Three key cases in one day address the future contours of arbitration clauses in California: action steps for employers

by DLA Piper

After what seems like years of confusion, the California Supreme Court this week clarified the permissible scope of class action waivers in arbitration clauses in California on June 23 in Iskanian v. CLS Transportation Los Angeles, LLC

The same day, the Ninth Circuit Court of Appeals confirmed that an arbitration policy could be adjusted for current employees, with only ongoing employment as the consideration for that new arbitration policy, if certain procedural safeguards were met. 

While California law still has some very large carveouts, employers now have a clear road map of how to proceed with class action waivers, if they choose to utilize arbitration agreements for their workforce.

First, in the California Supreme Court, Iskanian v. CLS Transportation Los Angeles, LLC addressed three issues:

1.  Are class action waivers lawful?

2.  Are representative action waivers lawful?

3.  Is the Private Attorney General Act (PAGA) constitutional?

The answers, in sum, are as follows: (1) yes; (2) no; and (3) yes.

The plaintiff was a driver with the defendant employer, who executed a “Proprietary Information and Arbitration Policy/Agreement” providing that any and all claims arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator.  The arbitration agreement also contained a class and representative action waiver.  Notwithstanding this provision, Iskanian filed a class and representative action.

Are class action waivers in employment arbitration agreements lawful?

In holding that the plaintiff may not proceed with his class action in court, Iskanian reinforced the US Supreme Court’s decision, AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), and abrogated an earlier California Supreme Court decision, Gentry v. Superior Court, 42 Cal. 4th 443, to the extent it contradicted Concepcion.[1]  The court noted that while the FAA does not prevent states through legislative or judicial rules from addressing the problems of affordability and accessibility of arbitration (i.e., unconscionability), a class action waiver in an arbitration agreement is not unconscionable.

In validating class action waivers, the California Supreme Court rebuffed the plaintiff’s argument that such waivers are invalid under the National Labor Relations Act (NLRA) as an unfair labor practice.  Noting that the NLRA itself favors arbitration and that there is nothing in the NLRB’s history prohibiting class action waivers in arbitration agreements, the court asserted: “Sections 7 and 8 the NLRA do not represent a contrary congressional command overriding the FAA‘s mandate.”[2]

What about representative actions?

Unlike class actions, however, the FAA does not preempt an employee’s right to bring a representative action under California’s Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.) for civil penalties on behalf of the state against her employer for Labor Code violations in any forum. 

Citing Arias v. Superior Court, 46 Cal.4th 969, 980–981 (2009) and consistent with the court’s endorsement of representative actions, the court concluded that an employee‘s right to bring a

PAGA action is unwaivable.  Allowing otherwise violates public policy: “The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state‘s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations.” 

The court also confirmed that PAGA, a “laudable” state law rule, is not preempted by the FAA because the FAA focuses on private disputes whereas a PAGA action focuses on a dispute between an employer and the Labor and Workforce Development Agency.  Thus, “PAGA lies outside the FAA’s coverage.”

Is PAGA even constitutional?

The defendant argued that PAGA actions violate the principle of separation of powers under the California Constitution and run afoul of the court’s prior holding in County of Santa Clara v. Superior Court, 50 Cal.4th 35 (2010) (citing People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985)), by (1) authorizing financially interested private citizens to prosecute claims on the state‘s behalf without governmental supervision; and (2) violating the principal of separation of powers because it is the province of the courts to regulate the legal profession. 

The court rejected these arguments and highlighted various qui tam actions, which “enhance the state‘s ability to use such scarce resources by enlisting willing citizens in the task of civil enforcement.”  Pointing out that the debate is not typically between a financially interested private citizen and prosecution by a neutral prosecutor, but rather, between a private citizen suit and no suit at all, the court limited its ruling in County of Santa Clara to attorneys hired by government entities as independent contractors. 

Thus, while class action waivers are likely here to stay, so are representative actions under PAGA.

Second, the Ninth Circuit Court of Appeals clarified the scope of arbitration clauses in two separate decisions.  In Johnmohammadi v. Bloomingdale’s, Inc., the court found that the arbitration clause at issue was lawful where the plaintiff was given the option of opting out of the company’s dispute resolution program, and did not coerce her to sign the agreement waiving her class action rights. 

More interestingly, in Davis v. Nordstrom, Inc., the court upheld an arbitration agreement that the employer revised in light of the US Supreme Court’s 2011 ruling in AT&T Mobility v. Concepcion.  In Davis, the employer revised its employee handbook and arbitration policy after Concepcion to include a class action waiver.  Nordstrom provided 30-days’ notice of the change to the employee handbook, and did not seek to enforce the new arbitration clause within that 30-day window.  The court further found that Nordstrom was not bound to inform the employee that her continued employment after receiving notice constituted acceptance of the new terms of employment.  In doing so, the Court reversed the district court, upholding the validity of the arbitration clause.

So what does this mean for California employers?  Action steps

First, California employers can adjust their policies for current employees, so long as they provide adequate notice of the change. 

Second, California employers should keep in mind that arbitration clauses can be changed for current employees to include class action waivers. 

Finally, employers must be aware that PAGA is still out there.  While PAGA has only a one-year statute of limitations, penalties can grow quickly, and there are not clear procedural guidelines for attacking PAGA claims. 

While the rules are clearer today with respect to arbitration agreements, employers still need to carefully evaluate how to utilize such agreements, given their own workforces and concerns.

[1] Gentry did not provide a blanket prohibition on class action waivers.  Rather, it prohibited class action waivers if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

[2] However, the NLRA may impose some limits on enforcing arbitration agreements.  See e.g., D.R. Horton, Inc. v. N.L.R.B, 737 F.3d 344 (5th Cir. 2013) which addressed an agreement which contained language that would lead employees to reasonably believe they were prohibited from filing unfair labor practice charges with the board.  Unlike in D.R. Horton, Iskanian’s “arbitration agreement does not prohibit employees from filing joint claims in arbitration, does not preclude the arbitrator from consolidating the claims of multiple employees, and does not prohibit the arbitrator from awarding relief to a group of employees. The agreement does not restrict the capacity of employees to ?discuss their claims with one another, pool their resources to hire a lawyer, seek advice and litigation support from a union, solicit support from other employees, and file similar or coordinated individual claims.”  While D.R. Horton has been called into question by the US Supreme Court’s Noel Canning decision, this will continue to be the enforcement posture of the NLRB for the foreseeable future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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