Everything an Employer Could Ask For in One Decision on Class Action Waivers

by Sheppard Mullin Richter & Hampton LLP
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[author:Thomas Kaufman ]

On June 4, 2012, the California Court of Appeal, Second District, Division Two, issued Iskanian v. CLS Transportation Los Angeles, LLC ("Iskanian"), a sweeping pro-employer decision that endorses every defense-side argument on the proper interpretation of the 2011 U.S. Supreme Court decision in AT&T Mobility LLC v. Concepcion ("Concepcion"). If the holdings of this decision ultimately survive as controlling law in California, then employers will be able to enforce arbitration agreements that require all employment related disputes to be resolved through individual arbitration. Unfortunately, the case creates a clear split of authority with last year's decision in Brown v. Ralphs Grocery Co. ("Brown"), which makes California Supreme Court review likely.

THE BASIC FACTS

During his employment, plaintiff signed an arbitration agreement that required individual arbitration of all employment related disputes. The agreement expressly prohibited bringing actions as a representative for other employees. Plaintiff nonetheless filed a California wage and hour class action against CLS in 2006.  CLS sought to compel arbitration, and the motion was granted, but it was reversed on appeal (in an earlier opinion) on the ground that the California Supreme Court's decision in Gentry v. Superior Court precluded enforcement of an arbitration agreement containing a class action waiver.

When the action was remanded, CLS withdrew its request for arbitration in the face of its certain defeat. The case went forward and the class action was certified in 2009.  In 2011, however, within a few weeks of the issuance of Concepcion, CLS renewed its motion to compel arbitration on the ground that Concepcion effectively overruled Gentry and mandated enforcement of the arbitration agreement. The trial court agreed and dismissed the class allegations and compelled arbitration.  Plaintiff appealed again.

THE APPELLATE DECISION

This decision focused heavily on the proper analysis of Concepcion and its application in the employment setting.  Although Concepcion was a consumer class action case, the central holding of Concepcion was that the FAA preempted any state law or state court doctrine that interferes with the central purpose of the FAA: “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” Concepcion also held that state law rules mandating that arbitration agreements provide for class arbitration are invalid because "class arbitration" is inconsistent with "streamlined proceedings." Furthermore, the U.S. Supreme Court held that states cannot invalidate arbitration agreements for collateral public policy reasons— e.g., that a state wants certain kinds of claims decided in courts.

When Concepcion first came down, many commentators recognized that, if its underlying reasoning was applied to employment law cases, states could not prevent enforcement of employment-based arbitration agreements requiring individual arbitration of all employment related disputes. If employers implemented those sorts of agreements on a widespread basis, it could severely curtail wage and hour class actions. Given the fondness a large segment of the judiciary have for such class actions, and given the great financial interest the plaintiffs' bar has in preserving them, plaintiffs' lawyers hatched several arguments to limit Concepcion and reduce or eliminate its impact on wage and hour class actions.  Although lower court decisions have varied in whether they accept these arguments, plaintiffs had enough success to create uncertainty as to the enforceability of mandatory individual arbitration in the employment setting.  For example, in last year's Brown decision, they obtained a ruling from another California appellate panel that Concepcion does not apply to Labor Code Private Attorney General ("PAGA") actions and does not apply to employment cases at all until the California Supreme Court announces that its previous precedents invalidating class action waivers in arbitration agreements are no longer good law.

Iskanian addresses all of the arguments that Plaintiffs raise to distinguish or limit Concepcion and rules for the employer and against the employee in every case. Here is a brief summary of its main holdings:

(1) Plaintiff Argument 1 – Concepcion dealt only with mandatory arbitration in consumer contracts, and does not invalidate the California Supreme Court's decision in Gentry v. Superior Court that effectively banned class action waivers in employment-based arbitration agreements. 

Response: The Iskanian court held that the reasoning in Concepcion that invalidated the California Supreme Court's Discover Bank decision also invalidated Gentry because Gentry sought to mandate that employment arbitration agreements provide for class arbitration which runs counter to Concepcion's holding that mandating class arbitration violated a central goal of the FAA to streamline proceedings.

(2) Plaintiff Argument 2 – Even if an appellate court believes that Concepcion invalidated Gentry, as a lower state court, the appellate court must continue to follow Gentry until the California Supreme Court announces that the decision is no longer good law.

Response: The Iskanian court properly recognized that the question of whether the FAA preempted the Gentry decision was a question of federal law. On matters of federal law, all courts must follow the U.S. Supreme Court. Thus, a California appellate court can properly recognize that the U.S. Supreme Court overruled the California Supreme Court's flawed interpretation of federal law. Note: This seemingly uncontroversial point was completely lost on the appellate panel that decided Brown.

(3) Plaintiff Argument 3 – Even if class action waivers were allowed in mandatory arbitration agreements, individual arbitration could not be mandated for PAGA claims because PAGA was enacted for the public purpose of enforcing the Labor Code through the deputizing of private attorneys general, and private arbitration agreements cannot undermine such private attorney general actions.

Response: The Iskanian court properly recognized that a state cannot insulate certain kinds of claims from arbitration—a point expressly made in Concepcion. Indeed, since Concepcion, the U.S. Supreme Court reversed two other state supreme courts who had issued decisions that certain state laws prevented mandatory arbitration of certain claims (California and West Virginia).

(3) Plaintiff Argument 4 - The National Labor Relations Board's ("NLRB") D.R. Horton decision had held that, as a matter of federal law, the National Labor Relations Act ("NLRA") precludes mandatory individual arbitration of employment claims, as it held that asserting class actions is a form of concerted activity protected by the NLRA. Because the NLRA is a federal statute, the FAA cannot preempt it in the same way it preempts state laws.

Response: The Iskanian court recognized that the U.S. Supreme Court held in its 2012 decision CompuCredit Corp. v. Greenwood that a determination that one federal statute precludes mandatory arbitration of claims arising under it will be found only if there is a clear "congressional command" to that effect. The Iskanian court found no such command in the NLRA and noted that the NLRB was not entitled to any deference in its interpretation of the FAA, since the NLRB had no responsibility to administer that statute.

TAKE AWAYS

This is a great decision for employers and would have been a far more momentous decision but for the awful Brown decision, which is now final and not subject to review.  When two appellate courts disagree, trial courts are free to pick and choose which one to follow. Nonetheless, this decision provides a road map for the arguments employers can and should raise in defending their arbitration agreements from attack in the trial courts. 

That being said, the case has a likely shelf life of only about 120 days until the California Supreme Court grants review to resolve the split of appellate authority. When that happens, the case will be depublished.  It is possible that the California Supreme Court will feel greater need as a result of this decision to address the viability of Gentry when it eventually issues a decision in the Sonic-Calabasas case that the United States Supreme Court reversed last year (opinion expected no sooner than 2013). In any event, do not expect any clarity in this area of the law for several more years.

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