In a long-awaited decision that employers hoped would clarify the enforceability of arbitration agreements under California law, the California Supreme Court in Iskanian v. CLS Transportation [PDF] split on the two issues before it.  The California high court held that class action waivers in arbitration agreements are enforceable but that waivers of claims under the Labor Code Private Attorneys General Act of 2004 (“PAGA”) are not.  In upholding the CLS agreement’s class action waiver, the Court acknowledged that pursuant to the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the California Supreme Court’s earlier decision in Gentry v. Superior Court, which had permitted judges to disregard class waivers, is preempted by the Federal Arbitration Act (“FAA”).  Concepcionheld state law limitations on class waivers cannot interfere with the “fundamental attributes of arbitration.”  With Gentry largely out of the picture, employers may continue to craft their arbitration agreements to require that employees pursue relief only on behalf of themselves, and not on a class and collective action basis.

Importantly, in reaching its conclusion, the California Supreme Court also rejected Iskanian’s argument that class action waivers violate Section 7 of the National Labor Relations Act, as the National Labor Relations Board (“NLRB”) held in its controversial decision in D.R. Horton Inc. v. Cuda [PDF] It is important to note, however, that the Iskanian Court recognized that if an arbitration agreement were to prohibit or otherwise lead an employee to believe that he or she were not permitted to file unfair labor practice claims with the NLRB, that agreement would violate the NLRA.

The Court distinguished Iskanian’s representative PAGA claims from the class action waivers at issue in Concepcion and Gentry.   The Court found that it would be contrary to California public policy to require an employee to waive the right to bring a PAGA claim in a pre-dispute arbitration agreement governing employment claims.  The Court reasoned that PAGA was not preempted by the FAA because the FAA applies to private contractual disputes between an employer and employee, whereas PAGA claims involve disputes between the employer and the state – which includes the state’s agents such as the Labor and Workforce Development Agency or aggrieved employees – concerning alleged Labor Code violations.  Thus, because the California high court considered the state to be the real party in interest – receiving 75% of the civil penalties to be recovered in a PAGA action, and the state is bound by the outcome – the Court concluded that PAGA claims do not interfere with the FAA and the cases construing it, and therefore barring a waiver of PAGA claims does not run afoul of the broad preference for enforcing arbitration agreements articulated in Concepcion.