California State CapitalSo much case law has come down in the past several years regarding California’s Private Attorneys General Act (PAGA) – and its ability to withstand class and representative action waivers – that observers might have overestimated PAGA’s arbitration-avoidance powers. The Ninth Circuit Court of Appeals offered a reminder on Tuesday that even though an arbitration agreement cannot validly waive the right to assert PAGA claims, a plaintiff may nevertheless be compelled to arbitrate PAGA representative claims.

Although the opinion in Valdez v. Terminix International Co., L.P., 9th Cir. No. 15-56236 was unreported and nonprecedential, it illustrates in the post-Iskanian landscape that PAGA claims can be arbitrated. In Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129 (Cal. 2014), the California Supreme Court held that even though class-action waivers in arbitration agreements were enforceable, where “an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.” PAGA claims, the Iskanian court noted, could not be waived because PAGA effectively deputizes employees to act on behalf of the state in vindicating the state’s “interest in enforcing the Labor Code,” which “does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.” In Iskanian, though, the California Supreme Court reserved for lower-court consideration on remand the question of whether the PAGA claims would proceed in litigation or “the parties would prefer to resolve a representative PAGA claim through arbitration.”The following year, the Ninth Circuit confirmed that after Iskanian, PAGA claims are not waivable, but they nevertheless may be arbitrable. In Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425, 434 (9th Cir. 2015) the appellate court explained: “The California Supreme Court’s decision in Iskanian expresses no preference regarding whether individual PAGA claims are litigated or arbitrated. … The Iskanian rule does not prohibit the arbitration of any type of claim.” The Sakkab court reasoned, similar to Iskanian, that denying the enforceability of a PAGA waiver did not necessarily preclude arbitration of a PAGA claim. Because PAGA representative actions operate separate from Rule 23 class-action procedures, the Sakkab court suggested that PAGA claims may be suitable to arbitration where class actions were not. Like Iskanian, though, the parties had not agreed to submit PAGA claims to arbitration.

That was the opening that the Valdez court walked through on Tuesday. The district court had denied Terminix’s motion to compel arbitration on the grounds that a PAGA claim “belongs to the state, and the state has not waived the judicial forum.” Valdez, slip op. at 3. But as the Ninth Circuit bluntly stated, the district court was incorrect because Iskanian and Sakkab clearly contemplate that an individual employee can pursue a PAGA claim in arbitration, and thus individual employees can bind a state to an arbitral forum.” Indeed, Valdez cited the earlier Ninth Circuit decision in Wulfe v. Valero Ref. Co., Cal., 641 F.App’x 758, 760 (9th Cir. 2016), which declared …”the district court’s order compelling arbitration does not run afoul of Sakkab and Iskanian because the order did not prevent Wulfe from bringing a representative PAGA claim in arbitration…”

Of course, whether an employer wants to compel arbitration of a PAGA claim is a different question that is likely to turn on case-specific considerations. Because the representative nature of the PAGA claim cannot be waived, arbitration of the PAGA claim necessarily involves arbitral procedures that may or may not be compatible with PAGA’s quasi-aggregate, yet nebulous, procedural structure. Reference to the arbitration agreement may be helpful because, as the Sakkab court observed, PAGA claims can be well-suited to arbitration, “provided that the parties are free to decide how the arbitration will be conducted.” But, because the procedure surrounding PAGA claims is still developing in the courts, arbitration could be difficult.

Bottom Line:

Even though case law remains clear that arbitration agreements with class-action waivers cannot waive PAGA claims, those PAGA claims can be subject to arbitration on a representative basis.