In recent decisions, both the Court of Appeals for the Ninth Circuit and the California Supreme Court have held that arbitration clauses barring employees from pursuing class actions in arbitration are unenforceable with respect to certain types of claims. Specifically, employment agreements cannot bar employees from pursuing through arbitration representative claims pursuant to the California Labor Code Private Attorney General Act.

California’s Iskanian Rule

In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that an arbitration agreement that required an employee to forfeit the right to pursue representative claims pursuant to the California’s Labor Code Private Attorneys General Act (PAGA) was contrary to public policy and unenforceable as a matter of state law. 327 P.3d 129, 149 (Cal. 2014), cert. denied, 135 S. Ct. 1155 (2015). The PAGA provides an employee the right to act as a private attorney general to recover civil penalties for Labor Code violations affecting other employees, with the majority of any monetary award accruing to the State.

In reaching its decision, the California Supreme Court held that the Federal Arbitration Act did not preempt its rule prohibiting the waiver of representative PAGA claims. The California Supreme Court distinguished AT&T Mobility LLC v. Concepcion, wherein the United States Supreme Court held that the Federal Arbitration Act preempted a California Supreme Court rule providing that class arbitration waivers in consumer contracts are unconscionable. 563 U.S. 333, 352 (2011). In Concepcion, the United States Supreme Court reasoned that California’s rule barring class arbitration waivers was inconsistent with the Federal Arbitration Act, because class arbitration is slower and more costly than bilateral arbitration. Id. at 348. In Iskanian, the California Supreme Court held that unlike in Concepcion, the Federal Arbitration Act did not have preemptive effect because the goal of the Act is to promote arbitration as a means of resolving private lawsuits, which does not preclude the Legislature from “deputizing employees to prosecute Labor Code violations on the state’s behalf.” Iskanian, 327 P.3d at 133, 149-150.

To support its holding that an employee’s right to bring a representative PAGA claim may not be waived, the California Supreme Court also relied on California Civil Code Section 1668. That section states that “[a]greements whose object, directly or indirectly, is to exempt [their] parties from violation of the law are against public policy and may not be enforced.” The California Supreme Court also relied on California Civil Code Section 3513, which provides that “a law established for a public reason cannot be contravened by a private agreement.” Iskanian, 327 P.3d at 148.

Thus, pursuant to the Iskanian rule, an employee’s right to pursue a representative PAGA claim in any forum may not be waived pursuant to an employment contract. Id. at 133.

Holding in Sakkab v. Luxottica Retail North America, Inc.

In Sakkab v. Luxottica Retail North America, Inc., a 2-1 panel majority in the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act does not preempt the Iskanian rule. 803 F.3d 425, 439 (9th Cir. 2015). Applying different reasoning than the California Supreme Court, the Court of Appeals determined that the United States Supreme Court’s holding in Concepcion was inapposite, reasoning that “[b]ecause a PAGA action is a statutory action for penalties brought as a proxy for the state, rather than a procedure for resolving the claims of other employees, there is no need to protect absent employees’ due process rights in PAGA arbitrations. PAGA arbitrations therefore do not require the formal procedures of class arbitrations.” Id. at 436 (internal citations omitted). 

The Ninth Circuit subsequently reached the same conclusion in Hopkins v. BCI Coca-Cola Bottling Co. of Los Angeles, holding that “the Iskanian rule applies to the arbitration agreement . . . and [the plaintiff’s] waiver of his right to bring a representative PAGA action is unenforceable.” No. 13-56126, 2016 WL 685018, at *1 (9th Cir. Feb. 19, 2016). The Hopkins Court adopted the Sakkab Court’s holding without further analysis.

The effect of the Iskanian, Sakkab, and Hopkins decisions is to permit an employee who has signed an employment contract barring representative action to nevertheless pursue representative claims for civil penalties pursuant to the California PAGA.

The Merits of Sakkab

Luxottica (the defendant in Sakkab) unsuccessfully argued that the Federal Arbitration Act preempts the Iskanian rule because that rule interferes with the Federal Arbitration Act’s objectives. The case turns on whether the facts in Concepcion and Sakkab (the former relating to class arbitration waivers and the latter pertaining to the arbitration of representative PAGA claims) are sufficiently analogous to render Concepcion controlling.

In Concepcion, the Supreme Court reasoned that a judicial rule invalidating class arbitration waivers interfered with the Federal Arbitration Act because (1) “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment”; (2) “class arbitration requires procedural formality”; and (3) “class arbitration greatly increases risks to defendants” due to the absence of review. 563 U.S. at 348-50 (emphasis in original). The panel majority in Sakkab, however, distinguished representative PAGA claims from class arbitration claims, reasoning that because a PAGA claim is not a procedure for resolving the claims of other employees, “there is no need to protect absent employees’ due process rights.” Luxottica Retail N. Am., Inc., 803 F.3d at 435. The majority concluded that “PAGA arbitrations therefore do not require the formal procedures of class arbitrations,” such as notice, opt-out, or class certification procedures. Id.

The dissenting judge, however, reasoned that “[t]he Iskanian rule burdens arbitration in the same three ways identified in Concepcion.” Id. at 444. He noted that pursuant to California’s Labor Code, “an arbitrator overseeing a representative PAGA claim would have to make specific factual determinations regarding (1) the number of other employees affected by the labor code violations, and (2) the number of pay periods that each of the affected employees worked.” Id. at 445 (emphasis in original). The dissenting judge argued that the arbitration of representative claims, when compared to the arbitration of individual claims, is (1) “certainly more likely to make the process slower, substantially more costly, and more likely to generate procedural morass”; (2) “certainly more procedurally complex”; and (3) “greatly increases the risk to employers.” Id. at 446-48. He concluded that because the Iskanian rule conflicts with the purpose of the Federal Arbitration Act by burdening arbitration, it is therefore preempted by the Federal Arbitration Act pursuant to Concepcion.

The Sakkab majority decision rests on a narrow reading of Concepcion in conjunction with a distinction between class arbitration and the arbitration of representative PAGA claims. Prior to the Court of Appeals’ decision in Sakkab, the majority of federal district courts to consider the issue had determined that the Iskanian rule was preempted by the FAA: nine district courts found preemption compared to three which did not. (All of the District Court decisions were within the Ninth Circuit and therefore either affirmed or overruled by Sakkab.)

In recent years, the United States Supreme Court has twice rejected arguments that class arbitration waivers are unenforceable under California law. Both times, the Supreme Court held that the Federal Arbitration Act preempts conflicting state law and that class arbitration waivers must be enforced:

  • AT&T Mobility v. Concepcion, 563 U.S. 333, 352 (2011) (overruling California Supreme Court and holding that the Federal Arbitration Act preempted California law providing that class action waivers in certain consumer contracts were unconscionable and unenforceable).
  • DirecTV v. Imburgia, 136 S. Ct. 463, 471 (Dec. 15, 2015) (overruling California Court of Appeal and holding that the Federal Arbitration Act requires enforcement of a waiver of class arbitration despite the Court of Appeal finding that class action waivers are unenforceable under California law).

The Sakkab case has some similarities to both the Concepcion and Imburgiacases, but comes out a different way. The defendant in Sakkab petitioned the Court of Appeals for the Ninth Circuit for rehearing en banc, but that petition was denied. Luxottica has 90 days from the date of the denial—until May 2, 2016—to file a petition for a writ of certiorari before the United States Supreme Court. U.S. Supreme Court Rule 13.

The United State Supreme Court has previously declined to review the Iskanian rule three times. CLS Transp. Los Angeles, LLC v. Iskanian, 135 S. Ct. 1155 (2015); Bridgestone Retail Operations, LLC v. Brown, 135 S. Ct. 2377 (2015); CarMax Auto Superstores California, LLC v. Areso, No. 15-236, 2015 WL 5005244 (2015). But in doing so the Supreme Court has provided some commentary. Specifically, when the Supreme Court issued its decision in DirecTV v. Imburgia—the same day that it declined to review the Iskanian rule in CarMax Auto Superstores California, LLC—the Supreme Court stated:

Lower court judges are certainly free to note their disagreement with a decision of this Court. But the Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source. The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.

136 S. Ct. 463, 468 (2015) (internal quotations and citations omitted).