The California Supreme Court ruled that the Federal Arbitration Act preempts its previous decision in Gentry v. Superior Court (2007) 42 Cal.4th 443, which invalidated class action waivers in most wage-hour matters.
Here are the facts per the Court:
So, in this case, Iskanian v. CLS Transportation Los Angeles, opinion here, the Court recognized that Gentry could not survive Concepcion.
The California Supreme Court also rejected Iskanian's argument that class action waivers are illegal under the National Labor Relations Act. The National Labor Relations Board so held in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184. But the courts have not agreed. In fact, the Court of Appeals for the Fifth Circuit refused to enforce the decision. The Supreme Court joined the other courts in rejecting the NLRB's rule:
The news was not all good for arbitration, however.
The Court maintained its rule in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II)," such that courts may find arbitration agreements unconscionable if they do not provide protections similar to the wage claim statute. That means the court is leaving open the door to invalidation of arbitration agreements under state law for a variety of reasons that courts have come up with over the years. Only the U.S. Supreme Court will be able to fix this ongoing situation, if the Court is so inclined.
The Court also held that employers may not require waiver of "representative" actions in arbitration. Therefore, employees who cannot maintain class actions in arbitration can pursue claims under the Private Attorney General Act, or PAGA.
What is a PAGA representative action? The Court explained, quoting from a prior decision:
Iskanian's arbitration agreement waived "representative" claims as well as class claims. Therefore, because he had to arbitrate all claims, and could not arbitrate representative claims at all, the question was whether the agreement was enforceable.
The Supreme Court said, "no."
1. Class action waivers are enforceable. Employers may implement valid arbitration agreements with class action waivers and foreclose employees from bringing class actions in court or arbitration. That will change only if the U.S. Supreme Court overrules itself, or if Congress amends the FAA. Given the ease with which courts are granting class certification, a properly managed and implemented arbitration program may be a wise decision for employers exposed to wage hour class actions.
2. Arbitration agreements cannot validly waive "representative" actions. Therefore employees proceeding under PAGA may pursue those Labor Code penalties authorized by PAGA, whether in arbitration or court. However, employees cannot use PAGA to bring claims for, damages, such as meal and break premiums, overtime, etc. Only penalties. This may change if the U.S. Supreme Court takes up this case.
3. Employers still must draft arbitration agreements to comply with the courts' notions of what is "unconscionable." This case does nothing to affect the unconscionabilty jurisprudence that the California courts have developed. That means arbitration will be remain expensive, and employers will not be able to use arbitration agreements to unfairly limit claims, statutes of limitations, or remedies. This will not change unless the U.S. Supreme Court decides that the FAA overruled the California courts' unconscionability jurisprudence.
4. The California Supreme Court's interpretation of the FAA and the NLRA provide a means for the U.S. Supreme Court to review this case, because of the federal laws involved. Let's see if the high Court takes the opportunity to clarify when state law "unconscionability" or "public policy" doctrine conflicts with the FAA.
Plaintiff Arshavir Iskanian worked as a driver for defendant CLS Transportation Los Angeles, LLC (CLS) from March 2004 to August 2005. In December 2004, Iskanian signed 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 provided for reasonable discovery, a written award, and judicial review of the award; costs unique to arbitration, such as the arbitrator’s fee, would be paid by CLS. The arbitration agreement also contained a class and representative action waiver that said: “[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.”The Supreme Court previously held in Gentry, cited above, that most of these class action waivers would be void and contrary to public policy. As a result, courts invalidated many class action waivers, despite the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __. In Concepcion, the U.S. Supremes held that the Federal Arbitration Act preempts state law rules that invalidate class action waivers.
So, in this case, Iskanian v. CLS Transportation Los Angeles, opinion here, the Court recognized that Gentry could not survive Concepcion.
The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to “class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,” it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration “even if it is desirable for unrelated reasons.”
The California Supreme Court also rejected Iskanian's argument that class action waivers are illegal under the National Labor Relations Act. The National Labor Relations Board so held in D.R. Horton Inc. & Cuda (2012) 357 NLRB No. 184. But the courts have not agreed. In fact, the Court of Appeals for the Fifth Circuit refused to enforce the decision. The Supreme Court joined the other courts in rejecting the NLRB's rule:
We agree with the Fifth Circuit that, in light of Concepcion, the Board’s rule is not covered by the FAA’s savings clause. Concepcion makes clear that even if a rule against class waivers applies equally to arbitration and nonarbitration agreements, it nonetheless interferes with fundamental attributes of arbitration and, for that reason, disfavors arbitration in practice. (Concepcion, supra, 563 U.S. at pp. __–__ [131 S.Ct. at pp. 1750–1752].) Thus, if the Board’s rule is not precluded by the FAA, it must be because the NLRA conflicts with and takes precedence over the FAA with respect to the enforceability of class action waivers in employment arbitration agreements. As the Fifth Circuit explained, neither the NLRA’s text nor its legislative history contains a congressional command prohibiting such waivers. (Horton II, supra, 737 F.3d at pp. 360–361.)
The news was not all good for arbitration, however.
The Court maintained its rule in Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109 (Sonic II)," such that courts may find arbitration agreements unconscionable if they do not provide protections similar to the wage claim statute. That means the court is leaving open the door to invalidation of arbitration agreements under state law for a variety of reasons that courts have come up with over the years. Only the U.S. Supreme Court will be able to fix this ongoing situation, if the Court is so inclined.
The Court also held that employers may not require waiver of "representative" actions in arbitration. Therefore, employees who cannot maintain class actions in arbitration can pursue claims under the Private Attorney General Act, or PAGA.
What is a PAGA representative action? The Court explained, quoting from a prior decision:
Also, the plaintiff keeps just 25% of the penalties recovered, the rest go to the state.
An employee plaintiff suing . . . under the [PAGA] does so as the proxy or agent of the state’s labor law enforcement agencies. . . . In a lawsuit brought under the act, the employee plaintiff represents the same legal right and interest as state labor law enforcement agencies — namely, recovery of civil penalties that otherwise would have been assessed and collected by the Labor Workforce Development Agency. [Citations.] . . . . Because collateral estoppel applies not only against a party to the prior action in which the issue was determined, but also against those for whom the party acted as an agent or proxy [citations], a judgment in an employee’s action under the act binds not only that employee but also the state labor law enforcement agencies.
“Because an aggrieved employee’s action under the [PAGA] functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties ‘is fundamentally a law enforcement action designed to protect the
Iskanian's arbitration agreement waived "representative" claims as well as class claims. Therefore, because he had to arbitrate all claims, and could not arbitrate representative claims at all, the question was whether the agreement was enforceable.
The Supreme Court said, "no."
a prohibition of representative claims frustrates the PAGA’s objectives. As one Court of Appeal has observed: “[A]ssuming it is authorized, a single-claimant arbitration under the PAGA for individual penalties will not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the Labor Code. That plaintiff and other employees might be able to bring individual claims for Labor Code violations in separate arbitrations does not serve the purpose of the PAGA, even if an individual claim has collateral estoppel effects. (Arias, supra, 46 Cal.4th at pp. 985–987.) Other employees would still have to assert their claims in individual proceedings.” (Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 502, fn. omitted.)The Court then addressed whether the Federal Arbitration Act would require the courts to allow waiver of representative claims. Again, the California Supreme Court said "no."
We conclude that the rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.* * *
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. Through his PAGA claim, Iskanian is seeking to recover civil penalties, 75 percent of which will go to the state’s coffers.So, where does this leave us with respect to arbitration:
1. Class action waivers are enforceable. Employers may implement valid arbitration agreements with class action waivers and foreclose employees from bringing class actions in court or arbitration. That will change only if the U.S. Supreme Court overrules itself, or if Congress amends the FAA. Given the ease with which courts are granting class certification, a properly managed and implemented arbitration program may be a wise decision for employers exposed to wage hour class actions.
2. Arbitration agreements cannot validly waive "representative" actions. Therefore employees proceeding under PAGA may pursue those Labor Code penalties authorized by PAGA, whether in arbitration or court. However, employees cannot use PAGA to bring claims for, damages, such as meal and break premiums, overtime, etc. Only penalties. This may change if the U.S. Supreme Court takes up this case.
3. Employers still must draft arbitration agreements to comply with the courts' notions of what is "unconscionable." This case does nothing to affect the unconscionabilty jurisprudence that the California courts have developed. That means arbitration will be remain expensive, and employers will not be able to use arbitration agreements to unfairly limit claims, statutes of limitations, or remedies. This will not change unless the U.S. Supreme Court decides that the FAA overruled the California courts' unconscionability jurisprudence.
4. The California Supreme Court's interpretation of the FAA and the NLRA provide a means for the U.S. Supreme Court to review this case, because of the federal laws involved. Let's see if the high Court takes the opportunity to clarify when state law "unconscionability" or "public policy" doctrine conflicts with the FAA.
