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Federal District Courts Still Finding PAGA Claims Can Be Waived Via an Arbitration Agreement Despite California Supreme Court’s Ruling in Iskanian v. CLS Transportation

In early December, a California federal court forced two assistant store managers bringing an overtime class action against Sears Holdings Management Corp. to arbitrate their dispute. In so doing, the court held federal law preempts the state prohibition against agreements that waive a worker’s ability to bring a Private Attorney General Act claim. (Lucero et. al. v. Sears Holdings Management Corporation, et. al., Case Number 3:14-cv-01620).

In granting Sears’ bid to compel arbitration, U.S. District Judge Battaglia ruled the Federal Arbitration Act trumps California’s rule barring arbitration agreements that waive a worker’s ability to bring a representative PAGA claim. A PAGA claim allows an employee to seek civil penalties on behalf of the state.

The lead plaintiffs, assistant store managers for Sears, accused Sears of (i) failing to pay overtime, (ii) not providing accurate wage statements, (iii) engaging in unfair business practices, and (iv) not providing certain owed wages in a timely manner. The Plaintiffs also filed a PAGA claim against Sears. Sears moved to compel both Plaintiffs into arbitration noting they had both consented to an arbitration agreement Sears rolled out in 2012. The retailer therefore sought to compel the plaintiffs into individual arbitration and to stay the case.

In response, Plaintiffs argued the arbitration agreement was unenforceable under the California Supreme Court’s recent decision in Iskanian v. CLS Transportation, a landmark ruling finding provisions requiring workers to waive their Private Attorney General Act claims to be enforceable. Because Sears’ arbitration provision included language that its PAGA waiver could not be severed, the plaintiffs argued the whole agreement was invalid.

While Judge Battaglia acknowledged the Supreme Court’s ruling in Iskanian, he concluded the district court was not limited by the state court’s reading of Federal law. He was therefore unpersuaded by the plaintiffs’ arguments.

“Instead, the court reaches the same conclusion as several other courts on this matter — the FAA preempts California’s rule against arbitration agreements that waive an employee’s right to bring representative PAGA claims,” Judge Battaglia wrote.

The judge further noted the workers’ other employment claims were within the bounds of the arbitration agreement, and therefore both compelled individual arbitration and stayed the case.

This ruling came just one week after another California judge, U.S. Magistrate Judge Kandis A. Westmore, ruled that a former employee bringing a wage class action against Kmart Corp. and its parent company Sears Holdings was also required to arbitrate her claims.

In October 2014 a California federal district court similarly rejected the California Supreme Court’s ruling in Iskanian v. CLS Transportation that workers’ right to bring representative Private Attorneys General Act (“PAGA”) claims cannot be waived through arbitration agreements.

In Langston et. al. v. 20/20 Communications Inc., et. al. (Case No. 5:14-cv-01360), U.S. District Judge Jesus Bernal granted 20/20 Communications Inc.’s motion to compel arbitration in a putative class action accusing the direct sales and marketing company of misclassifying sales representatives as independent contractors rather than employees.

The plaintiffs in Langston, who 20/20 said were bound by arbitration agreements, argued workers could not waive their right to bring a representative PAGA claim via an arbitration pact, based on the state’s highest court’s June 23 decision in Iskanian v. CLS Transportation.

Interestingly, Judge Bernal pointed out his ruling was not the first to go against the high court’s logic in Iskanian. Judge Bernal cited two other federal district court opinions that were issued in August and early October, both involving cases against Hobby Lobby Stores, Inc. In both cases, the district courts ruled California’s rule against PAGA waivers was preempted by the FAA. (See Ortiz v. Hobby Lobby Stores, Inc., No. 2:13-cv-01619, 2014 WL 4691126, at *11 (E.D. Cal. Oct. 1, 2014); Fardig v. Hobby Lobby Stores, Inc., 2014 WL 4782618, at *4.)

In his Order, Judge Bernal noted that while California courts control the interpretation of its state laws such as PAGA, federal courts have the role of interpreting federal statutes such as the FAA. There was no reason for the Court to defer to the California Supreme Court regarding the FAA preemption at issue.
Judge Bernal also stated that the Supreme Court stance on PAGA waivers treats arbitration agreements in a disfavorable manner. Judge Bernal rejected the public policy concerns asserted by the Supreme Court.
In contrast to the federal district court opinions, California appellate courts are predictably following the Supreme Court’s decision in Iskanian.

In mid-November, in Ramos v. Fry’s Electronics, Inc. , a California appeals court ruled the lead plaintiff in a proposed class action must arbitrate his individual labor claims against the electronics retailer, but said the employee could continue to pursue a separate Private Attorney General Act claim in court. (Ramos v. Fry’s Electronics Inc., Case number B246404.)

The second district appellate court’s decision partially overturned a Los Angeles County judge who previously ruled that Fry’s arbitration agreement with plaintiff was unenforceable. The appellate panel ruled the lower court’s ruling was outdated in light of the United States Supreme Court’s 2011 decision in AT& T Mobility v. Concepcion.

Citing Iksanian, the appeals court held Plaintiff’s PAGA claim could not be subject to a waiver included in an arbitration agreement. The appeals court also denied Fry’s request to stay the PAGA claim pending the conclusion of Ramos’ arbitration.

Fry’s claimed that Iskanian should not be applied to its case because its employment agreements with Ramos did not include an explicit PAGA waiver and because Ramos was not precluded from pursuing this claim on an individual basis. “Thus, Fry’s essentially argues that, under Iskanian, a plaintiff may be compelled to arbitrate his or her PAGA claim on an individual basis where the agreement is silent on the issue of representative arbitration proceedings,” the appeals court said.

The Second Appellate District rejected this argument, saying the employer in the Iskanian case raised a similar argument. “Even if we were to accept Fry’s’ assertion that the agreement included an implied waiver requiring Ramos to arbitrate his PAGA claim on an individual basis, such a provision would be unenforceable under Iskanian,” the appeals court said.

What does all this mean?

Right now, an employer who has an enforceable arbitration agreement should try to get its case removed to federal court, as this appears to be the best venue to obtain a ruling allowing arbitration of all wage/hour claims, including claims under PAGA. If an employer is forced to proceed in state court, so long as Iskanian holds up, the trial court will not compel arbitration of PAGA claims, and these claims will be allowed to proceed in court (while the other claims proceed in arbitration).

Update on Iskanian

Defendant CLS Transportation has filed a petition for U.S. Supreme Court review, and final briefs were submitted in early December. In October, four (4) legal and employer advocacy groups urged the Supreme Court to hear the case because the California Supreme Court’s decision undermines federal precedent. We will update the status of review by the U.S. Supreme Court when it becomes available.

ABOUT THE AUTHOR: Ms. Silva is a graduate of University of the Pacific. She is senior counsel in 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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