PAGA and Arbitration: Representative Actions Are Alive and Well in California

This post is the second in a series of posts on developments in PAGA jurisprudence in 2015.  It focuses on  the interplay between PAGA and arbitration agreements.

PAGA and Arbitration Agreements

In 2011, the U.S. Supreme Court handed down its blockbuster decision in AT&T v. Concepcion (2011) 563 U.S. 333.  Since then, many employers have begun to require that employees sign arbitration agreements that waive their rights to bring class, collective, and representative actions.  However, in 2014, the California Supreme Court held in Iskanian v. CTS Transportation, Inc. (2014) 59 Cal.4^th 348 that arbitration agreements that prevent employees from bringing representative actions are not enforceable with respect to PAGA claims.  In other words, at least in state court, employees could continue to bring PAGA claims on behalf of their co-workers even if they had signed an arbitration agreement to the contrary.  This is the so-called “Iskanian Rule.”

California courts rapidly adopted and applied the Iskanian Rule.  Yet despite the fact that the Iskanian Rule was a pronouncement by the California Supreme Court regarding California law, the response of the federal district courts was near-unanimous rejection.  Thus, for about a year there was a major conflict over the Iskanian Rule and whether to follow it.

In September 2015 the Ninth Circuit resolved this conflict, at least for now.  In Sakkab v. Luxottica Retail North America (9^th Cir.2015) 803 F.3d 425, the Ninth Circuit considered and blessed the Iskanian Rule.[1]  The court held that the Iskanian Rule did not run afoul of the Federal Arbitration Act (FAA) because it is a generally applicable contract defense.

The court also noted that the Iskanian Rule did not conflict with the underlying purposes of the FAA because it does not express any preference between arbitration and civil litigation.  Rather, it merely provides that PAGA claims cannot be waived.  This result is undoubtedly a win for employees.

One procedural question raised by implication in the holdings of Iskanian and Sakkab was how courts should handle cases involving arbitration agreements with class action waivers where the plaintiff brings both class and PAGA claims.  In Franco v. Arakelian Enterprises, Inc. (2015) 234 Cal.App.4^th 947, the court held that in such circumstances the parties should arbitrate the individual claims first, then return to court for the PAGA claims.  This decision is binding on superior courts throughout California.  It is a win for employers, who now have a chance to defeat the underlying claims prior to litigating the representative claims.

[1] A petition for writ of certiorari has been filed with the U.S. Supreme Court in Sakkab.  See Case No. 15-236.