Ninth Circuit Court of Appeals Finds that Certain Representative Actions Cannot Be Waived

Nicholas Fortuna, November 13, 2015

On September 28, the Ninth Circuit ruled that eyewear retailer, Luxottica, cannot require its employees to waive representative actions for violations of the Labor Code under California’s Private Attorney General Act (PAGA) in its arbitration agreements. This is important because up to now, employers were able to restrict employees to single plaintiff arbitrations for claims arising out of their employment. At issue was whether the Federal Arbitration Act preempted PAGA and thereby permitted waiver of representative actions.

The Ninth Circuit was presented with a case of first impression regarding the scope of the Federal Arbitration Act and the meaning of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, (2011). After analysis, the Court held that PAGA bars employers from compelling waivers of representative claims brought under it.

The Supreme Court in Concepcion stated that the Federal Arbitration Act preempted California law providing that class action waivers in certain consumer contracts were void. The rule was preempted because it conflicted with the purposes of the Federal Arbitration Act. The principal purpose of the Act is to ensure that private arbitration agreements are enforced according to their terms. The Act also embodies a liberal federal policy favoring arbitration agreements, notwithstanding any substantive or procedural policies to the contrary.

The Ninth Circuit pointed out that PAGA does not trigger federal preemption because arbitration of representative claims are permitted under it, thus, it did not create a conflict with the Federal Arbitration Act requiring enforcement of arbitration agreements. Preemption comes into play when state law stands as an obstacle to execution of the purposes and objectives of Congress as embodied in the statute in question. The Ninth Circuit stated that PAGA claims are consistent with the purposes of the Federal Arbitration Act’s goal to enforce arbitration agreements.

PAGA authorizes an employee to bring an action for civil penalties on behalf of the state against his employer for Labor Code violations committed against the employee and fellow employees, with most of the proceeds going to the state. PAGA was enacted to obtain civil penalties for violations of the Labor Code and to enlist private citizens to aid the government in compelling compliance with the Labor Code. The court reasoned that agreements requiring waiver of PAGA rights would harm the state’s interests in enforcing the state Labor Code and in obtaining civil penalties under the statute to deter future violations.

The Court explained that prohibiting waiver of representative PAGA claims does not diminish parties’ freedom to arbitrate. The court distinguished class actions from PAGA representative claims. A class action is a procedural device for resolving claims of absent parties on a representative basis. The Supreme Court has specifically held such procedures are waivable as part of an agreement to arbitrate. PAGA, by contrast, is a statutory action in which the penalties available are measured by the number of Labor Code violations committed by an employer. An employee bringing a PAGA action does so as the proxy or agent of the state’s labor law enforcement agencies. Absent employees’ claims are not vindicated by a PAGA action because PAGA actions do not aggregate individual claims. PAGA facilitates the state’s interest in policing Labor Code violations. Just as the state would if it brought an enforcement action directly against the employer.

The Ninth Circuit’s opinion regarding the validity of a waiver of such representative actions is an opening to maneuver around Supreme Court’s decision to enforce waiver of class actions. We may see more pro-employee states enacting similar statutes.