LawFlash

A Triple Crown for Employers: California Court of Appeal Enforces Class Action Waivers, PAGA Waivers and Refuses to Find That Class Action Waivers Violate the National Labor Relations Act

California Court of Appeals Issues Favorable Arbitration Ruling

June 22, 2012

In a decision favorable to employers, Iskanian v. CLS Transportation Los Angeles, LLC, the Second Division of the California Court of Appeal has made clear that the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S. Ct 1740 (2011) applies with equal force to employment claims. Because Concepcion was decided in the consumer context, some from the plaintiffs’ bar have insisted that arbitration claims in the employment arena should be treated differently. The Iskanian decision clearly rejects this argument: “In reiterating the general rule that arbitration agreements must be enforced according to their terms, Concepcion (which is binding authority) made no exception for employment-related disputes.” Following Concepcion, the Court of Appeal in Iskanian enforced both a class action and Labor Code Private Attorneys General Act of 2004 (“PAGA”) waiver and rejected the National Labor Relations Board’s contention that class action waivers violate the National Labor Relations Act (“NLRA”).

Background

In Iskanian, a driver employee sued his employer for labor code violations and unfair competition. He brought his claims as an individual, as a putative class representative, and in a representative capacity under PAGA. At the inception of his employment, the employee had signed an arbitration agreement that contained class action and PAGA waivers.

Class Action Waivers — Iskanian Rejects the California Supreme Court’s Decision in Gentry

The California trial court in Iskanian initially granted the employer’s motion to compel arbitration and the employee appealed. Prior to the hearing on appeal, the California Supreme Court issued its ruling in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), and the Court of Appeal sent the case back to the trial court for reconsideration. In Gentry, the California Supreme Court held that a case-by-case analysis was required to determine whether class arbitration “is likely to be a significantly more effective” means of vindicating unwaivable labor law rights and instructed courts to invalidate class arbitration waivers where it would be more effective. The employer thereafter withdrew its motion to compel arbitration. The employer, however, refiled its motion to compel arbitration following the Supreme Court’s decision in Concepcion, which was granted. The decision was appealed and the case went up to the Court of Appeals for the second time.

In Concepcion, the U.S. Supreme Court held that the FAA superseded a state law that barred class-action waivers and, in so doing, overturned the California Supreme Court’s decision in Discover Bank v. Superior Court, 26 Cal. 4th 148 (2005), which held that under certain circumstances, class action waivers in consumer contracts were unenforceable under California state law. The Supreme Court in Concepcion did not, however, address the Gentry decision.

The Court of Appeal in Iskanian ruled that under Concepcion, the FAA pre-empts (invalidates) the Gentry rule. The court focused on two parts of the Concepcion holding. First, Concepcion thoroughly rejected imposing class arbitration procedures on the employer because it never agreed to arbitrate class action claims, and, in any event, class arbitration was inconsistent with the FAA because: 1) it sacrificed the informality of arbitration, 2) required procedural formality because the rules governing class arbitration are complex like those under the Federal Rules of Civil Procedure for class litigation, and 3) greatly increased the risks to employers because of the limited ability to review arbitration decisions. Second, the court stated that the public policy rationale behind Gentry and employees’ desire to vindicate statutory rights were irrelevant as Concepcion squarely held that “states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”

NLRA Issues — Iskanian Instructs That the NLRB’s Decision in D.R. Horton Does not Preclude Class Waivers in Arbitration Agreements

In D.R. Horton, Inc. and Michael Cuda, 357 N.L.R.B. 184 (Jan. 3, 2012), the National Labor Relations Board (“NLRB”) held that a mandatory, employer-imposed agreement requiring individual arbitration (and disallowing class or collective claims) violated the NLRA because it infringed upon employees' Section 7 right to engage in concerted activity regarding their wages and working conditions. The NLRB distinguished Concepcion on the grounds that Concepcion dealt with consumer, not employment, contracts and because such class action waivers violate the NLRA, another federal law, the FAA does not automatically supersede the rule.

The Iskanian court declined to follow D.R. Horton because the NLRB went beyond interpreting the NLRA and interpreted the FAA, a statute the NLRB is not charged with interpreting. The court also noted that under CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012), a decision that came down a week after D.R. Horton, only Congressional command can override the FAA, even when federal statutory claims are at issue.

PAGA Claims — Iskanian Holds That PAGA Waivers are Enforceable

PAGA allows employees to bring claims for civil penalties on behalf of themselves and other current and former employees in a representative capacity. In 2011, the Fifth Division of the Court of Appeals held in Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011) that Concepcion did not apply to representative actions under PAGA and that PAGA waivers were unenforceable under California law. The Brown court based its decision on the fact that PAGA provides a public right for enforcement claims whereas class actions provide a private right for restitution claims.

The Iskanian court rejected these distinctions and held that Concepcion had already dealt with this issue when it stated, “When state law prohibits outright the arbitration of a particular type of claim, that analysis is straightforward: The conflicting rule is displaced by the FAA.”  Accordingly, the Court of Appeal held that it was required to follow Concepcion regardless of the fact that PAGA was designed to benefit the public and that private attorney general laws may be severely undercut by application of the FAA.

Implications for Employers

The topics at issue in Iskanian are ripe for review by the California Supreme Court. Only time will tell whether the California Supreme Court will overturn its decision in Gentry and agree with the Second Division of the Court of Appeal that Concepcion applies with equal force to employment cases. And although the California Supreme Court had an opportunity to rule on the enforceability of PAGA waivers in April, it declined certiorari in the Brown case. It may, however, decide to consider the issue in light of the split between the Second and Fifth Divisions of the Court of Appeal.

While the Iskanian decision is certainly good news for now, employers considering including class action and PAGA waivers in their arbitration agreement should contact counsel regarding the pros and cons in light of the continuing developments in the law in this area.

This alert was authored by Bingham labor and employment partner Debra Fischer, counsel Jessica Boar and summer associate Yosef Mahmood.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Fischer-Debra
Boar-Jessica
Aguilera-Jacqueline
Cooper-Jenny
Rodriques-Louis
Schwarz-Douglas
Severson-James

This article was originally published by Bingham McCutchen LLP.