Yesterday, the California Supreme Court at least partially retreated from a long-standing reluctance to enforce many business arbitration agreements. In an opinion by Justice Goodwin Liu, a 6-1 court affirmed in most respects the decision of the Court of Appeal in Iskanian v. CLS Transportation Los Angeles LLC, including on the crucial point of class action waivers. The Court reversed only with respect to the enforceability of complete waivers of statutory actions under the Private Attorneys General Act (“PAGA”). Our pre-argument previews of Iskanian, reviewing the voluminous briefing by the parties and amici as well as the facts and lower court decisions, are here, here, here, here and here.
The plaintiff in Iskanian worked as a driver for the defendant for nearly a year and a half in 2004 and 2005. Halfway through his employment, he signed an agreement providing that “any and all claims” arising out of his employment were to be submitted binding arbitration before a neutral arbitrator. The arbitration provisions themselves were quite reasonable, providing for discovery, a written reward and judicial review of the award. The employer agreed to pay all costs unique to arbitration. Finally, the agreement included a blanket waiver of class and representative actions, regardless of the forum.
A year after leaving his employment, the plaintiff filed a class action complaint against the defendant in court, alleging failure to pay overtime, provide meal and rest breaks, reimburse business expenses, and various other alleged violations of the Labor Code. The defendant promptly moved to compel arbitration, and the trial court granted the motion.
But while the defendant’s petition was pending before the Court of Appeal, the Supreme Court handed down Gentry v. Superior Court, which held that class action waivers in employment contracts were in most cases unenforceable. The Court of Appeal directed the superior court to reconsider its ruling in light of Gentry, and the defendant acknowledged that it couldn’t prevail under the Gentry test by dropping its motion to compel arbitration.
Four years later, the United States Supreme Court issued 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 immediately renewed its motion to compel arbitration. The plaintiff insisted that Gentry survived Concepcion, but the trial court granted the motion to compel, and the Court of Appeal affirmed.
The majority opinion begins by determining the central question of whether Gentry survived Concepcion. The answer, the Court found, was no. The plaintiff had argued that Gentry was materially different from Discover Bank in that Discover Bank had barred almost all class action waivers, whether or not they disadvantaged consumers, while Gentry mandated a case-by-case approach. The majority held that it didn’t matter, noting the Supreme Court’s holding in Concepcion that states can’t require a procedure that interferes with the basic attributes of arbitration, even if it seems desirable for other reasons. The court noted, however, that it was not receding from dicta in its 2013 decision in Sonic-Calabas, which noted that states were free to hold employee arbitration provisions unconscionable where they failed to provide for certain procedural protections.
The majority then turned to the plaintiff’s claim that requiring class action waivers as a condition of employment violated the National Labor Relations Act, which protects collective action by employees. The National Labor Relations Board had so held in 2012 in D.R. Horton, but the Fifth Circuit rejected the Board’s holding the following year. The California Supreme Court rejected Horton as well.
The Board had held that class action waivers were permissible under the FAA’s savings clause, which allows defenses which are equally applicable to litigation and arbitration contracts. The Court disagreed, noting that the Supreme Court had clearly said in Concepcion that class action waivers interfere with fundamental attributes of arbitration and are therefore inconsistent with the FAA, even where they do not discriminate against arbitration contracts on their face. Nor was the Court impressed by the argument that the NLRA was enacted after the FAA, so it should prevail in any conflict between the statutes. The NLRA was enacted many years before the advent of modern class action practice, the majority pointed out, so it was difficult to argue that it had much to say about a civil procedure that largely hadn’t been invented yet.
Next the Court turned to a portion of the opinion which many observers will likely overlook, but which is likely to have considerable import in a variety of cases moving forward. The plaintiff had argued that the defendant had waived its right to arbitration by litigating for roughly four years between Gentry and Concepcion. The defendant responded that any petition for arbitration was futile in the wake of Gentry, but the plaintiff responded that futility had never been adopted as part of California’s standard for waiver. However, “futility as grounds for delaying arbitration is implicit in the general waiver principles we have endorsed,” the majority found. Even though a scattered few motions to compel arbitration had succeeded after Gentry, the Court found that a party could potentially avoid waiver where a motion was “highly unlikely to succeed.”
Finally, the Court addressed the PAGA issue. PAGA had been enacted, the Court found, in response to a governmental problem: too few tax resources chasing too many Labor Code violations. Even though only “aggrieved employees” could bring representative PAGA actions, the Court found that the State – which receives three quarters of any recovery and is bound by any judgment – is the real party in interest. As such, the Court analogized PAGA actions to the classic qui tam cause of action. Against that background, the Court held that the right to bring a PAGA action could not be waived, given that at least two provisions of California law expressly bar waiving the advantage of laws intended to protect the public interest.
Nor was a ban on PAGA waivers preempted by the FAA, the majority found. This was so, according to the Court, because a PAGA claim was not a dispute between an employer and an employee arising out of their contractual relationship – it was a dispute between the employer and the State arising out of alleged Labor Code violations. Nothing in the FAA suggested that Congress intended to foreclose qui tam actions, a cause of action reaching back to the dawn of the republic, long before the FAA.
The majority opinion concludes with the question of what comes next. The plaintiff wanted to litigate everything in court, the defendant wanted to arbitrate all individual claims and bar PAGA claims altogether. Neither had gotten everything they wanted. There was no real basis in the agreement to decide whether the parties would prefer to litigate or arbitrate the PAGA claim. So the majority punted the remaining issues back to the Court of Appeal, and ultimately in all likelihood the trial court: (1) Can the parties agree on a PAGA forum; (2) Should the claims be bifurcated; (3) If so, should the arbitration be stayed pending litigation of the PAGA claim in court; (4) Are the plaintiff’s PAGA claims time-barred, or did the defendant waive that claim?
The concurring opinion by Justice Ming Chin, joined by retiring Justice Marvin Baxter, is of interest as well. Justice Chin concurs with the majority’s result in all respects, but disputes the reasoning in a couple of ways. First – having dissented in Sonic-Calabasas – he disputes the view that its unconscionability standard can be reconciled with U.S. Supreme Court law on arbitration. Second, although he agrees that the PAGA waiver cannot stand, he disputes most aspects of the majority’s reasoning. Justice Chin rejects the notion that a PAGA claim isn’t a dispute between employer and employee. He describes as “novel” the theory that PAGA claims are actually disputes between the employer and the State, and suggests a far simpler reason for striking the PAGA waiver. The waiver was invalid, he writes, because it purported to give up the right to pursue a PAGA claim anywhere. The United States Supreme Court has noted that global waivers of statutory rights may still be invalidated without running afoul of the FAA. Nor does Justice Chin entirely agree with the idea that the FAA has no impact at all on quasi-qui tam actions.
Justice Kathryn Werdegar wrote a lone dissent. Although she agreed that the plaintiff’s PAGA waiver was unenforceable, she argued that the class action waiver was unlawful as well. Justice Werdegar analogized waivers of class actions in employment contracts to nineteenth century style “yellow dog contracts” barring collective action by employees. Such contracts had been illegal for “eight decades,” Justice Werdegar wrote, and there was no basis for holding that the FAA had changed that: since class action waivers were banned across the board, regardless of the type of contract they appeared in, they fit within the FAA’s savings clause authorizing defenses which “exist at law or in equity for the revocation of any contract.”
The lessons of Iskanian seem relatively clear. Employers have a powerful new tool to persuade lower courts, some of which have been resistant to arbitration even while Iskanian was pending, to enforce arbitration agreements even where they include class action waivers. Although an agreement to waive PAGA rights in all forums will not be enforced, it seems that an agreement to arbitrate PAGA claims would be upheld by the Court. And finally, although preserving a party’s rights early and often is nearly always the best course (and waiver disputes are always highly fact-driven), California appears to have adopted the common-sense view that parties may not necessarily be obligated to bring a motion with virtually no chance of prevailing simply in order to preserve the defense.