Landmark California Supreme Court Ruling Is Positive for Employers in Class Action Cases But Not PAGA Claims

In an opinion filed June 23, 2014, Iskanian v. CLS Transportation Los Angeles, LLC,1(Iskanian) the California Supreme Court gave employers some relief when faced with class action suits. The court's significant decision will allow employers to proceed with employment arbitration agreements that include class action waivers after the court ruled that they are fully enforceable and no test of equities must be pursued.

In Iskanian, the court ruled, among other things, that: (1) the Federal Arbitration Act (FAA) preempts prior California case law finding class action waivers unenforceable; (2) class action waivers do not violate the National Labor Relations Act (NLRA) and, also for this reason, are enforceable; (3) employees' right to representative actions under the Private Attorney General Act (PAGA) may not be waived and the FAA does not preempt California law as to the unenforceability of PAGA waivers. In its Iskanian ruling, the California Supreme Court determined California's prior rule under Gentry no longer remains valid after the U.S. Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion.2

After years of uncertainty, the California Supreme Court has now clarified that an employee's right to initiate a class action suit may be waived in an employment arbitration agreement because such a rule would promote procedures incompatible with arbitration and the purposes of the FAA. PAGA waivers, however, are unenforceable because unlike private disputes the FAA does not reach employees' PAGA actions, which have the fundamental character of a public enforcement action by the state government seeking penalties for Labor Code violations that go largely to the state. PAGA serves a public purpose such that pre-dispute waivers of these claims would be against public policy.

Factual Background

CLS Transportation Los Angeles, LLC (CLS) employed Ashavir Iskanian from March 2004 to August 2005. Mr. Iskanian was required to sign an arbitration agreement providing "any and all claims" arising out of his employment would be submitted to binding arbitration, providing class and representative actions waivers, and providing that neither class action nor representative action procedures or claims would be asserted in any arbitration. Only "individual claims" would be asserted in arbitration.

Procedural Background

In August 2006, Mr. Iskanian filed a class action suit against CLS for failure to pay overtime and to provide meal and rest breaks. The trial court granted CLS's motion to compel arbitration. After Mr. Iskanian appealed, the Court of Appeal remanded the matter for reconsideration in light of the then-recent California Supreme Court ruling, Gentry v. Superior Court.3Gentry set forth the rule that a class action waiver in an employment arbitration agreement should not be enforced if certain factors, weighed collectively, demonstrated that a class arbitration would be significantly more effective than individual litigation or arbitration in vindicating employee rights.

On remand, CLS voluntarily withdrew its motion to compel and the parties proceeded to litigation. Mr. Iskanian added representative claims under the Unfair Competition Law and the PAGA. In October 2009, the case was certified as a class action.

In April 2011, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, invalidating the California Supreme Court decision in Discover Bank v. Superior Court,4which had restricted class action waivers in consumer arbitration agreements. Concepcion stated that the rule in Discover Bank invalidating class waivers in consumer arbitration agreements was preempted by the FAA. Left uncertain was if the Concepcion rule applied to employment arbitration agreements also.

Seizing upon Concepcion, CLS renewed its motion before the trial court to compel arbitration and to dismiss the class claim, and moved to compel arbitration on the representative claims. The trial court granted the motion on all claims and Mr. Iskanian appealed again.

On this second appeal, the Court of Appeal held that Concepcion invalidated the rule in Gentry concerning employment arbitration agreements and affirmed the order to compel arbitration. Notably, the court also rejected Mr. Iskanian's argument that his PAGA claim was not subject to FAA preemption.

Following this ruling, and with disagreement between certain court of appeal decisions on the questions presented, the California Supreme Court granted review.

Class Action Waivers Are Upheld; Gentry No Longer Good Law

Until the Iskanian decision, it remained unclear for years if the Concepcion rule that the FAA preempts class waivers in arbitration agreements found in consumer contracts (like in the Discover Bank case) also applied in employment contracts (as in theGentry case). Mr. Iskanian had argued that Gentry could survive Concepcion because the Gentry rule was not a categorical rule against class action waivers but involved a balancing of factors to determine if class arbitration would be unconscionable to the employee. In finding that Concepcion abrogated the Gentry rule, the Iskanian court noted that Concepcion hadclearly stated that state case law is preempted by the FAA because "states cannot require a procedure that interferes with fundamental attributes of arbitration even if it is desirable for unrelated reasons." Under Concepcion the Gentry rule is preempted by FAA even though it was not a categorical rule.

Class Action Waivers Do Not Violate the National Labor Relations Act (NLRA)

Next, the Iskanian court decided whether the class action waiver was invalid under the National Labor Relations Act (NLRA) and the recent holding of the National Labor Relations Board (NLRB) in D.R. Horton, Inc. & Cuda.5The Iskanian court noted that in 2012, the NLRB in D.R. Horton found that the NLRA prohibits contracts that compel employees to waiver their right to participate in class proceedings to resolve wage claims as a curtailment of their right to engage in "concerted activity" protected under the NLRA. But the Iskanian court also noted a U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) decision, D.R. Horton, Inc. v. NLRB,6 in which the Fifth Circuit refused to adopt the NLRB's position and found the NLRB's rule did not fall within the FAA's saving clause. Ultimately, having detailed the reasoning in both decisions, the Iskanian court adopted the Fifth Circuit's reasoning. The Iskanian court concluded the NLRB's rule in its holding was not covered by the FAA's savings clause. The court cited Concepcion favorably noting that "Concepcion makes clear that even if a rule against class waivers applies equally to arbitration and nonarbitration agreements, it nonetheless interferes with fundamental attributes of arbitration and, for that reason, disfavors arbitration practice." The court concluded that in light of the FAA's "liberal federal policy favoring arbitration" and because neither the NLRA's text nor its legislative history contained evidence of congressional intent to prohibit such class waivers, the NLRA's relevant sections do not represent a "contrary congressional command" overriding the FAA.

Waivers of PAGA Representative Actions Are Against Public Policy

Though he lost his argument as to class action waivers, Mr. Iskanian prevailed on his PAGA-related argument. As to compelled waivers of PAGA representative actions, the Iskanian court concluded such waivers were "contrary to public policy and unenforceable as a matter of state law." The court reasoned that the rule against PAGA waivers does not frustrate the FAA's objectives because "the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency." As the court put it, a PAGA suit is not a dispute between an employer and an employee but one between the employer and the state – either directly or through aggrieved employees who sue to enforce the state'sinterest in penalizing and deterring employers who violate California's labor laws. PAGA actions are outside the FAA's reach because the "fundamental character of the claim" is "a public enforcement action." The Iskanian court was careful to limit its ruling in this section of its opinion to actions that can only be brought by the state or its representatives, where the resulting judgment is binding on the state and monetary penalties go largely to state coffers.

What Iskanian Means for Employers

Iskanian certainly stands as one of the most significant recent positive developments for employers particularly in regards to class action suits. Now employers may proceed with class action waivers in employment arbitration agreements knowing they are fully enforceable and not subject to any test of equities between the parties. Employers should give very serious consideration to utilizing an arbitration agreement if they do not already have them in place.

Unfortunately, as the Iskanian court itself noted, its ruling leaves many questions unanswered. Unclear is how cases asserting both class and PAGA allegations will be managed in cases involving arbitration agreements. Indeed, the Iskanian court remanded the case for those issues to be sorted out – with Mr. Iskanian's individual claims to be arbitrated and the PAGA claim to be resolved in a forum yet to be determined. Moreover, the unenforceability of a PAGA representative action waiver means that more PAGA actions may arise from this decision. Finally, although enforceability of a class action waiver may protect against the aggregation of claims, it does not prevent an employee from bringing individual employment claims. Employers must therefore remain vigilant in enforcing policies designed to minimize risk of claims in the first instance.

Next Steps for Employment Arbitration Agreements

The Iskanian opinion is a landmark one that upholds class action waivers in employment arbitration agreements and provides certain defenses for employers. Holland & Knight's experienced labor and employment attorneys have a substantial background in creating and reviewing existing employment arbitration agreements, and can field any questions that this significant case may pose.