In Hernandez v. DMSI, N.D. Cal Follows Iskanian

On February 3, 2015, Judge Edward Chen of California’s Northern District issued an order in Hernandez v. DMSI Staffing LLC, No. C-14-1531 EMC (N.D. Cal Feb. 3, 2015) (slip op. available here), denying DMSI’s motion to compel arbitration to the extent it sought to enforce a waiver of the plaintiff’s representative claims under California’s Private Attorneys General Act (PAGA), following the reasoning of the California Supreme Court in its landmark ruling in Iskanian v. CLS Transportation. In Iskanian, the California Supreme Court held that an arbitration agreement precluding representative claims under PAGA is invalid as a matter of California public policy, and moreover that California’s rule against forced waivers of PAGA enforcement actions is not preempted by the Federal Arbitration Act (FAA). The Court emphasized that PAGA disputes—like qui tam actions—are between the state and the employer, and not between two contracting private parties.

Judge Chen’s recent ruling in Hernandez follows Iskanian’s reasoning, analogizing PAGA actions to qui tam actions, insofar as under PAGA a private citizen files suit in court to enforce the California Labor Code on behalf of the government. In Hernandez, the plaintiff sought civil penalties under PAGA for violations of the Labor Code, including: failure to pay minimum wage, failure to pay wages for all hours worked, failure to pay overtime, failure to pay wages timely upon termination, and failure to provide accurate and compliant wage statements. Defendants DMSI and Ross Stores sought to compel arbitration of the plaintiff’s individual claims, and to have the district court dismiss the plaintiff’s representative claims under PAGA. The court rejected the defendants’ arguments in support of enforcing the PAGA waiver, focusing on the enforceability of PAGA waivers under state law and on whether the state non-waiver rule is preempted by the FAA.

First, Judge Chen examined the issue of enforceability of PAGA waivers under state law. The court likened PAGA representative actions to qui tam actions, since they are both fundamentally law enforcement actions in which the real party in interest is the government, but where a private citizen plaintiff is authorized to bring the suit. The opinion went on to state that FAA preemption of the ban on PAGA waivers would not only “hinder the state’s ability to enforce its laws through qui tam actions” but would also “disable one of the primary mechanisms for enforcing the Labor Code.” (slip op. at 15, quoting Iskanian, 59 Cal. 4th 348 at 384.) Judge Chen expressed concern that compelling arbitration of a PAGA claim could “entirely waiv[e] a state agency’s statutory remedy,” since a PAGA action is invariably a “representative” action, and would thus be entirely extinguished by enforcing a “representative action” waiver. (Slip op. at 15.)

Second, Judge Chen analyzed whether the state law non-waiver rule is preempted by the FAA. The court noted that whether the FAA preempts the California rule announced in Iskanian is an issue of federal law, as to which the federal district courts are not bound by Iskanian. (Id. at 9.) Nonetheless, the court found Iskanian persuasive. The court further reasoned that the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), only bars state rules that “interfere with fundamental attributes of arbitration,” such as efficiency, informality, and expeditiousness, and “[t]he Iskanian rule against waiver of PAGA claims does not threaten to undermine the fundamental attributes of arbitration” because PAGA actions need not adhere to the time-intensive formalities of a Rule 23 class action, such as class certification and notice to absent plaintiffs. (Slip op. at 10-11, discussing Baumann v. Chase lnv. Servs. Corp., 747 F.3d 1117 (9th Cir. 2014).)

The court also rejected the defendant’s reliance on Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013), which held that the FAA preempts the Broughton-Cruz rule. In Broughton-Cruz, a plaintiff seeking broad injunctive relief under various consumer statutes could not be compelled to arbitrate those claims; in Ferguson, the court determined that a state law that precludes arbitration of a particular type of claim must be preempted by the FAA. Judge Chen distinguished PAGA actions from the consumer claims addressed in Broughton-Cruz and Ferguson, reiterating the qui tam nature of PAGA actions—a PAGA action is not a dispute between two private parties, but brought on behalf of the state, which retains the majority of the penalties collected. On this point, the Hernandez court flatly disagreed with the several federal district courts that have refused to follow Iskanian, holding that these courts are simply incorrect because they fail to distinguish between the public law enforcement aspect of PAGA and the private enforcement actions for injunctive relief at issue in Ferguson.

Finally, and perhaps most importantly, the Hernandez court noted that principles of federalism support the court’s conclusion of no preemption, reasoning that labor law enforcement traditionally falls within a state’s police powers, and state sovereignty depends on a state’s authority over its law enforcement. Thus, “state laws dealing with matters traditionally within a state’s police powers are not to be preempted unless Congress’s intent to do so is clear and manifest.” (Slip op. at 14, citing Californians For Safe & Competitive Dump Truck Transp. v. Mendonca, 152 F.3d 1184, 1186 (9th Cir. 1998).)

In any event, given the firm rejection of the federal district courts that have refused to follow Iskanian, an eventual showdown in the Ninth Circuit Court of Appeals seems likely.