This week the Supreme Court of California held that the FAA preempts California’s 2007 Gentry ruling, one that protected employees from nearly all class action waivers in arbitration agreements. Iskanian v. CLS Transp. Los Angeles, LLC, __ P.3d__, 2014 WL 2808963 (Cal. June 23, 2014). However, asserting its Californian-ness, the court found an clever way of ruling that arbitration agreements in employment contracts may still not waive a particular type of joint action: representative actions brought under California’s Private Attorneys General Act.
The decision reads like a Greatest Hits of Arbitration Law – 2014 edition. It touches on almost every hot issue in arbitration law in recent years: Concepcion and FAA preemption; vindication of statutory rights; waiver of the right to arbitrate; and the fight over whether federal labor laws can trump the Federal Arbitration Act (the D.R. Horton issue). (Are the 14 different groups of amici in the case to blame for the plethora of issues?! Or is that what drew them there??) The holdings on those issues track what courts around the country have done:
California found that “[u]nder the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers. (Gentry made it possible to invalidate a class action waiver if class arbitration will be “a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”)
California agreed with other federal courts that Sections 7 and 8 of the National Labor Relations Act do not override the FAA’s mandate to enforce arbitration agreements, even those agreements with class action waivers.
California recognized that a party who gives up on compelling arbitration in light of a precedential decision that makes enforcing the arbitration clause futile (in this case, Gentry), does not thereby waive its right to arbitrate.
But on one issue, the Iskanian decision ventured into uncharted territory. The issue was what the court should do with the employee’s claim, in a representative capacity, under California’s Private Attorneys General Act for Labor Code violations by his employer. The arbitration agreement stated “that class action and representative action procedures shall not be asserted” in arbitration. The court found that an employee’s right to bring a PAGA representative action is not waivable under California law. That holding was grounded in two California statutes that prohibit parties from using their contract to avoid responsibility for violations of statutes. While the employer argued that the employee could bring his PAGA claim on an individual basis, the court found that would frustrate the objective of the act: “to punish and deter employer practices that violate the rights of numerous employees.”
The court then had to analyze whether its new holding (that the ability to bring a PAGA claim on a representative basis cannot be waived) was preempted by the FAA. It held it was not. The court found that the PAGA claims fall outside the ambit of the FAA, because the FAA is concerned with disputes between private parties, while PAGA actions are really state enforcement proceedings against an employer. The court found support for its holding in the legislative history of the FAA, and especially the lack of any mention of qui tam actions becoming arbitrable as a result of the legislation. The court also noted that enforcement of wage and hour laws are well within the state’s historic police powers.
“Simply put, 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, which alleges directly or through its agents…that the employer has violated the Labor Code.”
This is the first time I have seen a state court find that their arbitration case law is not preempted because the FAA did not even apply to it. The distinction that California draws makes logical sense. But I can’t imagine SCOTUS ignoring California’s attempt to define some of its arbitration precedent as outside the scope of the FAA. I predict this case will end up on SCOTUS’ docket.