Employers can compel arbitration of PAGA claims, Ninth Circuit says (but California courts beg to differ)

The war between the California Private Attorneys’ General Act and the Federal Arbitration Act continues. A recent decision by the U.S. Court of Appeals for the Ninth Circuit confirms that federal courts can compel arbitration of PAGA claims. The court upheld a provision in an employment agreement requiring arbitration of a representative claim under the PAGA.

Valdez v. Terminix

Placido Valdez, a termite technician, brought a representative claim in federal court under the PAGA, alleging 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. Terminix appealed.

Although Terminix’s first two arguments on appeal were unsuccessful, it scored with its third.

Terminix first argued that the Federal Arbitration Act preempted the Iskanian rule. The Ninth Circuit rejected that argument, citing its 2015 decision in Sakkab v. Luxotica Retail N. Am. Inc., in which it ruled that the Iskanian rule did not stand as an obstacle to the accomplishment of the FAA’s objectives and was not preempted by the FAA.

Terminix also argued that the U.S. Supreme Court’s 2015 decision in Direct TV v. Imburgia cast doubt on the Ninth Circuit’s reasoning in Sakkab. In the Terminix decision, the Ninth Circuit rejected this argument as well, 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 winning argument for Terminix was 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 agreed, stating that although Iskanian and Sakkab prohibit the complete waiver of PAGA claims, both decisions clearly contemplate that an individual employee can be required to pursue a PAGA claim in arbitration.

Discussion

There are several limits to the applicability of the Valdez decision. First, the case may not be much help to an employer that is sued in state court, because it directly conflicts with several California state appellate decisions, including Betancourt v. Prudential Overall Supply, which says that an employer may not rely on a pre-dispute agreement requiring arbitration in a PAGA case. Second, the Valdez case does not disturb the Iskanian ruling that a complete PAGA waiver is unenforceable. Third, given that there is no right to a jury trial under PAGA and that the court has unfettered discretion to reduce or impose the maximum PAGA penalties, the arbitral forum may not necessarily be more advantageous or cost-effective than the judicial forum, particularly in a representative action like one arising under the PAGA.

For a printer-friendly copy, click here.