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The Ninth Circuit Decision

Delivering a perhaps unexpected blow to employers, the Ninth Circuit sided with the California Supreme Court earlier this week in upholding the state-court-fashioned Iskanian rule, which prevents employees from waiving representative Private Attorneys General Act (“PAGA”) claims in their employment agreement. Sakkab v. Luxottica Retail N. Am., Inc., 9th Cir., No. 13-55184, Sept. 28, (2015).

We have been following the growing divide between state and federal courts in California regarding the enforceability of representative PAGA waivers in blog articles over the last year.

In the summer of 2014, the California Supreme Court ruled that PAGA waivers in arbitration agreements are unenforceable under California law. Iskanian v. CLS Trans. Los Angeles, Inc., 59 Cal. 4th 348 (2014). The Iskanian court reasoned that authorizing an employee to bring an action on behalf of the state against his or her employer for labor code violations committed against the employee and fellow employees furthers important public policy and does not contravene the Federal Arbitration Act (“FAA”).

Many federal district courts, on the other hand, agreed that the Iskanian opinion conflicted with the FAA’s “liberal policy favoring arbitration.” Leading up to this week’s decision, at least six California district court decisions rejected the Iskanian rule as preempted by the FAA and enforced an employee’s right to waive his or her ability to pursue a representative PAGA claim.

On Monday, the Ninth Circuit weighed in on this issue in Sakkab v. Luxottica Retail North America, Inc., No. 13-55184, and ruled that the eyewear retailer violated the Iskanian rule by forcing its employees to waive representative PAGA claims in its arbitration agreements. Sakkab, a former employee of Lenscrafters (owned by defendant Luxottica), filed a putative class action against Luxottica claiming his former employer misclassified him and other employees as exempt supervisors in violation of overtime, meal, and rest break laws. Sakkab included a representative PAGA claim among his causes of action. The district court granted Luxottica’s motion to compel individual arbitration pursuant to an arbitration agreement entered into by Sakkab and Luxottica. The district court rejected Sakkab’s argument that the Iskanian opinion mandates that a representative PAGA claim is unwaivable under California law. Sakkab appealed this decision to the Ninth Circuit.

In a 2-1 decision, the Ninth Circuit followed Iskanian and concluded that the FAA does not preempt the state rule because it is generally applicable to all contracts and does not stand as an obstacle to the accomplishment of the FAA’s objectives. The majority rejected Luxottica’s argument that the Iskanian rule is preempted by the FAA in the same way another California state rule prohibiting class arbitration waivers was rejected by the U.S. Supreme Court in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 174 (U.S. 2011).

Asserting that it was following the logic of Concepcion, the court concluded that the Iskanian rule is saved from FAA preemption because it is a “generally applicable” contract defense preserved under the FAA’s § 2 savings clause. Specifically, the court found that the rule complies with the FAA’s prohibition on singling out arbitration agreements. Instead, “the rule bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.”

Applying ordinary conflict preemption principles, the court concluded that the Iskanian rule does not conflict with the FAA’s purposes. The court acknowledged the FAA’s liberal policy favoring arbitration but noted that “such a broad construction of the FAA’s purposes is untenable, of course, because it would render § 2’s saving clause wholly ‘ineffectual.’” Congress only intended to preempt state rules that interfere with arbitration.

The court distinguished PAGA claims from class actions and determined that “because representative PAGA claims do not require any special procedures [unlike class actions], prohibiting waiver of such claims does not diminish parties’ freedom to select the arbitration procedures that best suit their needs.” The Iskanian rule, according to the majority, “does not conflict with the FAA, because it leaves parties free to adopt the kinds of informal procedures normally available in arbitration” and only prohibits the parties from “opting out of the central features of the PAGA’s private enforcement scheme—the right to act as a private attorney general to recover the full measure of penalties the state could never recover.”

In dissent, Judge N.R. Smith opined that the majority circumvented the FAA and ignored the basic principles articulated in Concepcion. Judge Smith reasoned that Sakkab and Concepcion are indistinguishable and that the majority “overlooks the simple fact that, by preventing parties from limiting arbitration only to individual claims arising between the two contracting parties, the Iskanian rule interferes with the parties freedom to craft arbitration in a way the preserves the informal procedures and simplicity of arbitration”—a central tenet in Concepcion. Judge Smith concluded that the majority supported its conclusion by drawing improper comparisons between representative PAGA actions and antitrust claims or class arbitration instead of properly comparing a representative PAGA claim to individual, bilateral arbitration. This is what the parties had originally agreed to—and would have forced the majority to correctly conclude that the FAA preempts the Iskanian rule.

Two cases, Hopkins v. BCI Coca-Cola Bottling Company of Los Angeles, No. 13-56126 and Sierra v. Oakley Sales Corp., No. 13-55891, remain for Ninth Circuit review, presenting the same question of PAGA waiver enforceability. While oral argument for those cases was consolidated with Sakkab on May 25, 2015, it is unclear whether the Ninth Circuit will rule separately on them.

PAGA Amended

On Friday, October 2, 2015, California Governor Jerry Brown signed legislation to rein in PAGA actions asserting non-compliance with itemized wage statement requirements contained in California Labor Code Section 226(a).

Actions alleging wage statement violations have become all too common and emerged after a 2013 amendment to Section 226.  Under prior law employers could do nothing after they received an employee notice that their statements were non-compliant.  Now, the Governor’s approval of Assembly Bill 1506 gives employers a 33 calendar day window to “cure” wage statement problems and avoid a PAGA lawsuit.  To take advantage of the amendment, employers must give fully compliant itemized wage statements to all allegedly aggrieved employees for each pay period in the three years prior to the date of the written notice.

Bottom line: Barring possible en banc or Supreme Court review of the issue, the Sakkab opinion creates another impediment to full enforcement of representative actions waivers in California courts. However, the new amendment to California law, at least, provides employers with a means to stem the tide of PAGA actions based on non-compliant wage statements.