Over the past decade, a number of state arbitration laws have been preempted by the Federal Arbitration Act, meaning they are unenforceable because they conflict with it. A state's law will be preempted to the extent it stands as an obstacle to the FAA's objective to enforce private arbitration agreements. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011).
But in California, a notable exception to the FAA's sweeping preemption includes judicial decrees prohibiting an employer from requiring employees to waive their rights to bring representative actions under the Labor Code's Private Attorneys General Act. Such judicial interpretations declare that prohibiting waivers is not preempted by the FAA because that does not interfere with its purpose.
Over the past year, California courts have continued to reject PAGA waivers. But what is so unique about the nature of PAGA lawsuits and preemption?
and FAA Preemption
Congress enacted the FAA to curb against state courts' refusal to enforce arbitration agreements, the "origins" of which date back to "ancient times." Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 270 (1995). Thus, the FAA promotes a strong federal policy to "ensure that private arbitration agreements are enforced according to their terms." Concepcion, 563 U.S. at 352 (quoting Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 469 (1989)). Therefore, a state law is preempted (and unenforceable) to the extent it "stands as an obstacle" to the FAA's objectives. Concepcion, 563 U.S. at 352.
Concepcion abrogated California's Discover Bank rule, which had provided that class arbitration waivers in consumer contracts were unconscionable. Id. at 347 (abrogating Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005)). And following Concepcion, several different California laws were held preempted by the FAA. See, e.g., , 57 Cal. 4th 1109, 1124 (2013) (holding that a California rule categorically prohibiting waivers of a "Berman hearing" under the Labor Code was preempted by the FAA, making such waivers enforceable); see also Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899, 924 (2015) (California's Consumer Legal Remedies Act's anti-waiver provision was preempted by FAA to the extent it barred class action waivers in arbitration agreements governed by FAA); Scott v. Yoho, 248 Cal. App. 4th 392, 407 (2016) (FAA preempted California statute requiring the inclusion of a 30-day rescission period in arbitration contracts governing medical care disputes).
PAGA and Preemption
One area of California law has escaped Concepcion's grasp: prohibitions on pre-dispute waivers of representative actions brought under PAGA. For now, those prohibitions remain enforceable and are not preempted by the FAA.
California's Labor and Workforce Development Agency is authorized to collect civil penalties for Labor Code violations committed by employers. In 2003, the California Legislature enacted PAGA to address the lack of financing, staffing and decreased collection of civil penalties by the LWDA. PAGA authorized "aggrieved employee[s]" to act as agents for LWDA and bring representative actions to recover civil penalties for their employers' Labor Code violations. PAGA created two financial incentives for the aggrieved employee: (1) recovery of 25% of the civil penalties that go to the LWDA; and (2) recovery of attorney fees. The civil penalties are shared by all employees affected by the violation, not just the plaintiff.
After Concepcion a new issue emerged: Could an employer require its employees to waive PAGA claims, the same way (post-Concepcion) a company could require consumers to waive class actions?
The California Supreme Court answered "no" to that question, holding: (1) that pre-dispute PAGA waivers in employment contracts are contrary to public policy and unenforceable; and (2) there is no FAA preemption. Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 384 (2014). To support its no preemption holding, the court reasoned that the FAA's policy is to ensure resolution of private disputes, but PAGA actions are public and between the employer and the state, and the state is not bound by the pre-dispute agreement signed by the employee. The court analogized PAGA lawsuits to a qui tam or "whistleblower" action authorizing a private person to prosecute the case for the government and receive a reward. The U.S. Supreme Court denied a petition for certiorari seeking review of Iskanian.
and Challenges to
In 2018, the U.S. Supreme Court extended Concepcion's holding to the employment context in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018). In Epic, an employee sought to bring a class action for violations of California's Fair Labor Standards Act and overtime laws. The employer sought to compel the employee to individual arbitration pursuant to an arbitration clause in the employment agreement it had with the employee. Although the FLSA allowed for employees to bring collective actions, applying Concepcion, the Supreme Court held the FAA requires enforcement of the arbitration clause compelling the employee to individualized arbitration.
Over the past year, a number of challengers in California have argued that Iskanian's rule was superseded by Epic. However, those challenges have failed to date, as the courts of appeal held that Epic did not reach the specific issue of representative claims brought under PAGA. See, e.g., Correia v. NB Baker Elec., Inc., 32 Cal. App. 5th 602, 619-20 (2019); Winns v. Postmates Inc., 66 Cal. App. 5th 803 (2021). Because the employee in Epic asserted a claim on behalf of other employees (and not the government), the claim "differs fundamentally" from a claim brought by a PAGA plaintiff who is "deputized by the state" to enforce California labor laws. Correia, 32 Cal. App. at 602.
It seems inevitable that the U.S. Supreme Court will eventually have to step in to determine whether Iskanian's prohibition on pre-dispute waivers of PAGA claims is preempted by the FAA. There is a strong possibility the court may do so sooner rather than later: In May, a certiorari petition was filed in Viking River Cruises v. Angie Morana, 20-1573, seeking review of a court of appeal case that came to the same conclusion as Correia and Postmates in reaffirming Iskanian. In July, the court requested a response from the plaintiff/respondent employee, which could be a sign that it is willing to determine the viability of Iskanian.
On one level, Iskanian's reasoning seems to be a bit thin. After all, if the central purpose of the FAA is to "ensure that private arbitration agreements are enforced" (Concepcion, 563 U.S. at 352), how could a prohibition on enforcing PAGA waivers in an arbitration contract not stand as an obstacle to the FAA? Could it be that Iskanian is more of a pro-labor rights policy proscription than a faithful interpretation of FAA preemption under Concepcion and Epic? Or perhaps it could be viewed as the state's attempt to claw back some of its own power over arbitration issues vis-à-vis the federal government.
Is Iskanian's analogy of PAGA cases to qui tam actions also somewhat attenuated? Civil penalties in PAGA suits can be collected by other non-representative employees who were harmed by the labor violations, so, isn't a PAGA action analogous to the type of class action asserted by the plaintiff in Epic, who sought relief on behalf of other aggrieved employees?
On the other hand, the specific provisions of PAGA lend some support to the court's rationale. First, the state has to be notified of the lawsuit, even though it is not required to litigate itself. Second, 75% of the civil penalties generated by PAGA suits go to the state's coffers. One would be hard pressed not to conclude that the nature of the dispute is ultimately between an employer and the state. It logically follows that the state never waived a right to bring a lawsuit under PAGA by virtue of an arbitration clause signed by the employee. In that sense, the Correia court's distinction between Epic-style employment class actions and PAGA actions makes sense.
Perhaps the Supreme Court will not want to wade into some of these difficult questions. It could decline to hear the case as it did initially when Iskanian was decided. However, as Concepcion and Epic demonstrate, the high court is not afraid to dive in and overturn California's judicial interpretations favoring workers and consumers by distinguishing the FAA. It is hard to see why PAGA claims would be any exception for a court whose ideological composition has only moved further to the right in recent years.
Arbitration Angle is a bi-monthly column presented by Hanson Bridgett's Appellate Group.