In the months since the California Supreme Court filed its landmark decision in Iskanian v. CLS Transportation Los Angeles, many analysts have characterized the decision as good news for the business community, focusing on the court’s partial retreat from its long-standing hostility to many arbitration agreements and its willingness to approve a class action waiver.
In fact, the decision is a mixed bag for business. It seems clear agreements to arbitrate between California businesses and their customers and employees will be more likely to be enforced than ever before in the months and years ahead. Certainly, waivers of the right to file class actions will become even more commonplace than they already are. But on the other hand, potentially high-dollar value claims under PAGA—the Private Attorney General Act—may well become more common. And Iskanian does little to discourage claims that arbitration agreements are unconscionable because they set up a procedure which unreasonably favors one side.
The plaintiff in Iskanian had worked for the defendant as a driver for about a year and a half. Several months into his employment, he signed an arbitration agreement covering “any and all claims” arising out of his employment. The agreement provided for reasonable discovery, a written award and judicial review. In addition, the employer agreed to pay the arbitrator’s fee and other costs unique to arbitration. The parties agreed neither the employer nor the employee would file a class or representative proceeding, either in court or in arbitration.
A year after leaving his employment, the plaintiff filed a putative class action, claiming the defendant failed to pay overtime, provide meal and rest breaks, reimburse business expenses and other alleged violations of the Labor Code. The trial court granted the defendant’s motion to compel arbitration. But while the matter was pending before the Court of Appeal, the Supreme Court filed its opinion in Gentry v. Superior Court, holding that most class action waivers in employment contracts were unenforceable. In the wake of Gentry, the defendant understandably dropped its bid to force arbitration.
The parties returned to litigation and the plaintiff filed a PAGA claim, seeking penalties on behalf of all the defendants’ employees for the purported Labor Code violations. Subsequently, the trial court certified the class action. However, in 2011, the U.S. Supreme Court filed AT&T Mobility LLC v. Concepcion, holding that the California Supreme Court’s Discover Bank rule, which invalidated many class action waivers in consumer contracts, was preempted by the Federal Arbitration Act. The defendant renewed its motion to arbitrate, arguing that Concepcion necessarily invalidated Gentry. The trial court agreed, and the Court of Appeal affirmed. Last month, in an opinion by Justice Goodwin Liu for a six-justice majority, the Supreme Court agreed with the lower courts in most respects.
The majority began with the central question: Did Gentry survive Concepcion? The answer, the majority found, was no. The plaintiffs and the various amicus briefs supporting them argued Gentry survived because, unlike Discover Bank, it didn’t adopt a per se rule against arbitration agreements. But the majority recognized that under Concepcion, any procedure which interferes with the basic attributes of arbitration—most prominently, speed and cost savings—is preempted by the Federal Arbitration Act (FAA).
But even as it receded from Gentry, the court found dicta from its 2013 Sonic-Calabasas decision was not incompatible with the FAA. There, the court had indicated the lack of certain procedural protections was a relevant factor for lower courts to consider in determining whether they should refuse to enforce arbitration agreements in employment contracts. Counsel would be well-advised to take note of the court’s warning, at least until the U.S. Supreme Court speaks again on arbitration. Writing procedural rules into an arbitration clause which seem to too heavily favor one side or the other may well imperil a later motion to enforce the clause. It seems certain that we will see further litigation about the Sonic-Calabasas dicta.
The majority next turned to a portion of the opinion which has been overlooked by many in the post-decision commentary. When the defendant re-filed its motion to compel arbitration after Concepcion, the plaintiff argued that the defendant had waived its rights by litigating the case for four years. The defendant offered the common sense response that surely declining to bring a motion to compel arbitration which had no chance of winning post-Gentry and pre-Concepcion couldn’t amount to a waiver, but the plaintiff responded that futility wasn’t a defense to waiver under state law.
Not so, the majority held. Although the court had never made the matter clear before Iskanian, futility had always been implicit in California rules on waiver. So even though a few motions to compel arbitration had succeeded after Gentry, the court held that a party could potentially avoid waiver where a motion was “highly unlikely to succeed.”
The majority finally turned to the issue of what to do about the PAGA claim. Although of course any employee can unilaterally decide not to bring a PAGA claim, the majority found that an employee could nevertheless not bargain away that right. This was so, the court held, because the state—which receives three quarters of any recovery and is bound by any judgment—is the real party in interest in a PAGA claim, and statutes intended to protect the public interest cannot be waived. Furthermore, the majority found, a ban on PAGA waivers was not preempted by the FAA. In the majority’s view, Congress had expressed no intent in enacting the FAA to bar actions which were in effect disputes between the state and a private actor, such as the common law qui tam action, so there was no basis for finding the Court’s PAGA holding preempted.
In the wake of Iskanian, an employer who doesn’t have agreements to arbitrate any disputes with its employees—including class action waivers—should reconsider its position. Because further unconscionability challenges under Sonic-Calabasas seem certain, any such agreement should be carefully reviewed by counsel.
But in the end, Iskanian may pose more questions than it answers. PAGA claims may well increase, but will the lower courts, or the legislature, try to expand that exception by arguing additional statutes and causes of action are really public interest claims where the real party in interest is the state? And with two of the Supreme Court’s seven justices being replaced in the coming months, what kind of reception would such an argument receive at the Supreme Court? Significant battles still lie ahead. The business community should be ready.
The Recorder welcomes submissions to Viewpoint. Contact James Cronin at firstname.lastname@example.org.