Justices Won't Review California High Court's Decision Prohibiting Waiver of PAGA Claims

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By Lisa Nagele

Jan. 20 — Denying a petition filed by a limousine service, the U.S. Supreme Court Jan. 20 declined to review the California Supreme Court's ruling that the Federal Arbitration Act doesn't preempt a state law prohibiting waivers of the right to bring representative actions under the state's private attorneys general act.

The justices denied review of the California court's holding that, even though limousine driver Arshavir Iskanian signed an arbitration agreement waiving his right to participate in class and representative actions against his former employer, a waiver of PAGA representative actions is contrary to public policy and unenforceable as a matter of state law.

The California Supreme Court found that the class action waiver Iskanian signed was enforceable in light of the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 79 USLW 4279 (2011). However, it found that a PAGA representative action is “a type of qui tam action”—in which a private individual steps into the state's shoes to enforce laws for the public benefit. In a PAGA action, the state receives 75 percent of the recovered civil penalties, and the remaining 25 percent is distributed to the aggrieved employees.

In its petition for review, CLS Transportation Los Angeles LLC contended that anything a state legislature does may arguably be for a “public reason,” but that's not enough to avoid scrutiny under the FAA. Furthermore, arbitration doesn't limit an employee's ability to individually recover civil penalties under PAGA, the company argued.

“The fact that [Iskanian] must split any recovered penalties with the State does not change this analysis,” CLS asserted.

In his opposition brief, Iskanian argued that the state supreme court's decision is not hostile to arbitration. The ruling below “does not hold agreements to arbitrate PAGA claims unenforceable, but says only that an employee may not, as a condition of employment, be required to waive the right to pursue such a claim ‘in some forum,' ” Iskanian argued.

Dispute About Real Party in Interest

CLS contended that there is no principled difference between PAGA representative claims and class claims. In both representative and class claims, the representative plaintiff may receive a premium payment, attorneys are entitled to fees, settlement agreements must be approved by the court, and the “aggrieved party” is the employee, the company said.

CLS argued that a PAGA action is different than a qui tam action because the aggrieved party in a qui tam action is the government, whereas in a PAGA claim the real party in interest is the employee, who may have an employment contract and arbitration agreement.

But Iskanian argued the state supreme court correctly ruled that PAGA representative claims are a type of qui tam claim because the state is the real party in interest. Although a portion of the penalties recovered in a PAGA action are payable to the employee, Iskanian said, the purpose of a PAGA action is to deter and punish violations of the state labor code, and it “deputizes” the individual to pursue claims on behalf of the state.

Thus, a PAGA claim is a “representative claim” on behalf of the state regardless of whether the claim involves one or many employees, Iskanian said.

Federal Courts Disagree With State Ruling

To support its claim, CLS pointed to federal courts in California that have declined to follow the state supreme court's ruling and have held that FAA preemption applies to representative PAGA claim waivers.

Iskanian argued that CLS only cited federal district court rulings and didn't point to a federal appellate court or another state supreme court that has addressed the specific question of whether the FAA requires enforcement of PAGA claim waivers or preempts state laws that prohibit qui tam claim waivers in predispute arbitration provisions.

The U.S. Court of Appeals for the Ninth Circuit hasn't ruled on the issue yet, Iskanian said. “Disagreement among district court judges within the same circuit is not the sort of conflict that necessitates intervention by this Court, as it may be resolved by the court of appeals,” he said.

Iskanian was represented by Public Citizen Litigation Group and Capstone Law APC. Fox Rothschild LLP and Cole, Schotz, Meisel, Forman & Leonard PA represented CLS Transportation.

To contact the reporter on this story: Lisa Nagele in Washington at lnagele@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com