Newsletter – July 2020
The Kec decision illustrates the risks of poorly drafted arbitration provisions. The California Court of Appeal recently considered whether to enforce an arbitration agreement containing a class and representative claims waiver which was expressly not severable (Kec v. Super. Ct. (R.J. Reynolds Tobacco Co.), No. G058119 (Ct. App. June 19, 2020)). The opinion follows the Court’s previous holding in Securitas Security Services USA, Inc. v. Superior Court (2015) 234 Cal.App.4th 1109 (Securitas).
Facts of the Case
Nichole Kec filed a lawsuit against her employers, R.J. Reynolds Tobacco Company and Reynolds American Inc. (“R.J. Reynolds”), alleging that she and others had been misclassified as exempt employees in violation of the California Labor Code. Her lawsuit included individual claims, class claims, and PAGA claims. Ms. Kec had signed an arbitration agreement with R.J. Reynolds. As a result, R.J. Reynolds moved to compel arbitration for all of Ms. Kec’s claims except for the PAGA ones.
The trial court considered the language of the arbitration agreement when ruling on the motion. Importantly, the agreement included the following provisions in Section 5: “The Parties waive the right to bring, join, participate in, or opt into, a class action, collective action, or other representative action whether in court or in arbitration.” “This Section (Section 5) may not be modified or severed from this Agreement for any reason.” Further, the agreement contained a general severability provision and a “blow-up” provision. The “blow-up” provision stated:
“Except for Section 5, if any provision of this Agreement is held by a court of competent jurisdiction or an arbitrator to be invalid, void, or unenforceable, the remaining provisions shall, nevertheless, continue in full force without being impaired or invalidated in any way. If Section 5 is found by a court of competent jurisdiction to be, in any way, unlawful, invalid, void or otherwise unenforceable, the Agreement becomes null and void as to employee(s) who are parties to that particular dispute, for purposes of that dispute in the jurisdiction of the court delivering the ruling. If Section 5 is found by a court of competent jurisdiction to be, in any way, unlawful, invalid, void or otherwise unenforceable, any class claims, collective claims, or any other representative claims may only be brought in a court of competent jurisdiction.”
In other words, Agreement expressly provided that if a court found that Section 5 was unlawful, all claims would have to proceed in court (not arbitration). A court could not sever or modify the agreement to remove anything unlawful in Section 5.
Notably, it is well established the ability to bring PAGA claims in court is not waivable in an arbitration agreement. (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 378 (Iskanian).) The Iskanian decision provided that people can waive their ability to bring a class action in court, but they cannot do so for PAGA claims. Here, the arbitration agreement expressly stated that Ms. Kec waives her right to bring an “other representative action” in court. This provision is unlawful under the Iskanian holding.
Is the Arbitration Agreement Enforceable Despite Its PAGA Waiver?
After considering the briefs and arguments by both sides, the trial court granted R.J. Reynolds’ motion to compel arbitration. The trial court reasoned that because the court had not been called upon to decide whether Section 5 is unlawful, it was acceptable for R.J. Reynolds to pursue the PAGA claim in court and the other claims in arbitration. In addition, the “blow-up” provision could be interpreted to encompass only the PAGA claim, allowing the other claims to proceed in arbitration.
However, Kec appealed this decision, the Court of Appeal decided that the entire dispute should remain in court, not have the other claimed decided in arbitration. First, the Appellate Court agrees that the trial court did not decide (and did not have to decide) whether Section 5 is unlawful. More importantly, the opinion notes a prior decision that is “directly on point”, Securitas Security Services USA, Inc. v. Superior Court (2015) 234 Cal.App.4th 1109 (Securitas). In Securitas, the plaintiff also had signed an agreement containing a class and representative claims waiver, and the agreement said that the waiver was not severable. The opinion explains that the agreement was “all-or-nothing”: “when [an] employee asserts class, collective or representative claims, either the employee forgoes his or her right to arbitrate such claims, or the entire agreement to arbitrate disputes is unenforceable and the parties must resolve their disputes in superior court.” Securitas, supra.
Here, the Court of Appeal explained, R.J. Reynolds tried to sever the PAGA waiver from the rest of the agreement once Kec brought the lawsuit. This attempt violated the portion of the agreement (drafted by R.J. Reynolds) that stated, “This Section (Section 5) may not be modified or severed from this Agreement for any reason.” Like in Securitas, the wording of the agreement as drafted made it “all or nothing”: either all claims go to arbitration or all claims proceed in court. Since the PAGA claims cannot go to arbitration under Iskanian, the entire case must proceed in court. Thus, the Court of Appeal ordered the trial court to deny R.J. Reynolds’ motion to compel arbitration.
This is another illustration about how employers need to carefully draft arbitration language if they want to force employment-related claims into arbitration. When an arbitration agreement contains a PAGA waiver and provides that the waiver is not severable from the rest of the agreement, all claims must be litigated in court rather than arbitration. As a result, courts must continue to individually review the precise language of employees’ arbitration agreements to determine if they are enforceable.