Ninth Circuit Adopts California Supreme Court’s Iskanian Rule Prohibiting Enforcement of PAGA Waivers

Last week the Ninth Circuit Court of Appeals held that waivers of the right to bring representative actions under the California Labor Code Private Attorneys General Act of 2004 (PAGA) are unenforceable, essentially adopting the rule established in June 2014 by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC. Prior to the Ninth Circuit’s decision, district courts in California had been divided on the issue, but most district courts deciding the issue had rejected the Iskanian rule.

The Ninth Circuit’s decision was in Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (9th Cir. Sep. 28, 2015). In that case, Shukri Sakkab filed a putative class action for unpaid overtime and inaccurate wage statements against his former employer, Luxottica Retail North America, Inc. After Luxottica answered and removed the case to federal court, Sakkab filed an amended complaint adding a representative claim for civil penalties under the PAGA. Luxottica then filed a motion to compel arbitration under the dispute resolution agreement contained in its Retail Associate Guide. The agreement purported to prohibit Sakkab from filing or participating in any “class-based” lawsuit or arbitration, “including any collective action” or “collective arbitration.” The district court granted the motion, holding Sakkab had waived his right to bring a class action or representative PAGA action, and ordering him to arbitrate his individual claims.

After the district court granted Luxottica’s motion and entered judgment, the California Supreme Court issued its Iskanian decision, ruling that PAGA waivers are unenforceable under California law.

On appeal, Luxottica argued the Federal Arbitration Act (FAA) preempts the Iskanian rule. In a 2-1 decision, the Ninth Circuit panel rejected the preemption argument. In reaching its decision, the panel majority explained that the Iskanian rule is a generally applicable contract defense that is not limited to arbitration agreements, and therefore falls within the FAA’s savings clause, which preserves generally applicable contract defenses providing they do not conflict with the FAA’s purposes. Next, the majority determined the rule does not conflict with the FAA’s purposes of (1) overcoming judicial hostility to arbitration and (2) ensuring enforcement of the terms of arbitration agreements, because PAGA claims can be arbitrated, and the Iskanian rule merely prohibits waivers of the right to bring representative PAGA claims in any forum.

In a lengthy dissent, Justice N. Randy Smith stated his view that the FAA does preempt the Iskanian rule, relying on a line of United States Supreme Court cases including AT&T Mobility LLC v. Concepcion, in which the nation’s high court held that class and representative action waivers in consumer contracts were enforceable, reversing a previous Ninth Circuit decision to the contrary.

For the time being, PAGA representative action waivers are not enforceable in either the state or federal district courts in California. But the issue isn’t entirely settled. Luxottica may seek en banc review in the Ninth Circuit, or seek review by the United States Supreme Court. In the meantime, employers should review their arbitration agreements with counsel and make adjustments if necessary.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

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