Last June, in Iskanian v. CLS Transportation Los Angeles, the California Supreme Court settled a split of authority among California Courts of Appeal over the enforceability of arbitration clauses waiving representative actions permitted by the Private Attorneys General Act (PAGA) where the arbitration agreements are governed by the Federal Arbitration Act (FAA).  Iskanian held that an arbitration provision “compel[ling] the waiver of representative claims under the PAGA” is “contrary to public policy and unenforceable as a matter of state law.”  Iskanian also concluded that this rule was not preempted by the FAA.

Although Iskanian settled the division among California’s state courts, it did not end the debate over the FAA’s impact on PAGA representative action waivers.  Prior to Iskanian, numerous federal district courts in California had decided that PAGA representative action waivers must be enforced under the FAA.  Now, a majority of federal district courts have similarly declined to follow Iskanian, concluding that the FAA preempts Iskanian’s refusal to enforce these PAGA waivers.  (See, e.g., Estrada v. CleanNet USA, Inc. (N.D.Cal. Feb. 24, 2015) 2015 WL 833701, at pp. *4-*5; Lucero v. Sears Holdings Management Corp. (S.D.Cal. Dec. 2, 2014) 2014 WL 6984220, at pp. *4-*6 [collecting cases declining to follow Iskanian].)  Consequently, California’s state and federal courts are divided over the enforceability of PAGA representative action waivers under the FAA.

Recently, the employer in Iskanian invoked this continuing schism in an effort to persuade the U.S. Supreme Court to grant its cert. petition there.  But the employee successfully persuaded the high court to deny this cert. petition after stressing that the Ninth Circuit had not yet decided if it would follow Iskanian and urging the U.S. Supreme Court to wait for the Ninth Circuit to address the issue.

The U.S. Supreme Court may soon get that opportunity.  This week, the Ninth Circuit set oral argument in the following three arbitration appeals, where it is poised to decide whether PAGA representative action waivers must be enforced under the FAA (the very question addressed by Iskanian): (1) Sakkab v. Luxottica Retail North America, no. 13-55184; (2) Sierra v. Oakley Sales Corp., no. 13-55891; and (3) Hopkins v. BCI Coca-Cola Bottling Co., no. 13-56126.  The arguments in Sakkab and Hopkins are set for June 3, while the argument in Sierra is set for June 4.

If the Ninth Circuit, like many district courts, elects not to follow Iskanian, the U.S. Supreme Court may step in to resolve the conflict.  If it were to do so, the high court would be indirectly reviewing Iskanian’s rule even though the court had previously denied the cert. petition in Iskanian.  Nor would this be the first occasion when the high court will have undertaken such indirect review.  For example, in People v. Diaz (2011) 51 Cal.4th 84, the California Supreme Court held that the Fourth Amendment allowed a warrantless search of cell phone data incident to arrest as long as the cell phone was immediately associated with an arrestee’s person.  But, just last year, in Riley v. California, the U.S. Supreme Court granted certiorari and came to the opposite conclusion in reversing a California Court of Appeal decision that simply followed Diaz.

Interestingly, the Ninth Circuit appeals in Sakkab, Sierra, and Hopkins may call on the Ninth Circuit (and perhaps even the U.S. Supreme Court) to resolve not only the conflict over the enforceability of PAGA representative action waivers but also the related conflict over whether federal False Claims Act (FCA) actions are subject to arbitration under the FAA.

Iskanian held that the FAA does not require courts to enforce PAGA waivers because PAGA representative actions resemble qui tam claims brought under the FCA.  According to Iskanian, the FAA does not preempt “a rule prohibiting the waiver of this kind of qui tam action” since it is brought on behalf of the government.

But Iskanian ignored that courts are divided over whether the FAA mandates the enforcement of agreements to arbitrate FCA claims, thereby choosing a side in this preexisting conflict.  As we explained last year, several federal district court decisions hold that FCA claims are subject to arbitration under the FAA.  As one court put it, although an FCA qui tam claim is “necessarily ‘brought in the name of the Government,’ it still represents a claim belonging to the [p]laintiffs themselves” and is thus subject to arbitration pursuant to the FAA.  (Deck v. Miami Jacobs Business College Co. (S.D.Ohio Jan. 31, 2013) 2013 WL 394875, at pp. *6-*7.)

Since Iskanian’s rationale for refusing to apply the FAA’s mandate to PAGA representative action waivers relies on the premise that qui tam claims like those under the FCA are not subject to the FAA—a premise with which other courts disagree—a court assessing Iskanian’s rationale might address whether it agrees with the contrary line of case law applying the FAA to FCA claims.  Indeed, given this existing conflict over the FAA’s applicability to qui tam claims, U.S. Supreme Court review could be warranted even if the Ninth Circuit were to agree with Iskanian’s rationale in Sakkab, Sierra, or Hopkins.

Moreover, Iskanian’s linking of PAGA representative action waivers to FCA qui tam claims might persuade the Ninth Circuit not to follow Iskanian’s rationale.

After all, courts who have refused to compel arbitration of FCA claims often did so based on the FAA’s so-called “vindication” exception.  (See, e.g., Winston v. Academi Training Center, Inc. (E.D.Va. Mar. 13, 2013) 2013 WL 989999, at *1-*2.)  This “judge made exception” is not predicated on the FAA’s text and instead “originated as dictum” in a U.S. Supreme Court arbitration decision from the 1980s.  (Am. Exp. Co. v. Italian Colors Rest. (2013) 133 S.Ct. 2304, 2310.)  This earlier decision indicated that Congress may be able to manifest an intention in a federal statute enacted after the FAA to exempt federal statutory rights from the FAA’s scope.  (See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) 473 U.S. 614, 627-628.)  Based on this narrow premise, prior high court decisions have suggested in dicta that if a party could not effectively vindicate a federal statutory claim in arbitration, an inherent conflict might exist between the FAA and the federal law in question and this conflict may perhaps override the FAA’s mandate.  (See, e.g., Sherason/Am. Exp., Inc. v. McMahon (1987) 482 U.S. 220, 226-227, 242.)  This prospect of a potential conflict between two different federal laws has convinced some courts that the FAA is inapplicable to FCA claims.  (See, e.g., Nguyen v. City of Cleveland (N.D.Ohio 2000) 121 F. Supp.2d 643, 646-647.)

But unlike the California Supreme Court—which expanded this vindication principle to claims asserting state statutory rights (e.g., Broughton v. Cigna Healthplans of Cal. (1999) 21 Cal.4th 1066, 1082-1083)—the Ninth Circuit recently held that this principle “does not extend to state statutes.”  (Ferguson v. Corinthian Colleges, Inc. (9th Cir. 2013) 733 F.3d 928, 935-936.)  As a result, even assuming federal FCA qui tam claims are not subject to the FAA pursuant to the vindication principle, the Ninth Circuit may still refuse to apply this principle to PAGA representative action waivers in Sakkab, Sierra, or Hopkins because PAGA claims instead derive from state law.

Of course, these Ninth Circuit appeals are not the only cases that could present the U.S. Supreme Court with an opportunity to revisit Iskanian’s rule.  Rather, the high court will get that opportunity even before the Ninth Circuit hears oral argument when the U.S. Supreme Court decides whether to grant the employer’s cert. petition in Bridgestone Retail Operations, LLC v. Brown.  There, the California Court of Appeal followed Iskanian to hold that a PAGA waiver was unenforceable.  The employer filed a cert. petition earlier this year and the high court has requested a response from the employee that is currently due on April 27.  The U.S. Supreme Court may rule on this cert. petition around the same time, or just before, the Ninth Circuit hears oral argument about Iskanian’s rule.

[Full disclosure: Horvitz & Levy filed an amicus brief in support of the employer in Iskanian, arguing the FAA preempted an earlier California Supreme Court decision (Gentry) that permitted the invalidation of class action waivers in wage and hour lawsuits.  Iskanian agreed that the FAA preempted this rule.]