Did You Know…California Supreme Court Approves Class-Action Waivers, But Disapproves PAGA Representative Claim Waivers

by Nossaman LLP
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The California Supreme Court has issued its highly-anticipated opinion in Iskanian v. CLS Transportation Los Angeles, LLC (“Iskanian”).

The decision is mixed for employers: the Court ruled that arbitration agreements with mandatory class action waivers generally are enforceable.  However, the Court also concluded that representative actions under the Private Attorneys General Act (“PAGA”) cannot be waived.

In Iskanian, an employee sought to bring a class action lawsuit on behalf of himself and similarly situated employees for his employer’s alleged failure to compensate its employees for, among other things, overtime and meal and rest periods. The employee had entered into an arbitration agreement that waived the right to class proceedings. The Court considered, in part, whether a state’s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the Federal Arbitration Act (“FAA”), and concluded that it is.

Highlights from the opinion are below:

  1. An arbitration agreement with a class action waiver is enforceable.  The Court overruled its prior holding to the contrary in Gentry v. Superior Court (2007) 42 Cal. 4th 443 (“Gentry”) on the basis that Gentry has been preempted by the United States Supreme Court in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] (“Concepcion”).
  2. A class action waiver is not unlawful under the National Labor Relations Act (“NLRA”).  The Court declined to follow the National Labor Relations Board’s position in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184 [2012 WL 36274] that the NLRA generally prohibits contracts that compel employees to waive their right to participate in class proceedings to resolve wage claims.  Rather, the Court agreed with the Fifth Circuit’s opinion in D.R. Horton, Inc. v. NLRB (5th Cir. 2013) 737 F.3d 344, rejecting the NLRB’s opinion.  The Court held that “in light of the FAA’s liberal federal policy favoring arbitration, sections 7 and 8 of the NLRA do not represent a contrary congressional command overriding the FAA’s mandate.”
  3. A waiver of representative claims under PAGA is contrary to public policy and unenforceable as a matter of state law.  “An agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code.”  Because such an agreement exempts an employer from responsibility for violations of the law, the Court reasoned, it is against public policy.  Further, PAGA was “clearly established for a public reason,” so a waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties.  The Court distinguished the FAA and the U.S. Supreme Court’s decision in Concepcion by concluding that “the FAA aims to ensure an efficient forum for private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency;” PAGA lies outside the FAA’s coverage because it is not a private dispute between an employer and an employee, but a dispute between an employer and the state.

Having concluded that the employer could not compel the waiver of Iskanian‘s representative PAGA claim, but that the arbitration agreement was otherwise enforceable according to its terms, the Court considered the parties’ next steps.  The Court noted that although the arbitration agreement could be read as requiring arbitration of individual claims but not of representative PAGA claims, neither party contemplated such a bifurcation.

Neither party got all that it wanted: although Iskanian sought to litigate all claims in court, the California Supreme Court required Iskanian to proceed with bilateral arbitration on his individual damages claims.  Although CLS sought to arbitrate the individual claims while barring the PAGA representative claim altogether, the Court required CLS to answer the representative PAGA claims in some forum.

The Court’s decision thus raises a number of questions: (1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims? (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed?  The Court invited the parties to address these issues on remand.

Due to the significance of the issues, it is anticipated that one or both parties will file a petition for certiorari in the United States Supreme Court.  Stay tuned………….

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