DeMarinis v. Heritage Bank of Commerce (2023) is a recent case that highlights the complex interplay between the Private Attorneys General Act (PAGA) and the role of “poison pill” clauses in arbitration waiver agreements.

DeMarinis involved employees of Heritage Bank of Commerce (Heritage Bank) who, upon being hired, agreed to resolve any employment-related disputes through arbitration. A specific portion of the agreement, the "Waiver of Right to File Class, Collective, or Representative Actions," restricted both Heritage Bank and its employees from filing claims in a class or representative capacity. Notably, the agreement included a non-severability clause, also known as a "poison pill," which stated that if any portion of the waiver provision was found to be unenforceable, the entire agreement would be rendered null and void.

In 2020, Nicole DeMarinis and Kelly Patire, employees of Heritage Bank, filed a lawsuit against Heritage Bank for wage and hour and other Labor Code violations. The lawsuit was a putative class action and a representative action under PAGA. At trial, Heritage Bank unsuccessfully moved to compel arbitration of the plaintiffs' individual PAGA claims pursuant to the “representative” action waiver in the parties' arbitration agreement. 

Heritage Bank argued, based primarily on Viking River Cruises, Inc. v. Moriana (2022), that the trial court erred in denying arbitration, contending that the waiver provision was not an unenforceable "wholesale" waiver of PAGA claims but a valid waiver applicable solely to the plaintiffs' "non-individual" PAGA claims. Nevertheless, the trial court sided with the plaintiffs, deeming the waiver unenforceable. In light of the "poison pill" clause, the entire agreement was consequently declared null and void.

On appeal, the Court examined PAGA's complex legal history. First, the Court looked to the California Supreme Court's decision in Iskanian v. CLS Transportation Los Angeles LLC (2014), which held that PAGA claims could not be split into individual and non-individual claims and that a wholesale waiver of an employee's right to bring PAGA actions against their employer would be against public policy.

Subsequently, the Court examined the United States Supreme Court's decision in Viking River, which contradicted Iskanian, holding that PAGA claims could be separated into individual and non-individual claims. Citing the FAA's strong stance on enforcing arbitration agreements, the Supreme Court  held that employers could enforce arbitration waivers of individual PAGA claims. Unfortunately for employees, the Supreme Court also determined that, under California law, employees who arbitrate individual claims would lack standing to bring non-individual, representative PAGA claims.

However, the Viking River decision did not mark the end of the story. In 2023, the California Supreme Court issued a follow-up ruling in Adolph v. Uber Technologies, Inc. (2023), directly addressing Viking River. Here, the California Supreme Court held that while an employee could be compelled to arbitrate an individual PAGA claim, that employee would still retain standing to pursue a representative PAGA claim in court. Adolph emphasized that PAGA standing is acquired when an employee suffers a Labor Code violation and that an attempt to waive an employee's right to bring a representative PAGA claim would be unenforceable.

Heritage Bank had argued that its use of the term “representative” in its arbitration agreement only referred to non-individual PAGA claims, which would have been acceptable. However, the Court of Appeal in DeMarinis rejected this attempt to narrowly construe the term "representative." Instead, the Court held that the term must be interpreted broadly to encompass both individual and non-individual PAGA claims.

Using this broad interpretation of "representative," the Court found that Heritage Bank's agreement language required employees to bring claims only in their individual capacity. As such, Heritage Bank's waiver provision was, in fact, an unenforceable wholesale waiver of plaintiffs' right to bring representative PAGA actions. Given the agreement's inclusion of a “poison pill” clause, the Court concluded that Heritage Bank's entire arbitration contract was unenforceable in its entirety.

As employers consider this decision, it is crucial to draft arbitration clauses with care, particularly those that include "poison pill" clauses. DeMarinis emphasizes that a “poison pill” may render the entire arbitration agreement unenforceable if an arbitration waiver does not specifically waive only those individual PAGA claims. As the legal landscape between the FAA and California state law continues to develop, employers must ensure that their contractual language is consistent with evolving judicial interpretations of PAGA.