Why it matters: It’s official: The U.S. Supreme Court has declined to review the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles. Last June, the state’s highest court upheld the general enforceability of class waivers in mandatory employment arbitration agreements while carving out an exemption for employees to bring representative actions under the California Labor Code’s Private Attorneys General Act (PAGA). The employer asked the justices to review the decision, arguing in its cert petition that the PAGA exemption failed to “fully implement” Supreme Court precedent on arbitration. Without comment, the Court rejected the petition. While it remains to be seen what impact the cert denial will have, it is likely that employers will experience an increase in PAGA claims. However, since Iskanian was handed down, at least three federal courts have chosen not to follow the opinion and continued to enforce waivers of PAGA representative actions. Given the federal courts’ apparent disdain for Iskanian, employers may be able to remove cases to federal court and then seek to enforce an arbitration agreement in class actions that include a PAGA claim.

Detailed discussion: Arshavir Iskanian, a former driver for CLS Transportation, signed an agreement providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator. Among other features, the arbitration agreement also included a class and representative action waiver.

Iskanian filed a class action complaint against CLS alleging that the company failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, or pay final wages in a timely manner. A trial court justice granted CLS’s motion to compel arbitration based on the agreement.

While Iskanian’s appeal was pending, the California Supreme Court issued a decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), holding that class action waivers in employment arbitration agreements are invalid under certain circumstances. In light of the ruling, CLS voluntarily withdrew its motion and the parties proceeded to litigate, with the trial court certifying a class over CLS’s objection.

The U.S. Supreme Court then issued its 2011 decision in AT&T Mobility v. Concepcion (131 S. Ct. 1740), which expressly invalidated a California Supreme Court decision restricting consumer class action waivers in arbitration agreements in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). Relying on Concepcion, CLS renewed its motion to compel arbitration. The trial court ordered Iskanian into individual arbitration and dismissed the class claims with prejudice. He appealed.

The California Supreme Court addressed three primary issues: the validity of Iskanian’s class waiver and the viability of Gentry in the wake of Concepcion; whether CLS waived its right to compel arbitration by withdrawing its motion in light of Gentry; and the intersection of the Federal Arbitration Act (FAA) and California’s PAGA.

First, the court found that Gentry was abrogated by Concepcion and then determined that Iskanian failed to meet the heavy burden of proof to argue that CLS waived its right to arbitration, particularly in light of the procedural history of the case.

But on the final point of contention, the court sided with the plaintiff, emphasizing the intent of PAGA: to deputize employees as private attorneys general because of the government’s shortage of resources to pursue enforcement of the Labor Code. Because an agreement by employees to waive their right to bring a PAGA action would “disable one of the primary mechanisms for enforcing the Labor Code,” the court said it would be invalid.

“The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations,” the court wrote. “We conclude that where, as here, an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”

Such an outcome would not frustrate the FAA as “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship,” the court said. “It is a dispute between an employer and the state, which alleges directly or through its agents – either the Labor and Workforce Development Agency or aggrieved employees – that the employer has violated the Labor Code.”

CLS filed a petition for certiorari with the U.S. Supreme Court challenging the holding on the issue of PAGA representative actions. While the court denied cert, multiple federal courts in California have taken matters into their own hands, declining to follow the Iskanian decision on the basis that it treats arbitration “disfavorably” in contravention of the FAA and Supreme Court precedent. The California Supreme Court also displayed its prejudice against arbitration by inconsistently applying its rationale, a federal court judge ruled in Langston v. 20/20 Companies.

“While concluding that an employee’s agreement not to bring a representative PAGA action is contrary to public policy if it takes place before any dispute arises, the court nevertheless explained that, after a labor dispute arises, an employee is free to choose not to bring a representative PAGA claim. Moreover, after a dispute arises, an employee may agree to ‘resolve a representative PAGA claim through arbitration,’ ” Judge Jesus G. Bernal wrote. “Thus, although the court asserts that the basis for holding representative PAGA claim waivers unconscionable is that an employee cannot waive a right that properly belongs to the government, the court nevertheless acknowledges that an employee may actually sometimes waive the government’s right to bring a PAGA claim. That inconsistency illuminates the fact that, it is not an individual’s ability to waive the government’s right that drives the court’s rule, but rather the court’s general disfavor for pre-existing agreements to arbitrate such claims individually.”

The judge granted the employer’s motion to compel individual arbitration.

To read the opinion in Iskanian v. CLS Transportation, click here.

To read the decision in Langston v. 20/20 Companies, click here.