On June 23, 2014, the California Supreme Court announced a landmark ruling that arbitration agreements with mandatory class waivers are generally enforceable while carving out one notable exception.  That exception consists of representative claims brought under the Private Attorneys General Act (PAGA) which is unique to California.

Iskanian, an employee, sought to bring a class action for overtime and meal and rest period violations.  However, he had entered into an arbitration agreement that waived the right to class proceedings.  CLS moved to compel arbitration, and the trial court granted the motion.  Shortly after that, in 2007 the California Supreme Court decided in Gentry v. Superior Court that class action waivers in employment arbitration agreements are invalid under certain circumstances, and the Court of Appeal issued a writ of mandate directing the superior court to reconsider its ruling in light of Gentry.  On remand, CLS voluntarily withdrew its motion to compel arbitration and the parties proceeded to litigate the case in court.  After the United States Supreme Court issued the AT&T Mobility LLC v. Concepcion decision, CLS renewed its motion to compel arbitration and to dismiss all class claims.  The trial court ruled in favor of CLS, and the Court of Appeal affirmed.  That ruling was appealed to the California Supreme Court.
What are the key holdings in Iskanian?
1.  A state’s refusal to enforce a class action waiver on grounds of public policy or unconscionability is preempted by the Federal Arbitration Act, and the Court’s prior holding to the contrary in Gentry v. Superior Court has been abrogated by recent United States Supreme Court precedent – specifically by AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant
2.  The Court rejected arguments made in the D.R. Horton Inc. National Labor Relations Board decision that a class action waiver is unlawful under the National Labor Relations Act, especially where the arbitration agreement, apart from the class waiver, permits a broad range of collective activity to vindicate wage claims.
3.  The Court held that an employee’s right to bring a representative action under the PAGA is unwaiveable.  Therefore, an arbitration agreement requiring an employee as a condition of employment to give up the right to bring a PAGA action in any forum is contrary to public policy, and the FAA does not preempt a state law that prohibits waiver of PAGA actions in an employment contract.  The Court explained that “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 . . . that the employer has violated the Labor Code.”  Because the FAA does not aim to promote arbitration for claims belonging to a government agency, California’s public policy prohibiting waiver of PAGA Claims does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.
4.  The Court rejected the argument that the PAGA violates the principles of separation of powers under the California Constitution.
 Because the Court of Appeal held that the entire arbitration agreement, including the PAGA waiver, should be enforced, the Supreme Court reversed the judgment and remanded the case.  The Court noted that the arbitration agreement could be read as requiring arbitration of individual claims, but not of representative PAGA claims, and also noted several issues/questions that will need to be addressed on remand, including (1) whether the parties will agree on a single forum for resolving the PAGA claim and the other claims; (2) if not, whether it is appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation; (3) if such bifurcation occurs, whether the arbitration should be stayed pursuant to CCP 1281.2; and (4) whether Iskanian’s PAGA claims are time barred and whether CLS has forfeited this contention and cannot raise it on appeal.

What are the implications for employers? 

  • The decision is considered a partial win for employers in California and a win to employers in other states.  According to Justice Goodwin Liu, who wrote the lead opinion, the ruling aligns with all of the circuit courts and nearly all of the district courts to consider the D.R. Horton decision.
  • Employers can have a higher comfort level with arbitration agreements that contain class and representative action waivers, with the exception of California’s unique PAGA claim.
  • Employers in California can also anticipate the threatened uptick in PAGA claims as the plaintiffs’ bar adjusts its strategy.
  • Employers with existing cases which contain class claims and PAGA claims will face the same issues presented to the Court of Appeal on remand on how to proceed in light of the Iskanian holdings.

Ironically, both Iskanian and CLS are considering asking the U.S. Supreme Court to step in.  Iskanian may ask the Court to reconsider the FAA preemption and Dr. Horton rulings.  CLS may ask the Court to find that PAGA claims are within the scope of the Federal Arbitration Act.