For a second time the U.S. Supreme Court declined to hear a case challenging a California Supreme Court holding that the state’s Private Attorneys General Act (PAGA) could not be waived in a mandatory arbitration agreement. The January 5, 2015, certiorari petition in Bridgestone Retail Operations, LLC v. Brown, No. 14-790 asserted:

This case presents an issue of exceptional importance not only because it is an attempted end-run around this Court’s decision in [AT&T Mobility v. Concepcion] but also because it allows states to evade the [Federal Arbitration Act (FAA)] more broadly by rendering any claims non-arbitrable simply by deeming it brought “on behalf of the state.” (Petition at 3-4).

In a January 21, 2015, posting we discussed the denial of certiorari in a predecessor case, CLS Transp. Los Angeles LLC v. Iskanian, No. 14-341, leaving in place the California Supreme Court’s June 23, 2014, ruling that PAGA claims could not be waived in an arbitration agreement.

The plaintiffs in Bridgestone alleged various wage and hour violations under the California Labor Code and invoked PAGA to collect civil penalties for the same labor code violations. As with Iskanian, the U.S. Supreme Court declined certiorari on June 1, 2015.

The denial of certiorari in Iskanian and now in Bridgestone leaves a gulf between state and federal courts in California over whether arbitration agreements can entirely waive an employer’s ability to seek classwide or multiparty representational relief and the impact of the FAA on the resolution of employment-related claims. Our postings on October 22, 2014, January 6, 2015, and January 21, 2015, detailed that growing divide between California state and federal courts on these issues.

Indeed, further federal appellate review of PAGA claims is imminent. The Ninth Circuit will hear three cases presenting questions of whether the FAA requires that PAGA waivers be enforced: Sakkab v. Luxottica Retail North America, Inc., No. 13-55184; Hopkins v. BCI Coca-Cola Bottling Company of Los Angeles, No. 13-56126; and Sierra v. Oakley Sales Corp., No. 13-55891.

The denial of certiorari in Bridgestone will also likely lead to an increase in PAGA filings in California courts even though that Act remains shrouded in much uncertainty that was unchanged by the Iskanian decision. For example, while the Iskanian opinion referenced handling of arbitral and PAGA claims, it cited to an earlier decision under state procedures where a threshold arbitral resolution of individual claims was not required by the FAA. See Iskanian v. CCS Trans. L.A., LLC, 327 P.3d 129 (Cal. 2014). Plainly, a different outcome is required when the FAA is applicable and the arbitral claims must be resolved first. A recent case under California procedure points to that result. In Franco v. Arakelian Enterprises, 234 Cal. App. 4th 947 (2015), the court of appeals cautioned: “[b]ecause the issues subject to litigation under PAGA might overlap those that are subject to arbitration of Franco’s individual claims, the trial court must order an appropriate stay of trial court proceedings. The stay’s purpose is to preserve the status quo until the arbitration is resolved, preventing any continuing trial court proceedings from disrupting and rendering ineffective the arbitrator’s jurisdiction to decide the issues subject to arbitration.”

So, one way or another, federal and state courts will continue to expend much energy on PAGA, the FAA’s impact on it, and required procedures to protect litigants as well as other employees if cases are permitted to go forward in court. Employers should review their arbitration agreements in light of these developments, making sure they are premised on the FAA, if possible, and that any PAGA or representation action waivers are severable so as not to make the entire agreement potentially unenforceable.

Bottom Line

Companies should now review their arbitration agreements and waivers to ensure they have the greatest chance of enforcement based on the FAA. Companies with California employees also must continue to monitor PAGA waiver cases as they make their way through the courts so they are not caught unaware by the changing legal landscape.