New Barriers to Removal of PAGA Actions

New Barriers to Removal of PAGA Actions

California’s Labor Code Private Attorneys General Act (the “PAGA”) permits employees to step into the shoes of the state and sue their employers for civil penalties for Labor Code violations when the Labor and Workforce Development Agency declines to investigate the violations or issue citations. Under the PAGA, employees may bring suit on behalf of themselves and other current or former employees. Seventy-five percent of any penalties employees collect based on PAGA claims goes to the state of California. The employees retain the remaining twenty-five percent.

Employees typically file PAGA actions in state court, and employers often remove the cases to federal court, invoking diversity jurisdiction or jurisdiction under the Class Action Fairness Act (the “CAFA”). But recent developments in the law governing federal jurisdiction are likely to raise barriers to the removal of PAGA actions to federal court.

Recent Developments in the Ninth Circuit

The Ninth Circuit’s decision last year in Urbino v. Orkin Services of California, Inc. made it more difficult for employers to remove PAGA actions based on diversity jurisdiction. In Urbino, the court held that an employer could not aggregate the civil penalties attributable to Labor Code violations suffered by all employees to meet the $75,000 amount-in-controversy requirement for diversity jurisdiction. The plaintiff in Urbino filed a PAGA action in state court and the defendants removed the case to federal court based on evidence that the employees’ claims, in the aggregate, could result in liability in excess of $75,000. In concluding that there was no diversity jurisdiction, the Ninth Circuit reasoned that a PAGA plaintiff seeking penalties for violations suffered by other employees represents the interests of the state, which is not a “citizen” for diversity purposes.

The Ninth Circuit’s decision in Urbino did not address whether a PAGA action can be removed to federal court under the CAFA, either because it is sufficiently “similar” to a class action or because it qualifies as a “mass action.” The question whether a PAGA action is sufficiently similar to a class action currently is before the court in Baumann v. Chase Investment Services Corporation. The plaintiff in Baumann argued that the CAFA’s class action provision did not provide a basis for federal jurisdiction over PAGA actions, relying on the Ninth Circuit’s 2011 decision in Washington State v. Chimei Innolux Corporation, in which the court held that the CAFA’s class action provision did not provide a basis for federal jurisdiction over suits brought by states on behalf of their citizens, and on the California Supreme Court’s decision in Arias v. Superior Court, in which the court held that a PAGA action is a law enforcement action in which the plaintiff represents the same interests as the state.

The appeal in Baumann is before the same Ninth Circuit panel that decided Urbino, and was fully briefed and argued on March 5, 2013. However, the panel vacated submission of the case pending the U.S. Supreme Court’s decision in Mississippi ex rel. Hood v. AU Optronics Corporation.

The Supreme Court’s Decision in Hood

On January 14 of this year, the Supreme Court issued its decision in Hood. The Court held that the CAFA’s mass action provision did not provide a basis for federal jurisdiction over an action brought by the state of Mississippi alleging that the defendants’ unlawful price fixing resulted in economic harm to thousands of Mississippi residents.

Writing for a unanimous Court, Justice Sotomayor rejected the Fifth Circuit’s holding that the case was removable as a CAFA mass action. The basic problem, as Justice Sotomayor explained, is that the CAFA defines a “mass action” as one with one hundred or more “plaintiffs,” and Mississippi’s case against AU Optronics had only one plaintiff–the state of Mississippi. The Court rejected the defendants’ suggestion that the term “plaintiff” referred to the individual citizens on whose behalf relief was sought, observing that such a reading “would stretch the meaning of ‘plaintiff’ beyond recognition.”

The Upshot?

Although the Ninth Circuit has yet to issue its opinion in Baumann, the Supreme Court’s reasoning in Hood suggests that CAFA does not provide a basis for federal jurisdiction over PAGA claims that are not pled as class actions. While Hood was brought by the state of Mississippi rather than a private individual, the Ninth Circuit might not find this distinction relevant: after all, as the California Supreme Court observed in Arias, a PAGA action is fundamentally a law enforcement action brought on behalf of the public. And while Hood involved CAFA’s mass action provision rather than its class action provision, the Ninth Circuit’s decision in Chimei Innolux applied parallel reasoning to CAFA’s class action provision. Moreover, by vacating its submission of Baumann pending the Supreme Court’s decision in Hood, the Ninth Circuit indicated that it considers a PAGA plaintiff’s situation analogous to that of the state for purposes of determining jurisdiction under the CAFA.

Of course, in an appropriate case, a defendant may still invoke federal jurisdiction over a PAGA claim that is pled as a class action. However, under the California Supreme Court’s decision in Arias, plaintiffs are not required to plead PAGA claims as class actions.

Thus, going forward, employers are likely to encounter more barriers when seeking to remove PAGA actions in federal court.