Ninth Circuit Confirms that PAGA Claims Can Be Compelled to Arbitration; California Appellate Court Disagrees

By Anne Cherry Barnett and Michele Haydel Gehrke

In two unpublished decisions this month, the Ninth Circuit ruled in Wulfe v. Valero Refining Co. California and Valdez v. Terminix International Company, et al. that California Private Attorney General Act (PAGA) claims can be forced into arbitration based on arbitration clauses in employees’ contracts to which the State of California is not a party. While the Wulfe and Valdez decisions are unpublished and without precedential value, they do provide guidance on the Federal Court’s interpretation of how individual arbitration agreements impact potential PAGA claims in California. 

In Wulfe, an employee asserted wage claims against his employer, including a PAGA claim. He signed a mandatory arbitration agreement as a condition of employment. The employer moved to compel arbitration of the entire case, including the PAGA claim. The District Court granted the motion to compel arbitration and left the scope of the agreement to arbitrate, including whether the PAGA claim could be heard in arbitration, up to the arbitrator. The Ninth Circuit affirmed. The Court recognized the ruling of the California Supreme Court in Isakanian v. CLS Transportation Los Angeles, LLC and its own recent ruling in Sakkab v. Luxottica, in which both courts held that “pre-dispute agreements to waive the right to bring a representative PAGA claim are unenforceable and that this rule is not preempted by the FAA.” Nonetheless, the Ninth Circuit held that “the district court’s order compelling arbitration did not run afoul of Sakkab and Iskanian because the order did not prevent Wulfe from bringing a representative PAGA claim in arbitration…”

Similarly, in Valdez, Terminix appealed from the District Court’s order denying its motion to dismiss or compel arbitration of the Plaintiff’s representative PAGA claim. The Ninth Circuit reversed the lower court’s ruling finding that an individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration. The Court addressed the holdings of Isakanian and Sakkab, but found that Isakanian and Sakkab “clearly contemplate[d] that an individual employee can pursue a PAGA claim in arbitration, and thus that individual employees can bind the state to an arbitral forum.” Further, the Ninth Circuit held that “[a]n individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration. Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid.” 

The Ninth Circuit’s decisions in Wulfe and Valdez demonstrate a clear split in authority between Federal and California State Court. While the Ninth Circuit held in Wulfe and Valdez that PAGA actions can be compelled to arbitration in Federal Court, several California State Courts have held otherwise. On March 7, 2017, the Fourth Appellate District of the California Court of Appeal held in Betancourt v. Prudential Overall Supply, that “a defendant cannot rely on a predispute waiver by a private employee to compel arbitration in a PAGA case, which is brought on behalf of the state.” Betancourt is consistent with two other California Court of Appeal cases in which the courts also held that PAGA claims are not subject to pre-dispute mandatory arbitration agreements – Tanguilig v. Bloomingdale’s, Inc. and Hernandez v. Ross Stores, Inc. 

The practical impact of these decisions and this split in authority is significant and much will unfold in the coming months, especially as the United States Supreme Court considers the enforceability of class action waivers in the next term. For example, an individual employee subject to an arbitration agreement who brings a PAGA claim can theoretically be compelled to prosecute that representative action in arbitration, at least in federal court. The arbitration of those PAGA claims would impact the rights of other individual employees who may not have agreed to arbitrate employment claims. And employers may decide the prospect of arbitrating a PAGA claim is not so attractive after all. Accordingly, employers should review their arbitration agreements carefully to determine whether PAGA claims are excluded and discuss with experienced counsel whether it is advantageous to have PAGA claims litigated in arbitration and whether edits to current agreements are necessary.