Ninth Circuit, California Agree: Employee Waivers of PAGA Representative Claims Unenforceable

• In Sakkab v. Luxottica Retail North America, Inc. the U.S. Court of Appeals for the Ninth Circuit found a pre-dispute waiver of California's Labor Code Private Attorneys General Act (PAGA) representative claims unenforceable under California law, thereby resolving a split among district courts in the Ninth Circuit and adopting the California Supreme Court's ruling in Iskanian v. CLS Transportation Los Angeles, LLC.
• This case bears noting because federal district courts are now required to follow Iskanian and find waivers of PAGA representative actions unenforceable, whereas before Luxottica several district courts found Iskanian's rule to be preempted by the Federal Arbitration Act (FAA).
• Given this decision, employers should expect that PAGA claims will continue to be added to wage and hour complaints, and likely will see stand-alone PAGA claims increase in number.

A divided panel in the U.S. Court of Appeals for the Ninth Circuit recently issued a 2-1 decision in the anticipated case of Sakkab v. Luxottica Retail North America, Inc. (Luxottica)¹. Over a strongly worded dissent, the Luxottica court deemed unenforceable under California law a pre-dispute waiver of California's Labor Code Private Attorneys General Act (PAGA) representative claims in an employment dispute resolution agreement. The Luxottica court thereby resolved a split among district courts in the Ninth Circuit and adopted the holding issued by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC (Iskanian)².

The Employment Dispute Resolution Agreement and Sakkab's Suit

Luxottica Retail North America (Luxottica) operates several eyewear retail stores including Lens Crafters, which had employed Shukir Sakkab. During Mr. Sakkab's employment, Luxottica distributed a Retail Associate Guide to employees upon hire, which contained a dispute resolution agreement that stated: "You and the Company each agree that, no matter in what capacity, neither you nor the Company will (1) file (or join, participate or intervene in) against the other party any lawsuit or court case that related in any way to your employment with the Company or (2) file (or join, participate or intervene in) a class-based lawsuit, court case or arbitration (including any collective or representative arbitration claim)."

Despite Mr. Sakkab signing the agreement, he sued Luxottica in a putative class action in California state court, alleging (1) unlawful business practices, (2) failure to pay overtime compensation, (3) failure to provide accurate itemized wage statements and (4) failure to pay wages when due. Luxottica removed the matter to federal district court, and Mr. Sakkab thereafter filed a First Amended Complaint, adding a representative claim under PAGA.

PAGA allows employees to sue their employers for most workplace violations on behalf of themselves and other current or former employees. PAGA claims are representative actions which are similar but not identical to class actions.

Luxottica's Motion to Compel Arbitration and Dismiss the PAGA Claim

Luxottica sought to compel arbitration of Mr. Sakkab's four claims under its dispute resolution agreement, which Mr. Sakkab did not contest. He did argue, however, that his PAGA claim could not be waived in an agreement under California law. Thus, Mr. Sakkab argued that Luxottica's dispute resolution agreement could not prohibit him from bringing any representative PAGA claims and that the agreement was unenforceable to this extent.

Although it acknowledged a split in California federal case authority, the district court ruled that the Federal Arbitration Act (FAA) preempted any California rule barring waiver of PAGA claims in arbitration agreements. It thus granted Luxottica's motion to compel arbitration on the first four claims, dismissed the case, and entered judgment. Importantly, at the time the district court ruled, the California Supreme Court had not yet ruled in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), which ultimately held that employees could not waive their ability to bring PAGA representative claims.

The Ninth Circuit Appeal and Ruling in Favor of the Rule in Iskanian

On appeal, the Ninth Circuit ruled that the FAA did not preempt the rule in Iskanian that PAGA waivers were unenforceable. The Luxottica court found the Iskanian rule comes within the savings clause of the FAA that states a written arbitration agreement shall be valid, irrevocable, and enforceable, "save upon such grounds as exist at law or in equity for the revocation of any contract."³ The savings clause "permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses'[.]"⁴

The Luxottica court continued by noting that the FAA will preempt only those state laws that single out arbitration agreements and disfavor their enforcement as contrary to the FAA's purpose of eliminating "widespread judicial hostility to arbitration agreements."⁵ In reaching this result, the court focused on the fact that the rule in Iskanian barred PAGA waivers "regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement."⁶ Another fact critical to the Luxottica court was that the rule in Iskanian against PAGA waivers did not evidence judicial hostility toward arbitration. The rule, the Luxottica court found, did not prohibit arbitration of PAGA claims but only that such claims could not be waived altogether.⁷ As a final point, the Luxottica court found that the availability of PAGA claims, a qui tam action, are a part of California's legislative scheme for enforcing the state's Labor Code: "The explicit purpose of the rule barring enforcement of agreements to waive representative PAGA claims is to preserve the deterrence scheme the legislature judged to be optimal."⁸

Practical Ramifications

Following Luxottica, federal district courts are now required to follow Iskanian and find waivers of PAGA representative actions unenforceable. No longer may federal district courts order employees to arbitrate their PAGA claims on an individual basis. Given this decision, employers should also expect that PAGA claims will continue to be added to wage and hour complaints, and likely will see stand-alone PAGA claims increase in number.

Because California employers may enforce class action waivers but not PAGA claim waivers, and because severability clauses in agreements may sometimes pose unique issues, a carefully drafted arbitration agreement becomes critical. Attorneys in Holland & Knight's Labor, Employment and Benefits Group can assist in determining whether an arbitration agreement makes good business sense for your organization. We have extensive experience in the drafting or refinement of agreements to address the specific needs of a wide range of organizations.
   

Notes

¹ Sakkab v. Luxottica Retail North America, Inc., No. 13-55184, 2015 WL 5667912 (9th Cir. Sept. 28, 2015).

² Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014).

³ Luxottica, 2015 WL 5667912 at *4 (quoting 9 U.S.C. §2).

⁴ Id. (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740, 1746 (2011)).

⁵ Id. (quoting Concepcion, 131 S.Ct. 1740 at 1746).

⁶ Id.

⁷ Id. at *6.

⁸ Id. at *11.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.