In a surprising turn of events last month, the United States Supreme Court declined review of CLS Transportation Los Angeles LLC v. Iskanian (No. 14-341), thereby preserving the California Supreme Court’s June 2014 ruling that employees cannot be required to arbitrate representative wage claims brought under the California Private Attorney General Act (PAGA).

Iskanian seemed ripe for review given the active and growing divide between state and federal courts over the arbitrability of PAGA claims.  California state courts, bound by Iskanian, hold that PAGA claims are not subject to arbitration agreements or class action waivers contained in such agreements, while federal trial courts hold otherwise, and order employees to bring both traditional wage claims and PAGA claims in arbitration.  Many observers expected the U.S. Supreme Court to resolve this divide by taking up Iskanian, especially in light of the Court’s recent decisions favoring arbitration under the Federal Arbitration Act (FAA).

In Iskanian, the California Supreme Court considered an employment arbitration agreement that contained a class action waiver – a provision that prohibited employees from asserting collective action claims against the employer in arbitration, thereby requiring the employees bound by the agreement to pursue only individual claims in arbitration. The Court upheld the validity of class action waivers in arbitration agreements generally, finding that California public policy to the contrary was preempted by the FAA.  In doing so, the Court abrogated its 2007 decision invalidating class action waivers in Gentry v. Superior Court, the holding of which the Court recognized had been undermined by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors (2013).

However, the Court carved out one notable exception in Iskanian, and held that employees’ rights to bring “representative” claims under PAGA are not preempted by the FAA. The Court reasoned that PAGA actions fall outside the reach of the FAA because they are not disputes between employers and employees arising out of private contractual relationships. Rather, employees bring PAGA actions as representatives of the State of California to ensure compliance with the Labor Code, thereby turning these actions into disputes between employers and the state. The Court also held that California’s public policy against PAGA waivers does not obstruct the FAA’s goal of promoting arbitration as a forum for private dispute resolution.

Several federal district courts1 have rejected the California Supreme Court’s reasoning in Iskanian. These courts have held that the U.S. Supreme Court’s 2011 decision in Concepcion requires enforcement of such waivers in arbitration agreements as a matter of FAA preemption, even where the claims are pursued under PAGA.

As a result of this state-federal conflict, both employees and employers have greater reason to forum shop. And employers continue to face uncertainty over the enforceability of arbitration agreements.

While the denial of review in Iskanian comes as a surprise, the U.S. Supreme Court may yet take up the issue in the not-to-distant future. On January 5, 2015, the parties in Bridgestone Retail Operations, LLC, fka Morgan Tire & Auto, LLC v. Milton Brown, et al. (No. 14-790), a PAGA case based on the same reasoning asIskanian, filed a petition for certiorari with the Court.