California often prides itself on setting trends. When it comes to class arbitration waivers, though, California is just now catching up with the rest of the country. Headlined by the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), which involved a consumer contract, courts increasingly have enforced arbitration agreements that bar class actions. On Monday, the California Supreme Court in Iskanian v. CLS Transportation Los Angeles (June 23, 2014), abrogated its own prior precedent and ruled that class arbitration waivers in the employment setting are largely enforceable in light of Concepcion. As one caveat, the court ruled that such waivers cannot apply to representative actions brought under California's Private Attorneys General Act ("PAGA"). This statute allows private citizens to seek statutory penalties on behalf of the State and to recover 25 percent of these penalties for themselves and similarly situated employees. In the past PAGA claims often have been the undercard of California wage and hour class actions. Moving forward, the plaintiffs' bar likely will look more often to PAGA claims as a way to obtain some class recovery and attorney fees and to leverage the recovery of damages in individual arbitrations.
Class Arbitration Waivers in Employment Agreements Are Enforceable
The U.S Supreme Court in Concepcion invalidated the California Supreme Court's decision in Discover Bank v. Superior Court (2005), which had restricted class arbitration waivers in consumer contracts. In doing so, the Supreme Court cited the strong Congressional policy favoring arbitration under the Federal Arbitration Act ("FAA") and ruled that "[r]equiring the availability of class wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA."
The California Supreme Court in Gentry v. Superior Court (2007) adopted a similar, but distinct, test for class arbitration waivers in the employment setting. In particular, Gentry focused on whether "a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration." The California Supreme Court in Iskanian ruled that Gentry, like Discover Bank, could not survive Concepcion. In so holding, the court highlighted the holding in Concepcion that "even if a state law rule against … class waivers were limited to 'class proceedings [that] are necessary to prosecute small dollar claims that might otherwise slip through the legal system,' it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration 'even if it is desirable for unrelated reasons.'" Thus, while in the past the Gentry rule "regularly resulted in the invalidation of class waivers" in the employment setting, those days are now gone.
Continued Rejection of the NLRB’s D.R. Horton Ruling
The National Labor Relations Board ("NLRB") in D.R. Horton & Cuda (2012) created a new challenge to class arbitration waivers in employment agreements by ruling that such waivers violate employees' right to engage in "concerted activity" under the National Labor Relations Act ("NLRA"). As a reminder, this right also applies to employees in non-unionized workforces. While the NLRB has continued to stand by this interpretation, courts have broadly rejected the ruling. For example, the U.S. Court of Appeals for the Fifth Circuit (covering Texas, Louisiana, and Mississippi) refused to enforce the D.R. Horton ruling on appeal. The California Supreme Court in Iskanian jumped on this judicial bandwagon in ruling that the NLRA does not bar class arbitration waivers in employment agreements.
Continued Viability of PAGA Collective Action
The California PAGA allows private citizens to bring collective actions to seek statutory penalties for Labor Code violations and to recover 25 percent of these penalties, with the remainder going to the State. These penalties are distinct from the damages that employees may seek to recover for themselves, and the government is always the real party in interest for a PAGA claim. While there had been some split among the California appellate courts, it is not surprising that the California Supreme Court in Iskanian ruled that class arbitration waivers cannot bar PAGA collective actions.
Guidance for Employer
Arbitration agreements still must be crafted carefully and are not for every employer, but the California Supreme Court’s ruling in Iskanian further highlights their value in providing protection to employers facing significant risks of class litigation.
As for the continued viability of PAGA actions, the court noted lingering questions to consider on remand, for which the arbitration agreement did not provide specific answers. First, would the parties agree to a single forum to resolve the PAGA claims and the other claims? If not, should the claims be bifurcated, with individual claims going to arbitration and the PAGA claim going to court? Finally, if bifurcation occurs, should the arbitration be stayed pending the resolution of the PAGA claims? This possibility could increase the popularity of PAGA claims, as the plaintiffs' bar may seek to litigate these claims on a class basis and then use them as leverage to resolve individual claims for damages.