Sakkab v. Luxottica: Ninth Circuit Holds that Federal Arbitration Act Does Not Preempt Iskanian Holding that PAGA Representative Action Waivers Are Unenforceable

In Sakkab v. Luxottica Retail North America, Inc. (9th Cir. 9/28/15) ___ F.3d ___, the Ninth Circuit has held that the Federal Arbitration Act (FAA) does not preempt the holding of Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) that agreements to waive representative claims under the Labor Code Private Attorneys General Act of 2004 (PAGA) are not enforceable.

Plaintiff Shukri Sakkab filed a class and PAGA representative action against Luxottica, accusing it of misclassifying supervisors in its Lenscrafters stores as exempt employees. The district court granted Luxottica's motion to compel arbitration of all claims and dismissed Sakkab's complaint. Sakkab appealed, arguing that the waiver of his PAGA claims was not enforceable. The Ninth Circuit reversed, holding as follows:

The FAA provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The FAA preempts state law "to the extent that it 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" However, under its "savings clause," the FAA does not preempt "generally applicable contract defenses, such as fraud, duress, or unconscionability."

The FAA does not preempt Iskanian, which held that that pre-dispute agreements to waive PAGA claims are unenforceable. First, 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."

Second, the rule does not conflict with the FAA's purposes: overcoming judicial hostility toward arbitration, and ensuring enforcement of the terms of arbitration agreements. 

Iskanian does not evidence judicial hostility toward arbitration. It does not prohibit arbitration of PAGA claims. "It provides only that representative PAGA claims may not be waived outright." 

Iskanian does not conflict with the FAA's goal of ensuring enforcement of the terms of arbitration agreements. In AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321, the Supreme Court considered California's Discover Bank rule, which invalidated agreements to waive class claims in certain consumer cases. Concepcion held that the alternative to such a waiver, class arbitration, would sacrifice the principal advantages of arbitration: informality, speed, and efficiency. The Court thus held that the Discover Bank rule interfered with the parties' selection of the arbitral forum.

In contrast, because class actions and representative PAGA actions differ fundamentally, the Iskanian rule prohibiting waiver of representative PAGA claims "does not diminish parties’ freedom to select informal arbitration procedures."

Because a PAGA action is a statutory action for penalties brought as a proxy for the state, rather than a procedure for resolving the claims of other employees, there is no need to protect absent employees’ due process rights in PAGA arbitrations.... Because representative PAGA claims do not require any special procedures, prohibiting waiver of such claims does not diminish parties’ freedom to select the arbitration procedures that best suit their needs. Nothing prevents parties from agreeing to use informal procedures to arbitrate representative PAGA claims.

Finally, the Court's conclusion that the FAA does not preempt the Iskanian rule is bolstered by the fact that PAGA is part of California's legislative scheme for enforcing its labor laws, and such legislation falls within California's police powers. A PAGA action is a form of qui tam action, and the FAA was not intended to preclude states from authorizing qui tam actions. 

Given the Court's holding that the PAGA waiver is invalid, the Court remanded to the district court to determine whether the PAGA claims should be arbitrated or litigated in court. 

The opinion is available here.