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Employee need not arbitrate representative PAGA claim despite SCOTUS approval of class action waivers

By Marjorie Johnson, J.D.

Considerations that led the Supreme Court to rule that class action waivers in arbitration agreements are enforceable are not implicated to the same extent by arbitration of PAGA claims, which don’t require the formal procedures of class arbitration.

A former employee wasn’t required to arbitrate his representative claim brought under California’s Private Attorneys General Act (PAGA) since the U.S. Supreme Court’s recent ruling in Epic Systems Corp. v. Lewis, confirming that class- and collective-action waivers in arbitration agreements are enforceable, did not invalidate a prior Ninth Circuit decision that waivers of representative actions are not enforceable to bar PAGA claims. Concluding that the two cases were not “irreconcilable,” a federal district court in California denied an employer’s motion to compel arbitration and declined to continue to exercise supplemental jurisdiction over the PAGA claim (Echevarria v. Aerotek, Inc., June 17, 2019, Freeman, B.).

Removed to federal court. The employee filed his lawsuit in state court after working for Aerotek for about a week, asserting putative class claims for violations of state labor and unfair competition laws and a representative PAGA claim. Aerotek removed the case to federal district court, premising federal subject matter jurisdiction on the Class Action Fairness Act (CAFA).

Class claims arbitrable. Once in federal court, Aerotek moved to compel individual arbitration, dismiss the class claims, and stay the PAGA claim, relying on the parties’ arbitration agreement. The court denied the motion, concluding that the agreement’s class action waiver was unenforceable under then-binding Ninth Circuit authority. While Aerotek’s appeal was pending, the Supreme Court issued Epic, ruling that arbitration agreements which preclude class- or collective-actions are enforceable. Consequently, the Ninth Circuit vacated and remanded.

But what about PAGA claim? After the employee agreed to dismiss without prejudice his individual and proposed class claims, Aerotek filed its present motion, arguing that his representative PAGA claim must be dismissed and any individual PAGA claim arbitrated. The employee, in turn, sought to have the PAGA claim remanded back to state court.

Agreed to arbitrate “representative” actions. Before starting to work for Aerotek, the employee signed a mandatory arbitration agreement in which he agreed to arbitrate “all disputes, claims, complaints, or controversies” against Aerotek relating to his employment. The agreement also expressly precluded the pursuit of claims on a class, collective, or representative basis.

Was waiver enforceable? Aerotek argued that the Ninth Circuit’s Sakkab decision, which ruled that an arbitration agreement’s waiver of representative actions is not enforceable to bar PAGA claims, was no longer good law in light of the Supreme Court’s subsequent decision in Epic. The district court disagreed.

In Sakkab v. Luxottica Retail N. Am., Inc., the Ninth Circuit held that the Federal Arbitration Act did not preempt the California Supreme Court’s landmark decision in Iskanian v. CLS Transp. Los Angeles, LLC, which ruled that waivers of representative PAGA claims are unenforceable. In so ruling, the Sakkab court considered the U.S. Supreme Court’s Concepcion decision interpreting the FAA Sec. 2’s “saving clause” to permit “agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

The Ninth Circuit concluded that the Iskanian rule was “generally applicable” and could be preserved by Sec. 2’s saving clause so long as it did not conflict with the FAA’s purposes. Finding no such conflict, the Ninth Circuit emphasized “the fundamental differences between PAGA actions and class actions.” In Concepcion, the Supreme Court determined that the FAA preempted California’s rule classifying most collective arbitration waivers in consumer contracts as unconscionable. The Court held that although the rule did not require classwide arbitration, it allowed any party to a consumer contract “to demand it ex post,” and thus interfered with the purpose of the FAA because “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”

No conflict with FAA. The Sakkab court found that those considerations were not implicated to the same extent by arbitration of PAGA claims, which are brought as a proxy for the state rather than on behalf of a class and therefore don’t require the formal procedures of class arbitrations. Because Iskanian left parties “free to adopt the kinds of informal procedures normally available in arbitration,” and “only prohibits them from opting out of the central feature 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 recover,” the Iskanian rule did not conflict with the FAA.

Not irreconcilable. Accordingly,Epic neither overruled Sakkab nor undercut its reasoning in such a way as to render the two cases irreconcilable. In Epic, the Supreme Court held that the NLRA did not bar the enforcement of class action waivers or collective action waivers in arbitration agreements between employers and employees. Epic did not address the issues before the Sakkab court related to the arbitrability of a claim for civil penalties brought on behalf of the government or the enforceability of an agreement barring such a claim in any forum.

Still good law. The district court rejected Aerotek’s contention that the Supreme Court’s expansion on its FAA jurisprudence in Epic, combined with recent changes in California law rendering PAGA litigation more complicated, mandated reconsideration of Sakkab. While the aspects of Epic highlighted by Aerotek may “foreshadow a reversal of Sakkab were the Supreme Court to take up the interplay between the FAA and Iskanian at some future date,” the High Court had already denied certiorari on that issue on many occasions. Thus, “Sakkab is still good law.”

Remand to state court. Since all of the class claims giving rise to CAFA jurisdiction had been dismissed, the district court found it appropriate to remand the employee’s PAGA claim to state court. The court found no reason to continue to exercise supplemental jurisdiction over the only remaining claim now that the claims over which it had original jurisdiction had been dismissed.

It had not yet considered the merits of the PAGA claim. Moreover, PAGA was “a purely state law creature” and “primary responsibility for developing and applying state law rests with the California courts.” And while Aerotek pointed to the “significant federal issue” of whether FAA enforcement required dismissal of the employee’s representative claim in light of the Supreme Court’s Epic decision, the court had now addressed that issue.