Last week a California Court of Appeal addressed various issues relating to the enforceability of an employment arbitration agreement containing a class action and representative action waiver in the wake of the California Supreme Court’s decision in Iskanian v. CLS Transportation.  In this latest case, Securitas Security Services USA, Inc. v. Superior Court (Edwards), the employer presented its employees with an arbitration agreement, but acceptance of the agreement was not mandatory.  Instead, employees were allowed 30 days to opt-out of the agreement by simply calling a toll-free number and opting out.  If the employees did not exercise their opt-out right, they became bound by the agreement to arbitrate any and all employment disputes.  Like many arbitration agreements, Securitas’ arbitration agreement contained a class action and representative action (PAGA) waiver provision, stating that the parties waived any right to bring a class or representative action and that their individual disputes would be subject to binding arbitration. The plaintiff in this case did not opt out of the arbitration agreement and was thereby bound to arbitrate any disputes.

Notwithstanding her agreement to arbitrate disputes, the plaintiff filed a wage and hour lawsuit in state court, including class and representative PAGA claims.  Securitas moved to compel arbitration of the plaintiff’s individual claims and to dismiss or stay any non-arbitrable claims.  The trial court granted the motion to compel arbitration, but ordered that the class and representative PAGA claims would be arbitrated along with the plaintiff’s individual claims.  Securitas appealed, arguing that the trial court impermissibly ordered the class and representative PAGA claims to arbitration.  The Court of Appeal agreed with Securitas that these claims should not have been ordered to arbitration.  However, the Court of Appeal went even farther and held that the plaintiff’s individual claims should not have been ordered to arbitration either.

The Court of Appeal’s analysis focused first on the class action and representative action waiver and whether it was enforceable in the wake of Iskanian.  Based on Iskanian, the Court of Appeal held that the class action waiver was enforceable (indeed, even the plaintiff agreed that the class action waiver was enforceable).  The Court of Appeal then addressed whether the PAGA representative action waiver was enforceable.  In Iskanian, the California Supreme Court held that such waiver provisions generally are not enforceable because an employee bringing a representative PAGA claim effectively stands in the shoes of the state and a portion of any recovered penalties goes to the state.  As such, it is against public policy to “require” an employee to enter into a pre-dispute waiver of the right to bring a PAGA representative action.  Securitas argued that Iskanian’s holding does not apply to invalidate the PAGA representative action waiver in its arbitration agreement because the plaintiff was not “required” to enter into the agreement.  Plaintiff had the right to opt out of the agreement and by not opting out, she voluntarily agreed to arbitrate and to waive the right to bring any representative PAGA claims.  The Court of Appeal rejected Securitas’ argument, holding that the opt-out provision does not save the representative action waiver.  The Court of Appeal reasoned that Iskanian goes farther than simply saying an employee cannot be “required” to enter into an agreement to waive the right to bring a representative action under PAGA. Iskanian also says that the right to bring a PAGA representative action is an “unwaivable” right (pre-dispute anyway).  Interpreting Iskanian in this manner, the Court of Appeal held that the representative action waiver was unenforceable regardless of the fact that the plaintiff could have opted out of the agreement. 

In sum, the Court of Appeal held that the class action waiver was enforceable but the PAGA representative action was not.  So why didn’t the Court just agree with Securitas that the individual claims should be arbitrated, the class claims should be dismissed, and the PAGA claim should be stayed pending resolution of the arbitration of the individual claims?  Why did the Court instead hold that none of the claims (even the plaintiff’s individual claims) were arbitrable?  The answer to this lies in the specific language of the class/representative action waiver provision in the parties’ arbitration agreement, and the interplay between that provision and a separate severability provision in the agreement.  The Court described these provisions as follows:  

“Paragraph No. 4 of the dispute resolution agreement further provides in part:  ‘[T]here will be no right or authority for any dispute to be brought, heard or arbitrated as a class, collective or representative action ('Class Action Waiver'). Notwithstanding any other clause in this Agreement, the preceding sentence shall not be severable from this Agreement in any case in which the dispute to be arbitrated is brought as a class, collective or representative action. . . . Notwithstanding any other clause contained in this Agreement, any claim that all or part of the Class Action Waiver is unenforceable, unconscionable, void or voidable may be determined only by a court of competent jurisdiction and not by an arbitrator.’  Finally, the dispute resolution agreement contains the following severability clause in paragraph No. 10: ‘In the event any portion of this Agreement is deemed unenforceable, the remainder of this Agreement will be enforceable. If the Class Action Waiver is deemed to be unenforceable, [Securitas] and [Edwards] agree that this Agreement is otherwise silent as to any party's ability to bring a class, collective or representative action in arbitration.’”

The Court of Appeal interpreted these provisions, particularly the bolded language, to mean that the class/representative action waiver is not severable from the remainder of the agreement, meaning that either the employee foregoes his or her right to arbitrate class or representative claims or the entire arbitration agreement is unenforceable as to that employee and the parties’ dispute must be resolved in court.  Because the class/representative action waiver was unenforceable in part (as to the PAGA representative action waiver), the unique non-severability language in the provision rendered the entire agreement unenforceable.  For this reason, the Court of Appeal held that the plaintiff did not have to arbitrate any of her claims and the trial court should not have ordered any part of the action to arbitration. 

The Securitas case is a reminder for California employers that California state courts are bound by Iskanian and will enforce class action waiver provisions in employment arbitration agreements, but will not enforce PAGA representative action waiver provisions.  The Securitas case also is the first to hold that an opt-out right does not make a PAGA representative action waiver enforceable.  Finally, the Securitas case demonstrates the importance of well-crafted severability provisions in order to maximize enforceability of an arbitration agreement, even where a portion of it (e.g. a PAGA representative action waiver) is deemed unenforceable.  To review the full decision in this case, click here.  California employers should also note that even though the United States Supreme Court recently declined to review the Iskanian decision, another petition for review involving the same issue (California's view that PAGA representative action waivers are unenforceable) is currently pending before the United States Supreme Court in Bridgestone Retail Operations v. Milton Brown (U.S. Supreme Court Docket No. 14-790).  The United States Supreme Court is expected to decide whether or not it will grant review in that case in the next couple of months.  We will keep you posted on the outcome of that petition.