Ninth Circuit Rejects Arbitration Compulsion

PASADENA, Calif. (CN) - Overtime claims that a former LensCrafters employee brought against a California franchise led the Ninth Circuit to fine-tune arbitration rules Monday.

Shukri Sakkab filed the complaint in San Diego against Luxottica Retail North America, alleging that the LensCrafters franchise misclassified employees as supervisors so that they would be exempt from overtime and rest and meal breaks.

Citing a dispute-resolution agreement, however, Luxottica had the case dismissed in favor of arbitration.

Though Sakkab did not dispute that his employment claims were arbitrable, he argued that the portion of the dispute-resolution agreement prohibiting him from bringing any Private Attorney General Act (PAGA) claims was not enforceable under California law.

The dispute comes amid developing precedent about the enforceability of arbitration agreements.

Though the U.S. Supreme Court found in Concepcion v. AT&T Corp. that the Federal Arbitration Act pre-empts California's law on unconscionable contracts, California's high court used the 2014 case Iskanian v. CLS Transportation Los Angeles to announce a new rule that barred the waiver of representative claims under PAGA.

The Ninth Circuit sided 2-1 with Sakkab on Monday, noting that the Iskanian court observed that allowing employees to waive the right to bring PAGA actions would "disable one of the primary mechanisms for enforcing the Labor Code."

"Even if PAGA authorized purely 'individual' claims, an agreement to waive representative PAGA claims would be unenforceable," Judge Milan Smith wrote for the majority.

Rejecting Luxottica's claim that the FAA pre-empts the Iskanian rule, Smith said it is a "generally applicable" state contract defense per Concepcion.

"In exercising our judgment, we do not write on a blank slate, for the Supreme Court has repeatedly identified the purposes of the FAA and defined the scope of FAA preemption," Smith said.

"Read broadly," Smith said, the 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," he said. "Congress plainly did not intend to preempt all generally applicable state contract defenses, only those that interfere with arbitration," the majority added.

Judge Randy Smith wrote in dissent that the majority's holding "essentially ignores" Concepcion, and "interferes with the parties' freedom to craft arbitration in a way that preserves the informal procedures and simplicity of arbitration."

"The Iskanian rule interferes with the fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA," the dissent states.

Moreover, the rule makes the arbitration "slower, more costly, and more likely to generate procedural morass," the dissent continues.

Judge Randy Smith said the state court's rule requires a "more formal and complex procedure," exposes defendants to "substantial unanticipated risk" and cannot be justified on state policy grounds.

"A state may not insulate causes of action from arbitration by declaring that the purposes of the statute can only be satisfied via class, representative or collective action," the dissent states.

Responding to the dissent, Judge Milan Smith wrote that the majority did not read Concepcion to require the enforcement of all waivers of representative claims in arbitration agreements, but to examine whether the waived claims mandate procedures that interfere with arbitration.

"Here, they do not," he said.

The majority's Smith also said that the FAA's saving clause "clearly indicates that Congress did not intend for the parties' expectations to trump any and all other interests." He said that the dissent's concerns over the Iskanian rule's procedural difficulties were without recorded support.

"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," the majority opinion states.

"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 should recover," the majority added.

For the majority, "the PAGA's central role in enforcing California labor laws" enforces this position.

"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," the ruling states.

Class counsel Kyle Nordrehaug said in an email that Monday's reversal "aligns Federal Court with the California Supreme Court, and obeys the rules of California contract law."

"We are pleased that the rights of employees are being protected by this decision," said Nordrehaug, of Blumenthal & Nordrehaug in La Jolla, Calif. "We have no intention to seek further review as the matter should now be settled with both the California Supreme Court and the Ninth Circuit ruling in favor of employees and supporting their rights."

Luxottica did not return a request for comment on Monday.

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