November 1, 2017

PAGA Actions Still Cannot Be Individually Arbitrated: the U.S. Supreme Court Declines to Hear Challenge to Iskanian; Other Employment Arbitration Decisions on the Horizon

On October 16, 2017, the U.S. Supreme Court declined to review the California Court of Appeal’s 2016 decision in Tanguilig v. Bloomingdale’s, Inc.  At least for now then, the California Supreme Court’s 2012 decision in Iskanian v. CLS Transportation Los Angeles, LLC stands.  As readers of this blog will know, that earlier decision determined that employees may not waive their right to bring representative actions under California’s Private Attorneys General Act (“PAGA”) by signing an arbitration agreement that requires them to arbitrate disputes on an individual, and not on a class or representative, basis.  In Tanguilig v. Bloomingdale’s, Inc., the California Court of Appeal reaffirmed this principle, and rejected Bloomingdale’s arguments that Iskanian was wrongly decided or had been overruledIn dissecting the U.S. Supreme Court’s decision not to review Tanguilig v. Bloomingdale’s, it is worth revisiting that 2016 decision.

Essentially, before the California Court of Appeal, Bloomingdale’s argued that Iskanian was wrongly decided in light of prior and subsequent federal decisions, and that it had been overruled by the U.S. Supreme Court’s decision in DIRECTV, Inc. v. Imburgia in 2015 (which addressed when arbitration provisions in a contract are governed by the Federal Arbitration Act, or “FAA”).  Addressing Bloomingdale’s argument that Iskanian had been wrongly decided, the California Court of Appeal held that it was bound by stare decisis to follow the California Supreme Court’s decision in Iskanian and found that, in any case, the Ninth Circuit had also upheld Iskanian’s interpretation of federal case law.  As to the argument that Iskanian had been overruled by the U.S. Supreme Court in DIRECTV, the Court of Appeal reasoned that DIRECTV did not address the enforceability of PAGA waivers and therefore was irrelevant.

Bloomingdale’s also asked the court to compel arbitration of “the individual portion of Tanguilig’s PAGA claim” and stay “the representative portion” pending arbitration of the individual claim.  The Court of Appeal rejected this argument on the ground that PAGA claims are brought by plaintiffs as representatives of the state and there is no basis for compelling the state to arbitrate its claims against the employer.  Under this principle, the Tanguilig court held that, while “[i]t is less than clear whether an ‘individual’ PAGA cause of action is cognizable, the question was irrelevant because any such claim would be brought by a plaintiff as a representative of the state, which had not agreed to arbitrate its claims, whether individual or collective, against the employer.  (The California Supreme Court, for its part, denied Bloomingdale’s petition for review on March 1, 2017.)

The California Court of Appeal’s logic and decision (and the California Supreme Court’s refusal to review the Court of Appeal decision) is not surprising, and neither are decisions by the Ninth Circuit that are largely consistent with Tanguilig v. Bloomingdale’s.  However, the United States Supreme Court’s denial of review here is surprising.  The Supreme Court, and notably the late Justice Scalia, have largely rejected California’s prior attempts to limit the reach of the FAA.  (See, for example, AT&T Mobility v. Concepcion.)  It was thought that the Court would continue this line of reasoning given Justice Neil Gorsuch’s close ideological identification with Scalia’s positions.  The decision not to review Tanguilig either means that the Court views PAGA actions as unique (essentially qui tam actions, or actions by the state government brought by private citizens) and therefore not within the scope of its prior decisions on the breadth of the FAA, or that it did not view this case as the proper vehicle to review the reasoning of Iskanian.

The decision not to review Tanguilig will not, however, be the U.S. Supreme Court’s last word on employment arbitration for this term, however.  A few weeks ago, the Court heard oral argument on a trio of cases (Epic Systems Corp. v. Lewis, NLRB v. Murphy Oil USA, and Ernst & Young LLP v. Morris) addressing whether an employer’s use of class and collective action waivers in arbitration agreements with employees constitute an unfair labor practice under the National Labor Relations Act (“NLRA”) The National Labor Relations Board (“NLRB”) has consistently taken the position that such waivers violate the NLRA, but the federal Courts of Appeal are split on this.  And although not shocking, it is remarkable to note that the United States Department of Justice, having initially filed a brief alongside the NLRB under the Obama Administration has now switched sides and argued on behalf of employers and in defense of collective action waivers.

For now, employers should be mindful that PAGA cases cannot be individually arbitrated, and even representative (quasi-class) arbitration is uncertain at best.  (There has been a split between state and federal courts regarding representative arbitration for PAGA, and employers are likely better off in federal court, if such an option is available.)  A periodic review of employment arbitration agreements, with the advice of counsel, is warranted to make sure that the scope of arbitrable claims is properly defined.