California courts still haven't learned the FAA lesson

In its landmark AT&T Mobility LLC v. Concepcion decision, the U.S. Supreme Court held in 2011 that the Federal Arbitration Act (FAA) creates a nationwide policy unequivocally favoring enforcement of arbitration agreements. The court sent a strong message to lower courts: Cease your hostility to arbitration agreements; you may not rely on state law to refuse to enforce such agreements save on grounds that would apply to any contract. Unfortunately, California courts have not gotten the message.

The latest example of their defiance of Concepcion: Both the California Supreme Court and the 9th U.S. Circuit Court of Appeals have refused to enforce contracts providing for individual arbitration of claims arising under California's Private Attorneys General Act (PAGA). That issue is the subject of a pending U.S. Supreme Court certiorari petition, Bloomingdale's v. Vitolo. The court will decide in June whether to take up the issue by granting the petition. It should do so; the issue is of great importance to all employers and employees that enter into such agreements.

Policing Compliance with Concepcion

The Supreme Court has exhibited no reluctance in policing adherence to Concepcion. For example, its 2015 decision in DIRECTV, Inc. v. Imburgia reversed a California Court of Appeal decision that invoked California law as a basis for refusing to enforce an agreement that arbitration would not be conducted on a class-wide basis. Imburgia concluded that the state law at issue was preempted by the FAA because it failed to place arbitration contracts "on equal footing with all other contracts." Just this week, the court slapped down the Kentucky Supreme Court on similar grounds. Kindred Nursing Centers Ltd. Partnership v. Clark, 2017 DJDAR 4461 (May 15, 2017) ("Because [the Kentucky] rule singles out arbitration agreements for disfavored treatment, we hold that it violates the FAA.").

If anything, the Supreme Court has been strengthening its resolve to require enforcement of arbitration clauses, even as the plaintiffs' bar continues to complain that individuals ought to have the right to litigate on a class-wide basis despite having signed an arbitration agreement. In 2011, four justices (Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan) dissented from Concepcion, concluding that California was entitled to prohibit mandatory arbitration unless the defendant agrees to permit arbitration to proceed on a class-wide basis. When the court considered Imburgia five years later, however, Justices Breyer and Kagan acquiesced to Concepcion and voted to reverse the California Supreme Court. And last week, all four of the Concepcion dissenters voted in Kindred Nursing to reverse the Kentucky Supreme Court, with Justice Kagan writing the court's opinion and repeatedly citing Concepcion in support of her decision.

Arbitration Rules Apply to PAGA Claims

If the Supreme Court agrees to hear the Bloomingdale's case, the California courts likely will be reversed yet again. Nothing about PAGA, the California labor statute at issue, suggests a different outcome. PAGA permits individual employees to file lawsuits alleging that their employer has violated California wage and hour laws. They file as "representatives" of the state of California to recover penalties for labor-law violations as to themselves and "other current or former employees." Court-assessed penalties are payable to the state, but the plaintiffs are entitled to keep 25 percent of anything they recover. Both the California Supreme Court and the 9th Circuit have refused to enforce any employer-employee agreements that prevent class-wide adjudication of PAGA claims, concluding that the effect of such agreements is to limit the authority of the state itself to seek penalties for labor law violations.

It blinks reality to assert, as those courts do, that their PAGA decisions are anything other than the latest manifestation of their hostility to arbitration agreements. PAGA actions are not realistically viewed as lawsuits filed by California itself. The state possesses no supervisory control over a PAGA plaintiff, who retains unfettered authority to decide such matters as the allegations of the complaint, the identity of co-workers he represents, and whether to settle the complaint. Under those circumstances, Concepcion dictates that if the plaintiff has entered into an agreement with his employer to arbitrate disputes on an individual basis, he may not assert class-wide PAGA claims relating to the working conditions of his fellow employees.

PAGA Decisions Are Wreaking Havoc

U.S. Supreme Court review of the Bloomingdale's case is warranted in light of the California courts' continued defiance of Concepcion. Their PAGA decisions are wreaking havoc on California employers. Indeed, PAGA claims have become the principal vehicle for plaintiffs' lawyers seeking to file class actions against employers for alleged labor-law violations. The number of PAGA suits filed annually has increased by 400 percent in the past decade. Following Concepcion, lawyers realized that their ability to file traditional class actions had been greatly diminished. PAGA class actions have become the favored alternative. Lawyers are willing to hand over to the state 75 percent of any funds they recover in a PAGA class action, because the potential recovery is massive when the lawsuit asserts claims on behalf of a large number of employees.

Moreover, unless the Supreme Court steps in now by granting the Bloomingdale's petition, the California courts' decisions may ultimately nullify Concepcion entirely. Although PAGA is limited to labor law claims, the lower courts' reasoning would apply to any statute that the California Legislature might adopt authorizing individuals to file suit as agents of the state. If those decisions are not overturned, California could, for example, enact statutes designed to prevent enforcement of arbitration agreements by creating PAGA-like causes of action for violations of the state's consumer protection laws. Moreover, the plaintiffs' bar has been urging other states to emulate California by adopting their own PAGA statutes.

In passing the FAA, Congress made clear that federal law favors arbitration agreements and that states may not devise rules designed to discriminate against such agreements. By granting review in Bloomingdale's and reversing, the Supreme Court once again can send that message to the California courts in no uncertain terms.