Ninth Circuit Steals a PAGe from California Courts’ Playbook

Since the California Supreme Court’s 2014 ruling in Iskanian v. CLS Transportation that claims under the Private Attorneys General Act (“PAGA”) are not subject to arbitration, California federal district courts have rejected Iskanian, holding that PAGA claims are subject to mandatory arbitration under the Federal Arbitration Act (“FAA”). Now, however, a panel of the Ninth Circuit Court of Appeals has agreed with Iskanian, ruling that an arbitration agreement is unenforceable under California law to the extent that the agreement waives the employee’s right to bring a representative PAGA action. Sakkab v. Luxottica Retail N. Am. (September 28, 2015).

The Facts

Shukri Sakkab, a former employee of Lenscrafters, brought a California Labor Code class action lawsuit against Lencrafters’ owner, Luxottica Retail North America Inc. Sakkab also brought a representative action under PAGA, seeking civil penalties.

Because the parties had an arbitration agreement that waived Sakkab’s right to bring class actions or representative (e.g., PAGA) actions, the district court granted Luxottica’s petition to compel arbitration. The district court relied on the U.S. Supreme Court decision in AT&T Mobility LLC v. Concepcion to conclude that the FAA preempts a state rule barring waiver of PAGA claims. After the district court entered judgment for Luxottica, the California Supreme Court issued its ruling in Iskanian, holding that PAGA waivers are unenforceable under California law. Sakkab appealed.

The Appellate Court Decision

Before the Ninth Circuit, Sakkab relied on Iskanian to challenge the district court’s ruling on the PAGA claim. Luxottica argued that the FAA preempts the Iskanian rule. A Ninth Circuit panel, in a 2-1 decision, agreed with Sakkab, ruling that Iskanian rule does not stand as an obstacle to the accomplishment of the FAA’s objectives and, therefore, is not preempted.

The Ninth Circuit panel examined the “saving clause” of the FAA, which “permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

The Ninth Circuit panel concluded that the Iskanian rule is a “generally applicable” contract defense under the saving clause of the FAA. The Ninth Circuit panel reasoned that the Iskanian rule does not “single out” arbitration agreements for special treatment because it “places arbitration agreements on equal footing with non-arbitration agreements.”

The Ninth Circuit panel then determined that the Iskanian rule does not conflict with the FAA’s purposes. Rather, Iskanian “leaves parties free to adopt the kinds of informal procedures normally available in arbitration,” and “only prohibits them from opting out of the central feature of the PAGA’s private enforcement scheme—the right to act as a private attorney general to recover the full measure of penalties the state could recover.”

In reaching this conclusion, the panel majority distinguished a class action from a representative PAGA action, noting that the latter does not require any special procedure. Because a representative action is arbitrable, the panel majority held that the Iskanian rule does not “diminish parties’ freedom to select the arbitration procedure that best suits their needs.” Thus, the panel majority held that Iskanian does not conflict with the FAA objectives.

The dissenting opinion argues that the majority is splitting hairs in distinguishing a class action from a representative action for purposes of analyzing a waiver. The dissent explains that “class actions and PAGA actions both allow an individual … to bring an action on behalf of other people or entities.” In addition, waivers of class actions and representative actions both seek to prevent the parties from raising claims on behalf of others, by limiting arbitration to only those claims arising between the parties to the agreement. Thus, if Concepcion held that the FAA preempts state law barring a class action waiver, then the same holding should apply to invalidate the Iskanian rule barring a representative PAGA waiver.

The dissent also notes that the majority incorrectly compares representative actions with class actions, rather than with bilateral actions. The dissent argues that the Iskanian rule makes arbitration “slower, more costly, and more likely to generate procedural morass.” The Iskanian rule also requires “more formal and complex procedure” and “exposes the defendants to substantial unanticipated risk.” The dissent concludes that the Iskanian rule “interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

What Sakkab Means For Employers

Under current Ninth Circuit authority, Iskanian now prohibits an employer from requiring employees to enter into an arbitration agreement that waives representative PAGA actions. But the panel majority’s opinion does not limit an employer from enforcing an agreement that mandates arbitration of individual PAGA claims. As such, employers should consider the possibility of requiring employees to arbitrate PAGA claims. But such an analysis would necessitate considering the many factors that may make arbitration more or less cost-effective than litigating claims in court.

Furthermore, although a PAGA waiver is not currently enforceable under Sakkab and Iskanian, employers can still compel arbitration on the underlying Labor Code claims. So an employer might request a judicial stay of the PAGA claim pending arbitration of the underlying claims, and deal with the PAGA claim after obtaining an arbitral result on the underlying claims.