California Supreme Court Holds That Unmanageable PAGA Claims Cannot Be Dismissed

Now That California Courts Have Been Stripped of Authority to Dismiss Unmanageable PAGA Claims, How Will Employers Manage PAGA Litigation?

The California Supreme Court, on Jan. 18, issued its decision in Estrada v. Royalty Carpet Mills, Inc. (Jan. 18, 2024) S274340 and handed a major blow to California employers who are sued under the Private Attorney General Act (PAGA).  In short, the California Supreme Court held that unmanageable PAGA claims cannot be dismissed and in doing so eliminated a significant defense employer-defendants often asserted in defense of these complex PAGA claims.  So how are employers now supposed to defend unmanageable PAGA claims? Well, let us first look at how we got here to better understand what defenses remain against unmanageable PAGA claims.

Background

The Private Attorneys General Act (PAGA), enacted in 2004, allows aggrieved employees to step into the shoes of California’s labor law enforcement agency, the Labor and Workforce Development Agency (LWDA), by suing to recover civil penalties against their employers for various Labor Code violations. These PAGA claims are representative claims brought not just on behalf of the named plaintiff but on behalf of all current and former employees against whom one or more of the alleged violations were committed.

Since the enactment of PAGA, thousands of lawsuits asserting PAGA claims have been filed against California employers, stretching out to and impacting hourly, non-exempt employees en masse. While PAGA representative claims feel similar to class actions, expose employers to class action-type liability, and require employers to expend immense resources to defend these claims, as is true with class actions, California Courts have repeatedly held that PAGA actions are not subject to any of the requirements necessary for a plaintiff to proceed with a class action. Put differently, PAGA affords plaintiffs a far easier and less burdensome path to seek large monetary recoveries (whether via settlement or judgment) from employer-defendants.

Understanding that PAGA claims are not subject to the typical class action safeguards, over the years, employer-defendants argued for and sought judicial intervention to limit, strike, or dismiss PAGA claims that were simply “unmanageable.” These efforts produced mixed results. Indeed, before California’s Supreme Court’s decision in Estrada v. Royalty Carpet Mills, Inc., the state’s lower courts were split on whether courts had inherent authority to limit, strike or dismiss PAGA claims on manageability grounds.

The Previous Split

In Wesson v. Staples, the Court of Appeal for the Second Appellate District, Division Four, tackled a question of first impression: whether trial courts have inherent authority to ensure that PAGA claims will be manageable at trial, and to strike such claims if they cannot be managed.

In a win for employers, the Court of Appeal drew on prior precedent of the trial courts’ inherent authority to manage litigation, including ensuring the manageability of representative claims, and concluded that trial courts do have inherent authority to ensure that PAGA claims can be fairly and efficiently tried and, if necessary, may strike a claim that cannot be rendered manageable.  The Court of Appeal cautioned, though, that courts should not lightly strike even procedurally challenging claims and, instead, work with the parties to render a PAGA claim manageable by adopting a feasible trial plan or limiting the claim’s scope.

Then came the Court of Appeal for the Fourth District, Division Three in Estrada v. Royalty Carpet Mills, Inc., 76 Cal. App. 5th 685 (2022). This Appellate Court held that “a court cannot strike a PAGA claim based on manageability.”  While this Court of Appeal acknowledged the precedent the Wesson court relied on, it reached a different conclusion on such prior precedent and took the position that allowing dismissal of unmanageable PAGA claims would effectively interfere with PAGA’s purpose as a law enforcement mechanism. So, while this Court recognized that some PAGA claims may indeed be unmanageable, it found such claims could not be stricken on such grounds because doing so would place an extra hurdle (practically a class action requirement) on PAGA claims that are not placed on the state if the LWDA prosecuted the very same claim.

Acknowledging the challenges courts and litigants face when dealing with unmanageable claims, the Court of Appeal in Estrada reasoned that “courts are not powerless when facing unwieldy PAGA claims.”  More specifically, the Court proposed that trial courts may limit witness testimony and may limit other forms of evidence when determining the number of violations that occurred and the amount of penalties to assess.

Following the Court of Appeal’s decision in Estrada, the employer-defendant petitioned the California Supreme Court for review and the Supreme Court granted review.

The Resolution

On Jan. 18, the California Supreme Court issued its decision to resolve the question of “whether trial courts have inherent authority to strike a PAGA claim on manageability grounds.” The Court resolved the question by stripping courts of their authority to strike or dismiss PAGA claims for lack of manageability. While the Court concluded “that trial courts lack inherent authority to strike PAGA claims on manageability grounds”, the Court left open various other defense strategies to ensure a Defendant’s “right to due process was [not] violated[.]” More pointedly, the Court agreed that defendants, including employers in PAGA representative actions, have a due process right to:

• Present an affirmative defense;
• Present proof of their affirmative defenses;
• Present evidence to challenge plaintiff’s prima facie showing;
• Present evidence to reduce damages.

Indeed, understanding the importance of preserving defendants’ due process rights, the Court reserved judgment and refused to answer “whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim.” Instead, the Court focused on other “tools” that can and should be used to manage these complex PAGA cases, including:

• Limiting Plaintiff’s witnesses;
• Limiting Plaintiff’s other forms evidence;
• Managing discovery, including its scope;
• Managing the use of:
  • Representative testimony,
  • Surveys,
  • Statistical analysis.

Finally, the Court also held that trial courts “may … limit the scope of the PAGA claim.” Unfortunately, the Court did not elaborate on this final point and left litigants and lower courts without guidance of what are proper limitations of “the scope of the PAGA claim” as opposed to what limitations would amount to an improper striking of the PAGA claim.

While this decision is not the outcome California employers desired, many defense strategies remain available to employers facing PAGA claim lawsuits. If you have any questions about this article or the Estrada ruling, please contact Guillermo Tello (gtello@ClarkHill.com), Monique Eginli (meginli@clarkhill.com), or another member of Clark Hill’s California Labor and Employment Practice Group.

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