By George H. Friedman*
When the U.S. Supreme Court decided AT&T Mobility, LLC v. Concepcion, 563 U.S. 321 (2011), many in the arbitration field thought the Federal Arbitration Act (“FAA”) preemption war was over, even in California, which has slowly but surely embraced Concepcion. Turns out that may have been premature, because the state’s Supreme Court last fall held that FAA preemption was not absolute, and the U.S. Supreme Court recently declined to review the case.
A Primer on FAA Preemption
A core element of SCOTUS’ support for PDAAs is the so-called separability doctrine, which holds that, under the Federal Arbitration Act , 9 U.S.C. §§ 1 et seq., a PDAA is a separate contract from the one in which it is embedded, and must be on “equal footing” with any other contract. Section 2 of the FAA provides that a PDAA must be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” The issue of how far states can go in applying the “revocation of any contract” language in section 2 came to a head in Concepcion. There, SCOTUS invalidated a California rule of law because it singled out PDAAs for suspect, disparate, burdensome treatment. Said the Court, “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives.” After Concepcion, the bottom line on FAA preemption of state law on arbitration was this: consistent with FAA § 2, states may invalidate PDAAs based on laws applicable to contracts in general, as long as they don’t single out PDAAs for burdensome or negative treatment.
California Courts on FAA Preemption: “Yes, but….”
I’ve written previously that both state and federal courts – even in California– seem to have gotten the U.S. Supreme Court’s memo that the FAA generally preempts state laws that impinge on arbitration. At least in California, there are limits to FAA preemption, where a party asserts that the arbitration clause is unconscionable. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348, 327 P.3d 129 (Calif. June 23, 2014), a divided Court held that an employee could pursue claims against his employer under the California Private Attorneys General Act (“PAGA”), despite the existence of a PDAA waiving such claims. How was this possible in light of Concepcion? The Court reasoned that allowing an employee to waive PAGA claims violated public policy, rendering that part of the PDAA unenforceable. Specifically, the Court squared this part of its decision Concepcion by noting that PAGA does not stand as an obstacle to the aims of the FAA: “We conclude that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf.”
Et tu, SCOTUS?
Many in the arbitration universe thought SCOTUS would grant the employer’s petition for certiorari, but alas the Court summarily declined to do so in an order issued January 20th (case No. 14-341). My views on why appear a bit later.
Federal Courts Refuse to Apply Iskanian
Several federal courts – in California – have refused to apply Iskanian.
- In Lucero v. Sears Holding Mgmt. Corp., 2014 U.S. Dist. LEXIS 168782(S.D. Cal. Dec 2, 2014), the Court says of Iskanian, “this Court is not bound by the state supreme court’s determination that the FAA does not preempt the state’s rule that arbitrator agreements are unconscionable if they waive an employee’s right to bring a representative PAGA claim.”
- Before that there was Mill v. Kmart Corp., 2014 U.S. Dist. LEXIS 165666(N.D. Cal. Nov. 26, 2014). What of Iskanian? Says the Court, “Since Iskanian, at least three federal courts have addressed whether the FAA preempts California's rule prohibiting the waiver of representative PAGA claims, and all have concluded that it does…. Thus, ‘[i]n accordance with Concepcion, the FAA likewise preempts California's rule against PAGA waivers.’ Accordingly, the PAGA waiver is not substantively unconscionable” [citations omitted].
- In Langston v. 20/20 Companies, 2014 U.S. Dist. LEXIS 151477 (C.D. Cal. Oct. 17, 2014), the Court held that a PDAA can waive PAGA claims and that California’s rule to the contrary is preempted by FAA and Concepcion. Said the Court, “The California Supreme Court’s rule against representative PAGA claim waivers treats arbitration agreements disfavorably” and thus runs afoul of Concepcion.
- See to the same general effect Chico v. Hilton Worldwide,2014 U.S. Dist. LEXIS 147752 (C.D. Cal. Oct. 7, 2014).
- In Ortiz v. Hobby Lobby Stores, Inc., 2014 U.S. Dist. LEXIS 140552 (E.D. Cal. Sept. 30, 2014), the Court states “It is clear that the majority of federal district courts find that PAGA action waivers are enforceable because a rule stating otherwise is preempted by the FAA and As such, this Court holds that representative PAGA action waivers are enforceable.”
Will SCOTUS Weigh in?
I suspect that SCOTUS didn’t take the bait in Iskanian because it would rather review a federal court’s ruling on preemption. Undoubtedly, the Ninth Circuit will eventually have at this issue. I make no predictions as to where it will land on the FAA-PAGA issue, but my gut tells me SCOTUS would rather review a Ninth Circuit decision either way.
If so, it’s not a slam dunk pro-arbitration ruling from SCOTUS. On the one hand, the PAGA part of the Iskanian ruling, complete with potential bifurcation and delays in arbitration, seems to frustrate the objectives of the FAA – a Concepcion no-no. On the other hand, in EEOC v. Waffle House, Inc., 534 U.S. 279 (2002), the Supreme Court held that the EEOC does not stand in the shoes of the employee who has signed an arbitration agreement, meaning the EEOC could pursue litigation on behalf of an employee who had signed an employment contract containing an arbitration clause. Is Iskanian close enough conceptually to Waffle House? Only time will tell.
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).