Ninth Circuit Gives a Thumbs-Up to the California Supreme Court, Holds the Iskanian Decision Is Not Preempted by Federal Law
By Jennifer Suberlak and Jenna Leyton-Jones
In Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sept. 28, 2015), the Ninth Circuit Court of Appeals held that a waiver of the plaintiff’s representative Private Attorneys’ General Act (“PAGA”) claim could not be enforced.
Plaintiff Shukri Sakkab (“Sakkab”) filed a wage and hour class action lawsuit against his former employer, defendant Luxottica Retail North American, Inc. (“Luxottica”). Sakkab later amended his complaint to add a representative claim pursuant to the PAGA, which allows employees to step into the shoes of the California Attorney General and bring representative actions for alleged Labor Code violations. The United States District Court for the Southern District of California granted Luxottica’s motion to compel arbitration based on two arbitration agreements Sakkab entered into during his employment. The arbitration agreements expressly precluded Sakkab from pursuing class, collective, or representative claims, whether in court or in arbitration. Pursuant to Luxottica’s motion, Sakkab’s class and representative PAGA claims were dismissed.
Shortly after the district court entered its order on Luxottica’s motion, the California Supreme Court issued its ruling in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), holding that waivers of representative PAGA claims are contrary to California public policy and are thus unenforceable. Sakkab appealed the district court’s order, arguing that his representative PAGA claim could not be waived. On appeal, Luxottica argued that the Iskanian rule conflicts with the Federal Arbitration Act’s (“FAA”) objectives and is therefore preempted. The Ninth Circuit ultimately agreed with Sakkab, holding that the Iskanian rule is not preempted by the FAA, and that the waiver of Sakkab’s representative PAGA claim was therefore unenforceable.
According to the FAA, a written arbitration agreement is to be enforced according to its terms, except on grounds that exist at law or in equity for the revocation of any contract. The FAA’s so-called “savings clause” permits arbitration agreements to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration. If a “generally applicable” state rule interferes with the FAA’s objectives, it is preempted by federal law.
In its ruling, the Ninth Circuit explained that the FAA does not preempt the Iskanian rule for two reasons. First, the Iskanian rule bars the waiver of representative PAGA claims in any kind of contract, whether the contract concerns arbitration or not. Second, the Iskanian rule does not conflict with the FAA’s purposes. More specifically, because the Iskanian rule does not prohibit outright the arbitration of certain claims, but rather prohibits only the waiver of representative PAGA claims, the rule does not interfere with the FAA’s goal of overcoming judicial hostility to arbitration.
Moreover, the Iskanian rule does not prevent the parties from selecting the procedures they want applied in arbitration and therefore does not interfere with arbitration. The Ninth Circuit reasoned as follows: a PAGA action is an action brought on the state’s behalf; it is not a mechanism for resolving the claims of other employees. In contrast, a class action is designed to adjudicate the claims of absent class members; therefore, principles of due process mandate that class members’ rights be protected by requiring special and formal procedures to resolve those claims. Because representative PAGA claims do not require any special procedures, prohibiting waiver of such claims does not diminish parties’ freedom to select the arbitration procedures that best suit their needs.
What does all of this mean for employers?
Employers have long been familiar with California courts’ distaste for arbitration: the Iskanian decision is merely one in a long line of cases making it increasingly difficult for employers to enforce their contractual agreements to arbitrate. However, in the absence of binding authority from the Ninth Circuit as to the validity of the Iskanian rule, numerous federal district courts in California have enforced representative PAGA waivers. Now that the Ninth Circuit has weighed in, employers face yet another unwelcome hurdle to the enforcement of PAGA waivers. Unless and until Sakkab (or some other case) makes its way to the U.S. Supreme Court, California employers will be precluded from enforcing PAGA waivers in either state or federal court.
The material contained in this article has been prepared for informational purposes only. It should not be construed as legal advice. Pettit Kohn expressly disclaims all liability with respect to actions taken or not taken based on the content of this article.