This week, the U.S. Supreme Court declined to grant review in Iskanian v. CLS Transportation Los Angeles, LLC, leaving in place a California Supreme Court holding that pre-dispute arbitration agreements cannot require employees to waive their right to bring a representative action on behalf of themselves and other “aggrieved employees” under California’s Private Attorneys General Act (PAGA).
Following U.S. Supreme Court precedent interpreting the Federal Arbitration Act (FAA), the California Supreme Court last summer held in Iskanian that pre-dispute class action waivers in arbitration agreements are enforceable. But it created an exception for representative PAGA claims, in which employees essentially are deputized as state agents to seek penalties for state Labor Code violations, with 75% of the recovered penalties going to the state. Unlike private contractual disputes between employers and employees, which are regulated by the FAA, the California Supreme Court emphasized that PAGA claims are fundamentally law enforcement actions by the state against an employer, and concluded that such actions lie outside the coverage of the FAA. Therefore, said the California Supreme Court, it is against public policy for an employee to be deprived of the right to bring a PAGA action before a dispute arises.
Now that the U.S. Supreme Court has denied review, the Iskanian decision is final. What does this mean for arbitration agreements in California?
On the upside, employers can continue to have pre-dispute arbitration agreements, and California state and federal courts will enforce class and collective action waivers in otherwise valid agreements. In other words, an employee can be compelled to arbitrate his or her claims for damages against the employer on an individual basis and not try to bring a class action.
Two significant disadvantages to employers remain, however. One is that an employee who asserts a PAGA claim is entitled to go to court, regardless of whether he or she signed an arbitration agreement. This means that a single case may have to be resolved in two different forums, with individual claims for damages going to arbitration and PAGA claims for penalties being litigated in court. Which goes first? The California Supreme Court in Iskanian declined to issue any guidance as to the order of proceedings in such cases, so we will have to wait for the case law to further evolve. Motions to stay either the PAGA claim or the arbitration will become important hearings. So will rapid arbitration hearings. Win the arbitration first, and the PAGA claim could be moot. But if the PAGA claim goes first, then the arbitration could be moot.
Which court you are in could decide the issue as well. While Iskanian remains mandatory for California state courts, numerous federal courts in California have reached the opposite conclusion, holding that representative action waivers are enforceable under the FAA and therefore the PAGA claim is precluded. This has left employers facing different outcomes, simply depending on whether they are in state or federal court. It remains to be seen what approach the federal district courts will take in light of the U.S. Supreme Court’s refusal to grant review in Iskanian.
Nonetheless, if you do not have an arbitration agreement with a class action waiver with your employees, you should consider one.