Daily Blast June 23, 2014

The California Supreme Court issued an opinion in Iskanian v. CLA Transportation Los Angeles, LLC (June 23, 2014, S204032) ___ Cal.4th ___, again addressing the issue of whether the Federal Arbitration Act (FAA) preempts a state law rule that restricts enforcement of terms in arbitration agreements. The Court analyzed: (1) whether AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S. Ct. 1740, 179 L.Ed.2d 742] (“Concepcion”) impliedly overruled Gentry v. Superior Court (2007) 42 Cal.4th 443 (“Gentry”) with respect to contractual class action waivers in the context of non-waivable labor law rights; and (2) whether Concepcion permits arbitration agreements to override the statutory right to bring representative claims under the Labor Code Private Attorneys General Act of 2004 (Lab. Code, § 2698 et seq.) (PAGA). The Court held that arbitration agreements with mandatory class action waivers are enforceable in light of Concepcion. The Court then held 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.” (Slip opn., pp. 1-2.)

Plaintiff Arshavir Iskanian (“Iskanian”) worked as a driver for defendant CLS Transportation Los Angeles, LLC (“CLS”). Iskanian signed an arbitration agreement that contained a class and representative action waiver. (Slip opn., p. 2.) Iskanian filed a class action complaint against CLS, alleging, among other things, that CLS failed to pay overtime and provide meal and rest breaks. CLS moved to compel arbitration. The trial court granted the motion and Iskanian filed a petition for writ of mandate. Shortly thereafter, the Supreme Court decided Gentry, which held that if individual arbitration or litigation cannot be designed to approximate the advantages of a class proceeding, then a class waiver is invalid. (Gentry, supra, 42 Cal.4th at pp. 463-464.) The Court of Appeal issued a writ of mandate directing the superior court to reconsider its ruling in light of Gentry. CLS then voluntarily withdrew its motion to compel arbitration, and the parties proceeded to litigate the case. (Slip opn., p. 3.) CLS then renewed its motion to compel arbitration and dismiss class claims after the United States Supreme Court issued Concepcion, which invalidated Discover Bank v. Superior Court(2005) 36 Cal.4th 148, and held that “[requiring] the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1748].) The trial court ruled in favor of CLS, ordering the case into individual arbitration and dismissing the class claims with prejudice. (Slip opn., p. 4.) The Court of Appeal affirmed. (Ibid.)

The Supreme Court reversed. (Slip opn., p. 48.) The Court first held that a state’s refusal to enforce a class action waiver on grounds of public policy or unconscionability is preempted by the FAA. The Court stated that its holding in Gentry has been abrogated by Concepcion. (Id. at p. 1.) The Court explained that “states cannot require a procedure that interferes with fundamental attributes of arbitration even if it is desirable for unrelated reasons.” (Id. at p. 7 quoting Concepcion,supra, 563 U.S. at p. __ [131 S.Ct. at p. 1753].) “Concepcion held that because class proceedings 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.” (Slip opn., p. 8, italics in original, citing Concepcion, supra, 563 U.S. at p. __ [131 S.Ct. at p. 1753].)  Additionally, “Concepcion held that the FAA . . . [prevents] states from mandating or promoting procedures incompatible with arbitration.”  The Court concluded that the Gentry rule runs afoul of this latter principle and thus the FAA preempts Gentry’s rule against employment class waivers. (Id. at pp. 8, 11.)

The Court then rejected Iskanian’s argument that the class action waiver was unlawful under the National Labor Relations Act. (Slip opn., pp. 1-2.) The court reasoned that “Concepcion makes clear that even if a rule against class waivers applies equally to arbitration and nonarbitration agreements, it nonetheless interferes with fundamental attributes of arbitration and, for that reason, disfavors arbitration in practice.” (Id. at p. 19 quoting Concepcion, supra, 563 U.S. at pp. __–__ [131 S.Ct. at pp. 1750-1752].)

In addition, the Court held that CLS did not waive its right to arbitrate by withdrawing its motion to compel arbitration after Gentry. (Slip opn., p. 22.) The Court concluded that “[the] fact that a party initially successfully moved to compel arbitration and abandoned that motion only after a change in the law made the motion highly unlikely to succeed weighs in favor of finding that the party has not waived its right to arbitrate.” (Id. at p. 25.)

Finally, the Supreme Court held that an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions was contrary to public policy and unenforceable as a matter of state law. (Slip opn., p. 36.) According to the Court, an employee’s right to bring a PAGA action in unwaivable. (Id. at p. 34.) The Court noted that “employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. . . . But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.” (Id. at p. 35.) Further, the Court concluded that the rule against PAGA waivers does not frustrate the FAA’s objectives. (Id. at pp. 36-37.) “The FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.” (Id. at p. 37, italics in original.) “There is no indication that the FAA was intended to govern disputes between the government in its law enforcement capacity and private individuals.” (Id. at p. 38.) Thus, “California’s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.” (Id. at p. 43.)

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