United States: California Arbitration Update: Significant Changes Imminent?

On August 31, 2015, the California State Legislature approved and enrolled AB 465. The bill was presented to Governor Brown on September 3, 2015. While he has until November 11 to act upon this bill, he has not yet done so as of the date of this Alert.

If signed by Governor Brown, this bill would amend the California Labor Code by adding a new Section 925, prohibiting any person from:

"[R]equir[ing] another person to waive any legal right, penalty, remedy, forum, or procedure for a violation of any provision of [the California Labor Code], as a condition of employment, including the right to file and pursue a civil action or complaint with, or otherwise notify, the Labor Commissioner, state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity."

AB 465 provides that agreements to waive rights obtained in violation of the statute include "any agreement to waive a legal right, penalty, remedy, forum, or procedure . . . including an agreement to accept private arbitration" [emphasis added]. The bill, if enacted, will apply to any agreement entered into on or after January 1, 2016.

The key point is that the proposed statute prohibits requiring waivers of rights (including waivers found in arbitration agreements) as a condition of employment. Even if the bill becomes law, an employer could still offer employees the opportunity to enter into binding arbitration agreements in exchange for the employer's provision of some additional "consideration" to the employee, such as extra vacation days, "flex time off" or other benefits to which the employee is not otherwise entitled.

For those who counsel and advise employers, this bill signifies a giant step backward. At present, California employers can require new employees to execute a mutual, binding agreement to arbitrate as a condition of hire. There are several requirements for such mandatory arbitration agreements to be held enforceable. Such arbitration agreements must impose upon the employer most of the cost and expense of the arbitration, cannot limit the extent of claims or damages the worker can seek, cannot shorten statutes of limitations and cannot force the worker to waive his or her rights to attorneys' fees. Many cases in the last few years have focused on whether mandatory binding arbitration agreements can require workers to agree to arbitrate class action claims or claims brought under the state's Private Attorney General Act (PAGA). Last year, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), that mandatory arbitration agreements between an employer and its employees cannot require the employee to waive his or her right to bring a PAGA representative action in court.

The Ninth Circuit has now weighed in on the PAGA issue, as well. In Sakkab v. Luxottica Retail North America, Inc., No. 13-55184 (September 28, 2015), the Ninth Circuit Court of Appeals held that the employee's waiver of his right to bring a PAGA claim in court could not be enforced. The employer contended that the Federal Arbitration Act (FAA) preempted the California rule created by the Iskanian decision.

The key provision of the FAA, 9 U.S.C. § 2, generally declares that contractual agreements to arbitrate disputes are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Courts interpreting § 2 have held that arbitration agreements may be invalidated by generally applicable contract defenses, such as fraud, duress or unconscionability. However, if a state law conflicts with the FAA's objectives, the state law is preempted. AT&T Mobility LLC v. Concepcion, 131 S. Ct 1740, 1748 (2011).

The FAA's objective is to hold up as enforceable contractual agreements to arbitrate. So, the question facing the Ninth Circuit was whether the Iskanian ruling (holding that an employee cannot be forced to waive his or her right to file a PAGA action in court) was preempted by the FAA, which generally favors the enforceability of contractual arbitration agreements. The Ninth Circuit first concluded that the Iskanian rule was a "generally applicable" contract defense. It next concluded that upholding Iskanian's rule prohibiting a waiver of the right to litigate PAGA claims was not in conflict with the FAA's overreaching objective of enforcing contractual arbitration agreements. The reasoning of the court was that a PAGA representative action is not one in which the employee is seeking to redress wrongs suffered by him or her as an individual. Rather, the PAGA plaintiff stands as a proxy in the shoes of the state. The rights of the state to recover civil penalties are not subject to waiver by individuals in their private arbitration agreements with their employers.

Another key aspect of the Sakkab decision is that while the court held that Sakkab could not be forced to arbitrate his representative PAGA claims, it punted on the question of whether the PAGA waiver contained in the agreement rendered the entire agreement void. The court noted that Sakkab had not argued that the entire agreement was void. Nor had he disputed that his non-PAGA claims must be arbitrated. Yet, the Ninth Circuit stated, "It is unclear, however, whether the parties have agreed to arbitrate such surviving claims or whether they must be litigated instead."

The Sakkab decision has some significant implications. First, it upholds the Iskanian decision, clarifying that arbitration agreements between an employer and an employee cannot require the employee to waive the right to litigate PAGA claims. It also underscores the significance for employers to ensure that PAGA or representative action waivers are eliminated from their arbitration agreements; leaving such clauses in could result in the entire arbitration agreement being found unenforceable.

Finally, the Sakkab decision raises questions concerning the viability of challenges to AB 465 if it is signed by Governor Brown. One of the anticipated challenges to AB 465 is that the FAA preempts it. The fact that the U.S. Supreme Court has found the Iskanian ruling not to conflict with the FAA means that it may be more challenging to make the preemption challenge to AB 465.

What This Means for Employers

Employers may wonder whether they can avoid the impact of AB 465 by having their employees execute new mandatory arbitration agreements with provisions stating that the laws of another state will control. The short answer to that question is "No." The text of AB 465 clarifies that "it is the policy of the State of California to ensure that all persons have the full benefit of the rights, penalties, remedies, forums, and procedures established in the Labor Code, and that individuals not be deprived of those rights, penalties, remedies, forums, or procedures through the use of involuntary or coerced waivers." When there is a declaration of public policy, such legislative intent cannot be thwarted by relying upon laws of another jurisdiction (for example, California public policy against non-competes cannot be avoided by requiring employees to agree that another state's laws will control).

Employers who currently use mandatory arbitration agreements with California employees may want to ensure that those agreements do not contain waivers of rights to pursue PAGA or other representative claims or other provisions that might invalidate the arbitration agreement. Employers should be prepared for the possibility that they may not be able to use mandatory arbitration agreements as a condition of hire going forward. They should consider developing contingency plans, including possible development of new, voluntary arbitration agreements with additional consideration. Employers may also want seek counsel on whether and when to roll out any "new" arbitration agreements. Many employees or prospective employees, given the chance to earn some additional "consideration," may be more than willing to enter into new, voluntary arbitration agreements. Such agreements should contain multiple "checks and balances" to increase the likelihood that a court or arbitrator will deem them to be truly voluntary.

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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