Despite its past losses in the U.S. Supreme Court, the plaintiffs’ bar’s crusade against individualized arbitration marches on. In the past year, powerful allies in federal agencies, such as the National Labor Relations Board and the Consumer Financial Protection Bureau, as well as friendly media outlets like the New York Times, have helped to advance the backward notion that arbitration is anti-consumer. Federal and state courts in California— trial lawyers’ favorite state—continue to be sympathetic to this anti-consumer argument, as evidenced by the decisions a trilogy of cases recently decided by the U.S. Court of Appeals for the Ninth Circuit: Sakkab v. Luxottica Retail North America, Inc., Hopkins v. BCI Coca-Cola Bottling Co., and Sierra v. Oakley Sales Corp.
California courts, wielding such subjective legal standards as “unconscionability” and “against public policy,” have consistently thumbed their noses at the Federal Arbitration Act (FAA) while invalidating class-wide arbitration waivers agreed upon by contract. In a series of decisions beginning with 2011’s AT&T Mobility LLC v. Concepcion, the Supreme Court has ruled the FAA preempts California court-made rules that restrict the use of class waivers. The plaintiffs’ bar’s efforts to chip away at Concepcion paid off in 2014 when the California Supreme Court decided Iskanian v. CLS Transportation Los Angeles, LLC. The court carved out an exception from federal preemption for claims filed under California’s Private Attorney General Act (PAGA).
PAGA allows individual employees to bring a representative action against their employers for violations of the labor code. California receives 75% of any award, with the rest going to the employees—and their attorneys. Iskanian concluded that PAGA claims are akin to qui tam suits, and thus the actual dispute was between the state, and the employer, not between employer and employee. Contracts that denied California the ability to enforce PAGA, the court reasoned, were contrary to public policy, an outcome that did not, in the court’s opinion, conflict with the objectives of the FAA.
The U.S. Supreme Court refused to review whether Iskanian conflicted with its past FAA rulings. After that cert denial, federal district courts in California largely refused to embrace the “Iskanian rule,” finding arbitration waivers of PAGA claims lawful. But then, in September 2015, the Ninth Circuit got involved.
That court endorsed the Iskanian rule in Sakkab. There, the plaintiff argued that the Iskanian rule rendered an agreement to individually arbitrate all claims against his employer void as applied to his PAGA action. The Ninth Circuit reversed a lower court’s dismissal of the suit, holding that the FAA did not preempt the Iskanian rule and therefore the collective arbitration waiver was void as to the plaintiff’s PAGA claim. The court agreed with the California Supreme Court that the Iskanian rule did not stand as an obstacle to the purpose of the FAA. The purported differences between arbitration on a class-wide basis (the prohibition of which were at issue in Concepcion) and arbitration of PAGA claims, and the importance of PAGA in the larger scheme of California labor law, were both key factors in the Sakkab ruling.
Judge N. Randy Smith penned a vigorous dissent. In the opinion’s first paragraph, Judge Smith upbraided the majority for displaying the very “judicial hostility to arbitration” that led Congress to pass the FAA in 1925. He went on to argue that class actions and PAGA claims are not, as the majority asserted, dissimilar. In fact, he continued, they are sufficiently analogous to support FAA preemption of the Iskanian rule. That rule, contrary to the majority’s conclusion, seriously undercuts the FAA’s objectives as explained by the Supreme Court in Concepcion. Luxottica Retail petitioned the Ninth Circuit for a rehearing en banc, which the court denied on February 2, 2016. Luxottica is expected to file a petition for review in the Supreme Court.
On February 18, 2016, the Ninth Circuit finally got around to issuing rulings in Hopkins and Sierra. Both opinions were unsigned and unpublished, and both followed the reasoning of Sakkab.
With its 2014 denial of cert in Iskanian, the U.S. Supreme Court facilitated the chipping away at Concepcion that is taking place in California courts, and its inaction may have also encouraged federal agencies’ anti-arbitration agendas. The justices should remedy that mistake by agreeing to review Sakkab if asked to do so. Surely a majority of the Court understands that only the plaintiffs’ bar benefits from the type of judicial hostility to arbitration occurring in Sakkab, Sierra, and Hopkins. That is certainly not what Congress intended when it passed the Federal Arbitration Act.