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The Battle Continues: The Ninth Circuit Court of Appeals and the California Court of Appeal Continue to Disagree on Whether PAGA Claims Can Be Compelled to Arbitration

Published by on July 20, 2017

For now California employers are faced with extremely challenging decisions about whether or not they should try to enforce an arbitration agreement covering PAGA claims.

Federal and state courts in California continue to disagree about whether claims brought pursuant to the California Private Attorney General Act (PAGA) may be compelled to arbitration. On March 3, 2017, the Ninth Circuit Court of Appeals confirmed that federal courts can compel arbitration of PAGA claims in Valdez v. Terminix International Co., L.P., No. 15-56736 (9th Cir. Mar. 3, 2017). Placido Valdez, a termite technician, brought a representative claim in federal court under PAGA, in which he alleged that Terminix failed to provide meal and rest breaks, pay wages in a timely manner, or provide accurate pay statements. Terminix moved to compel arbitration of the PAGA claim. Relying on a 2014 decision issued by the California Supreme Court, Iskanian v. CLS Transp. Los Angeles, LLC, which held that an individual could not waive the right to bring a PAGA claim, the district court denied Terminix’s motion and Terminix appealed.

In its appeal, Terminix argued that the Federal Arbitration Act (FAA) preempted the Iskanian rule. Based on its 2015 decision in Sakkab v. Luxotica Retail N. Am. Inc., in which it ruled that the Iskanian rule was not preempted by the FAA, the Ninth Circuit rejected Terminix’s argument. Terminix also argued that the U.S. Supreme Court’s 2015 decision in Direct TV v. Imburgia contravened the Ninth Circuit’s reasoning in Sakkab. The Ninth Circuit also rejected this argument, reaffirming that the Iskanian rule is a “generally applicable contract defense” that “bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.” The Ninth Circuit, however, agreed with Terminix’s prevailing argument that PAGA claims can be arbitrated because arbitration is not a categorical and complete waiver of a judicial forum prohibited by Iskanian and Sakkab. The Ninth Circuit held that both Iskanian and Sakkab clearly contemplate that an individual employee can be required to pursue a PAGA claim in arbitration, even though both decisions prohibit the complete waiver of PAGA claims.

The California Court of Appeal, however, recently came to a different conclusion based on its differing analysis and interpretation of Iskanian. In Betancourt v. Prudential Overall Supply, No. EO64326 (Cal. Ct. App. 4th Dist., Mar. 7, 2017), the California Court of Appeal took the position that a PAGA claim could not be compelled to arbitration. The plaintiff sued Prudential Overall Supply, raising only a PAGA claim. Concluding that a PAGA claim was not subject to arbitration under an existing agreement, the trial court denied Prudential’s motion to compel arbitration.

In affirming the trial court’s denial of the motion to compel arbitration, the Court of Appeal’s analysis of Iskanian differed from the Ninth Circuit’s analysis:

We have not interpreted Iskanian as prohibiting arbitration of all PAGA claims. Hypothetically, a PAGA plaintiff might consent to arbitration after the filing of a complaint. We provide no advice on whether such a procedure would be proper. Our reading of Iskanian is limited to a defendant’s reliance on a predispute arbitration agreement to compel arbitration when an employee becomes a type of qui tam plaintiff in a PAGA action. The problem . . . concerns using a predispute contract between private parties to bind the state.

In its analysis, the California Court of Appeal hinted that there may be a type of arbitration agreement sufficient to compel arbitration, declaring:

The issue in the instant case is not an all-or-nothing question of whether PAGA cases can be arbitrated. The issue is whether Prudential can rely upon a predispute arbitration agreement with Betancourt to compel arbitration in a PAGA case. In Iskanian, our Supreme Court explained, ‘Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents —- either the Labor and Workforce Development Agency or aggrieved employees —- that the employer has violated the Labor Code.’ Betancourt is not suing in his private capacity. Betancourt is suing on behalf of the state.

The court, however, did not identify what type of arbitration agreement might be sufficient to compel arbitration. For now, the question of whether representative PAGA claims can be subject to mandatory arbitration is unsettled as between federal and state courts in California.

Welter Insight

The Ninth Circuit’s Valdez decision will be of limited use to employers in state court because it directly conflicts with several California state appellate decisions, including Betancourt, which state that an employer may not rely on a predispute agreement requiring arbitration in a PAGA case. Valdez also does not contravene the Iskanian rule that a complete PAGA waiver is unenforceable. Thus, for now California employers are faced with extremely challenging decisions about whether or not they should try to enforce an arbitration agreement covering PAGA claims.

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