On June 23, 2014, the California Supreme Court, ruling 6-1, issued its highly anticipated ruling in Iskanian v. CLS Transportation Los Angeles, LLC, No. S204032, holding that arbitration agreements with mandatory class waivers are generally enforceable in light of the landmark U.S. Supreme Court ruling, AT&T Mobility v. Concepcion, 563 U.S. 321 (2011). The court carved out an exception, however, for actions brought under California’s Private Attorneys General Act (“PAGA”).

The plaintiff, Arshavir Iskanian, a chauffeur for limousine company CLS Transportation, signed an arbitration agreement that included a waiver of the right to bring employment-related disputes on a class or representative basis. In 2006, Iskanian filed a class action and representative suit under PAGA, alleging violations of the Labor Code. CLS Transportation moved to compel individual arbitration and enforce the class and representative action waiver.

Class Action Waivers—The Demise of Gentry

The Iskanian opinion, written by Justice Goodwin Liu, held that a state’s refusal to enforce a class action waiver on grounds of public policy or unconscionability is preempted by the Federal Arbitration Act (“FAA”). With this ruling, the California Supreme Court reversed its prior holding to the contrary in Gentry v. Superior Court, 42 Cal.4th 443 (2007), which invalidated class action waivers in arbitration agreements in most wage and hour matters.

The court noted that Gentry was abrogated by the 2011 U.S. Supreme Court case Concepcion, which held that state law rules against such waivers are preempted by federal law if they interfere with fundamental attributes of arbitration. The court preserved its rule in Sonic-Calabasas A, Inc. v. Moreno, 57 Cal.4th 1109 (2013) (Sonic II), however, holding that courts may find arbitration agreements unconscionable and invalid if they do not provide protections similar to the wage claim statute, such as fee shifting and mandatory undertaking.

PAGA Still In Play

Significantly, the Iskanian court also carved out an exception to its ruling, holding that employees of CLS Transportation can pursue claims for penalties against the employer as a representative action under PAGA. PAGA allows an employee to sue as the proxy for the state’s labor law enforcement agencies. Under PAGA, the employee-plaintiff can recover civil penalties that otherwise would have been assessed and collected by California’s Labor Workforce Development Agency.

The Iskanian opinion further noted that state law precludes waivers of the right to bring PAGA actions and that a PAGA lawsuit is not a purely private  dispute that would be preempted by the FAA. The court explained that “a PAGA claim lies outside of FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. 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.”

The court further found that a prohibition of representative claims “frustrates the PAGA’s objectives,” and agreed with a court of appeal that observed that a “single-claimant arbitration under the PAGA for individual penalties will not result in the