This morning, the Supreme Court of the United States declined review of a state supreme court case that has sparked widespread flux in the landscape of class action arbitration waivers in California. The Supreme Court of California, in Iskanian v. CLS Transportation Los Angeles, LLC, S204032 (June 23, 2014), had ruled on the issue of whether the Federal Arbitration Act (FAA) preempts California’s policy against enforcement of a class action waiver on the grounds that it is contrary to public policy or unconscionable. This past summer, the state’s highest court held that the California policy was preempted. But the California Supreme Court refused to find that the FAA preempted representative action waivers as applicable to the Labor Code Private Attorneys General Act of 2004 (PAGA). As a result, under the California Supreme Court’s decision, while arbitration agreements can prohibit employees from bringing class actions, employees can still bring representative actions pursuant to PAGA and an arbitration agreement containing a waiver of PAGA representative actions is not enforceable. The United States Supreme Court’s decision means that the California Supreme Court’s decision is still good law.

The California Supreme Court’s Decision

In Iskanian, the California Supreme Court had considered an arbitration agreement that waived employees’ rights to class proceedings. In addition to finding that the California policy was preempted, the state’s highest court also held that its 2007 decision, Gentry v. Superior Court, was abrogated as a result of recent precedent established by the Supreme Court of the United States, namely in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013). In Gentry, the court had held that the state’s refusal to enforce an arbitration agreement that waived class actions.

However, with regard to the employee’s claim under PAGA, the California Supreme Court concluded that an arbitration agreement that requires an employee to waive his or her right to bring a representative PAGA action in any forum is not preempted by the FAA. This meant the employees could still maintain PAGA representative actions despite having arbitration agreements that precluded them.

Question Before the Supreme Court

On September 22, the employer, CLS Transportation Los Angeles, LLC, filed its petition for writ of certiorari with the Supreme Court of the United States, urging the Court to review the judgment of the state supreme court. In its petition, the employer argued that the state supreme court failed to “fully implement” the import of the Supreme Court’s decisions in Concepcion and Italian Colors.

The question presented by the employer in its petition to the Supreme Court was:

Is an employee’s waiver in an arbitration agreement of a collective or “representative action” under the California Private Attorneys General Act, Cal. Labor Code § 2698 et seq., so distinguishable from a “class action” waiver that it is immune from the otherwise preemptive effect of the Federal Arbitration Act, 9 U.S. Code § 1, et seq., as held by this Court in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011)?

In November of 2014, Arshavir Iskanian, the employee who had signed the arbitration agreement containing a class and representative action waiver with CLS, submitted a brief to the Supreme Court. According to Iskanian, the Supreme Court should not review the case because the California Supreme Court decision wasn’t a final decision (in that it remanded Iskanian’s case) and because currently courts are not split on the issue. On January 20, the Court sided with Iskanian and decided that it would not review the California Supreme Court’s decision.

Practical Impact

According to Jack Sholkoff, a shareholder in the Los Angeles office and a member of the firm’s Class Action Practice Group, “Employers throughout California are disappointed by the United States Supreme Court’s failure to grant certiorari. Under Iskanian, employees may still, notwithstanding prior agreements to arbitrate them on an individualized basis, maintain PAGA representative actions, at least in state court. Since Iskanian was issued, federal district courts in California have refused to follow Iskanian, and have enforced representative action waivers in PAGA cases, while state courts have not. The Supreme Court’s failure to grant certiorari continues this uncertainty, and highlights the importance of forum selection in these cases. Moreover, with Iskanian surviving, employers remain at risk for devastatingly dangerous PAGA claims for even minor or technical violations of the Labor Code, thereby reiterating the importance of strict and persistent efforts by employers to comply with the often dizzyingly complex California wage and hour laws. Carefully prepared arbitration agreements will help reduce the risk, but they will not eliminate it. Employers will have to redouble their compliance efforts.”