S274671.

Even if the California Supreme Court holds in Adolph that plaintiffs maintain standing to assert group PAGA claims after their individual claims are compelled to arbitration, the first holding of Viking River, combined with Rocha,still provides a roadmap for employers to defeat PAGA claims:

1. Under Viking River, a plaintiff's individual claims are compelled to arbitration.
2. If Adolph disagrees with Viking River, the group portion of the PAGA claim will not be dismissed and will remain in state court.
3. The employer files a motion under California Code of Civil Procedure § 1281.4 to stay the PAGA claim still in court until the plaintiff's arbitration is resolved. The stay is mandatory if the claims in court and arbitration overlap.
4. Under Rocha, any Labor Code claims that the employer defeats on the merits in arbitration will have preclusive effect and strip the plaintiff of standing to assert those claims on a PAGA group basis in court.

In short, Rocha weakens plaintiff counsels' argument that PAGA claims are impenetrable, given their expectation that the California Supreme Court will expand PAGA standing in Adolph. Technically, the issue to be decided in Adolph is not whether an employee has PAGA standing after losing on the merits at arbitration. So, Rocha should remain undisturbed by Adolph, and allow employers to attack PAGA claims no matter how Adolph treats the second holding of Viking River. Unfortunately, the possibility can never be dismissed that the California Supreme Court in Adolph might find a way to undo Rocha.

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