Ninth Circuit Weighs in on the PAGA Saga

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On September 28, 2015, the United States Ninth Circuit Court of Appeals held that the Federal Arbitration Act (“FAA”) does not preempt the California Supreme Court’s ruling in Iskanian v. CLS Transportation Los Angeles, which prohibits the waiver of representative claims under the state Private Attorney General Act (“PAGA”). Sakkab v. Luxottica Retail North America, Inc. (9th Cir., No. 13-55184, Sept. 28, 2015). The Ninth Circuit’s decision reversed the order of the district court, which, like multiple other district courts, found PAGA claims subject to waiver where an employee has executed an enforceable arbitration agreement that contains a waiver of the right to bring any class or representative action.  The Sakkab decision is significant because it harmonizes federal law with state law on the issue of whether PAGA claims can be waived through an arbitration agreement containing a waiver of the right to assert representative actions.

The plaintiff in Sakkab was an employee of Lenscrafters (an eyewear retailer owned by Luxottica) who signed an arbitration agreement in connection with his employment. Although the agreement specifically stated that Sakkab would not file any “class-based lawsuit, court case or arbitration (including any collective or representative action,” Sakkab filed a putative class action against Luxottica alleging various wage-and-hour violations, as well as a claim for penalties under PAGA, which he purported to assert in a representative capacity. Relying on AT&T Mobility LLC v. Conception, 131 S. Ct. 1740 (2011), the district court granted Luxottica’s motion to compel to arbitration, which effectively left Sakkab without a forum in which to bring his representative PAGA claims. Although Sakkab argued that his PAGA claims could not be waived, the California Supreme Court had not yet ruled on this issue, and the district court rejected his argument as inconsistent with Concepcion. Sakkab appealed the ruling.

After the district court in Sakkab issued its order, the California Supreme Court ruled in Iskanian that PAGA waivers are unenforceable under California law. On Sakkab’s appeal, the Ninth Circuit considered whether the FAA preempts the California’s Supreme Court’s ruling. The Ninth Circuit held that it does not.

The Ninth Circuit noted that the FAA permits arbitration agreements to be revoked on any ground that is applicable to any other type of contract. The panel held that the Iskanian rule constitutes a valid ground for revocation because the rule “bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.”

The court also held that the Iskanian rule does not conflict with the FAA’s purpose of overcoming judicial hostility towards arbitration and ensuring enforcement of the terms of arbitration agreements. The court noted that the California Supreme Court’s decision in Iskanian “expresses no preference regarding whether individual PAGA claims are litigated or arbitrated.” Further, according to the court, PAGA claims (unlike the class-action claims that were held waivable in Concepcion) do not require any special procedures and, therefore, the pursuit of them in arbitration would not “diminish the parties’ freedom to select arbitration procedures that best suit their needs.”

Although the Sakkab decision is noteworthy for employers using mandatory arbitration agreements, it may not be the last word on the subject. We can expect a petition for an en banc review of the decision and, ultimately, a petition for certiorari to the Supreme Court. In addition, although the defendant’s petition for certiorari was denied in Iskanian, a cert petition in Car Max v. Areso raising the same issue is still pending. If these developments are not enough to keep you on pins and needles, take a look at Assembly Bill 465 (currently awaiting Governor Brown’s signature), which would prohibit employers from requiring employees “to agree to the waiver of any legal right, penalty, forum, or procedure for any employment law violations.”