The Federal Arbitration Act (FAA) preempts California law disfavoring the enforcement of a class action waiver in employee arbitration agreements, the California Court of Appeal has ruled. Iskanian v. CLS Transp. Los Angeles, LLC, No. B235158 (Cal. Ct. App. June 4, 2012). The Court found the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), overruled California law.

Prior Rulings

Section 2 of the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The U.S. Supreme Court said in Concepcion that arbitration agreements are enforced according to their terms, in the same manner as other contracts. The FAA’s “saving clause” permits revocation of an arbitration agreement if “generally applicable contract defenses, such as fraud, duress, or unconscionability,” apply.

In Concepcion, the U.S. Supreme Court found that, although the FAA savings clause preserved 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.” Thus, a state rule may not interfere with the FAA’s overarching purpose “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”

In Gentry v. Superior Court, 42 Cal. 4th 443 (2007), the California high court found the right to receive overtime pay is unwaivable and that, under certain circumstances, a class action waiver would “impermissibly interfere with employees’ ability to vindicate unwaivable rights and to enforce the overtime laws.” It held that a class action waiver must be invalidated if, after applying various factors, a court determines class arbitration is “likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

Gentry Preempted by Concepcion

In Iskanian, the Court of Appeal found Concepcion conclusively invalidated Gentry. Concepcion limited state-law rules impeding the FAA’s objective of enforcing “arbitration agreements according to their terms so as to facilitate streamlined proceedings,” the Court said. In addition, the Court held, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” The Court affirmed the order granting the employer’s motion compelling arbitration and dismissing the class claims.

Note to Employers

Iskanian is not necessarily the California courts’ last word on arbitration. The California courts have shown a continual reluctance to enforce employment arbitration agreements. Employers should consult legal counsel when considering drafting or enforcing arbitration agreements. More details on Iskanian are available on our website, at http://www.