Breaking News: California Supreme Court Rules In Favor Of Employers in Regards to Class Action Waivers, But Not In Regards to PAGA Claims

Posted on July 10, 2014

On June 23, 2014, the California Supreme Court issued a long awaited opinion in Iskanian v. CLS Transportation Los Angeles, LLC (2014 WL 2808963). Long awaited is an understatement, as the underlying case was filed in 2006. The issue of whether class action waivers in arbitration agreements are enforceable has been ruled on differently by several courts over the past several years, based on reliance on Gentry v. Superior Court (2007) 42 Cal.4th 443. In Gentry, the California Supreme Court previously ruled that class action waivers in arbitration agreements were unconscionable and against public policy, and were not preempted by the Federal Arbitration Act (FAA).

Court’s Rulings

The Iskanian Court took into consideration the AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740 case in reaching its decision. The United States Supreme Court in Concepcion held that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA. In the recent Iskanian ruling, the California Supreme Court ruled that under the logic of Conception, the FAA does preempt Gentry’s rule that restricts enforcement of class action waivers. This is a big win for employers.

Another issue that the Court addressed was whether class action waivers were unlawful under the National Labor Relations Act (NLRA). Plaintiff Iskanian contended that even if the FAA preempts Gentry, the class action waiver in his case is invalid under the NLRA. Iskanian adopted the position of the National Labor Relations Board (Board) in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184 (2012 WL 36274), wherein the NLRA prohibited contracts that compel employees to waive their right to participate in class proceedings to resolve wage claims.

The Iskanian Court rejected this argument and ruled that the class action waiver at issue in the case was not unlawful under the NLRA in light of the FAA’s “liberal federal policy favoring arbitration'” (citing to Concepcion, supra, 131 S.Ct. at p. 1745). Sections 7 and 8 the NLRA do not represent “a contrary congressional command”‘ overriding the FAA’s mandate, (citing CompuCredit v. Greenwood (2012) 132 S.Ct. 665.) This was also a win for employers.

There was one win for employees. The Court held that employees’ right to ‘representative actions’ under the Private Attorney General Act (PAGA) may not be waived, and the FAA does not preempt California law as to the unenforceability of PAGA waivers. Plaintiff Iskanian contended that the PAGA, which authorizes an aggrieved employee to file a claim “on behalf of himself or herself and other current or former employees” ( Labor Code§ 2699, subd. (a)), does not permit an employee to file an individual claim. The Court agreed and concluded that where an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.

The Court also ruled that PAGA is not preempted by the FAA. “Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents – either the Labor and Workforce Development Agency or aggrieved employees – that the employer has violated the Labor Code.”

What Does The Ruling Mean for Employers?

The murky aspect of the ruling involves to how courts and arbitrators will handle claims alleging both class and PAGA allegations. The Iskanian Court did remand the case back to the trial court, so hopefully we will get some insight as to how that court will rule. We anticipate that the trial court will likely rule for separating out the claims, allowing the non-PAGA claims to be arbitrated and the PAGA claims to be resolved either as a class action or in some other forum.

The ruling was also a coup for the enforceability of arbitration agreements in the employment context. In light of the historical legal turmoil regarding enforceability of class action waivers in arbitration agreements, employers can now breathe a sigh of relief that these particular clauses will be enforceable. Employers should still ensure that their arbitration agreements meet the requirements sets forth in the hallmark case Armendariz v. Foundation Health Psychcare Services (2000) 24 Cal.4th 83, to ensure that the terms are neither substantively or procedurally unconscionable.