In 2020 Nicole DeMarinis and Kelly Patire filed a putative class action against Heritage Bank, asserting nine causes of action for (1) failure to reimburse business-related expenses; (2) failure to provide meal periods; (3) failure to provide rest periods; (4) failure to pay minimum wages; (5) failure to pay overtime compensation; (6) failure to provide accurate itemized wage statements; (7) failure to pay all wages due at separation of employment; (8) violation of the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200); and (9) violation of PAGA.

In the PAGA cause of action, plaintiffs allege they are “aggrieved employees” as defined in Labor Code section 2699, subdivision (a), and bring the PAGA action on behalf of the State of California with respect to themselves and all persons employed by Heritage Bank in California during the relevant time period.

Upon their hiring, plaintiffs purportedly executed a “MUTUAL AGREEMENT TO ARBITRATE CLAIMS” reflecting the parties’ “mutual consent to the resolution by arbitration of all claims, arising out of my employment (or its termination) that the Company may have against me, or that I may have against the Company.” The arbitration agreement covers claims for wages and other compensation, and for violations of any federal, state, or other law, statute, regulation, or ordinance.

In 2022, the United States Supreme Court issued its much-anticipated decision in Viking River Cruises v Moriana, 142 S.Ct. 1906 (2022), which held the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts the ruling of Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348 (Iskanian) “insofar as [Iskanian] precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” (Viking River, supra, at p. 1924].)

Relying on Viking River, Heritage Bank moved to compel arbitration of plaintiffs’ “individual claims (including individual PAGA claims)” and to dismiss “any class or non-individual PAGA claims.”

The trial court denied the motion. Observing that the waiver provision includes an improper waiver of the right of employees to bring “an action in court as proxy or agent of the LWDA und[er] the PAGA,” and that the nonseverability clause and poison pill preclude severance of that unenforceable waiver, the court determined the entire agreement to arbitrate is null and void and provides no basis for compelling arbitration of plaintiffs’ individual PAGA claims.

The Court of Appeal affirmed the denial of the motion to arbitrate in the published case of DeMarinis v. Heritage Bank of Commerce -A167091 (January 2024).

The arbitration agreement in Viking River contained “a severability clause specifying that if the waiver was found invalid, any class, collective, representative, or PAGA action would presumptively be litigated in court. But under that severability clause, if any ‘portion’ of the waiver remained valid, it would be ‘enforced in arbitration.’ ” (Viking River, 596 U.S. at p. ___ [142 S. Ct. at p. 1916].) The court interpreted this clause as permitting the employer to enforce arbitration of just the individual PAGA claim. (Viking River, 596 U.S. at p. ___ [142 S. Ct. at p. 1917].)

The last word came just over a year later when the California Supreme Court held in Adolph that an aggrieved employee who was compelled to arbitrate his individual PAGA claim nonetheless maintained standing to pursue his nonindividual PAGA claims in court. (Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104.)

Thus the Court of Appeal concluded this waiver provision is unenforceable under Iskanian’s principal rule, which “Viking River left undisturbed” (Adolph, supra, 14 Cal.5th at p. 1117), because it requires plaintiffs to waive their right to bring any “representative” PAGA claim “in any forum,” arbitral or judicial (see Iskanian, supra, 59 Cal.4th at pp. 360, 383).

Adolph recognizes that an individual PAGA claim in a case may proceed to arbitration, while nonindividual PAGA claims in the matter remain in court. (Adolph, supra, 14 Cal.5th at p. 1123; see, e.g., Piplack supra 88 Cal.App.5th at p. 1289. To facilitate this, employers are free to draft a severability clause like the one that Viking River interpreted in conjunction with the PAGA waiver to permit arbitration of just the individual PAGA claim.

“But here, Heritage Bank did not do so; instead, it used an arbitration agreement containing a nonseverability clause and a poison pill which together specified that all conditions in the waiver provision are material and may not be modified or severed, either ‘in whole or in part,’ and that if the waiver provision is found unenforceable, then ‘the entirety’ of the arbitration agreement is ‘null and void.’ “

Division Two reached a similar conclusion in Westmoreland v. Kindercare Education LLC (2023) 90 Cal.App.5th 967, at page 972. “There, as here, the arbitration agreement included a waiver of ‘class, collective, or representative’ claims, as well as a poison pill stating in relevant part that ‘if the Waiver of Class and Collective Claims is found to be unenforceable, then this agreement is invalid and any claim brought on a class, collective, or representative action must be filed in a court of competent jurisdiction.’ “

Severability and Poison Pill Clause Makes Arbitration Agm’t Null and Void