Arbitrating PAGA Representative Actions: Federal and State Courts Begin to Part Ways

by Seyfarth Shaw LLP
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Seyfarth Synopsis: Three decisions issued earlier this month reveal an increasing tension between the Ninth Circuit and California appellate courts on whether representative PAGA actions can be arbitrated. As a result, employers wishing to compel arbitration of representative PAGA claims are likely to be better off in federal court than in state court.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC that pre-dispute arbitration agreements cannot require employees to waive representative claims under California’s Labor Code Private Attorneys General Act (“PAGA”). The following year, the Ninth Circuit agreed with Iskanian and held in Sakkab v. Luxottica Retail North America, Inc. that PAGA representative actions cannot be waived.

While state and federal courts agree that pre-dispute waiver of PAGA actions is prohibited, they disagree on the next logical question: can private arbitration agreements require PAGA claims to be arbitrated on a representative basis? In a pair of recent unpublished decisions, the Ninth Circuit has answered “yes.” Two state appellate courts, in contrast, have expressed the view that representative PAGA claims cannot be arbitrated—even if the employer and employee agreed to do so in a pre-dispute arbitration agreement—unless the State has also consented.

The Ninth Circuit. Earlier this month, Wulfe v. Valero Refining Co. California considered a pre-dispute arbitration agreement that was silent regarding waiver of PAGA claims. The Ninth Circuit held that “the district court’s order compelling arbitration did not run afoul of Sakkab and Iskanian because the order did not prevent [the employee] from bringing a representative PAGA claim in arbitration.” It is only “pre-dispute agreements to waive the right to bring a representative PAGA claim [that] are unenforceable,” the Court held.

Two days later, in another unpublished decision, the Ninth Circuit reached the same result. In Valdez v. Terminix International Company Limited Partnership, it reversed a district court, which had held that PAGA claims categorically cannot proceed to arbitration.” The Ninth Circuit again concluded that “Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid.” It also interpreted Sakkab as “likewise recogniz[ing] that individual employees may pursue PAGA claims in arbitration.”

California appellate courts.  Days after Wulfe and Valdez, a state appellate court opined in Betancourt v. Prudential Overall Supply that PAGA claims cannot be arbitrated without the State of California’s consent. The “fact that [the employee] may have entered into a pre-dispute agreement to arbitrate does not bind the state to arbitration,” the court concluded. However, these statements arguably were not necessary to the Court of Appeal’s ultimate holding, which was that the arbitration agreement was unenforceable because it contained a PAGA waiver in violation of Iskanian.

Betancourt is in line with Tanguilig v. Bloomingdale’s, Inc., another state appellate court opinion issued in November 2016. Tanguilg also opined that “a PAGA plaintiff’s request for civil penalties on behalf of himself or herself is not subject to arbitration under a private arbitration agreement between the plaintiff and his or her employer. This is because the real party in interest in a PAGA suit, the state, has not agreed to arbitrate the claim.” As in Betancourt, however, the arbitration agreement had a PAGA waiver in violation of Iskanian, arguably making the Court of Appeal’s broader discussion unnecessary to its holding.

As a result of the current tension between state and federal courts, employers who wish to compel arbitration of a PAGA claim on a representative basis should pay careful attention to the forum in which they are litigating. Though Wulfe and Valdez are unpublished, they are persuasive Ninth Circuit authority, making the chances for success higher in federal court than in state court. Unless the issue is resolved by the California Supreme Court, the uncertainty surrounding arbitration of PAGA representative claims is likely to continue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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