By Felix Shafir, John Querio, and Selene Houlis, colleagues at Horvitz & Levy LLP, a firm devoted to civil appellate litigation. The firm has extensive experience handling appeals in class and representative actions, including many wage-and-hour lawsuits asserting PAGA claims.
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California’s Private Attorneys General Act (PAGA) “empowers employees to sue on behalf of themselves and other aggrieved employees to recover civil penalties previously recoverable only by the Labor Commissioner.” ZB, N.A. v. Superior Court, 448 P.3d 239, 243 (Cal. 2019). The California Supreme Court has concluded that a “PAGA representative action” is “a type of qui tam action” in which workers sue as proxies for state labor law enforcement agencies. Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129, 147-48 (Cal. 2014).
This characterization of PAGA claims as qui tam actions has helped plaintiffs to circumvent limitations that would otherwise apply to representative actions—for example, to sidestep the Federal Arbitration Act’s mandate requiring courts to enforce representative-action waivers in arbitration agreements. See, e.g., id. at 145-53. However, the Ninth Circuit’s recent decision in Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668 (9th Cir. 2021), refused to permit that characterization to eviscerate Article III standing requirements for claims in federal courts. Magadia held that, notwithstanding this “qui tam” label, a plaintiff has no standing to bring PAGA claims for violations suffered by employees other than the plaintiff, distinguishing PAGA claims from traditional qui tam actions.
Magadia signals that federal courts may now be less willing to permit a PAGA claim’s “qui tam” rubric to undermine the application of federally-mandated requirements to representative PAGA actions.
PAGA Claims and Qui Tam Actions
PAGA “deputiz[es] employees harmed by labor violations to sue on behalf of the state and collect penalties, to be shared with the state and other affected employees.” Williams v. Super. Ct., 398 P.3d 69, 79 (Cal. 2017). Under PAGA, “aggrieved employees, acting as private attorneys general,” are able to “bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations.” Arias v. Superior Court, 209 P.3d 923, 929-30 (Cal. 2009). “Of the civil penalties recovered, 75 percent goes to [California’s] Labor and Workforce Development Agency, leaving the remaining 25 percent for the ‘aggrieved employees.’” Id. at 930.
In 2014, the California Supreme Court held that PAGA claims are a “type of qui tam action.” Iskanian, 327 P.3d at 148. Qui tam actions have a long history in England and America. Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 774 (2000).
Qui tam actions “appear to have originated around the end of the 13th century” in England, “when private individuals who had suffered injury began bringing actions in the royal courts on both their own and the Crown’s behalf.” Id. But such common-law qui tam lawsuits “gradually fell into disuse” starting in the 14th century. Id. at 775.
“At about the same time, however, Parliament began enacting statutes that explicitly provided for qui tam suits. These were of two types: those that allowed injured parties to sue in vindication of their own interests (as well as the Crown’s),” and “those that allowed informers to obtain a portion of the penalty as a bounty for their information, even if they had not suffered an injury themselves.” Id. These latter informer statutes “were highly subject to abuse” and were gradually curtailed in England until they completely ceased to exist there by 1951. Id. at 775-76.
“Although there is no evidence that the [American] Colonies allowed common-law qui tam actions,” the Colonies “did pass several informer statutes expressly authorizing qui tam suits.” Id. “Moreover, immediately after the framing, the First Congress enacted a considerable number of informer statutes.” Id. Indeed, the “most frequently used” American qui tam statute is the False Claims Act, originally enacted by Congress in 1863. See id. at 768-69.
The California Supreme Court characterized PAGA as creating a type of qui tam claim akin to that authorized by the federal False Claims Act because an aggrieved employee’s PAGA action functions as a substitute for an action brought by the government, the judgment in a PAGA action binds not only the named plaintiff and defendant but also the government and nonparty aggrieved employees, and the civil penalties recovered by the PAGA plaintiff on behalf of the state were previously recoverable only by state labor law enforcement agencies. Iskanian, 327 P.3d at 147-48.
The Explosive Growth of PAGA Litigation
Following an explosive increase in the number of class actions during the modern era, businesses sought to curb such representative litigation through class-action waivers in arbitration agreements. These efforts initially faced resistance in California, where California courts often refused to enforce such waivers. See, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 340, 342 (2011). But this began to change with the U.S. Supreme Court’s Concepcion decision, which held that the Federal Arbitration Act (FAA) preempted state-law restrictions of such waivers in arbitration agreements and required their enforcement. Id. at 341-52.
Thereafter, to evade Concepcion, plaintiffs in wage-and-hour lawsuits turned with increasing frequency to PAGA. Their efforts soon bore fruit: in Iskanian, the California Supreme Court held that (1) state public policy prohibited the enforcement of an arbitration agreement’s PAGA representative-action waiver, and (2) the FAA did not preempt this prohibition. 327 P.3d at 133. Iskanian insisted that the FAA applies solely to the arbitration of claims belonging to private parties and that a PAGA claim, as a type of qui tam claim, amounted to a public law enforcement action lying “outside the FAA’s coverage.” Id. at 147-48, 151-53. Subsequently, the Ninth Circuit likewise held that the FAA did not preempt Iskanian’s PAGA rule. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015).
Following Iskanian and Sakkab, the number of PAGA representative actions exploded. In 2005—when the California Supreme Court first adopted restrictions on the enforcement of class-action waivers in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005)—plaintiffs filed approximately 759 PAGA lawsuits. Emily Green, State Law May Serve as Substitute for Employee Class Actions, L.A. Daily Journal (Apr. 17, 2014). By contrast, California’s own data indicates that tens of thousands of PAGA notices—the necessary precursor for initiating PAGA lawsuits—are now filed with the State each year. Laura Reathaford & Sam Garcia, When Employee Protection Becomes Calamity, L.A. Daily Journal (Feb. 27, 2020).
Moreover, after Iskanian and Sakkab, California courts quickly began to expand the scope and reach of PAGA lawsuits. For example, the California Supreme Court expanded the scope of “PAGA discovery as broadly as class action discovery has been extended,” Williams, 398 P.3d at 548. And a California Court of Appeal held that so long as the named plaintiff in a PAGA lawsuit suffers one Labor Code violation, that plaintiff can pursue penalties on behalf of other “aggrieved employees” for violations the plaintiff did not personally suffer. Huff v. Securitas Security Services USA, Inc., 233 Cal. Rptr. 3d 502, 504, 506-13 (Cal. Ct. App. 2018).
In short, unconstrained by representative-action waivers in arbitration agreements, California courts “have consistently eroded employers’ ability to defend against PAGA litigation.” Ivan Muñoz, Note, Has PAGA Met Its Final Match? Continued Expansion of California’s Private Attorneys General Act Leads To Trade Group’s Constitutional Challenge, 60 Santa Clara L.Rev. 397, 399 (2020).
The Ninth Circuit’s Resistance To PAGA’s “Qui Tam” Label
Notwithstanding Iskanian’s classification of PAGA claims as qui tam actions, the Ninth Circuit has refused to let this qui tam label trump the limits imposed by federal laws and the U.S. Constitution.
For example, whereas California courts maintain that PAGA qui tam claims “fall outside the FAA’s purview,” Correia v. NB Baker Elec., Inc., 244 Cal. Rptr. 3d 177, 185, 190 (Cal. Ct. App. 2019), the Ninth Circuit has concluded that “an individual employee can pursue a PAGA claim in arbitration” under the FAA and “can bind the state to an arbitral forum.” Valdez v. Terminix Int’l Co. Ltd. P’ship, 681 F. App’x 592, 594 (9th Cir. 2017). And, despite Iskanian’s insistence that PAGA claims are brought on behalf of the government, the Ninth Circuit has concluded that a federal statutory exception to the automatic bankruptcy stay imposed on lawsuits against a debtor after the debtor initiates bankruptcy proceedings—specifically, an exception for actions by a governmental unit—does not apply to a PAGA claim because the named PAGA plaintiff’s claim is filed by that individual and “it remains under his control.” Porter v. Nabors Drilling USA, L.P., 854 F.3d 1057, 1059, 1060-62 (9th Cir. 2017).
This resistance to California courts’ efforts to depict PAGA claims as qui tam actions recently culminated in Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668 (9th Cir. 2021). There, the Ninth Circuit refused to permit the qui tam label to trump the constitutional standing requirements a lawsuit must meet to proceed in federal court.
The plaintiff in Magadia brought a wage-and-hour class action suit alleging that an employer violated California’s Labor Code by issuing improper wage statements and failing to provide sufficient meal-break payments. Id. at 673. The plaintiff also sought civil penalties for those violations under PAGA. Id.
The district court found for the plaintiff on his wage statement claims, but found against him on his meal-break payment claim because the plaintiff had not personally suffered any meal-break violation. Id. The court nonetheless allowed the plaintiff to recover PAGA penalties for meal-break violations suffered by other employees. Id.
On appeal, the Ninth Circuit addressed whether the plaintiff had standing to maintain the PAGA meal-break claim in federal court under Article III of the U.S. Constitution, given the finding that he had not personally suffered a meal-break violation. Id. at 674-80. To meet this standing requirement, a plaintiff must have suffered an injury-in-fact fairly traceable to the defendant’s unlawful conduct that will be redressed by a favorable decision. Id. at 673-74. The court held that, “with no individualized harm” for the meal-break claim, the plaintiff “cannot establish traditional Article III standing.” Id. at 674.
The plaintiff argued that he nevertheless had standing to bring this PAGA claim because it was a qui tam action, which is a “‘well-established exception’ to the traditional Article III analysis.” Id. at 674. The Ninth Circuit rejected this argument because PAGA’s structure deviated sharply from traditional qui tam actions in two significant ways. Id. at 676, 678.
First, PAGA “creates an interest in penalties, not only for California and the plaintiff employee, but for nonparty employees as well.” Id. at 676. The implication of third-party rights is “atypical,” “if not wholly unique,” for a supposed qui tam action. Id. The Ninth Circuit held that this feature “conflicts with qui tam’s underlying assignment theory”—i.e., “that the real interest is the government’s, which the government assigns to a private citizen to prosecute on its behalf”—and “Article III’s core principle that each plaintiff ‘must assert his own legal rights and interests . . . [not] . . . the legal rights or interests of third parties.’” Id. at 676–77.
Second, “PAGA represents a permanent, full assignment of California’s interest to the aggrieved employee,” whereas “a traditional qui tam action acts only as ‘a partial assignment’ of the Government’s claim.” Id. at 677. In such traditional qui tam lawsuits, “[t]he government remains the real party in interest” and “can intervene in a suit, can settle over the objections of the relator, and must give its consent before a relator can have the case dismissed.” Id. By contrast, “once California elects not to issue a citation, the State has no authority under PAGA to intervene in a case brought by an aggrieved employee.” Id. Thus, PAGA “lacks the ‘procedural controls’ necessary to ensure that California—not the aggrieved employee (the named party in PAGA suits)—retains ‘substantial authority’ over the case.” Id.
The Ninth Circuit acknowledged that Iskanian had characterized PAGA as a qui tam statute. Id. at 675. But the Ninth Circuit held that federal courts applying federal requirements “must look beyond the mere label attached to the statute and scrutinize the nature of the claim itself.” Id. On carefully examining the material differences between traditional qui tam actions and how PAGA representative lawsuits operate in practice, the Ninth Circuit concluded that case law authorizing Article III standing for qui tam actions did not confer such standing on a plaintiff pursuing a PAGA claim for violations the plaintiff did not personally suffer.
If this decision withstands the plaintiff’s pending en banc rehearing petition or a potential petition for writ of certiorari, Magadia will further curtail plaintiffs’ efforts to evade federal restrictions on PAGA claims. Indeed, Magadia could have ramifications beyond the Article III standing context.
For example, whereas the California Supreme Court has held that representative PAGA claims need not satisfy class action requirements in state courts, Arias, 209 P.3d at 926, federal district courts are divided over whether PAGA claims must satisfy federal class action requirements to proceed as representative actions in federal courts, see, e.g., Evans v. Wal-Mart Stores, Inc., No. 2020 WL 6253695, at *11 (C.D. Cal. Sept. 14, 2020) (collecting cases). Federal courts that permit plaintiffs to proceed without satisfying class certification requirements often reason that citizens who bring qui tam claims typically have Article III standing, and therefore plaintiffs who bring representative PAGA claims likewise have such standing since a PAGA lawsuit is a type of qui tam action. But this rationale may not survive Magadia’s requirement that federal courts look beyond this “qui tam” label and its holding that PAGA claims are materially different from traditional qui tam claims.
Moreover, employers are currently filing petitions for writs of certiorari challenging the premise that the FAA does not preempt California’s prohibition against the enforcement of PAGA representative-action waivers in arbitration agreements. See, e.g., Felix Shafir et al., The PAGA Preemption Battle Knocking On High Court’s Door, Law360 (Aug. 3, 2021). These petitions urge the U.S. Supreme Court to look beyond Iskanian’s “qui tam” label for PAGA claims in assessing whether the FAA should apply to PAGA representative-action waivers with no less force than it does to class-action waivers based on how PAGA representative actions operate in practice. See, e.g., Petition for Writ of Certiorari, Viking River Cruises, Inc. v. Moriana (U.S. May 10, 2021), 2021 WL 1944938. The Ninth Circuit’s refusal to turn a blind eye to the practical reality of how a PAGA claim differs from traditional qui tam claims could potentially bolster such FAA preemption challenges.
Conclusion
California and federal courts continue to vigorously disagree over the extent to which California’s characterization of PAGA claims as qui tam actions can trump federal requirements. The Ninth Circuit’s recent decision to look beyond the qui tam label that Iskanian attached to PAGA claims exacerbates this conflict and may signal a willingness on the part of federal courts meaningfully to apply federal laws and the U.S. Constitution to PAGA claims notwithstanding this label.