Authored by Holger G. Besch 

Perhaps signaling the importance of the issue for American businesses and jurisprudence, the U.S. Supreme Court‎ chose the first day of its term beginning in October as the date to set oral arguments in three petitions for certiorari asking whether employees can be required to waive their rights via arbitration agreements to file class and collective actions against their employers. The arguments in Ernst & Young LLP v. Morris; Epic Systems Corp. v. Lewis; and NLRB v. Murphy Oil USA Inc., will all be heard on October 2nd, so mark your calendars.

The cases before the Supreme Court originated either before the National Labor Relations Board, which had ruled that such agreements violate workers’ rights under the National Labor Relations Act to take collective action to ameliorate their working conditions, or with district courts that had used the NLRB’s ruling to reject employers’ motions to compel bilateral arbitration of putative collective and class actions.

SCOTUS will be resolving the resulting Circuit split, in which the Ninth and Seventh Circuits backed the NLRB’s position when they ruled against Ernst & Young and Epic Systems, respectively, and the Fifth Circuit ruled in favor of Murphy Oil. Opening briefs are already on file and address, at bottom, whether the Federal Arbitration Act or the NLRA should take precedence.

Co-authored by Noah Finkel and Andrew Scroggins

Employers have faced questions about the enforceability of arbitration agreements with class and collective action waivers since the NLRB’s highly controversial D.R. Horton decision in 2012, which held that the waivers violate employees’ right to engage in protected concerted activity. The Fifth Circuit refused to enforce the decision, and other courts followed, but the NLRB refused to change course. In 2016, the Seventh and Ninth Circuits also adopted the NLRB’s view, as has the Sixth Circuit in 2017.

In January 2017, the U.S. Supreme Court agreed to hear the issue, consolidating cases from the Fifth, Seventh, and Ninth Circuits. Oral argument is scheduled to take place during its Fall 2017 term.

The tea leaves at the Supreme Court give many reason to believe that the NLRB’s position will be struck down. Newly-appointed Justice Neal Gorsuch is considered by many observers to be likely to follow the pro-arbitration stance of his predecessor, Justice Scalia. The Office of the Solicitor General recently reversed its position, filing an amicus brief in support of the employers that details the flaws it sees in the NLRB’s position and leaving the NLRB on its own to argue the case before the Court. And the appointment of new Board members and the end of the NLRB General Counsel Richard Griffin’s term in November 2017 raise the possibility the agency may revisit its position, thus eliminating any argument that courts should defer to the NLRB’s current position on the legality of class waivers.

Some, from both sides of the bar, speculate that if the Supreme Court rejects the D.R. Horton theory nearly all well-advised employers seeking to minimize their risks will adopt mandatory arbitration programs with class waivers, and that wage-hour litigation as we know it will be over. That hope/fear, however, may be overstated.

This post is the first of several that will consider what the future may hold if employers find themselves confident that they will be able to issue enforceable, mandatory arbitration programs containing class and collective waivers. To what extent will the wage-hour class and collective action landscape change?

A recent Sixth Circuit decision, Taylor v. Pilot Corporation, et al., provides a glimpse into one part of the future. The employer had in place an arbitration agreement with a collective action waiver that applied to most, but not all, of its 50,000 hourly employees. One of the employees who was not bound by the agreement filed an FLSA collective action alleging that she had not been paid for all of her overtime hours. She asked the court to authorize sending notice of conditional certification to those “similarly situated” to her, which she contended included all 50,000 hourly employees.

The employer protested that the plaintiff was not similarly situated to the tens of thousands of employees bound by the arbitration agreement. After all, even if those employees opted in to the suit, the court would lack subject matter jurisdiction, and their claims would be dismissed and sent to arbitration. The district court disagreed, reasoning that it would determine whether the arbitration agreements were enforceable only after learning who had opted-in to the litigation. Notice to all 50,000 hourly employees was approved. The decision was affirmed on appeal, with the Sixth Circuit concluding it did not have jurisdiction to consider questions about the enforceability of the arbitration agreement at this stage.

The decision illustrates how even carefully prepared arbitration agreements can have unintended consequences if not carefully rolled out. Suppose that notice to 50,000 employees results in just 1,000 opt-in plaintiffs, and all of them have signed enforceable arbitration agreements with a collective action waiver. While those employees ultimately may not be able to participate in the collective action for which they received notice, they nonetheless have now been in touch with a lawyer or group of lawyers who can file individual arbitration demands on behalf of all 1,000 employees who had filed consents to join the lawsuit for which they received a collective action notice after conditional certification.

And it gets worse. Consider that most third-party arbitration services require that the employer pay an initial fee when the employee’s claim is filed. The American Arbitration Association, for example, imposes a non-refundable fee of at least $1,500 on the employer for cases filed by an employee. Continuing with the example from above, the employer could be hit with $1,500,000 in costs just as the price to play. Costs begin to rise exponentially when it comes time to mount a defense and arbitrator and hearing fees begin.

In other words, employers should not expect that a Supreme Court endorsement of arbitration agreements with class and collective action waivers will act as a complete bar to collective claims. After all, to adopt a famous movie phrase, plaintiffs’ lawyers “find a way.” The Taylor decision shows the potential power of finding the “unicorn” plaintiff who is not bound by the same agreement as her co-workers, and shows that employers will have to ensure that each and every one of their employees will have to be bound by an arbitration program to maximize a class waiver’s protection. But even then, the unicorn for a plaintiff’s lawyer may merely be someone who had been employed by the defendant-employer within the last three years (the longest of the FLSA’s potential limitations periods), but whose employment had ended before the arbitration program had been enacted. Other novel workarounds are sure to arise if new rules about arbitration force plaintiffs to get more creative.

Co-authored by David D. Kadue and Rocio Herrera

Seyfarth Synopsis: A California appellate court has held that unless a collective bargaining agreement includes an explicitly stated, clear, and unmistakable intent to waive the right to a judicial forum for statutory claims, arbitration of those claims will not be compelled. The CBA in the case, Vasserman v. Henry Mayo Newhall Memorial Hospital, did not waive the right to a judicial forum because its “Grievance and Arbitration” section failed to specify the California Labor Code provisions that would have to be arbitrated.

The Facts

Tanya Vasserman, a registered nurse, worked for Henry Mayo Newhall Memorial Hospital, under a CBA between the Hospital and the California Nurses Association. The CBA’s “Grievance and Arbitration” section provided for grievances culminating in arbitration, and defined a grievance as any dispute “arising out of the interpretation or application of a specific Article and Section of this Agreement during the term of the Agreement … as to events or incidents arising only at the Hospital.” The CBA outlined a three-step grievance procedure. Step three required the Hospital or the California Nurses Association to “file the grievance for binding arbitration pursuant to the rules of the Federal Mediation and Conciliation Service.” The CBA included articles on compensation, including overtime, and meal and rest periods. None of these articles referred to the grievance procedure or to remedies for violations.

Instead of filing a grievance, Vasserman sued in state court for violation of the California Labor Code, including claims for a failure to pay all regular and overtime wages and a failure to provide meal and rest breaks. The Hospital moved to stay the case and compel arbitration. The Hospital argued that Vasserman and the other employees she sought to represent in her putative class action were all covered by a CBA that included a Grievance and Arbitration section that clearly required the Hospital or the union to file a grievance for mandatory arbitration at step three. The Hospital argued that the grievance procedure explicitly waived the right to pursue claims in a judicial forum and Vasserman had to arbitrate her claims. The trial court denied the Hospital’s motion to compel arbitration, and the Hospital appealed to the California Court of Appeal.

The Court of Appeal’s Decision

The Court of Appeal affirmed the trial court’s decision. It found that the Grievance and Arbitration section defined a grievance as “any complaint or dispute arising out of the interpretation or application of a specific Article or Section of this Agreement.” The section also described a three-step grievance procedure, including step three in which any unresolved grievances may be submitted to arbitration. But it also limited the power of the arbitrator. The section provided that the arbitrator “shall be without authority to decide matters specifically excluded or not included in this Agreement.”

The court held that because the Grievance and Arbitration section did not specifically refer to the California Labor Code or other state or federal statutes, or include any language suggesting that the union intended to waive employees’ rights to bring statutory claims in court, the CBA contained no explicitly stated, clear, and unmistakable waiver of a judicial forum.

The court also rejected the Hospital’s argument that the parties, by including specific articles on pay and meal and rest breaks in the CBA, clearly and unmistakably intended to submit all disputes regarding those subjects to the grievance or arbitration process. The articles on pay and meal breaks did not refer to state laws. A waiver cannot be inferred from “broad, nonspecific language … not coupled with an explicit incorporation of statutory requirements.”

What Vasserman Means for Employers

We are reminded that to preclude judicial litigation of statutory rights, CBAs should specify any statutory rights that will be subject to grievance and arbitration procedures. These grievance procedures should also be incorporated by reference in any other section of the CBA discussing statutory rights, to ensure that the parties clearly and unmistakably state their intent to submit all disputes regarding those subjects to the grievance and arbitration procedures set forth in the CBA.

Authored by Simon L. Yang

As discussed by our Consumer Class Defense Blog, this week’s Supreme Court decision in DirecTV, Inc. v. Imburgia reversed a California Court of Appeal that had applied the California Consumer Legal Remedies Act’s prohibition of class waivers in arbitration agreements. According to the lower court’s decision, an arbitration agreement’s terms—directing application of the “law of your state”—permitted the court to effect the California law’s ban on class waivers. But as DirecTV reiterated, courts cannot ignore the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (“FAA”) trumps contrary state laws when it comes to class waivers.

But on the same day the Supreme Court reaffirmed that California’s continuing hostility to honoring class waivers is impermissible, the Supreme Court also declined an opportunity to weigh in on California’s similar hostility to “PAGA waivers” in arbitration agreement. By denying a petition to review in CarMax Auto Superstores California, Inc. v. Areso, the Supreme Court left standing California’s “Iskanian rule” that holds PAGA waivers—or representative action waivers concerning claims under California’s Private Attorney General Act—are unenforceable.

Even though this is the third time that the Supreme Court has passed up an opportunity to invalidate the Iskanian rule, employers shouldn’t jump to conclusions that this week’s action in DirecTV and inaction in CarMax suggests that the Supreme Court is tacitly approving the Iskanian rule.

The Supreme Court simply may be deferring the question, since a petition for rehearing en banc is pending before the Ninth Circuit in Sakkab v. Luxottica Retail North America, Inc. Unlike several prior federal district court decisions that considered the Iskanian rule and found it inconsistent with both the FAA and Concepcion, the Ninth Circuit upheld the Iskanian rule in Sakkab. The Supreme Court might be waiting to see how the en banc panel addresses the Iskanian rule and take up that decision, if necessary. Or the Supreme Court may believe review is not procedurally proper because the CarMax decision is not final, since it did not hold PAGA claims to be non-arbitrable but held only that representative claims under PAGA could not be waived entirely.

In any event, while employers can all take solace from DirecTV’s reaffirmation of Concepcion, employers need not despair that CarMax means the Iskanian rule shall remain the law of the land (in California) forever. Maybe an en banc Ninth Circuit panel will deliver justice. If not, maybe the Supreme Court finally will weigh in. The only certainty is we’ll keep you posted.

Authored by Emily Barker

This week, in Sakkab, et al v. Luxottica Retail North America, Inc., the Ninth Circuit ruled that an employee cannot waive the right to bring a representative action under the Private Attorneys General Act (“PAGA”) through an arbitration agreement or any other means. In so doing, it found the California Supreme Court’s “Iskanian Rule”—which essentially says that pre-dispute agreements to waive PAGA claims are unenforceable under California law—was not preempted by the Federal Arbitration Act (“FAA”).

The FAA generally preempts any law that creates a special rule disfavoring arbitration or conflicts with the FAA’s objectives. The Luxottica Court found that the Iskanian Rule was simply a ground for the revocation of any contract. “The rule bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.” The Court also held that it did not conflict with the FAA’s  purposes and thus was not preempted.

What the Ninth Circuit’s blessing of the Iskanian Rule will ultimately mean for California employers is still open to debate. The decision appears contrary to the United States Supreme Court holding in AT&T Mobility LLC v. Concepcion. There, the High Court held that the FAA preempted a California rule banning class action waivers in arbitration agreements because a rule “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” namely its informality, and “creat[ed] a scheme inconsistent with the FAA.” Because the rule stood as an  obstacle to the accomplishment and execution of the full purposes and objectives of Congress, it was preempted.

The Luxottica court attempted to distinguish PAGA actions by noting that unlike class actions, PAGA actions are not relegated to any particular procedure for resolution by due process. Since parties may agree to more informal measures of resolution for PAGA claims, it is possible to structure an arbitration agreement to align with the aims of the FAA. But as pointed out by the dissent, this “reasoning overlooks the simple fact that, by preventing parties from limiting arbitration only to individual claims arising between two contracting parties, the Iskanian rule interferes with the parties’ freedom to craft arbitration in a way that preserves the informal procedures and simplicity of arbitration.”

The dissent likewise highlights that while PAGA actions do not require the procedural formality of a class action, there will still need to be some mechanism to determine the number of other employees affected by the labor code violations, the number of pay periods that each of the affected employees worked, etc. This would require multiple, individual fact determinations regarding employment status and discovery of a breadth not normally conceived of in arbitration. “All of these additional tasks and procedures necessarily make the process substantially slower, substantially more costly, and more likely to generate a procedural morass than non-representative, individual arbitration”—all of which are contrary to the FAA’s aims.

And there is yet another piece of the Luxottica decision, not highlighted by the dissent, which seems to rest on circular logic, contra Concecpcion. The Luxottica Amici argued that  the Iskanian Rule conflicts with the FAA’s purpose to overcome judicial hostility to arbitration because it prohibits arbitration of individual PAGA claims. The Luxottica court summarily rejected this argument claiming Iskanian expressed no preference as to whether individual PAGA claims are litigated or arbitrated. “[The Iskanian Rule] provides only that representative PAGA claims may not be waived outright … [it] does not prohibit the arbitration of any type of claim.”

But this determination begs the question—when could an employee ever bring an individual PAGA claim if he is never allowed to waive his right to bring the claim in a representative capacity? The Iskanian Rule as adopted by the Ninth Circuit then would seem to squarely prevent arbitration of individual PAGA claims and should therefore be preempted under Concepcion.

While California employers must wait and see if the most-oft reversed Circuit lives up to its reputation, they are not out of options entirely when it comes to structuring cost-saving arbitration agreements.

It should be noted that both the Iskanian and Luxottica decisions left open the possibility of claim bifurcation through arbitration agreements.  That is, a court can compel an employee’s non-PAGA claims to arbitration, leaving only PAGA claims in court if the agreement makes clear this is the parties’ intent. For this reason, employers may wish to continue to include representative action waivers in their arbitration agreements, stating explicitly that to the extent not enforceable, the provisions applicable to PAGA claims are severable, do not void the entire agreement, and that it is the parties’ intent in such cases that the PAGA claims alone remain in court.

While such a provision could at first blush appear to increase costs by subjecting the employer to suits in two fora, one other factor should be considered. Neither the Iskanian Rule nor the Luxottica holding precludes setting the procedural order of adjudication of a PAGA claim by agreement; it mandates only that such claims cannot be waived. Employers thus could conceivably include provisions in their agreements providing that non-PAGA claims subject to a class action waiver must be adjudicated in arbitration before adjudication of any PAGA claims. This would essentially stay any PAGA claims in court until the arbitration was completed.

Such provisions would seem to be in line with the purposes of PAGA and the Luxottica decision. PAGA claims can only be brought by an “aggrieved” employee, so allowing a determination of whether the employee is aggrieved through individual arbitration prior to subjecting the employer to a PAGA suit would seem to comport with the statute. Likewise, the Luxottica reasoning is heavily based in the theory that employers can structure their agreements to allow for a streamlined PAGA adjudication in keeping with the goals of the FAA.

In the end, every employer needs to weigh the pros and cons of continuing to address PAGA claims in arbitration agreements, and there is no one size fits all approach. Given the apparent conflict between the Luxottica/Iskanian rule and Supreme Court precedent, the possibility of relegating the PAGA claims alone to court and staying them pending individual arbitration, and the generally shortened statute of limitations period for PAGA claims, implementation of an arbitration agreement may yet offer substantial protections against class and representative actions.

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.