The Perils of PAGA

Starks v. Vortex Indus., Inc., No. B288005 (D2d1 Aug. 25, 2020)

Yet again, the Court of Appeal finds that a judgment in a PAGA case is res judicata to another PAGA case alleging the same violations by a different aggrieved employee. That’s not particularly controversial.

This case, however, illustrates how treating PAGA claims as a qui tam and not a class action can yield some pretty funky results. Plaintiff #1 and Plaintiff #2 both have PAGA claims over the same violations. Because Plaintiff #1 was the first to file by about six monts, Plaintiff #2’s case got stayed. 

During the stay, Plaintiff #1 settled. The settlement should have raised some red flags. Plaintiff #1’s lawyers got $630k. Plaintiff #1 got a $10k incentive award. And then $25k was allocated as the penalty for the PAGA violation, which get split 75/25 between the LDWA and the aggrieved employees. So that’s $18,750 for the LWDA and $6,250 for the aggrieved employees, with each aggrieved employee getting $33.30 each. Suffice it to say, a settlement like that that would probably never get approved for a class action. 

But this isn’t a class action. PAGA requires notice to the LDWA and that the court  review and approve any settlement. See Labor Code § 2699(l)(2). So after the deal was struck, Plaintiff #1 mailed the settlement agreement to the LDWA. None of the other aggrieved employees got notice. The parties moved for approval of the settlement on an ex parte basis. The ex parte didn’t explain the potential value of the claims and it did not give any information that would have permitted a loadstar calculation for Plaintiff #1’s attorney’s fees. And it included a specific request that Plaintiff #2 didn’t need to be informed of the settlement. The LDWA never objected, and the trial court approved the settlement and entered judgment. 

Eventually Plaintiff #2 got word of the settlement. About three weeks after the judgment effectuating the settlement had been entered, Plaintiff #2 filed a motion to vacate under Code of Civil Procedure § 663. A few days later, he also filed a motion to intervene. While all this was going on, the LDWA cashed its $18,750 check. Also, Plaintiff #2’s wife got his $33.30 check in the mail and cashed it without telling Plaintiff #2.

The trial court denied Plaintiff #2’s intervention motion as untimely. It denied his § 663 motion because the LDWA—on whose behalf Plaintiff #2 was purporting to act—had cashed its check and thus waived any ability to object to the judgment. And then it granted summary judgment in Plaintiff #2’s case on because of the preclusive effect of the judgment in Case #1. 

Plaintiff #2 appeals in both cases. The Court of Appeal affirms. If you think of a PAGA as a qui tam, each step of its analysis basically makes sense. It’s generally not ok to wait till judgment to intervene. And if a principal (LDWA) accepts the benefit of a settlement, it should not be able to object through some other agent (like Plaintiff #2). And as I said at the top, the res judiciata effect over successive PAGA actions based on the same violations is not controversial.

But treating the analysis as a purely qui tam question leaves out one group of constituents: the other aggrieved employees, who split 25 percent of the penalties. In this case, they got screwed. Because the LDWA is chronically underfunded, it does not have the resources to examine the merits of proposed settlements. So nobody, at any point in the case, was looking out for the interests of the other aggrieved employees. Indeed, although they had money on the line, they didn’t get so much as a notice.

That, generally, is the gist of Justice Bendix’s dissent. She agrees that the intervention was untimely, but she thinks the court should have reached the merits of the § 663 motion and vacated the judgment. As she sees it, because the LDWA is so understaffed, its cashing of a settlement check isn’t really indicative of approval of anything. It is certainly not knowing and voluntary enough to make out a waiver. Nor, for that matter, was Plaintiff #2’s wife’s act of cashing his check enough to show that Plaintiff #2 knowingly accepted the settlement’s benefits. 

And given that Plaintiff #2 had a pecuniary interest that was affected by the terms of the settlement, he should have been considered a “party aggrieved” for both the purposes of § 663 and § 902, which governs standing on appeal. So his objections should have been taken on the merits. And given that the terms of the settlement were so uneven they suggested collusion, the trial court abused its discretion by failing to “review and approve” the agreement. Thus, the trial court should have vacated the judgment and conducted further inquiry. And without that judgment, nothing precluded Plaintiff #2’s case.

I get the feeling that a petition for review is in the future here.

Affirmed.