However, the court found PAGA representative action waivers unenforceable; employers should consider practical implications with respect to arbitration agreements.
On June 23, the California Supreme Court issued its much-anticipated decision in Iskanian v. CLS Transportation Los Angeles, LLC,[1] addressing the enforceability of class and Private Attorneys General Act (PAGA) action waivers in employee arbitration agreements. A 6–1 majority affirmed the Court of Appeal decision that class action waivers in employee arbitration agreements are enforceable because recent U.S. Supreme Court precedent on the Federal Arbitration Act (FAA) had abrogated the California Supreme Court’s prior holding in Gentry v. Superior Court.[2] The majority also rejected arguments that class action waivers are unlawful under the National Labor Relations Act (NLRA) and that CLS waived the right to compel arbitration. The court, however, ruled 7–0 that CLS’s waiver barring representative actions under California’s Labor Code PAGA is contrary to public policy, unenforceable, and not saved by FAA preemption. PAGA allows aggrieved employees in California to bring actions on behalf of themselves and other aggrieved employees for civil penalties and attorney fees for violation of many provisions of the California Labor Code. The State of California is paid 75% of any penalty recovered.
Background
As a driver for CLS, Arshavir Iskanian signed a “Proprietary Information and Arbitration Policy/Agreement,” providing that any and all employment-related disputes would be submitted to binding arbitration. The arbitration agreement contained a waiver of the right to bring claims on behalf of a class or as a representative of others.
Iskanian filed a class and representative action complaint against CLS, alleging that the company failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, and pay final wages in a timely manner.
Soon after the U.S. Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion,[3] which overruled California law regarding class action waivers in commercial contracts, CLS renewed its motion to compel arbitration. The trial court granted the motion, and the Court of Appeal affirmed, finding that Concepcion invalidated the California Supreme Court’s decision in Gentry as to class action waivers. The Court of Appeal also enforced the representative action waiver based on Concepcion. The California Supreme Court granted review in September 2012.
Class Action Waivers Enforceable
The California Supreme Court affirmed the Court of Appeal’s holding that the CLS class action waiver was enforceable, agreeing that Gentry “has been abrogated by recent United States Supreme Court precedent” and, therefore, “the FAA preempts the Gentry rule.”[4] The court also rejected the National Labor Relations Board’s (NLRB’s) view that the NLRA bars class action waivers. Agreeing with the U.S. Court of Appeals for the Fifth Circuit in D.R. Horton, Inc. v. NLRB,[5] and recognizing the “liberal federal policy favoring arbitration,” the court found that neither the NLRA’s text nor its legislative history contains a “congressional command” overriding the FAA mandate, thereby siding with “all the federal circuit courts and most of the federal district courts that have considered the issue.”[6]
Court Rules That PAGA Waivers Violate Public Policy and Are Unenforceable
Overturning the Court of Appeal, the court found that the parties’ agreement not to assert representative action claims violated public policy as to PAGA and was not enforceable.[7] The court concluded that a PAGA representative action to recover civil penalties “is fundamentally a law enforcement action designed to protect the public and not to benefit private parties” and thus “a type of qui tam action.”[8] Making comparisons to the Federal False Claims Act, the court found that the right to bring a PAGA action was unwaivable because “an agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code.”[9] The court left open the question of whether or not an individual PAGA claim is permissible, but it concluded that this did not matter because “a prohibition of representative claims frustrates the PAGA’s objectives.”[10] The court therefore found that the waiver of PAGA representative claims was “contrary to public policy and unenforceable as a matter of state law.”[11]
The court then ruled that this state law is not preempted by the FAA because a PAGA claim “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[.]”[12] The court viewed the FAA as only applying to private disputes because “[t]here is no indication that the FAA was intended to govern disputes between the government in its law enforcement capacity and private individuals.”[13] The court conceded that only “an aggrieved employee” can bring a PAGA action but asserted that this “does not change the character of the litigant or the dispute.”[14] In the court’s view, PAGA representative actions, “unlike class action suits for damages, do not displace the bilateral arbitration of private disputes between employers and employees over their respective rights and obligations toward each other. Instead, they directly enforce the state’s interest in penalizing and deterring employers who violate California’s labor laws.”[15]
The court also rejected CLS’s argument that, by authorizing financially interested private citizens to prosecute claims on the...
