Calif. Supreme Court Enforces Part of Arbitration Agreement

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The California Supreme Court on June 23, 2014, departed from a prior decision, which had been nullified by a recent U.S. Supreme Court ruling, by finding an arbitration agreement that waived the right to bring a class-action suit was enforceable under the Federal Arbitration Act (FAA).

However, the California court also ruled that any arbitration agreement requiring workers, as a condition of employment, to give up their right to representative actions under the state’s Private Attorneys General Act (PAGA) is contrary to public policy. According to the court’s decision, the FAA cannot pre-empt state law that prohibits waivers of PAGA representative actions in employment contracts.

The California Supreme Court case (Iskanian v. CLS Transportation Los Angeles, S204032) “allows for the resolution of the vast majority of employment-related disputes on an individual basis in arbitration,” said Enzo Der Boghossian, an attorney with Proskauer in Los Angeles. “All California employers should therefore strongly consider implementing mandatory arbitration agreements with class-action waivers.”

Arbitration agreements don’t even need to include a class-action waiver, according to Steven Katz of Reed Smith in Los Angeles. He said it’s now clear that if an arbitration agreement is silent about the availability of class actions, there is no class relief. Katz remarked that class actions often aren’t in employees’ best interest anyway because they can hold a claim hostage to the outcome of the class, and mainly benefit plaintiffs’ attorneys.

Even though PAGA actions can’t be waived, Laura Reathaford, a Proskauer attorney in Los Angeles, said the claims are typically smaller in scope in class actions “because of the one-year statute of limitations associated with PAGA, as compared with the four-year statute of limitations associated with most California wage and hour class claims. Moreover, under PAGA, courts have the ability to reduce a penalty award if it finds the award is unjust, arbitrary and oppressive or confiscatory.”

Class Action Brought

Arshavir Iskanian worked as a driver for CLS Transportation from March 2004 to August 2005. In December 2004, he signed an arbitration agreement providing that any claims relating to his employment were to be submitted to binding arbitration before a neutral arbiter. The agreement also included a class and representative action waiver.

On Aug. 4, 2006, Iskanian filed a class-action suit against CLS, alleging it failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, or pay final wages in a timely manner. Attorneys for CLS filed a motion asserting that all of Iskanian’s claims were subject to binding arbitration. The trial court granted the employer’s motion.

Then the California Supreme Court decided in Gentry v. Superior Court, 42 Cal.4th 443 (2007), that class-action waivers in employment arbitration agreements are invalid under certain circumstances. Iskanian’s case was sent back to the trial court, and CLS withdrew its motion to compel arbitration. The plaintiff then filed a complaint alleging violations of the California Labor Code and an unfair competition law claim. He brought his claims as an individual and class representative seeking damages. In addition, Iskanian filed the claim in a representative capacity under PAGA seeking civil penalties, and the court then certified the class.

As Iskanian’s new claim began winding its way through the California judicial system, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which led CLS to renew its motion to compel arbitration and dismiss the class claims. In the motion, attorneys for CLS argued that the U.S. Supreme Court’s decision in Concepcion invalidated Gentry. The trial court agreed, ruled in favor of CLS, ordered the case into individual arbitration and dismissed the class claims. An appellate court affirmed the lower court’s decision.

Calif. Supreme Court Overrules Concepcion

On appeal, the California Supreme Court disagreed with Iskanian’s contention that Gentry survives Concepcion. In the Gentry decision, the court noted that if individual arbitration or litigation could not be designed to approximate the advantages of a class-action proceeding, then a class waiver is invalid.

“But Concepcion held that because class proceeding interfere with fundamental attributes of arbitration, a class waiver is not invalid even if an individual proceeding would be an ineffective means to prosecute certain claims,” the court stated.

Moreover, “Concepcion held that the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The Gentry rule runs afoul of this latter principle. We thus conclude in light of Concepcion that the FAA pre-empts the Gentry rule.”

NLRA Argument Rejected

The California Supreme Court also rejected the argument that the class-action waiver is invalid under the National Labor Relations Act (NLRA). The National Labor Relations Board (NLRB) ruled that the NLRA prohibits contracts that compel employees to waive their right to participate in class proceedings to resolve wage and hour claims (D.R. Horton Inc. & Cuda, 357 NLRB No. 184 (2012)). But the U.S. 5th Circuit Court of Appeals has refused to enforce that portion of the NLRB’s opinion (D.R. Horton Inc. v. NLRB, 737 F.3d 344 (2013)), as did the state Supreme Court.

In light of the FAA’s “liberal federal policy favoring arbitration,” the NLRA does not represent “a contrary congressional command overriding the FAA’s mandate,” the California Supreme Court decided. “This conclusion is consistent with the judgment of all the federal circuit courts and most of the federal district courts that have considered the issue.”

In addition, the court noted that the arbitration agreement in this case still allowed “a broad range of collective activity to vindicate wage claims,” including:

  •         Employees filing joint claims in arbitration.
  •         The arbitrator consolidating claims of multiple employees.
  •         The arbitrator awarding relief to a group of employees.
  •         Employees discussing their claims with one another, pooling their resources to hire a lawyer, seeking advice and litigation support from a union, soliciting support from other employees, and filing similar or coordinated individual claims.

No Waiver of PAGA Claims

The California legislature enacted PAGA in 2003 to enable aggrieved employees, acting as private attorneys general, to recover civil penalties for Labor Code violations. Under PAGA, 75 percent of civil penalty awards go to California’s Labor and Workforce Development Agency, while 25 percent goes to the plaintiffs. Part of the rationale for enacting PAGA was a lack of adequate government resources for effective enforcement of the state’s Labor Code.

“Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement,” the court stated. “PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations.”

Therefore, the court concluded that an employment agreement compelling a waiver of representative claims under PAGA is contrary to public policy and unenforceable as a matter of state law.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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