The California Supreme Court Pulls The Carpet Out From Underneath Employers

Seyfarth Synopsis: On January 18, 2024, in Estrada v. Royalty Carpet Mills, Inc., the California Supreme Court addressed the split in appellate authority as to whether trial courts have inherent authority to strike a PAGA claim on the grounds that they were not manageable.  The Court concluded that, while trial courts may use a variety of tools to efficiently manage PAGA claims, striking such claims due to manageability concerns — even if those claims are complex or time-intensive — is not among the tools trial courts possess.

Facts

Former employees brought a lawsuit against Royalty, a carpet mill that ceased doing business in 2017 because of the “high cost of doing business in California.”  The complaint filed by the former employees alleged, among other things, that they failed to receive meal and rest periods during their employment. They sought to pursue these claims on behalf of a class of employees, as well as a representative PAGA action for additional penalties under the Labor Code.

The California Lower Court Decisions

A subclass of employees was certified to determine whether "class members were provided timely first meal periods and/or deprived of second meal periods." The trial court then held a bench trial on plaintiffs’ claims. Plaintiffs presented live testimony from 12 of the 13 named plaintiffs, deposition testimony from four different managers and officers of Royalty, live testimony from two of Royalty's human resources employees, and live testimony from an expert witness. In defense, Royalty presented testimony from two former employees and one expert witness.

Following the bench trial, the court decertified the meal period subclass because there were “too many individualized issues to support class treatment.” In the same order, the court dismissed the representative PAGA claim for meal period-related penalties as “being unmanageable.”

The plaintiffs appealed and the Court of Appeal reversed the trial court’s order and directed the trial court to hold a new trial on the meal period-related class and PAGA claims.

The California Supreme Court’s Decision

The California Supreme Court granted Royalty’s petition for review to resolve the split of appellate authority as to whether trial courts have inherent authority to strike a PAGA claim on manageability grounds. The Supreme Court rejected the trial court’s decision that a lack of predominance for class claims meant that the PAGA claims were unmanageable for the same reasons and should be dismissed. Ultimately, the Supreme Court held that trial courts cannot strike a PAGA claim solely on manageability grounds.

Notwithstanding its holding limiting the ability of trial courts to dismiss PAGA cases on the ground that they were not manageable,  the Supreme Court did note that trial courts have inherent authority to dismiss claims in limited circumstances. However, such circumstances (e.g. failure to prosecute, sham complaint) were not present here. Instead, the Supreme Court affirmed that trial courts can formulate rules of procedure to facilitate trial on the merits and to devise a procedure to adjudicate certain claims. However, such authority to formulate rules and procedures stops short of permitting a trial court to strike or dismiss a PAGA claim outright.

The Supreme Court also reaffirmed its proposition in Williams v. Superior Court that a plaintiff should ensure that the trial of a PAGA claim is manageable. Indeed, the Supreme Court stated that “it behooves the PAGA plaintiff to ensure the trial of the action is manageable.” However, it again stated that a lack of manageability was not grounds for a trial court to strike the PAGA claim in its entirety.

Instead, the Supreme Court stated that in order for PAGA claims to be “effectively tried,” trial courts can limit the type of evidence a plaintiff may present,  or otherwise limit the scope of the PAGA claim.  This includes limiting witness testimony and other forms of evidence when determining the number of violations that occurred and the amount of penalties to assess. The Supreme Court also declared that trial courts can issue rulings on demurrer or summary judgment to effectively manage claims which are pleaded in an overbroad and unspecific manner, to the extent that plaintiff is unable to prove liability as to all or most of the employees they are seeking to represent.

The Supreme Court also agreed with the arguments of Royalty and amici that employer-defendants have a due process right to present affirmative defenses. Accordingly, an employer must still be permitted to “introduce its own evidence, both to challenge the plaintiffs' showing and to reduce overall damages” and if plaintiffs seek to use a statistical model to prove their claims, defendants “must be given a chance to impeach that model or otherwise show that its liability is reduced.” However, because the trial court did not preclude Royalty from calling witnesses or otherwise presenting evidence (i.e. infringing upon Royalty’s due process rights) the Supreme Court explicitly left open the question as to whether PAGA claims can be stricken to preserve an employer’s due process rights.

What Estrada Means for Employers

While the Estrada decision will make headlines, it may not have much of an impact on the day-to-day defense of PAGA claims by employers.  Courts may no longer dismiss a PAGA claim based on manageability, but that nuclear option had already become increasingly rare in recent years.

Employers still can, and should, push for trial courts to use the case management tools the Supreme Court affirmed they can use to efficiently manage trials of PAGA claims. In doing so, employers should continue to advocate for trial courts to require plaintiffs to provide trial plans and sound statistical sampling methodology to demonstrate that any trial of PAGA claims can be effectively managed, while preserving the due process rights of the employer to present its defenses.

The Supreme Court’s decision still permits trial courts to effectively manage PAGA claims by other means short of striking the claims outright. For example, overbroad and unwieldy PAGA claims can and should be limited in scope via demurrer, motion for summary judgment, and/or narrowing down the plaintiff’s definition of “aggrieved employees.” Indeed, the Supreme Court reaffirmed that trial courts can limit the evidence to be presented at trial which would effectively redefine the group of “aggrieved employees” who claims are being adjudicated.

What’s Next

Following Estrada, manageability arguments alone can no longer be grounds for dismissal of a PAGA claim. However, manageability is still a basis to reduce the scope of PAGA claims—potentially to just a handful of employees—and can still be a potent defense.

The Supreme Court explicitly left open the question of whether due process concerns regarding an employer-defendant’s right to present affirmative defenses for each alleged aggrieved employee in the group could provide grounds for a trial court to dismiss a PAGA claim (rather than just limit its scope).  The due process argument may well be a question the Supreme Court will face in the future.