The brewing preemption battle over Iskanian’s PAGA rule

For years, California courts refused to enforce class action waivers in arbitration agreements. The U.S. Supreme Court upended such restrictions in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), holding that the Federal Arbitration Act preempted them and required the enforcement of class-action waivers.

Subsequently, plaintiffs in wage-and-hour cases increasingly turned to California's Private Attorneys General Act to circumvent Concepcion. PAGA permits an "aggrieved employee" to "bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations." Arias v. Superior Ct., 209 P.3d 923, 930 (Cal. 2009).

In Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (Cal. 2014), the California Supreme Court held that state public policy prohibited the enforcement of an arbitration agreement's PAGA representative-action waiver. Iskanian further determined that the FAA did not preempt this prohibition because the FAA applies solely to the arbitration of claims belonging to private parties, whereas PAGA claims are qui tam actions in which individual workers pursue public (not private) claims for relief. Thereafter, in a 2-1 decision, the 9th U.S. Circuit Court of Appeals likewise held that the FAA did not preempt Iskanian's PAGA rule. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015).

Following Iskanian and Sakkab, the number of PAGA representative actions grew dramatically. Faced with this flood of PAGA litigation, businesses have increasingly argued that intervening U.S. Supreme Court precedent -- particularly the high court's decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) -- eviscerated Iskanian and Sakkab, requiring the enforcement of PAGA representative-action waivers pursuant to the FAA. Although California Courts of Appeal have rejected this argument, there is growing disagreement among state and federal judges over Epic's impact and California courts' insistence that qui tam claims fall outside the FAA's scope.

This division has now reached the U.S. Supreme Court in Viking River Cruises, Inc. v. Moriana. The high court will soon decide whether to address the tension between the FAA and Iskanian's PAGA rule.

The growing state-federal divide over Iskanian

Before Sakkab, the "majority of [federal] district courts" had concluded the FAA preempted Iskanian. Nanavati v. Adecco USA, Inc., 99 F. Supp. 3d 1072, 1080-81 (N.D. Cal. 2015) (collecting cases). In Sakkab, Judge N. Randy Smith dissented based on the same conclusion.

But the Sakkab majority's contrary endorsement of Iskanian did not end the debate over this issue, particularly after the U.S. Supreme Court decided Epic, which held that the FAA preempted rules rendering arbitration provisions unenforceable for requiring individualized arbitration. See Epic, 138 S. Ct. at 1621-23. Before and after Epic, disagreement has continued to simmer between state and federal judges over the interplay between the FAA and PAGA.

First, federal and state judges have disagreed over whether Epic's interpretation of the FAA undermined Iskanian and Sakkab.

Federal judges have recognized Epic's impact. For example, in Rivas v. Coverall North America, Inc., 842 F. App'x 55, 56 (9th Cir. 2021), the 9th Circuit recently acknowledged that "tension exists between Supreme Court case law and Sakkab." As Judge Patrick Bumatay's concurring opinion explained, the "tensions" between Epic and Sakkab are "obvious": intervening Supreme Court precedent "seriously undermined" Sakkab, and Iskanian's PAGA rule now "clearly ... runs afoul of the FAA and must be preempted." Id. at 57, 59 (Bumatay, J., concurring).

In contrast, consistent with Iskanian's view that the FAA applies only to "the resolution of private disputes," whereas PAGA claims are public claims, Iskanian, 327 P.3d at 149-51, California courts maintain that Epic is distinguishable because it involved purely private class and collective claims, e.g., Correia v. NB Baker Elec., Inc., 244 Cal. Rptr. 3d 177, 187-88 (Cal. Ct. App. 2019).

Second, federal and state judges disagree over whether the FAA applies to PAGA claims regardless of Epic.

Adhering to Iskanian's insistence that PAGA claims are "a type of qui tam action" -- like those brought under the federal False Claims Act -- and therefore amount to law enforcement actions lying "outside the FAA's coverage," Iskanian, 327 P.3d at 147-48, 151, California courts maintain that PAGA claims "fall outside the FAA's purview," Correia, 244 Cal. Rptr. 3d at 185, 190. But there is a split of authority over whether qui tam claims -- including PAGA claims -- are subject to arbitration under the FAA, id. at 179, 190-91.

Some courts hold that the named plaintiff who brings a federal qui tam claim on behalf of the government, and who has agreed to arbitration, can be compelled to arbitrate the qui tam claim under the FAA. E.g., Deck v. Miami Jacobs Bus. Coll. Co., 3:12-cv-63 (S.D. Ohio Jan. 31, 2013). Translating this approach to PAGA, the 9th Circuit has concluded that "an individual employee can pursue a PAGA claim in arbitration" and "can bind the state to an arbitral forum." Valdez v. Terminix Int'l Co. Ltd. P'ship, 681 F. App'x 592, 594 (9th Cir. 2017).

California courts take the opposite approach by insisting that the state is the sole real party in interest in a PAGA action. Correia, 244 Cal. Rptr. 3d at 179, 189-91. They acknowledge "that several federal courts have reached a different conclusion." Id. at 179, 190. But California courts consider those federal cases to be "unpersuasive," and instead follow conflicting federal decisions suggesting the government is the sole real party in interest in a federal qui tam action. Id. at 179, 189-91.

The conflict reaches the U.S. Supreme Court's doorstep

These simmering tensions have now reached the high court in Viking River Cruises, Inc. v. Moriana, 20-1573.

The trial court in Moriana denied the defendant's motion to compel arbitration in a PAGA action, and the California Court of Appeal affirmed, rejecting the argument that Epic invalidated Iskanian. Moriana v. Viking River Cruises, BC687325 (Cal. Ct. App. Sept. 18, 2020). The defendant has petitioned the U.S. Supreme Court for a writ of certiorari, asking the high court to decide "[w]hether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA."

This may be the first of several such petitions filed in the next several months. For instance, in Rivas, the 9th Circuit recently granted the defendant's motion to stay issuance of the mandate pending a petition for a writ of certiorari to the high court, signaling that Rivas may soon be heading to the Supreme Court. And given the number of recent California Court of Appeal decisions rejecting FAA preemption challenges to Iskanian's PAGA rule, it would not be surprising if others soon filed similar petitions with the Supreme Court. If the high court takes up the issue, any ruling requiring California courts to enforce PAGA representative-action waivers may sharply curtail the deluge of PAGA litigation inspired by Iskanian. 