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California Supreme Court Limits Unfair Competition Law and Expands Private Attorneys General Act

On June 30, the California Supreme Court issued a decision holding that representative actions for alleged violations of the California Labor Code brought by employees under the unfair competition law, Cal. Bus. & Prof. Code §§ 17200 et seq. (the “UCL”), must be certified as class actions, but that representative actions by employees under the Labor Code Private Attorneys General Act of 2004, Cal. Lab. Code §§ 2698 et seq. (“PAGA”), may proceed without being certified as class actions. See Arias v. Superior Court, S155965 (June 29, 2009). This will likely encourage many more plaintiffs and their counsel to pursue PAGA claims. In a companion case, the California Supreme Court held that neither UCL actions nor PAGA actions may be assigned, and that unions lack standing to pursue such actions on behalf of employees. See Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court, S151615 (June 29, 2009).

In Arias, the Court held that Proposition 64, by which California voters amended the UCL, requires that representative UCL actions satisfy class action requirements. The Court rejected the plaintiffs’ argument that the language of Proposition 64, which requires plaintiffs to comply “with Section 382 of the Code of Civil Procedure,” did not impose a requirement that actions be brought as class actions. The Court held that a thorough review of the Voter Information Guide for Proposition 64, including the official title prepared by the Attorney General, the ballot measure summary prepared by the Secretary of State and the analysis prepared by the Legislative Analyst, left “no doubt” that voters intended to impose class action requirements on representative actions brought under the UCL.

The Court also held, however, that the same requirement does not apply in actions brought under PAGA. The Court noted that PAGA allows an “aggrieved employee” to bring a civil action on behalf of other current or former employees to recover penalties for Labor Code violations. The Court rejected the defendants’ argument that class action requirements apply generally to any form of representative action unless the Legislature affirmatively precludes their application. The Court also found that nothing in the legislative history of PAGA indicated intent to require compliance with class action procedures. Finally, the Court rejected the defendants’ argument that their due process rights would be violated through the resulting problem of “one-way intervention,” which refers to the following dilemma: if an employee prevails in a non-class representative action, the judgment is binding on the employer as to other employees, but if the employer prevails in the action, the judgment is not binding on other employees. The Court acknowledged this problem, but held that, “[t]he potential for nonparty aggrieved employees to benefit from a favorable judgment under the act without being bound by an adverse judgment, however, is not unique to” PAGA.

In Amalgamated Transit, the Court held that the plaintiff union lacked standing to pursue representative claims under either the UCL or PAGA on behalf of employees. First, the Court held that UCL and PAGA claims are not assignable (and, therefore, that the union lacked standing pursuant to the purported assignment of claims to it). The Court noted that, following the enactment of Proposition 64, UCL claims may only be brought by persons suffering “actual injury.” As the Court held, that requirement would be nullified if a person who suffered an injury could assign a claim to a person who did not. The Court also held that, because claims for statutory penalties are not assignable, a cause of action under PAGA may not be assigned. Second, the Court held that the union did not have “associational standing” to pursue claims on behalf of its members under either the UCL or PAGA. The Court held that unions did not suffer “actual injury” as required by the UCL and that they were not “aggrieved employees” as required by PAGA.

The Court’s decisions will have a significant impact on the numerous wage and hour cases currently pending and yet to be filed in the California courts. The requirement that representative UCL actions be certified as class actions should slow the growth of such suits against employers, but the absence of any similar requirement under PAGA creates significant potential for abuse. Absent the need to satisfy class actions requirements, plaintiff and their counsel will find PAGA claims more enticing, thereby increasing the stakes for employers.

O’Melveny & Myers, together with co-counsel, filed amicus briefs in the Arias and Amalgamated Transit cases on behalf of the Employers Group, the California Employment Law Council, the Chamber of Commerce of the United States of America, and the California Chamber of Commerce.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Scott Dunham, an O’Melveny partner licensed to practice law in California, and Ryan Rutledge, an O’Melveny counsel licensed to practice law in California, have contributed to the content of this newsletter. The views expressed in this memo are those of the authors.