Ninth Circuit Upholds California Rule on Unenforceability of PAGA Representative Action Waivers
Today, the Ninth Circuit issued a surprising decision (disagreeing with the view of many California district courts), holding that the California Supreme Court’s Iskanian v CLS Transportation decision is not preempted by the Federal Arbitration Act (FAA). In Iskanian, the California Supreme Court held that while class action waiver provisions in arbitration agreements are enforceable, a PAGA representative action waiver is not enforceable because employees have an unwaivable statutory right to bring a representative PAGA claim against their employers. The California Supreme Court reasoned that a PAGA plaintiff essentially stands in the shoes of the state in bringing the claim and acts in large part to collect penalties on behalf of the state. In this way, the intent of the statute would be frustrated if employees could be required to waive the right to pursue a representative PAGA action. The Court further held that the FAA does not require that California enforce a PAGA waiver in an arbitration agreement.
The California Supreme Court’s ruling has prevented full enforceability of employment arbitration agreements in California state courts because all California state courts are bound by the California Supreme Court’s ruling. This predominantly impacts wage and hour class actions, which almost always have a piggy-back representative PAGA claim included. This has resulted in a situation where employers can successfully defeat the “class” claims by compelling arbitration of these claims on an individual, as opposed to class, basis. However, employers cannot preclude the representative PAGA claim. This leads to questions of where the PAGA representative action will be litigated (in arbitration or in court) and in what order compared to the individual claims. Many employers have revised their arbitration agreements to include specific provisions answering these questions to avoid the need to litigate them after a dispute has arisen.
Up until today, these complications were mostly limited to cases brought in California state courts. Employers facing wage and hour actions in California federal courts (either because the action was filed in federal court or the employer was able to remove it to federal court) have had great success in enforcing both class action and representative PAGA waivers, thereby being able to turn a class/representative court action into an individual action to be resolved in arbitration. This is because federal courts are not bound by the California Supreme Court’s view of FAA preemption and can instead independently determine whether the FAA preempts the California rule (set forth in Iskanian) barring enforceability of PAGA representative action waivers in arbitration agreements. Most California district courts to confront the issue have held that the FAA does, in fact, preempt California law in this regard. As such, these district courts have rejected Iskanian and have held that PAGA representative action waivers in arbitration agreements are enforceable just like class action waivers.
The split between California state courts and federal courts ended today (for now) with the Ninth Circuit ruling in Sakkab v. Luxottica Retail North America that the Iskanian rule on PAGA representative action waivers is not preempted by the FAA. The Ninth Circuit held that the FAA only preempts state rules that uniquely disfavor arbitration and that it does not preempt state law rules generally applicable to contracts (regardless of whether the contract is an arbitration agreement or some other type of contract). The Ninth Circuit reasoned that the Iskanian rule prohibiting pre-dispute waivers of PAGA claims applies to such a waiver regardless of what type of contract it is in and that it is not unique to arbitration agreements. [It is, of course, hard to conceive of any other type of agreement that would include a PAGA representative action waiver.] The Ninth Circuit further held that the Iskanian rule does not frustrate the FAA’s purposes because it simply preserves the right of an individual to bring a PAGA representative action in some forum – whether in arbitration or in court.
The Ninth Circuit acknowledged that a principal purpose of the FAA is to ensure that arbitration agreements are enforced according to their agreed upon terms. It cannot credibly be disputed that the Iskanian rule prevents an arbitration agreement with a representative PAGA waiver from being enforced according to its terms. However, the Ninth Circuit held that the FAA does not suggest that parties to an arbitration agreement can agree to terms that are unconscionable under state law and then have those terms enforced.
Justice N. Randy Smith dissented, stating his view that the Iskanian rule is preempted by the FAA.
Today’s ruling means that California employers will no longer be able to successfully enforce PAGA representative action waivers in California district courts, absent review and reversal of the Ninth Circuit’s decision by the United States Supreme Court. Stay tuned for a petition for review to be filed. The United Stated Supreme Court has already denied review in two California cases on this same issue but it is possible that the high Court will agree to review the Ninth Circuit decision, particularly given that it is a split decision.
Meanwhile, legislation is sitting on the desk of California’s Governor that, if signed into law, would add even more difficulty for California employers in the area of employment arbitration agreements. AB 465 would prohibit mandatory pre-dispute agreements to arbitrate claims brought under the California Labor Code. While there certainly are arguments that this new law would be preempted for arbitration agreements governed by the FAA, it will create one more obstacle for employers to litigate – with the risk of having to pay the employee’s attorneys’ fees in the event the employee defeats the employer’s motion to compel arbitration (thanks to a one-way fee-shifting provision in the legislation). The Governor has until October 11, 2015 to sign or veto this bill. We will keep you posted of further developments in this area.