In June the California Supreme Court issued its much-anticipated decision in Iskanian v. CLS Transportation of Los Angeles. In its already controversial opinion, the court held that its prior decision in Gentry v. Superior Court, which had held that a class-action waiver would not be enforced if it undermined the vindication of employees’ statutory rights, could not survive the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion. The court further held that the Federal Arbitration Act (FAA) preempts a state’s refusal to enforce a class-action waiver on grounds of state public policy or unconscionability, and likewise rejected the argument that a class-action waiver is unlawful under the National Labor Relations Act (NLRA). However, the court held that the FAA does not preempt state law that prohibits waiver of an employee’s right to bring a “representative” action under California’s Private Attorneys General Act (PAGA).
Iskanian has employers, in both California and around the country, wondering what the decision means to their businesses. Although the full impact of the decision is unknown because, among other things, the case may ultimately be decided by the U.S. Supreme Court, there are many lessons employers can learn from it.
For starters, employers that currently use arbitration agreements containing class-action waivers should feel more secure that the agreements will be enforced. For those employers considering rolling out an arbitration agreement containing a class-action waiver, there has never been a better time. As Iskanian demonstrates, even states like California that have traditionally been hostile to arbitration agreements are finally accepting the reality that a state’s ability to refuse to enforce an arbitration agreement governed by the FAA is very limited.
Iskanian also puts yet another nail in the coffin of the argument that class-action waivers are a violation of the NLRA’s Section 7 right to engage in concerted activity, a position adopted by the National Labor Relations Board in D.R. Horton v. NLRB. The California Supreme Court was thought by some to be a forum where the argument might have gained some traction, but instead it became the latest court to dismiss the argument. Virtually every court that has considered the D.R. Horton argument has rejected it, including the U.S. Court of Appeals for the Fifth Circuit (which decided the appeal on the case).
While the Iskanian decision is a big victory for class-action waivers, the California Supreme Court refused to find that employees could waive their rights to bring a PAGA representative action—even when the waiver is part of an arbitration agreement governed by the FAA. It found that the FAA “does not preclude [California’s] legislature from deputizing employees to prosecute labor code violations on the state’s behalf.” Not only does the ruling mean that employers in California may see more PAGA claims from plaintiffs attempting to avoid individualized arbitration, but Iskanian also may have created a roadmap for other states to place limits on the enforceability of arbitration agreements. As the U.S. Supreme Court commented in Concepcion, the FAA was enacted in response to “a great variety of devices and formulas declaring arbitration against public policy,” and the enactment of legislation that allows private individuals to bring representative actions on behalf of the state could be the latest such device.
Yet, Iskanian may have little effect outside of California state courts. Federal courts are not bound by a state court’s interpretation of federal law and are free to disregard Iskanian’s analysis of FAA preemption of PAGA rights. In fact, several federal district courts in California have already held that PAGA claims may be waived as part of an arbitration agreement governed by the FAA.
Even in California state courts, there may still be hope for PAGA waivers. While Iskanian makes clear that mandatory predispute PAGA waivers are invalid in California, the decision may leave open the door to both postdispute and predispute PAGA waivers so long as they are not compulsory. The Iskanian opinion continuously references “compelling” or “requiring” employees to waive their right to bring a PAGA action. Thus, Iskanian may not be controlling where the employee is given the opportunity to opt out of the agreement. Indeed, in an opinion issued the same day as Iskanian, the Ninth Circuit held that an employee who is given an opportunity to opt out of an arbitration agreement is not being compelled to accept its terms.
Also, Iskanian may not prevent an employer from enforcing a PAGA waiver in relation to a dispute that has already arisen, as the opinion references waiving the right to bring a PAGA action “before any dispute arises.” Indeed, the opinion notes: “employees are free to choose whether or not to bring PAGA actions when they are aware of labor code violations.”
For those California employers that already have PAGA waivers in mandatory, predispute arbitration agreements, the risk appears to be slight. In Iskanian, the parties’ entire agreement was not invalidated simply because it contained a PAGA waiver. As a result, even if a reviewing court does not enforce a PAGA waiver, the employer should still be able to compel an employee’s individual claims to arbitration. The parties may then be forced to contemporaneously litigate or arbitrate the PAGA representative claim, or a party could attempt to stay the PAGA representative action pending the determination of the employee’s individual claims in arbitration. As a precaution, agreements containing PAGA waivers should also include severability clauses whereby reviewing courts can sever the PAGA waivers, if necessary, to enforce the remainder of the agreement.
In summary, Iskanian is a clear endorsement of class-action waivers generally. If parties are careful to utilize well-drafted agreements with reasonable terms, very few challenges to the enforcement of class-action waivers will be successful—in California or elsewhere. The future of PAGA waivers is less clear. Only time will tell whether Iskanian’s analysis will survive, or what influence it may have in federal courts, other state courts and legislatures.
Edward F. Berbarie is a shareholder and Alexa L. Woerner is an associate with Littler Mendelson, the world’s largest employment and labor law practice representing management. They coauthored an amicus curie brief to the California Supreme Court in the Iskanian case. They can be reached at firstname.lastname@example.org and email@example.com, respectively.