Authority Over Efficiency: District Court Lacks Authority To Rule On Arbitration Preemption Question In Remanded PAGA Action, Ninth Circuit Says

As a recent Ninth Circuit decision demonstrates, although substantial time, effort, and briefing may be spent litigating issues in a removed federal putative class action, parties should be prepared for a round two of their persuasion attempts in state court where the case is remanded to state court.

In Echevarria v. Aerotek, Inc., a California district court remanded a representative action filed under California’s Private Attorneys General Act (PAGA) after finding that jurisdiction was improper under the Class Action Fairness Act (CAFA) and declining to exercise supplemental jurisdiction over the claim––but not before passing on an arbitration preemption issue surrounding the claim. No. 19-16275, 2020 WL 4435090 (9th Cir. Aug. 3, 2020). In particular, because the parties had entered into an arbitration agreement that waived the plaintiff’s ability to bring a representative action, the court considered whether the Federal Arbitration Act (FAA), which requires enforcement of class action waivers in arbitration agreements, preempted California’s rule against waiver of PAGA claims. PAGA allows an employee, standing in the shoes of California’s Labor and Workforce Development Agency, to bring an action for labor code violations on behalf of other current or former employees against his or her employer. The court reasoned that it was appropriate to consider this preemption question prior to remanding the case to state court “in light of the resources already expended on briefing and arguing [the motion to compel arbitration].” The district court ultimately held that the FAA did not preempt California’s rule and that the arbitration agreement’s class waiver was unenforceable as it related to the PAGA claim.

On review, while it agreed that the district court lacked subject matter jurisdiction, the Ninth Circuit held that the court lacked power to adjudicate the preemption issue. It reasoned that “[t]he district court’s decision to decline supplemental jurisdiction over the PAGA claim divested it of jurisdiction to decide the preemption issue.” Instead, “[t]he entirety of the PAGA litigation, including the issue of preemption, should be remanded to state court.” Thus, the parties, which have been litigating the action since 2016, will have to start anew in California state court.