On March 3, 2017, in an unpublished decision in Valdez v. Terminix International Company Limited Partnership, Case No.15-56236, the U.S. Court of Appeals for the Ninth Circuit reversed a District Court order denying defendant Terminix International Company Limited Partnership’s (Terminix) motion to compel arbitration of plaintiff Palcido Valdez’s (Valdez) claim for penalties for violation of the California Private Attorneys General Act of 2004, Labor Code section 2698 et seq. (PAGA).

As readers may recall, in 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), that PAGA representation actions cannot be waived in arbitration agreements. For more information on the Iskanian decision, click here.

In 2015, in Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425 (9th Cir. 2015), the Ninth Circuit previously held that the Federal Arbitration Act (FAA) does not preempt the California “Iskanian rule” prohibiting PAGA waivers. For more information on the Sakkab case, click here.

Nevertheless, the Ninth Circuit has now held that “Iskanian and Sakkab clearly contemplate that an individual employee can pursue a PAGA claim in arbitration, and thus that individual employees can bind the state to an arbitral forum. The Ninth Circuit explained, “Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid,” and that Sakkab “recognized that employees may pursue PAGA claims in arbitration.”

In doing so, the Ninth Circuit also affirmed that the Iskanian rule is not preempted by the FAA as it “does not stand as an obstacle to the accomplishment of the FAA’s objectives,” citing Sakkab, and that the U.S. Supreme Court’s recent decision in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), which, according to the Ninth Circuit, “evinces a garden-variety application of the FAA preemption test” to strike down “arbitration-specific contract defenses,” does not cast doubt on Sakkab’s holding that the Iskanian rule is a valid, “generally applicable” contract defense.

After holding that PAGA claims are arbitral, the Ninth Circuit determined that Valdez’s PAGA claim fell within the scope of the arbitration clause at-issue, which In analyzing the arbitration agreement at-issue, the Ninth Circuit found that As such, the Ninth Circuit reversed the District Court’s order denying Terminix’s motion to compel arbitration and remanded the case back to the District Court to determine whether to dismiss or stay the action pending arbitration.

Accordingly, following Valdez, although prior thought was that PAGA claims could not be compelled to arbitration and should be stayed pending arbitration of the underlying claims (see prior discussion here), employers should consider attempting to compel PAGA claims to arbitration claims through valid arbitration agreements.

Employers who operate in California and have arbitration agreements should seek legal guidance to ensure the arbitration agreements are valid and enforceable.