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California Supreme Court Issues Iskanian Decision, Ruling that Class Action Waivers in Arbitration Agreements Are Enforceable, But Still Allows PAGA Claims to Proceed on Representative Basis

On June 23, 2014, the California Supreme Court issued its decision in Iskanian v. CLS Transportation Los Angeles, LLC, confirming that an express class action waiver in an employment arbitration agreement is enforceable under California law.  In its decision, the Court held that its earlier decision in Gentry is no longer good law under the United States Supreme Court’s rulings as to enforceability of the Federal Arbitration Act (FAA) and also rejected the NLRB’s D.R. Horton decision that the National Labor Relations Act (NLRA) invalidates class action waivers.  Meanwhile, the California Supreme Court also held that an arbitration agreement provision barring arbitration of PAGA representative claims is invalid as a matter of California public policy.  Thus, employers in California now have a little more certainty as to the enforceability of their arbitration agreements and their ability to prevent their employees from bringing class actions.  However, it still is possible that the matter will be appealed and the United States Supreme Court will weigh in on the applicable PAGA issues.

First, the California Supreme Court confirmed, what has been expected in light of the United States Supreme Court’s pronouncements, that Gentry’s rule against class action waivers in employment actions is preempted by the FAA and no longer is good law:  “Under the logic of [the United States Supreme Court’s decision in] Concepcion, the FAA preempts Gentry’s rule against employment class waivers,” since it frustrates the fundamental purpose of the FAA (i.e., streamlined and quick proceedings).  Thus, it now is clear that class action waivers can be enforced in employment matters.

Next, the California Supreme Court agreed with the Fifth Circuit’s ruling on D.R. Horton that the NLRA does not foreclose enforcement of a class action waiver in an arbitration agreement.  Citing the United States Supreme Court’s decisions in CompuCredit and Italian Colors where the liberal policy favoring arbitration under the FAA was reiterated, the California Supreme Court held that “there is no inherent conflict between the FAA and the NLRA as that term is understood by the United States Supreme Court.”  Thus, contrary to the reasoning of the NLRB in D.R. Horton, an employer will not be found to have prevented its employees from engaging in collective action and, thus, acting in violation of the NLRA (which does not override the FAA’s mandate), merely because it has entered into an arbitration agreement with its employees that requires individual arbitration of employment‑related claims.  Accordingly, express class action waivers are not necessarily barred by the NLRA.

The remaining substance of the decision involved the California Supreme Court’s discussion of PAGA and whether a class action waiver would be enforceable to bar employees from bringing representative actions to seek civil penalties under PAGA.  Notably, the California Supreme Court held that an arbitration agreement precluding representative PAGA claims is invalid as a matter of California public policy and that that public policy to enforce wage-and-hour laws on behalf of the State is not preempted by the FAA (since the dispute was not between two contracting private parties, but between the State and an employer).  Ultimately, the California Supreme Court remanded the action back to the court of appeal where it is requested to address whether the asserted PAGA claims should proceed on a representative basis in front of the trial court or in arbitration.

The majority also for the first time clarified the scope of various provisions of the PAGA statute.  First, the California Supreme Court answered an important open-ended question about who receives the PAGA civil penalties that are recovered through the action.  Specifically, the California Supreme Court made clear that the penalties are distributed to all aggrieved employees (unlike a typical qui tam action where the bounty hunter keeps all of the money that does not go to the State), unequivocally stating that “a portion of the penalty goes not only to the citizen bringing the suit but to all employees affected by the Labor Code violation.”  Additionally, the majority opinion also made clear that employees are permitted to bring individual PAGA actions, holding that an employee could seek to recover PAGA civil penalties just for the violation that impacted the one employee and was not required to pursue penalties on behalf of all aggrieved employees.  Lastly, the California Supreme Court found that PAGA does not violate constitutional separation of powers.

The California Supreme Court’s rationale with regard to the PAGA issues leaves open the possibility that the United States Supreme Court will accept review of this decision.  First, the majority opines that PAGA claims are entirely outside the scope of the FAA because PAGA claims address disputes between the state (through its proxy or agent, an aggrieved employee) and the employer, and not between two contracting private parties.  The majority notes that there is no FAA decision that recognizes such a distinction but says that the United States Supreme Court’s decision in EEOC v. Waffle House is not inconsistent with such a rule.  In short, the majority seems to argue that qui tam actions are completely outside the FAA, a proposition that might just be ripe for United States Supreme Court review.

Meanwhile, the concurrence opinion of Justices Chin and Baxter attacks the reasoning for the majority opinion that PAGA claims are categorically outside the FAA.  They note that Waffle House certainly implied that the FAA applied but was not controlling there, since the EEOC was the party actually bringing the enforcement action and it never signed an arbitration agreement (unlike the employee on whose behalf the action was being pursued or an aggrieved employee in a PAGA action).  Nonetheless, the concurrence still found that the arbitration agreement in this instance was unenforceable as to the PAGA claims because every PAGA action (even one brought on an individual basis) by definition is a “representative action” (since it is brought on behalf of the State, while acting as its representative) and the agreement required the arbitration of all employment‑related claims but barred the bringing of representative actions in arbitration.  Therefore, in effect, the arbitration agreement precluded the plaintiff “from bringing a PAGA actionin any forum.”  (Emphasis in original.)

Now, we just will have to keep our eyes on what happens with the matter going forward with regard to a further appeal to the United States Supreme Court.  We likely will know by the end of this year or the very early part of 2015 as to whether or not the United States Supreme Court will grant review of this California Supreme Court decision.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Gregg A. Fisch, Labor Employment Lawyer, Sheppard Mullin Law firm
Partner

Mr. Fisch is a partner in the Labor & Employment Practice Group in the firm's Century City office.

310-228-3721