KS Industries contends the trial court's failure to order arbitration of some of the claims violated the Federal Arbitration Act (
The Federal Arbitration Act plays a central role in this appeal. If the act requires a claim to be arbitrated, a contrary rule of state law must give way because of federal preemption. The Federal Arbitration Act requires the enforcement of arbitration agreements covering private disputes. Here, the arbitratiоn agreement is worded to cover claims arising from the employment relationship, which includes the employee's claims for unpaid wages and other types of victim-specific relief. The State of California is not a party to the agreement and, thus, claims brought by it or on its behalf are not subject to arbitration. Therefore, under the Federal Arbitration Act, the claims that are private disputes between the employee and KS Industries must be arbitrated and the claims brought on behalf of the State of California need not be arbitrated. The rule adopted in Iskanian attempted to define the boundary between the two types of claims by stating that PAGA representative claims for civil penalties are not subject to arbitration.
We therefore affirm the order insofar as it denies arbitration of the representative claims for civil penalties and remand for further proceedings.
FACTS AND PROCEEDINGS
In January 2012, plaintiff Richard Esparza (Employee) completed an application for employment with defendant KS Industries, L.P. The application included the following arbitration provision:
"I hereby agree to submit to binding arbitration all disputes and claims arising out of the submission of this application. I further agree, in the event that I am hired by the company, that all disputes that cannot be resolved by informal internal resolution which might arise out of my employment with the company, whether during or after that employment, will be submitted to binding arbitration. I agree that such arbitration shall be conducted under the rules of the American Arbitration Association. This application contains the entire agreement between the parties with regard to dispute resolution, and there are no other agreements as to dispute resolution, either oral or written."
In February 2015, Employee filed a complaint against KS Industries as an aggrieved employee on behalf of himself and other current and former aggrieved employees. The complaint stated the lawsuit was a representative action brought pursuant to the PAGA for violations of 16 sections of the Labor Code. The violations were based on allegations that KS Industries failed to (1) pay minimum and overtime wages, (2) provide meal periods and rest breaks, (3) pay wages in a timely manner, (4) provide complete and accurate wage statements, and (5) reimburse business expenses.
In March 2015, Employee filed a first amended complaint, which is the operative pleading in this lawsuit. The amended complaint continued to list the same 16 sections of the Labor Code, asserted essentially the same failures by KS Industries, and presented a single causе of action for violation of PAGA. The amended complaint also alleged written notice of KS Industries' alleged violations of the Labor
As to damages, the amended complaint alleged Employee, individually and on behalf of other aggrieved employees, was entitled to recover "unpaid wages, civil penalties, interest, attorneys' fees and cоsts" as well as statutory penalties for each aggrieved employee calculated on the number of pay periods in which a violation occurred. Employee also alleged the right to recover "[a]n amount sufficient to recover unpaid wages under Labor Code § 558 [and] under Labor Code § 1197.1." The prayer for relief sought costs, attorney fees and "civil penalties and wages" pursuant to the PAGA for the violations of the listed Labor Code sections.
In July 2015, KS Industries filed a motion to compel arbitration and stay the proceedings. The motion stated Employee was trying to circumvent his arbitration agreement by filing a single, nonarbitrable cause of action under PAGA and stylizing the relief sought as civil penalties under PAGA. KS Industries argued the label "civil penalties" could not disguise the true nature of the relief sought, which was individualized damages, wages, reimbursement and statutory penalties. In KS Industries' view, these victim-specific types of relief are not "civil penalties" that the PAGA and Iskanian rule precludes from being arbitrated.
Employee's opposition to the motion to compel arbitration argued that a claim for civil penalties under the PAGA is not subject to arbitration and, for purposes of this rule, the civil penalties recoverable under the PAGA include the recovery of wages. Employee argued the plain language of Labor Code sections 558 and 1197.1 identifies wages as part of the civil penalties that are recoverable under the PAGA. Employee also contended some of KS Industries' arguments were not appropriate for a motion to compel, but might be presented in a motion to strike.
KS Industries' reply argued that Employee's interpretation of the PAGA conflicted with the Federal Arbitration Act and its directive for the enforcement of an arbitration agreement covering claims for victim-specific relief. KS Industries argued that federal directive preempted any contrary rule of state law. KS Industries also argued that a motion to strike was not appropriate because when arbitrable claims are combined with inarbitrable claims, courts may sever them and send the arbitrable claims to arbitration and stay further judicial proceedings on the other claims until the arbitration is completed.
DISCUSSION
I. THRESHOLD MATTERS
A. Standard of Review
KS Industries contends the trial court's order denying arbitration was based primarily
We conclude that KS Industries has accurately identified the standards of review. Accordingly, our review of questions of law is de novo review and we review findings of fact under the substantial evidence standard.
B. New Issues on Appeal
As a general rule, issues not raised in the trial court cannot be raised for the first time on appeal. ( Johnson v. Greenelsh (2009)
The general rule against new issues is subject to an exception that grants appellate courts the discretion to address questions not raised in the trial court when the theory presented for the first time on appeal involves only a legal question determinable from facts that are (1) uncontroverted in the record and
We conclude the exception tо the general rule does not apply to the three new arguments raised on appeal by Employee. First, the claim that KS Industries failed to make a showing that the Federal Arbitration Act applied could have been addressed if it had been raised in the trial court because such a showing involves the presentation of evidence.
Second, Employee's argument about the lack of mutuality also could have addressed the presentation of extrinsic evidence relating to the interpretation of the arbitration clause. (See Winet v. Price (1992)
Third, Employee's argument that it is unclear whether KS Industries ever signed the agreement because there is no signature and only a time stamp on the online employment application appears, to be directed at the contractual element of
Accordingly, the new issues raised by Employee will not be considered by this court. We are not convinced those issues fall within the discretionary exception to the general rule prohibiting a party from raising a new theory or argument on appeal.
Employee contends that the PAGA claims pursued in this lawsuit are outside the scope of the Fеderal Arbitration Act and, therefore, federal preemption does not require any of those claims to be arbitrated. KS Industries disagrees with Employee about the scope of the Federal Arbitration Act, contending the federal statute applies to Employee's claims seeking victim-specific relief and, therefore, federal preemption prohibits applying a rule of state law that would render the arbitration agreement unenforceable as to those claims.
In view of these contentions, our analysis begins with an overview of (1) the Federal Arbitration Act and its preemptive effect and (2) the PAGA and the Iskanian rule that precludes the arbitration of certain types of claims brought under the PAGA. This overview lays the fоundation for analyzing the basic question presented in this appeal: Are some of the claims being pursued subject to arbitration under the Federal Arbitration Act or, alternatively, do those claims fall within California's rule prohibiting arbitration of representative claims brought under the PAGA?
A. Federal Preemption
In 1925, the Federal Arbitration Act was enacted in response to widespread judicial hostility to arbitration agreements. ( AT&T Mobility LLC v. Concepcion (2011)
"A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocablе, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2 .)
The United States Supreme Court broadly interpreted the reference to a controversy "arising out of such contract or transaction" as applying to both statutory and contractual claims between the parties to an arbitration agreement. ( Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985)
B. The PAGA
1. Concerns Addressed by Statute
In 2003, the Legislature enacted the PAGA to address (1) the lack of prosecution of violations of the Labor Code that were punishable only as criminal misdemeanors and (2) the shortage of government resources to pursue enforcement. ( Iskanian , supra ,
The Legislature dealt with the lack of resources for labor law enforcement by authorizing aggrieved employees, acting as private attorneys general, to recover civil penalties for Labor Code violations, provided that the Labor and Workforce Development Agency is notified of the alleged violations and does not take action within 33 days. ( Iskanian , supra , 59 Cal.4th at pp. 379-380,
2. Representative Actions
The concept of a PAGA "representative action" plays a significant role in the arguments raised in this appeal. Our Supreme Court has identified a number of the legal characteristics of a PAGA representative action. First, an employee plaintiff
Our Supreme Court provided a further explanation by describing a PAGA representative action as a type of qui tam action because it involves (1) a statute that exacts a penalty, (2) part of the penalty being paid to the informer, and (3) the informer being authorized to sue to recover the penalty. ( Iskanian , supra ,
3. Civil Penalties
The distinction between civil penalties and statutory damages also is important to defining the scope of the Iskanian rule and its relationship to federal preemption. We begin our discussion by attempting to clarify the meaning of the terms.
This opinion uses the label "statutory damages" (not "statutory penalties") for the monetary relief provided by Labor Code provisions that falls outside the concept of "civil penalties" as that term in used in the Iskanian rule, which provides that PAGA representative claims for civil penalties are not subject to arbitration. We note that some cases quoted in Iskanian used the term "statutory penalties" (
In Iskanian , our Supreme Court recognized the distinction between civil penalties and statutory damages: "The civil penalties recovered on behalf of the state under the PAGA are distinct from the statutory damages to which employees may be entitled in their individual capacities." ( Iskanian , supra ,
Our Supreme Court illustrated the distinction between civil penalties and statutory damages by stating Labor Code section 225.5 provided an example of a "civil penalty." ( Iskanian , supra ,
In contrast, the Supreme Court referred to Labor Code section 203 as providing an example of "statutory damages" that an employee may collect in his or her individual capacity. ( Iskanian , supra ,
Furthermore, civil penalties are distinguishable from statutory damages because civil penalties recovered in a PAGA representative action must be allocated 75 percent to the enforcement agency and 25 percent to the aggrieved employee. ( Iskanian , supra ,
In Iskanian , the Supreme Court did not discuss Labor Code section 558 or Thurman . As a result, it did not refer to the following statutory construction:
"In our view, the language of [Labor Code] section 558, subdivision (a), is more reasonably construed as providing a civil penalty that consists of both the $50 or $100 penalty amount and any underpaid wages, with the underpaid wages going entirely to the affected employee or employees as an express exception to the general rule that civil penalties recovered in a PAGA action are distributed 75 percent to the Labor and Workforce Development Agency ... and 25 percent to the aggrieved employees ( [Lab. Code,] § 2699, subd. (i).)" ( Thurman , supra ,203 Cal.App.4th at p. 1145 ,.) 138 Cal.Rptr.3d 130 4
C. Relationship between Claims for Civil Penalties and Federal Preemption
In Iskanian , our Supreme Court explained why a representative action under PAGA that sought only civil penalties was not subject to arbitration and why this rule of nonarbitrability was not preempted by the Federal Arbitration Act. ( Iskanian , supra , 59 Cal.4th at pp. 378-389,
"[A] PAGA claim lies outside the [Federal Arbitration Act's] coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state , which alleges directly or through its agents-either the [Labor and Workforce Develоpment] Agency or aggrieved employees-that the employer has violated the Labor Code." ( Id. at pp. 386-387,, 173 Cal.Rptr.3d 289 .) 327 P.3d 129
The court emphasized the distinction between a dispute between the state and an employer, which was not covered by the Federal Arbitration Act, and a private dispute between the employer and one or more employees by stating: "Our opinion today would not permit a state to circumvent the [Federal Arbitration Act] by, for example, deputizing employee A to bring a suit for the individual damages claims of employees B, C, and D." ( Iskanian , supra ,
"In sum, the [Federal Arbitration Act] aims to promote arbitration of claims belonging to the private parties to an arbitration agreement. It does not aim to promote arbitration of claims belonging to a government agency, and that is no less true when such a claim is brought by a statutorily designated proxy for the agency as when the claim is brought by the agency itself. The fundamental character of the claim as a public enforcement actiоn is the same in both instances. We conclude that California's public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the [Labor and WorkforceDevelopment] Agency's interest in enforcing the Labor Code, does not interfere with the [Federal Arbitration Act's] goal of promoting arbitration as a forum for private dispute resolution." ( Iskanian , supra , at pp. 388-389, , 173 Cal.Rptr.3d 289 .) 327 P.3d 129
D. Analysis of Employee's Claims for Relief
Employee's contention that his claim for unpaid wages constitutes a civil penalty is based on Labor Code section 558, subdivision (a), which provides in full:
"(a) 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 ." (Italics added.)
Employee argues this text clearly states that an award "an amount sufficient to recover underpaid wages" is a civil penalty. Employee further argues that this "civil penalty" under Labor Code section 558 constitutes a "civil penalty" within the meaning of Labor Code section 2699, subdivision (a) and a "civil penalty" for purposes of the rule adopted in Iskanian . We disagree. Employee's argument is based on semantics and not substance. One substantive aspect of the claim is the financial reality that 100 percent of the "amount sufficient to recover underpaid wages" is paid to the affected employee. ( Lab. Code, § 558, subd. (a)(3).) In Iskanian , our Supreme Court clearly expressed the need to avoid semantics and analyze substance in determining the scope of representative claims that could be pursued outside arbitration without violating the Federаl Arbitration Act. (See Iskanian , supra ,
Similarly, Employee's attempt to recover wages on behalf of other aggrieved employees involve victim-specific relief and private disputes. The rule оf nonarbitrability adopted in Iskanian is limited to claims "that can only be brought by the state or its representatives, where any resulting judgment is binding on the state and any monetary penalties largely go to state coffers." ( Iskanian , supra ,
In sum, Employee's claims for unpaid wages are subject to arbitration pursuant to the terms of the parties' arbitration agreement and the Federal Arbitration Act. The rule of nonarbitrability adopted in Iskanian is limited to representative claims for civil penalties in which the state has a direct financial interest.
E. Appropriate Appellate Relief
The trial court's order denied the motion to compel arbitration and struck the words "statutory penalties" from paragraph 30 of the amended complaint "based on [Employee's] contention that he only seeks PAGA civil penalties and no individual damages."
Counsel for Employee drafted the order signed by the trial court and included the phrase "he only seeks PAGA civil penalties and no individual damages." We cannot interpret this phrase as a waiver of Employee's right to pursue claims for unpaid wages because that statement was based on a misunderstanding of applicable
Alternatively, if Employee intends to (1) limit the claims pursued to PAGA representative claims seeking civil penalties paid largely into state coffers and (2) waive the claims for individualized relief (such as the recovery of unpaid wages pursuant to Lab. Code, § 558 ), then the litigation can proceed on those limited claims. In that situation, there is no need for an order referring claims to arbitration and possibly staying the litigation until the arbitration is completed.
DISPOSITION
The order denying the motion to compel arbitration is affirmed insofar as it denies arbitration of the PAGA representative claims seeking civil penalties that are paid, in whole or in part, to the Labor and Workforce Development Agency. The trial court is directed to conduct further proceedings to determine the plaintiff's intention with respect to the pursuit of other claims and, after his intentions are made clear, to enter an order that is consistent with this opinion.
WE CONCUR:
POOCHIGIAN, Acting P.J.
SMITH, J.
Notes
We italicized the terms civil penalties and civil penalty for the remainder of this introduction to emphasize that, as used by the Californiа Supreme Court in Iskanian, they are terms of art with a precise meaning designed to avoid the reach of the Federal Arbitration Act. This precise meaning is narrower than the way the terms were used by the Legislature in Labor Code section 558 and by the court in Thurman v. Bayshore Transit Management, Inc. (2012)
If the employee intends to pursue the claims for unpaid wages on remand, the trial court must order those claims to arbitration and resolve whether to stay the litigation until the arbitration is completed. Alternatively, if he intends (1) to limit the claims pursued to PAGA representative claims seeking civil penalties (see fn. 1, ante ) 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.
In Discover Bank v. Superior Court (2005)
We accept the second part of this statutory construction, which allows all of the underpaid wages recovered under Labor Code section 558 to go to the aggrieved employee, rather than being alloсated under the PAGA's general rule requiring 75 percent to go to the government and 25 percent to the employee. The provision in Labor Code section 558 is more specific and, thus, controlling. (See State Dept. of Public Health v. Superior Court (2015)
The exception was EEOC v. Waffle House, Inc. (2002)