Class action waivers in arbitration agreements are enforceable according to a California Supreme Court decision issued yesterday.  In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court finally acknowledged that the U.S. Supreme Court had left it no choice but to enforce those agreements.

For many years, the California Supreme Court had found that class action waivers in arbitration agreements were unenforceable - the Gentry rule (named after Gentry v. Superior Court, the California Supreme Court case which decided the issue) - because the modest size of the potential individual recovery, the lack of information to other class members and other "real world obstacles" to the vindication of class members' rights in wage-hour cases made it "more effective" for employees to litigate those claims in a class action.  In AT&T Mobility v. Concepcion, the U.S. Supreme Court rejected that analysis for two reasons.  First, contrary to Gentry, class actions actually "make the process slower, more costly and more likely to generate procedural morass," not more effective.  Second, even if litigation was less effective - or even entirely uneconomical - federal law still requires the enforcement of arbitration agreements.

Since the Concepcion decision in 2011, the Gentry rule appeared to be on shaky footing at best.  But, until yesterday, several Courts of Appeal in California had continued to rely on Gentry to invalidate class action waivers in arbitration agreements.

Yesterday, the California Supreme Court put an end to the Gentry rule, finding that it had been "abrogated" by the U.S. Supreme Court.  Although the justices disagreed on the reasons why Gentry ceased to be viable, they all agreed it was no longer good law and that class action waivers in arbitration agreements were enforceable.

The Court also disagreed with the decision of the National Labor Relations Board (NLRB) in its much-maligned D.L. Horton decision.  In that case, the NLRB found that class action waivers violated federal labor law guaranteeing employees the right to engage in activities for their "mutual aid and protection."  Like nearly every other court to consider the issue, the California Supreme Court found that federal labor law does not affect an employer's right to limit class actions by its employees.

However, the California Supreme Court did find that employers could not avoid representative actions, which operate like class actions, under the Private Attorneys General Act (PAGA).  The PAGA allows employees to seek civil penalties under the State's Labor Code on behalf of similarly situated employees and keep 25 percent of any recovery for themselves.  Ultimately, all of the justices agreed that since PAGA claims were essentially public claims (brought by an individual in place of the state to enforce public, and not individual, rights), they are unwaivable.  Thus, employers could not force employees to give up their right to bring a PAGA claim - collectively or individually - by way of an arbitration agreement containing a waiver of a representative action under the PAGA.  It remains to be seen whether the employer will seek review of this issue from the U.S. Supreme Court.

How This Affects You

Despite the ruling on the PAGA issue, this is an overwhelmingly positive decision for employers.  Over the last decade, California state courts have expressed increasing hostility to arbitration agreements and have used every conceivable argument to avoid straightforward rulings by the U.S. Supreme Court.  With Iskanian, the California Supreme Court appears to have thrown in the towel.  While Plaintiffs' counsel will continue to explore using PAGA claims to pursue employers with a threat of large litigation expense, this decision will clearly impact the litigation landscape.
The question still remains: are arbitration agreements right for you?  And if so, what should that agreement provide?  Not all employers agree that arbitration is preferable to litigation in court.  For one thing, arbitrators are costly, they have tremendous discretion and their decisions are generally unreviewable except in very limited circumstances.  Indeed, in a state where it can easily take over two years to take a case to trial, some employers feel that the "more effective" forum may not necessarily be the most advantageous for them.

At the same time, it is difficult for an employer to ignore the power of a class action waiver, especially in a class action-friendly state like California.  For many years, employers have found themselves the victim of what they view as baseless class actions which have cost billions of dollars to defend and settle.  The Iskanian decision gives employers a very strong response to those claims and may well mark the beginning of the end of those claims in California.