Co-authored by David D. Kadue and Simon L. Yang
On Tuesday, January 20, 2015, the Court declined to take the case of CLS Transportation Los Angeles, LLC v. Iskanian, in which an employer asked the Court to reverse a ruling of the California Supreme Court. At issue was whether an employee who has agreed to submit all employment-related claims to arbitration, and who has also agreed to waive participation in class and representative actions, can evade that agreement and sue the employer under California’s Private Attorney General Act (“PAGA”). The California Supreme Court in June 2014 had sided with the suing employee.
Many observers expected that the case would be the latest episode in a drama that features a complicated relationship between two supreme courts. To simplify a bit, the U.S. Supreme Court traditionally has read the Federal Arbitration Act (“FAA”) to require the enforcement of private arbitration agreements by their terms. The California Supreme Court, meanwhile, has often searched creatively for some Cal-centric reason to deny enforcement to arbitration agreements.
Recent examples of the contrasting supreme viewpoints have occurred in the context of arbitration agreements that waive the procedural right to proceed or participate in a class action. The California Supreme Court once held, in both the consumer-claim context and in the employee-claim context, that a class-action waiver in an arbitration agreement is unenforceable, because any such waiver offends the California public policy favoring class actions. But then the U.S. Supreme Court, in Concepion v. AT&T Mobility, ruled in 2011 that the FAA preempts the California ban on class-action waivers. Concepion involved a consumer complaint. For several years, California courts resisted the clear implication that Concepcion also applies to employee complaints. Finally, in Iskanian, the California Supreme Court relented, acknowledging that, under the FAA, class-action waivers in arbitration agreements are enforceable, even in California.
But even then the Iskanian court also sounded a note of resistance, based on a special Cal-peculiarity: the court held that Concepcion does not apply to a PAGA claim. The rationale for creating this PAGA exception to Concepcion was that a PAGA claim differs from a class action in that PAGA plaintiffs act as private attorneys general, on behalf of the State of California—an entity that never agreed to arbitrate. Meanwhile, a dozen or more federal district court decisions repudiated this rationale, holding that the FAA, as interpreted by Concepcion, requires courts to enforce arbitration agreements calling for individual arbitration of PAGA claims, even if that enforcement keeps the plaintiff from acting as a private attorney general.
The employer petitioned the U.S. Supreme Court for a hearing on whether the California Supreme Court, in Iskanian, has once again strayed from the FAA’s true path. In supporting this request for intervention, the employer community explained that Iskanian’s rationale does not withstand scrutiny, for several reasons. First, the injuries that PAGA addresses are Labor Code violations that have harmed the suing “aggrieved employee.” The notion that this injury is really to the State of California is an overbroad legal fiction that could apply to any statutory claim—as California presumably has an interest in compliance with all of its statutes. This legal fiction contrasts with the actual governmental injury asserted in a true qui tam claim under the False Claims Act, in which a private party, on behalf of the government, alleges fraud on the government, after notifying the government of the claim and letting the government decide whether to sue for itself. Second, PAGA differs from a true qui tam action in that the State of California plays almost no role in a PAGA action. Under the False Claims Act, the government investigates the claims and a case cannot proceed as a qui tam action unless the government expressly consents, so the government plays a true gatekeeper role. Under PAGA, by contrast, the California Labor and Workforce Development Agency (“LWDA”) has a limited chance to investigate and intervene after the aggrieved employee gives written notice of a violation, and the LWDA almost never investigates. On the contrary, unless, within 33 days, the LWDA says it will investigate (a once-in-a-blue-moon occurrence), the aggrieved employee can sue, without any government oversight, so that the aggrieved employee may unilaterally dismiss the action. Third, the State of California rarely sees the 75% share of the civil penalties that PAGA nominally promises. Settlements of Labor Code claims often involve no PAGA penalty whatsoever. The only judicial oversight is to approve any PAGA penalty sought: if no PAGA penalties are allocated, the court has nothing to approve. Individual plaintiffs can thus use PAGA claims to pressure a greater settlement of their private claims, while producing nothing for the State. In short, because individuals control PAGA actions from start to finish, enabling them to seek recovery for their own alleged injuries, there is no good reason to distinguish PAGA claims from other wage and hour claims. As to all these claims, the FAA preempts any state public policy that would interfere with the enforcement of arbitration agreements. So why should PAGA be any different?
Yet, alas, on Tuesday the U.S. Supreme Court denied the employer’s petition. We thus expect to see continuing discord between federal and California courts on whether PAGA represents an exception to the general rule that courts should enforce arbitration agreements that waive class and representative actions.