Authored By: Jeffrey Bils

In yet another setback for employers seeking to remove California wage and hour cases to federal court, the Ninth Circuit held that the federal Class Action Fairness Act (“CAFA”) provides federal courts with no basis to assert jurisdiction over suits filed under the California Labor Code Private Attorneys General Act (“PAGA”) that are not pled as class actions.

Thursday’s decision in Baumann v. Chase Investment Services Corp., Case No. 12-55644, comes on the heels of Urbino v. Orkin Services, 726 F.3d 1118 (9th Cir. 2013), in which the Ninth Circuit held that potential PAGA penalties cannot be aggregated to meet the minimum amount in controversy requirement for federal diversity jurisdiction.  The net result of these two decisions is that employers now have fewer legal tools available to remove California PAGA claims to federal court.

PAGA, also referred to as the “Sue Your Employer Act,” allows California employees to step into the shoes of the state’s Labor and Workforce Development Agency if the agency declines to investigate alleged Labor Code violations.  PAGA empowers an employee to sue on his or her own behalf and in a representative basis on behalf of other current and former employees.  The stakes can be high: Statutory penalties under PAGA can be $100 for each aggrieved employee per pay period for the initial violation, and $200 for each subsequent violation.  For large employers, this can mean potential liability in the millions of dollars.

In Baumann, the employee brought PAGA claims in Los Angeles Superior Court alleging that Chase failed to pay overtime, provide meal breaks, allow rest periods, and reimburse expenses on time for its financial advisors.

Chase did what many employers have done in such circumstances:  It removed the action to federal District Court.  Chase asserted two bases to invoke federal jurisdiction: 1) diversity jurisdiction, in part because the amount in controversy exceeded $75,000 if all potential PAGA penalties and attorneys’ fees were aggregated; and 2) jurisdiction under CAFA.

CAFA creates federal jurisdiction for class actions in which the amount in controversy exceeds $5 million, the class has at least 100 members, and any member of the class is a citizen of a state different from any defendant.  CAFA defines a class action as any civil action filed under Federal Rule of Civil Procedure 23 (which governs class actions) or under a “similar State statute or rule of judicial procedure.”

Baumann asked the District Court to remand the case back to state court.  The District Court declined to remand, aggregating the potential PAGA penalties to invoke diversity jurisdiction.  Baumann appealed the District Court’s order denying Baumann’s motion to remand.

In its decision, the Ninth Circuit rejected diversity jurisdiction in a footnote, in which it cited to its decision in Urbino holding that aggregating PAGA penalties will not satisfy the amount in controversy requirement for federal diversity jurisdiction.  The bulk of the Baumann decision focuses instead on whether CAFA provides a basis for federal jurisdiction.

The Ninth Circuit resolved this question as a matter of statutory interpretation.  The Court examined whether a PAGA action, when compared with a Rule 23 class action, could be regarded as a “similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action,” as required by CAFA.  The panel’s resounding answer: No.

Why not?  Because, according to the court, PAGA does not include many of the requirements that are built into the federal Rule 23 requirements for class actions.  For example, the Ninth Circuit panel noted, unlike Rule 23, PAGA does not require unnamed aggrieved employees to be provided notice of the lawsuit, and PAGA does not permit those employees to opt out.  Nor does the trial court look into the ability of the named plaintiff and class counsel to represent the unnamed employees fairly and adequately, as Rule 23 would require.  In addition, the panel noted, “PAGA contains no requirements of numerosity, commonality, or typicality.”  And PAGA judgments do not have the same binding and preclusive effects as a Rule 23 class action judgment.

The panel also noted that “[b]ecause an identical suit brought by the state agency itself would plainly not qualify as a CAFA class action, no different result should obtain when a private attorney general is a nominal plaintiff.”

The panel reversed the District Court and remanded with instructions to grant Baumann’s motion to send the case back to state court.

The Bottom Line:  For employers, the Baumann decision is the second shoe dropping after the Urbino decision last year took away the possibility of aggregating PAGA penalties to meet the minimum amount in controversy requirement for federal diversity jurisdiction.  With these two decisions, the law is more clear and removing a PAGA action to federal court is even more difficult than before.