On June 23, 2014, the California Supreme Court issued a long anticipated decision in Iskanian v. CLS Transportation Los Angeles, LLC, S20403 upholding the validity of employee class action waivers but carved out an exception for representative actions pursuant to the Private Attorney General Act (PAGA). If the decision stands, class action waivers in valid arbitration agreements will preclude employees from bringing claims against their employer. However, their representative PAGA claims will survive, where a portion of recovery goes to the named plaintiff, and the remainder is paid to the state. In effect, an employee’s individual claims for damages would be subject to an individual arbitration while their PAGA claims would proceed in state or federal court as a representative action. An indirect result of these decisions is that more and more employment and consumer lawsuits are ending up in arbitration. And while arbitration was designed to be faster and less expensive, and has the advantage of avoiding a “runaway jury” award, the arbitration fees, which include the hourly fee of the arbitrator, can often exceed the value of the amount in controversy. Employers must carefully balance each claim presented and proceed accordingly.

In the short term, it is unknown whether a petition for review by the US Supreme Court will be filed, which would result in a further stay of trial court proceedings, however, the implications of Iskanian on the automotive industry are particularly compelling. In the employment context, the decision in Gonzales v. Downtown LA Motors, LP (2013) 215 Cal. App. 4th 36, which held that technicians must be paid the minimum hourly wage for the time that they are required to wait between their piece-rate paid repair jobs, has resulted in a flurry of wage and hour class actions brought by technicians. Unless the US Supreme Court reverses Iskanian, automotive dealers will be forced to resolve the individual claims in arbitration (provided an arbitration clause exists) while having to also defend against the representative PAGA claims in court.

In Iskanian, the employee brought a putative class action in Los Angeles Superior Court against its employer for wage and hour violations. The trial court granted the employer’s motion to compel arbitration and dismissed the class claims based on the class action and representative PAGA waivers within the arbitration agreement. The Court of Appeal affirmed the decision, which was then taken up for review by the California Supreme Court.  In upholding the validity of the employee class action waiver, the California Supreme Court held that the Federal Arbitration Act (FAA) preempts California law holding class action waivers as to employees’ unwaivable rights to be contrary to public policy. This holding is consistent with the US Supreme Court’s opinion in AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740, 1745-1746 (2011) (Concepcion) and cases of its progeny.

As for PAGA, the Court carved out an exception given the nature of such claims. In that regard, the Court stated that a PAGA claim is a type of “qui tam” action (where a private individual who assists a prosecution can receive all or part of any penalty imposed). Tying this category to PAGA and the FAA, the California Supreme Court found that “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. It is a dispute between an employer and the state… Through his PAGA claim, Iskanian is seeking to recover civil penalties, 75 percent of which will go to the state’s coffers.”

Unless the US Supreme Court reverses this decision, it may have damaging consequences to employers, who would then be faced with having to effectively defend themselves in two actions. Individual employment claims will be arbitrated, but employees will also prosecute their PAGA claims as representative actions on behalf of the State in the trial courts. If the employee prevails, the employee can recover Labor Code penalties and attorneys fees and costs against the employer, 75 percent of which will go to the state of California. Of course, the real motivation is with the employees’ attorneys, who seek to obtain large settlements from employers who want to avoid the cost of defending multiple actions arising from the same claim.

The California Supreme Court left unanswered whether other means exist for employees and employers to resolve PAGA claims on a private contractual basis. It is also left for debate what process and procedure should be followed by courts to resolve PAGA claims. Many trial courts are ordering individual actions to arbitration while staying the PAGA claims in the interim. Most importantly, the Supreme Court did not discuss whether a ruling in arbitration regarding an employee’s individual wage and hour claim would have a binding (res judicata) effect on PAGA claims. If an employee loses in arbitration, he or she should not be allowed a second bite at the apple through PAGA.

Iskanian may also foreshadow how the California Supreme Court may rule inSanchez v. Valencia Holding Co., a consumer class action filed against an automotive dealer in California that challenges the arbitration provision in the retail installment sale contract used in the vast majority of financed automobile purchases. A large number of consumer class actions are stayed pending the California Supreme Court’s review of a very similar issue in Sanchez.

If the California Supreme Court’s rational in Iskanian is followed, the class action waiver contained in the RISC should be held valid as well. And while consumer lawyers may cling to the notion that an exception should be made for claims under the Consumers Legal Remedies Act (CLRA) and for injunctive relief, those arguments should also fail, as several courts have already recognized vast differences between representative PAGA and CLRA actions. And while injunctive relief is an available remedy under the CLRA, courts have found that claims for injunctive relief can be resolved in arbitration. The purpose of arbitration — to voluntarily resolve private disputes in an expeditious and efficient manner — is consistent with the CLRA. Most importantly, in Concepcion, the US Supreme Court already held that a California CLRA class action waiver is not unconscionable.