Class-Action Waivers in Employment Agreements Deemed Valid by California Appeals Court

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[authors: Geoffrey D. Bruen, Steven W. Suflas]

In a precedent-toppling decision last week, a California appellate court held that a class-action waiver in an employment arbitration agreement was valid after concluding that a California Supreme Court decision to the contrary has now been overruled by the U.S. Supreme Court.

In Iskanian v. CLS Transport, the California Court of Appeals, 2nd District, applied the U.S. Supreme Court’s landmark decision in AT&T Mobility v. Concepcion, which held that state law rules disfavoring arbitration are displaced by the Federal Arbitration Act.

The court found that Concepcion has overruled the California Supreme Court’s decision in Gentry v. Superior Court, which allowed state courts to invalidate class-action waivers where class arbitration would be a more effective way to vindicate the rights of aggrieved employees.

In Gentry, addressing a class action brought by employees who claimed they were unlawfully denied overtime pay, the court mandated that waivers should be invalidated where class actions are a more effective means of vindicating the rights of aggrieved employees than individual arbitration or litigation, outlining a test courts were to apply in deciding whether class waivers are unconscionable.

Now, in unequivocal terms, the Iskanian court has found that Concepcion “conclusively invalidates the Gentry test,” strengthening the validity of class waivers in employment arbitration agreements. In doing so, the court noted that Concepcion’s interpretation of the FAA prohibits the imposition of class arbitrations on employers who did not agree to it contractually. In other words, a class waiver in an arbitration agreement means what it says.

Rejecting the claim that the Gentry rule was based on public policy—and that Concepcion therefore did not reach it—the Iskanian court found that the Concepcion rule applies even where employees are vindicating state statutory rights, reiterating Concepcion’s mandate that “states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”

The Iskanian court continued: “The sound policy reasons identified in Gentry for invalidating certain class waivers are insufficient to trump the far reaching effect of the FAA.”

Accordingly, the appellate court found that the trial judge appropriately enforced the arbitration agreement, dismissing class-action claims and compelling individual arbitration of the wage claim.

Significantly, the appellate court disagreed with the National Labor Relations Board’s employee-friendly interpretation of Concepcion in the recent D.R. Horton decision. In that case, the NLRB found that employer-imposed arbitration agreements disallowing class or collective claims violated the National Labor Relations Act because they interfere with employees’ rights to engage in protected concerted activity under Section 7 of the National Labor Relations Act.

The Iskanian court found that it need not defer to the NLRB’s interpretation of the Concepcion decision and the FAA, since the Board is tasked only with interpreting the NLRA, and that, in any event, the D.R. Horton case was invalidated by subsequent U.S. Supreme Court precedent. The court also pointed out that Concepcion “made no exception for employment-related disputes.”

The plaintiff has signaled that the decision, which conflicts with prior state appellate precedent, will be appealed to the California Supreme Court.

As arguably the most employer-friendly decision in the wake of Concepcion, the Iskanian court’s interpretation of the FAA and Concepcion could be used persuasively across the country to attack state law arguments seeking to invalidate class waivers in employment arbitration agreements.

The attorneys in Ballard Spahr’s Labor and Employment Group regularly advise clients on employment arbitration agreements and programs, including their use of class-action waivers. If you have questions on the recent ruling or its implications for your organization, please contact Steven W. Suflas at 856.761.3466 or suflas@ballardspahr.com; Geoffrey D. Bruen at 215.864.8264 or brueng@ballardspahr.com; or the member of the Labor and Employment Group with whom you work.