On June 23, 2014, the Supreme Court of California upheld the validity of class waivers in arbitration agreements under the Federal Arbitration Act, with one notable exception.

Background

In Iskanianv. CLS Transportation Los Angeles, a driver for CLS Transportation Los Angeles, LLC (CLS), brought a class action complaint alleging various violations of the California Labor Code. In addition, he asserted a “representative action” claim under California’s unique Labor Code Private Attorneys General Act of 2004, Lab. Code § 2698 et seq. (PAGA), which permits “aggrieved” employees to stand in the shoes of the state to pursue civil penalties against employers. As part of Iskanian’s employment with CLS, he signed an arbitration agreement in which he waived the right to pursue class action and representative action claims against CLS and instead agreed to submit his individual claims to arbitration.

CLS moved to compel arbitration, asserting that Iskanian’s claims were subject to binding individual arbitration and that he could not pursue any class or representative claims. The trial court granted CLS’s motion and Iskanian appealed. While that appeal was pending, the California Supreme Court decided Gentry v. Superior Court, 42 Cal.4th 443 (2007), holding that class action waivers in employment arbitration agreements are invalid under certain circumstances. In light of Gentry, the California Court of Appeal in Iskanian sent that case back to the trial court to reconsider its decision granting the motion to compel. CLS subsequently withdrew its motion to compel and the parties proceeded to litigate the case in court.

During the course of litigation, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion,131 S.Ct. 1740 (2011), in which it held that the Federal Arbitration Act (FAA) preempts state law rules that invalidate class action waivers. In light of Concepcion, CLS renewed its motion to compel arbitration and argued that Concepcion invalidated Gentry. Iskanian argued, among other things, that Gentry was still good law and that class action waivers were unlawful, that employers cannot require the arbitration of representative PAGA claims, that the arbitration agreement violated the National Labor Relations Act (NLRA), and that CLS had waived its right to arbitration by proceeding in court. Both the trial court and California Court of Appeal ruled in favor of CLS, and Iskanian appealed to the California Supreme Court.

Decision

The California Supreme Court held that Concepcion abrogated Gentry because, following Concepcion,a state’s refusal to enforce a class action waiver on grounds of public policy or unconscionability is preempted by the FAA. Under Gentry, class waivers were “regularly invalidated” because courts had to consider “whether individual arbitration [was] an effective dispute resolution mechanism for employees by direct comparison to the advantages of a procedural device (a class action) that interferes with fundamental attributes of arbitration.” Now, however, the California Supreme Court was forced to acknowledge that Concepcion “prevent[s] states from mandating or promoting procedures incompatible with arbitration.”

Iskanian also had argued that the class action waiver in the arbitration agreement violated the NLRA and cited the NLRB’s decision inD.R. Horton Inc. & Cuda, 357 NLRB No. 184 (2012). The California Supreme Court rejected that argument and relied instead on later proceedings in D.R. Horton, Inc. v. NLRB,737 F.3d 344 (5th Cir. 2013), in which the Fifth Circuit Court of Appeals declined to enforce the NLRB’s finding that class action waivers amount to a violation of the NLRA.

Although the California Supreme Court upheld the class action waiver in CLS’s arbitration agreement, it also held that the attempted waiver of PAGA representative claims was invalid and contrary to public policy because a right to pursue a PAGA action is “unwaivable.” The court reasoned that this does not frustrate the FAA’s objectives because the “FAA aims to ensure an efficient forum for the resolution of private disputes,” but a PAGA action is more akin to a public dispute – one between an employer and the state Labor and Workforce Development Agency, albeit one in which a private citizen is standing in the shoes of the state.

Finally, the court rejected CLS’ argument that, by permitting private citizens to act on behalf of the state, PAGA violates the principle of separation of powers under the California Constitution. The court analogized PAGA actions to qui tam actions, which have been held to be a legitimate exercise of legislative authority.

What Iskanian Means for Employers

Iskanian provides long-awaited guidance and confirms the enforceability of class action waivers in arbitration agreements in California. Employers seeking to implement such class waivers should consult their legal counsel to ensure that any arbitration agreement is carefully drafted to avoid potential challenges.

Iskanian also clarifies that, at least in actions filed in California state courts, an employer likely will not be able to enforce a waiver by employees of PAGA representative actions through an arbitration agreement. As a result, while employers with arbitration agreements can expect to face fewer class actions, they can expect to see an increase in “representative actions” under PAGA.