Iskanian Not Pre-empted by FAA: Ninth Circuit | Practical Law

Iskanian Not Pre-empted by FAA: Ninth Circuit | Practical Law

In Sakkab v. Luxottica Retail North America, Inc., the US Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) does not preempt the rule announced by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC that representative claims brought under California's Private Attorney General Act (PAGA) cannot be waived. The Ninth Circuit found that the Iskanian rule could stand because it was not an impediment to the FAA's objectives.

Iskanian Not Pre-empted by FAA: Ninth Circuit

Practical Law Legal Update 9-619-1027 (Approx. 6 pages)

Iskanian Not Pre-empted by FAA: Ninth Circuit

by Practical Law Labor & Employment
Published on 05 Oct 2015 • California
In Sakkab v. Luxottica Retail North America, Inc., the US Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) does not preempt the rule announced by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC that representative claims brought under California's Private Attorney General Act (PAGA) cannot be waived. The Ninth Circuit found that the Iskanian rule could stand because it was not an impediment to the FAA's objectives.
On September 28, 2015, in Sakkab v. Luxottica Retail North America, Inc., the US Court of Appeals for the Ninth Circuit held in a 2-1 decision that the Federal Arbitration Act (FAA) does not preempt the rule announced by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC that representative claims brought under California's Private Attorney General Act (PAGA) cannot be waived. The Ninth Circuit found that the Iskanian rule was not an impediment to the FAA's objectives and that PAGA claims cannot be waived under California law. The court reversed a district court's decision compelling arbitration of an employee's PAGA claim. (No. 13-55184, (9th Cir. Sept. 28, 2015).)

Background

Shukri Sakkab, a former employee of Lenscrafters, a Luxottica company, brought a class action against Luxottica for wage and other employment-related violations. Sakkab also brought a non-class, representative claim seeking civil penalties under California's PAGA.
The district court granted Luxottica's motion to compel arbitration and to dismiss all of Sakkab's claims, including the PAGA claim, based on an alternative dispute resolution (ADR) agreement that Sakkab signed during his employment which included a waiver of all employment-related, class-based and representative claims. The district court rejected Sakkab's argument that his PAGA claim could not be waived, finding that the FAA would preempt any state rule that held waivers of PAGA claims to be unenforceable.
Subsequent to the district court's decision, the California Supreme Court held in Iskanian v. CLS Transp. Los Angeles, LLC that waivers of PAGA claims are unenforceable (327 P.3d 129 (Cal. 2014)).
Sakkab appealed the district court's dismissal of his PAGA claim to the Ninth Circuit, relying on Iskanian. On appeal Luxottica argued that the FAA preempted the Iskanian rule.

Outcome

The Ninth Circuit reversed the district court's decision to compel arbitration on Sakkab's PAGA claim, holding that:
  • The FAA did not preempt the California Supreme Court's ruling in Iskanian that PAGA waivers are unenforceable.
  • Sakkab's PAGA waiver in the ADR agreement was unenforceable and Sakkab's PAGA claim could proceed.
The Ninth Circuit majority noted that:
  • PAGA allows employees in California to pursue civil penalties on behalf of the state against their employers for violating California labor code violations (Cal. Lab. Code § 2698 to 2699).
  • Iskanian holds that agreements to waive PAGA claims, including representative PAGA claims seeking penalties for California Labor Code violations affecting other employees, are unenforceable under California law (the Iskanian rule).
  • The FAA preempts state law when state law conflicts with the FAA's objective of enforcing arbitration agreements (9 U.S.C. § 2 to 9 U.S.C. §16 ; AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011)).
  • The FAA's saving clause permits arbitration agreements to be invalidated by "generally applicable contract defenses" that would be a ground for revocation of any contract, including:
    • fraud;
    • duress; or
    • unconscionability.
    (9 U.S.C. § 2; Concepcion, 131 S.Ct. at 1748.)
  • To fall within the FAA's saving clause and invalidate an arbitration agreement, a contract defense based on state law must not single out arbitration agreements for special treatment but must instead treat arbitration and non-arbitration agreements equally (Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).
The Ninth Circuit majority found that the FAA did not preempt the Iskanian rule because the rule:
  • Falls within the FAA's saving clause as a generally applicable contract defense and a ground for revocation of any contract.
  • Does not conflict with the FAA's purpose because it places arbitration and non-arbitration agreements on equal footing and does not:
    • indicate a preference for whether PAGA claims should be litigated or arbitrated; or
    • interfere with or reduce the parties' freedom to select informal arbitration procedures.
The majority remanded to the district court to determine the appropriate forum for resolving Sakkab's representative PAGA claim.

Practical Implications

The Ninth Circuit's decision in Sakkab confirms that the Iskanian rule that waivers of representative PAGA claims are unenforceable is binding on federal district courts. Under Sakkab, California employers cannot enforce waivers of representative PAGA claims in state or federal court. Employers should ensure that their arbitration agreements comply with both Iskanian and Sakkab.