Ending in a Draw: In Iskanian v. CLS Transportation, the California Supreme Court Upholds Class Action Waivers in Arbitration Agreements, But Also Makes PAGA Claims Unwaivable

Ever since the U.S. Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, California employers hoped this day would come. In a predictable result, the California Supreme Court today acknowledged that class action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act (FAA). In so doing, the Court overruled its 2007 decision in Gentry v. Superior Court which effectively had barred class action waivers for wage and hour cases. But the Court’s 6-1 plurality decision also bolstered an alternate method for bringing Labor Code claims in court by declaring that actions brought under the Private Attorneys General Act (Labor Code § 2968 et seq.) are not waivable by private agreement and thus not subject to compelled arbitration.

In Iskanian v. CLS Transportation, the Court overruled its holding in Gentry, which stood for the proposition that class action waivers in employment arbitration agreements are invalid under certain circumstances. The Court’s decision conformed California law with the U.S. Supreme Court’s opinion in Concepcion, which held that state law rules against class waivers are preempted by the FAA because they interfere with the “fundamental attributes of arbitration.” Employers should be pleased with this result, which clarifies that class action waivers in arbitration agreements cannot be invalidated by a balancing of factors as called for in Gentry.

Furthermore, the Court rejected the plaintiff’s contention that the challenged class action waiver was invalid under the National Labor Relations Act (NLRA). The plaintiff had argued, pursuant to the National Labor Relations Board’s decision in D.R. Horton Inc., that the NLRA prohibits contracts requiring employees to waive their rights to participate in class proceedings. The Court agreed with the reasoning of a more recent Fifth Circuit decision, holding that “in light of Concepcion, the Board’s rule is not covered by the FAA’s savings clause,” and that the NLRA did not prohibit the class waiver at issue.

However, the Court’s decision created an avenue for employees to pursue a type of group-wide relief even in the face of an arbitration agreement. Analyzing the purpose and goals of PAGA, the Court held that employees cannot be forced to waive a PAGA action by private agreement. The Court reasoned that a PAGA action is not a dispute between an employer and an employee, but is instead a dispute between an employer and the state. Because the plaintiff/employee stands in the stead of the state enforcement agency, the enforcement action becomes a matter of public, not simply private, concern. Waiver, therefore, is against California’s public policy, and cannot be enforced.

The defendant in Iskanian had argued that PAGA violated the separation of powers doctrine by authorizing private citizens to file suit without government supervision. However, the Court confirmed that the enactment of “qui tam” statutes such as PAGA (brought on behalf of the government as well as the plaintiff) is a legitimate exercise of legislative authority, and thus PAGA does not violate the separation of powers principle under the California Constitution.

As a result of this case, employers should review their arbitration agreements and harmonize their provisions with these developments as necessary.

 

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Orrick - Global Employment Law Group on:

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