On September 28, 2015, the Ninth Circuit held in Shukri Sakkab v. Luxottica Retail North America, Inc. that the FAA does not preempt the rule that the California Supreme Court enunciated in Iskanian v. CLS Transportation that California law bars the waiver of Private Attorneys General Act (“PAGA”) claims.  As a result, California employers will likely see an increase in the filing of PAGA cases as employees use them as a vehicle for representative actions outside of arbitration.

In Sakkab, the named plaintiff was a former employee of Lenscrafters, owned by Luxottica, who filed a putative wage and hour class action with a representative claim for civil penalties under PAGA.  Luxottica filed a motion to compel arbitration based on Sakkab’s acceptance of the company’s arbitration agreement in its Retail Associate Guide.  The arbitration agreement provided that Sakkab would not file, inter alia, a class, collective, or representative action against Luxottica.

Prior to the California Supreme Court’s Iskanian ruling, the district court granted Luxottica’s motion to compel arbitration and rejected Sakkab’s argument that he could not waive the right to bring a representative PAGA claim.  Sakkab appealed.  The California Supreme Court subsequently ruled in Iskanian that mandatory PAGA waivers are unenforceable under state law.

The divided Ninth Circuit panel reversed the district court’s order and remanded the case to the district court.  The Ninth Circuit stated that the Iskanian rule did not “single out arbitration agreements for special treatment,” but rather “bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.”  Therefore, the Court held that the rule “is a ‘generally applicable’ contract defense that may be preserved by the FAA’s § 2 savings clause, provided that it did not conflict with the FAA’s purposes.”

The Ninth Circuit considered whether the Iskanian rule conflicts with the FAA objectives and is therefore preempted.  The Ninth Circuit first reasoned that the rule is not “hostile” to arbitration because the California Supreme Court’s decision did not state whether individual PAGA claims must be litigated or arbitrated; therefore, the “rule does not prohibit the arbitration of any type of claim.”

The Ninth Circuit then determined, after a lengthy analysis, that the Iskanian rule did not “interfere” with arbitration.  The Ninth Circuit contrasted Iskanian with the AT&T v. Concepcion decision, in which the Supreme Court struck down California’s Discover Bank rule invalidating class action waivers in the consumer context.  The Discover Bank rule imposed formal class wide arbitration procedures on the parties, and class arbitration sacrificed the usual arbitration advantages of lower costs, greater efficiency and speed.  The Ninth Circuit distinguished the Iskanian rule and held that it did “not diminish the parties’ freedom to select informal arbitration procedures” because of the “fundamental differences between PAGA actions and class actions.”  The Ninth Circuit explained that whereas a class action is a procedure to resolve the substantive claims of absent parties on a representative bass, an employee bringing a PAGA action stands in the shoes of the state to recover statutory penalties.  Therefore, “there is no need to protect absent employees’ due process rights in PAGA arbitrations” and “nothing prevents parties from agreeing to use informal procedures to arbitrate representative PAGA claims.”

The dissent blasted the majority for failing to follow Concepcion and recognize that the FAA controls.  Judge N. Randy Smith stated that the majority’s holding  “essentially ignores” Concepcion, and that “the Iskanian rule interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA,” which makes the arbitration “slower, more costly, and more likely to generate procedural morass.”  Judge Smith insisted that “a state may not insulate causes of action from arbitration by declaring that the purposes of the statute can only be satisfied via class, representative or collective action” and that the Iskanian rule exposes defendants to “substantial unanticipated risk” that cannot be justified on state policy grounds.

The Sakkab decision, and the strongly-worded dissent, underscore the continuing challenges that employers face in California state and federal courts in enforcing arbitration agreements in their entirety.  This decision may not be the final word on this issue, given the possibility of an en banc rehearing or petition to the U.S. Supreme Court.