This week, in Sakkab, et al v. Luxottica Retail North America, Inc., the Ninth Circuit ruled that an employee cannot waive the right to bring a representative action under the Private Attorneys General Act (“PAGA”) through an arbitration agreement or any other means. In so doing, it found the California Supreme Court’s “Iskanian Rule”—which essentially says that pre-dispute agreements to waive PAGA claims are unenforceable under California law—was not preempted by the Federal Arbitration Act (“FAA”).
The FAA generally preempts any law that creates a special rule disfavoring arbitration or conflicts with the FAA’s objectives. The Luxottica Court found that the Iskanian Rule was simply a ground for the revocation of any contract. “The rule bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.” The Court also held that it did not conflict with the FAA’s purposes and thus was not preempted.
What the Ninth Circuit’s blessing of the Iskanian Rule will ultimately mean for California employers is still open to debate. The decision appears contrary to the United States Supreme Court holding in AT&T Mobility LLC v. Concepcion. There, the High Court held that the FAA preempted a California rule banning class action waivers in arbitration agreements because a rule “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” namely its informality, and “creat[ed] a scheme inconsistent with the FAA.” Because the rule stood as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, it was preempted.
The Luxottica court attempted to distinguish PAGA actions by noting that unlike class actions, PAGA actions are not relegated to any particular procedure for resolution by due process. Since parties may agree to more informal measures of resolution for PAGA claims, it is possible to structure an arbitration agreement to align with the aims of the FAA. But as pointed out by the dissent, this “reasoning overlooks the simple fact that, by preventing parties from limiting arbitration only to individual claims arising between two contracting parties, the Iskanian rule interferes with the parties’ freedom to craft arbitration in a way that preserves the informal procedures and simplicity of arbitration.”
The dissent likewise highlights that while PAGA actions do not require the procedural formality of a class action, there will still need to be some mechanism to determine the number of other employees affected by the labor code violations, the number of pay periods that each of the affected employees worked, etc. This would require multiple, individual fact determinations regarding employment status and discovery of a breadth not normally conceived of in arbitration. “All of these additional tasks and procedures necessarily make the process substantially slower, substantially more costly, and more likely to generate a procedural morass than non-representative, individual arbitration”—all of which are contrary to the FAA’s aims.
And there is yet another piece of the Luxottica decision, not highlighted by the dissent, which seems to rest on circular logic, contra Concecpcion. The Luxottica Amici argued that the Iskanian Rule conflicts with the FAA’s purpose to overcome judicial hostility to arbitration because it prohibits arbitration of individual PAGA claims. The Luxottica court summarily rejected this argument claiming Iskanian expressed no preference as to whether individual PAGA claims are litigated or arbitrated. “[The Iskanian Rule] provides only that representative PAGA claims may not be waived outright … [it] does not prohibit the arbitration of any type of claim.”
But this determination begs the question—when could an employee ever bring an individual PAGA claim if he is never allowed to waive his right to bring the claim in a representative capacity? The Iskanian Rule as adopted by the Ninth Circuit then would seem to squarely prevent arbitration of individual PAGA claims and should therefore be preempted under Concepcion.
While California employers must wait and see if the most-oft reversed Circuit lives up to its reputation, they are not out of options entirely when it comes to structuring cost-saving arbitration agreements.
It should be noted that both the Iskanian and Luxottica decisions left open the possibility of claim bifurcation through arbitration agreements. That is, a court can compel an employee’s non-PAGA claims to arbitration, leaving only PAGA claims in court if the agreement makes clear this is the parties’ intent. For this reason, employers may wish to continue to include representative action waivers in their arbitration agreements, stating explicitly that to the extent not enforceable, the provisions applicable to PAGA claims are severable, do not void the entire agreement, and that it is the parties’ intent in such cases that the PAGA claims alone remain in court.
While such a provision could at first blush appear to increase costs by subjecting the employer to suits in two fora, one other factor should be considered. Neither the Iskanian Rule nor the Luxottica holding precludes setting the procedural order of adjudication of a PAGA claim by agreement; it mandates only that such claims cannot be waived. Employers thus could conceivably include provisions in their agreements providing that non-PAGA claims subject to a class action waiver must be adjudicated in arbitration before adjudication of any PAGA claims. This would essentially stay any PAGA claims in court until the arbitration was completed.
Such provisions would seem to be in line with the purposes of PAGA and the Luxottica decision. PAGA claims can only be brought by an “aggrieved” employee, so allowing a determination of whether the employee is aggrieved through individual arbitration prior to subjecting the employer to a PAGA suit would seem to comport with the statute. Likewise, the Luxottica reasoning is heavily based in the theory that employers can structure their agreements to allow for a streamlined PAGA adjudication in keeping with the goals of the FAA.
In the end, every employer needs to weigh the pros and cons of continuing to address PAGA claims in arbitration agreements, and there is no one size fits all approach. Given the apparent conflict between the Luxottica/Iskanian rule and Supreme Court precedent, the possibility of relegating the PAGA claims alone to court and staying them pending individual arbitration, and the generally shortened statute of limitations period for PAGA claims, implementation of an arbitration agreement may yet offer substantial protections against class and representative actions.