UPDATE: 9th Circuit Court Steps into Iskanian Debate and Rules PAGA Waivers in Arbitration Agreement Are Not Enforceable

Author: Regina Silva

Earlier this year, we issued several articles discussing the impact of Iskanian and federal district court’s continued rejection of Iskanian’s holding that PAGA waivers in arbitration agreements are not enforceable.   (Iskanian v. CLS Transportation (2014) 59 Cal.4th 348.)  The Ninth Circuit has now ruled on this issue.

On September 28, 2015, the Ninth Circuit Court issued its decision in Sakkab, et. al. v. Luxottica Retail North America, Inc. (No. 13-55184, D.C. No. 3:12-cv-00436-GPC-KSC), ruling that an employee who signs an arbitration agreement cannot waive their right to bring a representative action under the Private Attorney General’s Act (“PAGA”).

Facts:  Plaintiff Sakkab is a former employee of Lenscrafters, which is owned by Defendant Luxottica Retail North America (Luxottica), and worked at the retail store in San Diego.   In 2012, Sakkab filed a class action lawsuit against Luxottica in San Diego Superior Court and alleged four causes of action related to wage/hour violations such as failure to pay wages and overtime owed.  Sakkab claimed Luxottica misclassified its employees in order to avoid paying overtime wages and to avoid having to provide meal/rest breaks.  The case was removed to federal court.  Sakkab filed an amended complaint adding a representative cause of action under PAGA.  Luxottica thereafter sought to compel arbitration of all of the causes of action, and cited to an arbitration provision contained in the Company’s “Retail Associate Guide.”  The “Retail Associate Guide” provided the employee waived their right to bring a lawsuit, class action, or collective/representative action against the company.

While Sakkab did not dispute his initial four causes of action were subject to arbitration, he argued the portion of the arbitration agreement that prohibited him from bringing a PAGA representative action was not enforceable.  In early 2013, the district court granted Luxottica motion’s to compel arbitration, and dismissed Sakkab’s entire lawsuit.   The district court relied on the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) 131 S. Ct. 1740, to find that the Federal Arbitration Act (“FAA”) preempted a state rule that barred waiver of PAGA claims.  At the time the district court issued its decision, the California Supreme Court had not issued the decision in Iskanian.

Sakkab appealed the district court’s opinion in light of the Iskanian decision.  Luxottica argued on appeal the FAA preempted the Iskanian holding.

Analysis:  In its decision, the Ninth Circuit first discussed the two “perceived flaws” that PAGA addressed: 1) providing for penalties for Labor Code sections that did not already provide for penalties; and 2) providing an enforcement mechanism where the government was short on resources to pursue enforcement of the Labor Code penalties.

The Ninth Circuit then summarized the Iskanian decision, and discussed how in Iskanian the California Supreme court held therein that two state statutes prohibited the enforcement of PAGA waivers.  In addition, the Ninth Circuit cited to Iskanian’s finding that Agreements which waived the right to bring a “representative” PAGA claim (specifically claims seeking civil penalties for Labor Code violations on behalf of the employee and other employees) was not enforceable under California law.

The Ninth Circuit then noted if the Iskanian holding was valid, that Sakkab’s waiver of his right to bring a PAGA representative action was not enforceable.  The Ninth Circuit further concluded the FAA did NOT preempt the Iskanian holding because it fell within the FAA’s saving clause, and was a “’ground[] …for the revocation of any contract[]’” (emphasis added) [citations omitted].  The Ninth Circuit found the Iskanian holding (or “rule” as the Ninth Circuit called it) barred “any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.”  Further, so long as the Iskanian holding did not conflict with the FAA’s purposes, then it could be preserved by the FAA’s saving clause.  After applying “ordinary conflict preemption principles,” the Ninth Circuit concluded the Iskanian holding did not conflict with the FAA’s purposes.  The Ninth Circuit further noted the Iskanian holding prohibiting the waiver of representative PAGA claims did not “diminish parties’ freedom to select informal arbitration procedures.”

What does this mean for Companies with Arbitration Agreements?

What this decision (in part) means for companies is that they cannot rely on Federal District Courts to continue rejecting the Iskanian holding.  District Courts will have to follow this new ruling issued by the Ninth Circuit as it is binding law.  Hence, companies who were forum shopping and opting to go to federal court (where possible) when looking to enforce an arbitration agreement with class action and PAGA waivers will not have this as an option.

As we primarily suggested, California employers should re-review their Arbitration Agreements, and make sure that it is clear that PAGA claims are to proceed in arbitration.  In addition, as the Iskanaian and Luxottica cases do not preclude how the PAGA causes of action are adjudicated, or at what point the PAGA cause of action gets litigated (whether before or after the claims that are subject to the class action waiver), employers may also add a provision in their Agreement provides that the non-PAGA claims subject to the class action waiver are to be determined first in arbitration, while the PAGA claim(s) are stayed in Court until the completion of arbitration.

ABOUT THE AUTHOR
Ms. Silva is a graduate of University of the Pacific. She is the head of the firm’s Employment Practices Group. She is a former prosecutor and has considerable trial experience. Contact her at rsilva@tysonmendes.com.

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