The Ninth Circuit and PAGA:  A Pair of Important Decisions in Yocupicio v. PAE and Sakkab v. Luxottica

The Ninth Circuit Court of Appeals recently clarified two critical issues that pertain to claims brought under California’s Private Attorneys General Act of 2004 (PAGA), Cal. Lab. Code § 2698 et seq..  Each of these decisions is helpful to workers seeking to recover civil penalties under PAGA.

First, in Yocupicio v. PAE Grp., LLC, 795 F.3d 1057 (9th Cir. 2015), the Court held that PAGA penalties may not be counted when calculating damages for the purpose of the Class Action Fairness Act (CAFA).  Under CAFA, when certain other requirements are met, a class action that is filed in state court can be removed to federal court if the defendants can show that the damages at issue are worth more than $5 million.  (In very general terms, most plaintiffs want to be in state court because state courts are perceived as being more favorable to class actions than federal court.)

However, PAGA penalties add up quickly.  Often they can result in a relatively small class action being worth more than $5 million, at least on paper.  As a result,  before Yocupicio, plaintiffs were faced with a dilemma:  include PAGA penalties in their claims and risk removal to federal court; or leave them out and forfeit them.

In Yocupicio, the Ninth Circuit squarely addressed the question of whether PAGA claims can be counted toward CAFA’s amount-in-controversy requirement.  The Court held that they cannot, because a PAGA representative claim “cannot be deemed to be a class claim.” Yocupicio, 795 F.3d at 1060.

The Yocupicio defendants sought en banc review of that decision, and the Ninth Circuit unanimously denied the petition for rehearing en banc on September 11, 2015. 9th Cir. 15-55878, ECF No. 28.  Thus, the decision in Yocupicio is the binding law in California and throughout the Ninth Circuit.  As a result, more class actions that are filed in state court will remain there-where they belong.

Of equal importance, in Sakkab v. Luxottica Retail North America, Case No. 13-55184 (September 28, 2015) the Ninth Circuit considered the so-called Iskanian Rule.  That Rule, announced by the California Supreme Court in 2014, provides that an employee cannot waive his or her right to bring representative claims under PAGA.  (Iskanian left for another day the question of whether workers can bring individual PAGA claims.  However, as Justice Chin argued, there is at least some support for the argument that every PAGA claim is a representative claim because the plaintiff stands in the shoes of the Labor Commissioner.)

As a result, employers cannot force their employees to surrender their representative PAGA claims in exchange for a job-or at least if they do so, such waivers are not enforceable.

Sakkab involved a situation that is increasingly common.  Luxottica, the employer, required its workers to sign an arbitration agreement that waived the workers’ right to bring representative actions.  Since PAGA claims are by definition representative, the arbitration agreement effectively waived the workers’ right to bring PAGA actions.  Mr. Sakkab then sued, alleging a series of wage and hour violations including failure to pay overtime, failure to pay wages when due, and failure to provide adequate wage statements.  Mr. Sakkab’s complaint alleged both class action claims and, after amendment, non-class representative claims under PAGA.

In response, Luxottica filed a motion to compel arbitration.  The district court, following an unfortunate trend, rejected Mr. Sakkab’s argument that PAGA waivers are unenforceable under California law.  Pointing to the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion, the district court found that the Federal Arbitration Act would preempt a rule such as the Iskanian Rule.

The Ninth Circuit, in a 2-1 decision, found otherwise.  The Court noted that an agreement waiving workers’ right to bring PAGA claims would harm California’s interests in that violations of the Labor Code would go unpunished.  Turning to the Federal Arbitration Act, the Court made several important points:

First, the Iskanian Rule is a generally applicable contract defense.  Thus, it falls within the savings clause of section 2 of the Federal Arbitration Act.  That clause provides that an arbitration agreement can be invalid under “such grounds as exist in law or in equity for the revocation of any contract.”

Second, the Iskanian Rule does not conflict with the underlying purposes of the Federal Arbitration Act.  This is because the Iskanian Rule does not express any preference between arbitration and civil litigation.  It merely provides that PAGA claims cannot be waived.

Furthermore, PAGA claims are not subject to the same requirements as class actions.  Cf. FRCP 23.  Therefore, PAGA claims may be handled in arbitration.

Finally, the Court noted that PAGA claims are a type of qui tam action.  Qui tam actions predate the Federal Arbitration Act by hundreds of years, and there is nothing in that Act that indicates that it was intended to curtail such actions.

In upholding the Iskanian Rule, the Ninth Circuit rightly took a brave step toward protecting the rights of workers who wish to bring representative actions based on workplace violations.  En banc review of Sakkab is likely, and we will continue to follow this critical decision until then.