California Supreme Court rules the Federal Arbitration Act preempts State’s refusal to enforce class arbitration waivers on public policy or unconscionability grounds; holds PAGA claims unwaivable.

On June 23, 2014, the California Supreme Court issued its long-awaited decision in Iskanian v. CLS Transportation of Los Angeles, LLC. The Iskanian decision addressed the enforceability of class arbitration waivers in employment contracts in the aftermath of the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which upheld class arbitration waivers in consumer contracts. Iskanian clarifies the California high court’s view that Concepcion applies equally to employment agreements and overrules that court’s earlier opinion in Gentry v. Superior Court, which held that class arbitration waivers in employment agreements were unenforceable under California law if class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration. Although the decision will undoubtedly limit employment class actions seeking to vindicate private rights, Iskanian also held that the right to bring a representative Private Attorney General Act (PAGA) claim may not be waived. This may open the door to arguments that arbitration agreements containing PAGA waivers are unconscionable in their entirety as a result of the impermissible PAGA waiver. The decision may also result in a flurry of representative PAGA claims against employers in which the employees have otherwise given up the right to bring private claims on behalf of a class.

Background -

In the 2005 Discover Bank v. Superior Court decision, the California Supreme Court held that most class arbitration waivers in consumer adhesion contracts were unconscionable and thus per se unenforceable when the disputes were likely to involve a small amount of damages and the party with inferior bargaining power alleged a deliberate scheme to defraud. Two years later, in Gentry, the court set a stringent test for determining whether class action waivers in the employment context were unenforceable because they were exculpatory and contrary to public policy.