Ninth Circuit Agrees with California Supreme Court’s Ban on PAGA Waivers in Employment Arbitration Agreements

On September 28, 2015, the Ninth Circuit ruled that an employee’s right to pursue representative claims under the Private Attorneys General Act (“PAGA”) cannot be waived through employment arbitration agreements. In Sakkab v. Luxottica Retail North America, Inc., the court in a divided 2-1 panel decision, weighed in for the first time on the scope of federal arbitration law applied to representatives acting under PAGA and agreed with the California Supreme Court, resolving a split among federal district courts in California.

PAGA was enacted in 2004 but it has only recently become a widely litigated claim.  Under PAGA, employees are given the authority to sue their employer on behalf of themselves and other “aggrieved employees” for various violations of the Labor Code.  In a PAGA action, the employee and his or her attorney litigate the case “on behalf of the state” to recover civil penalties.  The penalties recoverable under PAGA must be paid 75% to the State and 25% to the aggrieved employees.   Under PAGA, the employee’s attorney is entitled to recover their attorneys’ fees and costs.

In Sakkab, the plaintiff, a former employee at a Lenscrafter retail store, filed a class action complaint against Luxottica alleging wage and hour violations along with a claim under PAGA.  Luxottica petitioned to compel arbitration based on the arbitration agreement between Sakkab and Luxottica which barred any collective, class or representative actions.  In 2013, the district court granted Luxottica’s petition to compel arbitration on an individual basis and dismissed the action. Plaintiff appealed the district court’s ruling.

After the district court entered judgment in Sakkab, the California Supreme Court ruled in Iskanian v. CLS Transportation, 26 Cal.4th 348 (2014) that PAGA waivers are unenforceable under California law.  The so-called “Iskanian rule” was met with mixed results in the federal district courts.  Some district courts refused to follow the Iskanian rule, holding that a state law ban on enforcement of arbitration agreements was contrary to federal arbitration law and the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) while, other federal district courts in California followed the Iskanian rule.

In a notably scathing dissent, Judge N. Randy Smith argued that the majority has “ignored” Concepcion and improperly “upholds a ‘judicially created’ state rule” which clearly frustrates the purpose of the Federal Arbitration Act (“FAA”).  Judge Smith concluded that the court should have deferred to the “FAA’s ‘liberal federal policy favoring arbitration’…rather than circumventing it” and should have held that the Iskanian rule is preempted by the FAA.

With a slim majority and strongly worded dissent in Sakkab, the Ninth Circuit resolved the conflict among the district courts in California and avoided a collision with the California Supreme Court.  However, en banc review of the panel decision before the entire Ninth Circuit is likely, and therefore last week’s ruling may not be the last word on this issue.  Also, two related appeals remain pending before the Ninth Circuit, Sierra v. Oakley Sales Corp., case number 13-55891 and Hopkins v. BCI Coca-Cola Bottling Company of Los Angeles, case number 13-56126.

Neither Sakkab nor Iskanian directly addressed the issue of whether an employee can be required to arbitrate a representative PAGA claim or if employees are entitled to a judicial forum in a PAGA lawsuit.

As a result of this decision, employers are likely to see more PAGA cases headed their way.  Employers can preemptively avoid or minimize the risk of a costly PAGA lawsuit through routine audits of their wage and hour policies and practices.  This process should include a review of any employment related arbitration agreements that are being utilized to ensure that they comply with various legal requirements proscribed by California and federal law.

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