California Supreme Court Submits to Federal Preemption, Holds Class Action Waivers Enforceable in Employment Cases – But Not in PAGA Claims

By Scott J. Wenner

We have written previously of the back and forth between the United States Supreme Court and the California Supreme Court on questions relating to mandatory binding arbitration and class action waivers in the workplace (see here). While the U.S. Supreme Court has construed the Federal Arbitration Act’s (FAA) policy favoring arbitration expansively, the California Justices have taken the opposite view.

The California Supreme Court consistently has read the limited exceptions to FAA preemption of state laws broadly, while seeming to construe U.S. Supreme Court opinions approving binding arbitration and class action waiver agreements as narrowly as possible – most recently in Sonic-Calabassas A, Inc. v. Moreno, a 2013 opinion that nominally narrowed use of the state’s unconscionability doctrine to invalidate mandatory binding arbitration agreements in response to the U.S. Supreme Court’s Concepcion opinion.

Yesterday, the California Supreme Court took what was for it a giant step in Iskanian v. CLS Transportation.  The following excerpt from the Court’s opinion best summarizes the questions considered and primary holdings of Iskanian:

In this case, we again address whether the Federal Arbitration Act (FAA) preempts a state law rule that restricts enforcement of terms in arbitration agreements. Here, an employee seeks to bring a class action lawsuit on behalf of himself and similarly situated employees for his employer‘s alleged failure to compensate its employees for, among other things, overtime and meal and rest periods. The employee had entered into an arbitration agreement that waived the right to class proceedings. The question is whether a state‘s refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA. We conclude that it is and that our holding to the contrary in Gentry v. Superior Court (2007) . . . has been abrogated by recent United States Supreme Court precedent.  We further reject the arguments that the class action waiver at issue here is unlawful under the National Labor Relations Act and that the employer in this case waived its right to arbitrate by withdrawing its motion to compel arbitration after Gentry.

The opinion continued:

The employee also sought to bring a representative action under the Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.). This statute authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations committed against the employee and fellow employees, with most of the proceeds of that litigation going to the state. . . . [W]e conclude that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy. In addition, we conclude that the FAA‘s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state‘s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.

California plaintiff-side class action lawyers routinely include PAGA claims in actions they bring for wage-hour and other Labor Code violations, so framing their complaints as PAGA claims will be nothing new.  However, PAGA claims ordinarily are less remunerative for the represented employees because of the shorter one-year limitations period and the fact that only 25 percent of the amount awarded, deemed penalties, is paid to the plaintiff class, with the balance paid to the state. What will drive the answer to whether Iskanian signals the decline of the expensive and, for class counsel very profitable, California Labor Code class action will likely depend on whether these cases remain as profitable for the lawyers who bring them.