Opinion ID: 3005108
Heading Depth: 4
Heading Rank: 2

Heading: The FAA’s Purpose to Ensure Enforcement of

Text: the Terms of Arbitration Agreements The Supreme Court has stated that “[t]he ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’” Concepcion, 131 S. Ct. at 1748 (second alteration in original) (quoting Volt, 489 U.S. at 478). The Court has also stated that the FAA embodies “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Id. at 1749 (quoting Moses H. Cone, 460 U.S. at 24). The Iskanian rule does not conflict with these purposes. Read broadly, these statements of the FAA’s purposes would require strict enforcement of all terms contained in an arbitration agreement, including terms that are unenforceable under generally applicable state law. Such a broad construction of the FAA’s purposes is untenable, of course, because it would render § 2’s saving clause wholly “ineffectual.” See Geier, 529 U.S. at 870; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967) (“As the ‘saving clause’ in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.”). Congress plainly did not intend to preempt all generally applicable state contract defenses, only those that “interfere[] with arbitration,” Concepcion, 131 S. Ct. at 1750. SAKKAB V. LUXOTTICA RETAIL N. AM. 19 A defense interferes with arbitration if, for example, it prevents parties from selecting the procedures they want applied in arbitration. See id. at 1748–53. Concepcion illustrates how a generally applicable contract defense might do so. The California rule at issue in Concepcion, which provided that class action waivers in certain consumer contracts of adhesion were unconscionable, did not explicitly discriminate against arbitration. See id. at 1745. As applied to arbitration agreements, however, the rule “interfere[ed] with fundamental attributes of arbitration,” id. at 1748, by imposing formal classwide arbitration procedures on the parties against their will. Id. at 1750–51. As the Court explained, “In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” But before an arbitrator may decide the merits of a claim in classwide procedures, he must first decide, for example, whether the class itself may be certified, whether the named parties are sufficiently representative and typical, and how discovery for the class should be conducted. Id. at 1751 (citation omitted) (quoting Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 685 (2010)). The Court observed that “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration–its informality–and makes the process slower, more costly, and more likely to generate procedural morass than final 20 SAKKAB V. LUXOTTICA RETAIL N. AM. judgment.” Id. The parties could not opt out of the formal procedures of class arbitration because the procedures were required to protect the due process rights of absent parties. Id. Therefore, although the California rule prohibiting class action waivers applied equally to both arbitration agreements and non-arbitration agreements, it could not be applied to arbitration agreements without interfering with parties’ freedom to select informal procedures. The Iskanian rule prohibiting waiver of representative PAGA claims does not diminish parties’ freedom to select informal arbitration procedures. To understand why, it is essential to examine the “fundamental[]” differences between PAGA actions and class actions. See Baumann v. Chase Inv. Servs. Corp., 747 F.3d 1117, 1123 (9th Cir. 2014) (quoting McKenzie v. Fed. Express Corp., 765 F. Supp. 2d 1222, 1233 (C.D. Cal. 2011)). The class action is a procedural device for resolving the claims of absent parties on a representative basis. See Fed. R. Civ. P. 23; Ortiz v. Fibreboard Corp., 527 U.S. 815, 832–33 (1999); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613–17 (1997). By contrast, a PAGA action is a statutory action in which the penalties available are measured by the number of Labor Code violations committed by the employer. An employee bringing a PAGA action does so “as the proxy or agent of the state’s labor law enforcement agencies,” Iskanian, 59 Cal. 4th at 380 (quoting Arias v. Superior Court, 46 Cal. 4th 969, 986 (2009)), who are the real parties in interest, see id. at 382. As the state’s proxy, an employee-plaintiff may obtain civil penalties for violations committed against absent employees, Cal. Lab. Code § 2699(g)(1), just as the state could if it brought an enforcement action directly. However, by obtaining such penalties, the employee-plaintiff does not vindicate absent employees’ claims, for the PAGA does not give absent SAKKAB V. LUXOTTICA RETAIL N. AM. 21 employees any substantive right to bring their “own” PAGA claims. See Amalgamated Transit Union, Local 1756, AFLCIO v. Superior Court, 46 Cal. 4th 993, 1003 (2009); see also Iskanian, 59 Cal. 4th at 381 (explaining that “[t]he civil penalties recovered on behalf of the state under the PAGA are distinct from the statutory damages to which employees may be entitled in their individual capacities”). An agreement to waive “representative” PAGA claims–that is, claims for penalties arising out of violations against other employees–is effectively an agreement to limit the penalties an employeeplaintiff may recover on behalf of the state. Because a PAGA action is a statutory action for penalties brought as a proxy for the state, rather than a procedure for resolving the claims of other employees, there is no need to protect absent employees’ due process rights in PAGA arbitrations. Compare Concepcion, 131 S. Ct. at 1751–52 (observing “it is . . . odd to think that an arbitrator would be entrusted with ensuring that third parties’ due process rights are satisfied”), with Arias, 46 Cal. 4th at 984–87. PAGA arbitrations therefore do not require the formal procedures of class arbitrations. See Baumann, 747 F.3d at 1123.10 10 A judgment in a PAGA action binds absent employees because it binds the government agency tasked with enforcing the labor laws. Arias, 46 Cal. 4th at 986. As the California Supreme Court has explained, [w]hen a government agency is authorized to bring an action on behalf of an individual or in the public interest, and a private person lacks an independent legal right to bring the action, a person who is not a party but who is represented by the agency is bound by the judgment as though the person were a party. 22 SAKKAB V. LUXOTTICA RETAIL N. AM. Unlike Rule 23(c)(2), PAGA has no notice requirements for unnamed aggrieved employees, nor may such employees opt out of a PAGA action. In a PAGA action, the court does not inquire into the named plaintiff’s and class counsel’s ability to fairly and adequately represent unnamed employees—critical requirements in federal class actions under Rules 23(a)(4) and (g). . . . Moreover, unlike Rule 23(a), PAGA contains no requirements of numerosity, commonality, or typicality. Id. at 1122–23 (citations omitted). Because representative PAGA claims do not require any special procedures, prohibiting waiver of such claims does not diminish parties’ freedom to select the arbitration procedures that best suit their needs. Nothing prevents parties from agreeing to use informal procedures to arbitrate representative PAGA claims. This is a critically important distinction between the Iskanian rule and the rule at issue in Concepcion. The dissent emphasizes that both the Iskanian rule and the rule at issue in Concepcion “interfere[] with the parties’ freedom to limit their arbitration only to those claims arising between the contracting parties.” We do not read Concepcion to require the enforcement of all waivers of representative claims in arbitration agreements. Whether a claim is technically denominated “representative” is an imperfect proxy for whether refusing to enforce waivers of that claim Id. Since the aggrieved employee bringing the action “does so as the proxy or agent of the state’s labor law enforcement agencies,” absent employees are also bound by any judgment regarding civil penalties. Id. SAKKAB V. LUXOTTICA RETAIL N. AM. 23 will deprive parties of the benefits of arbitration.11 Instead, Concepcion requires us to examine whether the waived claims mandate procedures that interfere with arbitration, as the class claims in Concepcion did. Here, they do not. We take the dissent’s broader point to be that the Iskanian rule defeats the parties’ contractual expectations, as expressed in their arbitration agreement. See Concepcion, 131 S. Ct. at 1752 (“Arbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.”). We recognize that Sakkab and Luxottica likely expected the waiver of representative PAGA claims to be enforced, and that the Iskanian rule prevents that expectation from being fulfilled. Any generally applicable state law that invalidates a mutually agreed upon term of an arbitration agreement will, by definition, defeat the parties’ contractual expectations. However, the FAA’s saving clause clearly indicates that Congress did not intend for the parties’ expectations to trump any and all other interests. As we have explained, a rule requiring that the parties’ expectations be enforced in all circumstances, regardless of whether doing so conflicts with generally applicable state law, would render the saving clause wholly ineffectual. We acknowledge that the Court in Concepcion also expressed concern that “class arbitration greatly increases risks to defendants” by aggregating claims and increasing the 11 For example, even an “individual” PAGA claim does not arise solely between an employer and an employee. As the court in Iskanian observed, “every PAGA action, whether seeking penalties for Labor Code violations as to only one aggrieved employee–the plaintiff bringing the action–or as to other employees as well, is a representative action on behalf of the state.” Iskanian, 59 Cal. 4th at 387. 24 SAKKAB V. LUXOTTICA RETAIL N. AM. amount of potential damages. Id. at 1752. As the Court observed, arbitration is “poorly suited to the higher stakes of class litigation,” because it does not provide for judicial review. Id. Although PAGA actions do not aggregate individual claims, they may nonetheless involve high stakes. Defendants may face hefty civil penalties in PAGA actions, and may be unwilling to forgo judicial review by arbitrating them. It does not follow, however, that the FAA preempts the Iskanian rule just because the amount of civil penalties the PAGA authorizes could make arbitration a less attractive method than litigation for resolving representative PAGA claims. By their nature, some types of claims are better suited to arbitration than others. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (recognizing that agreements to arbitrate federal statutory claims are enforceable even if they do not appear to be “appropriate for arbitration”). But the FAA would not preempt a state statutory cause of action that imposed substantial liability merely because the action’s high stakes would arguably make it poorly suited to arbitration. Cf. Medtronic, 518 U.S. at 485 (“[B]ecause the states are independent sovereigns in our federal system, we have long presumed that Congress does not cavalierly pre-empt statelaw causes of action.”). Nor, we think, would the FAA require courts to enforce a provision limiting a party’s liability in such an action, even if that provision appeared in an arbitration agreement. Cf. Booker v. Robert Half Int’l, Inc., 413 F.3d 77, 83 (D.C. Cir. 2005) (assuming, without deciding, that a term in an arbitration agreement barring punitive damages was unenforceable as applied to a claim under the District of Columbia Human Rights Act). The FAA contemplates that parties may simply agree ex ante to litigate high-stakes claims if they find arbitration’s informal procedures unsuitable. By the same token, the FAA does not SAKKAB V. LUXOTTICA RETAIL N. AM. 25 require courts to enforce agreements to waive the right to bring representative PAGA actions just because the amount of penalties an aggrieved employee is authorized to recover for the state makes the formal procedures of litigation more attractive than arbitration’s informal procedures. Just as the high stakes involved in antitrust actions may cause parties to agree ex ante to exclude antitrust claims from arbitration, parties may prefer to litigate representative PAGA claims. It is true that PAGA actions, like many causes of action, can be complex. It is not true, however, that PAGA actions are necessarily “procedurally” complex, as the dissent claims. Rather, the potential complexity of PAGA actions is a direct result of how an employer’s liability is measured under the statute. The amount of penalties an employee may recover is measured by the number of violations an employer has committed, and the violations may involve multiple employees. “[P]otential complexity should not suffice to ward off arbitration,” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985), where, as here, the complexity flows from the substance of the claim itself, rather than any procedures required to adjudicate it (as with class actions). Cf. id. (holding that an agreement to arbitrate antitrust claims was enforceable). The dissent argues that representative PAGA actions will make the arbitration process “slower” and “more costly.” There is no support for this conclusion in the record. Cf. Concepcion, 131 S. Ct. at 1751 (citing American Arbitration Association statistics regarding the duration of class arbitrations). Moreover, even if there were evidence that representative PAGA actions take longer or cost more to arbitrate than other types of claims, the same could be said of any complex or fact-intensive claim. Antitrust claims, for 26 SAKKAB V. LUXOTTICA RETAIL N. AM. example, have the potential to make arbitration slower and more costly. This does not mean that a rule declining to enforce waivers of such claims interferes with the FAA in any meaningful sense, since, unlike class claims, parties are free to arbitrate them using the procedures of their choice. In many ways, arbitration is well suited to resolving complex disputes, provided that the parties are free to decide how the arbitration will be conducted. See id.; see also American Arbitration Association Commercial Arbitration Rules (describing separate procedures for “Large, Complex, Commercial Disputes”). The dissent also argues that representative PAGA claims are “more likely to generate procedural morass.” But whether arbitration of representative PAGA actions is likely to “generate procedural morass” depends, first and foremost, on the procedures the parties select. One way parties may streamline the resolution of complex PAGA claims is by agreeing to limit discovery in arbitration. See Dotson v. Amgen, Inc., 181 Cal. App. 4th 975, 983 (Ct. App. 2010) (observing that “arbitration is meant to be a streamlined procedure. Limitations on discovery, including the number of depositions, is one of the ways streamlining is achieved”). California courts have recognized that “discovery limitations are an integral and permissible part of the arbitration process.” Id. (citing Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 106 n.11 (2000)); see also Roman v. Superior Court, 172 Cal. App. 4th 1462, 1476 (Ct. App. 2009). Notably, California law permits parties to arbitrate under the American Arbitration Association’s employment dispute resolution rules. See Roman, 172 Cal. App. 4th at 1476. The rules give arbitrators broad authority to decide how much discovery is appropriate, “consistent with the expedited nature of arbitration.” See American Arbitration SAKKAB V. LUXOTTICA RETAIL N. AM. 27 Association Employment Arbitration Rules and Mediation Procedures (2009), at 19. Of course, whether representative PAGA claims are likely to “generate procedural morass” will also depend on whether, and to what extent, state law purports to limit parties’ right to use informal procedures, including limited discovery, in representative PAGA arbitrations. It is conceivable that a state law imposing such limits could run afoul of the Court’s decision in Concepcion by requiring a degree of formality that is inconsistent with traditional arbitration procedures. See Concepcion, 131 S. Ct. at 1751. No such state law is before us, however, and it is premature to conclude that representative PAGA claims will necessarily result in “procedural morass” when there is no indication that state law limits parties’ freedom to select informal procedures, or limit discovery, in PAGA arbitrations. Cf. Williams v. Superior Court, 236 Cal. App. 4th 1151, 1156–58 (Ct. App. 2015) (upholding trial court’s refusal to order statewide discovery in a PAGA action and observing that “[p]laintiff’s proposed procedure, which contemplates jumping into extensive statewide discovery based only on the bare allegations of one local individual having no knowledge of the defendant’s statewide practices would be a classic use of discovery tools to wage litigation rather than facilitate it”). In sum, the Iskanian rule does not conflict with the FAA, because it leaves parties free to adopt the kinds of informal procedures normally available in arbitration. It only prohibits them from opting out of the central feature of the PAGA’s private enforcement scheme–the right to act as a private attorney general to recover the full measure of penalties the state could recover. 28 SAKKAB V. LUXOTTICA RETAIL N. AM. Our conclusion that the FAA does not preempt the Iskanian rule is bolstered by the PAGA’s central role in enforcing California’s labor laws. The Court has instructed that “[i]n all pre-emption cases” we must “start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Medtronic, 518 U.S. at 485 (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)); see also Arizona v. United States, 132 S. Ct. 2492, 2503 (2012) (considering historic police powers of the State in analyzing obstacle preemption). “States possess broad authority under their police powers to regulate the employment relationship to protect workers within the State.” Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 756 (1985) (quoting DeCanas v. Bica, 424 U.S. 351, 356 (1976)). Both the PAGA statute and the Iskanian rule reflect California’s judgment about how best to enforce its labor laws. “[T]he Legislature’s purpose in enacting the PAGA was to augment the limited enforcement capability of the Labor and Workforce Development Agency by empowering employees to enforce the Labor Code as representatives of the Agency.” Iskanian, 59 Cal. 4th at 383. And the “sole purpose” of the Iskanian rule “is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code.” Id. at 388–89. The explicit purpose of the rule barring enforcement of agreements to waive representative PAGA claims is to preserve the deterrence scheme the legislature judged to be optimal. See id. at 384. As the California Supreme Court has explained, a PAGA action is a form of qui tam action. See id. at 382. Qui tam actions predate the FAA by several centuries. See Vermont SAKKAB V. LUXOTTICA RETAIL N. AM. 29 Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 773–76 (2000). The FAA was not intended to preclude states from authorizing qui tam actions to enforce state law. Nor, we think, was it intended to require courts to enforce agreements that severely limit the right to recover penalties for violations that did not directly harm the party bringing the action. The right to inform the state of violations that did not injure the informer is the very essence of a qui tam action. See id. at 775. That qui tam actions can be difficult to arbitrate does not mean that the FAA requires courts to enforce private agreements opting out of the state’s chosen method of enforcing its labor laws.