California Justices Back Class Action Waiver But Decide a PAGA Claim Is Not Preempted

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By Lawrence E. Dubé  

June 23 — The California Supreme Court June 23 decided that its prior refusal to enforce class action waivers on grounds of public policy or unconscionability has been “abrogated” by U.S. Supreme Court decisions on the preemptive effect of the Federal Arbitration Act.

Lawyers in the long-running dispute were carefully studying the 70-page decision shortly after it was released by the court, but both sides found pluses, minuses, and some unanswered questions.

Writing for the state court, Justice Goodwin Liu said its 2007 holding in Gentry v. Superior Court was no longer viable after the U.S. Supreme Court ruled in 2011 that state law rules against such waivers are preempted by federal law if they interfere with fundamental attributes of arbitration.

Justices Tani Gorre Cantil-Sakauye, Carol A. Corrigan, and Joyce L Kennard joined in the court's opinion.

Finding a class waiver signed by Arshavir Iskanian and other employees of a limousine service was enforceable under the FAA, the state court rejected Iskanian's argument that the waiver was prohibited by the National Labor Relations Act.

However, the court held that employees of CLS Transportation Los Angeles LLC can pursue group claims for penalties against the employer under California's Private Attorneys General Act. State law precludes waivers of the right to bring PAGA actions, and Liu said a PAGA lawsuit is not a purely private dispute that would be preempted by the Federal Arbitration Act.

Complex Ruling Draws Mixed Reactions

David F. Faustman, a partner in Fox Rothschild LLP in Los Angeles who represented CLS Transportation, said the court's ruling was a “clear victory” for the employer on all of the class allegations against the firm.

Faustman said the employer is still reviewing the court's decision on Iskanian's PAGA claim and is not certain there is a “principled difference” between that claim and a class action claim the court said was precluded by the FAA.

Glenn A. Danas, senior counsel at Capstone Law APC in Los Angeles represents Iskanian. He acknowledged it was “not good” that the court allowed the employer to block class action by employees to vindicate their rights, but he said it was “very important and significant” the court allowed the PAGA claim to go forward.

California wage and hour claims under the private attorneys general statute can result in the assessment of significant penalties that sometimes exceed the back pay or damages value of an underlying labor law violation, Danas said. PAGA actions also allow awards of attorneys' fees. The lawyer said he was “very happy” with the court's ruling on the PAGA issue.

Arbitration Dispute in Wage/Hour Case

Iskanian and other employees of the Los Angeles limousine company signed an agreement that “any and all claims” arising out of his employment would be resolved through binding arbitration. The agreement contained a waiver of class claims, and bound the employee signing the agreement not to seek to represent the interests of any other person.

Finding a class waiver signed by employees was enforceable under the FAA, the state supreme court rejected the argument that the waiver was prohibited by the NLRA. However, the court held that the employees can pursue group claims for penalties against the employer under California's Private Attorneys General Act.

In August 2006, Iskanian filed a state court lawsuit against CLS, alleging that it violated the California Labor Code by failing to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, and pay employees' final wages in a timely manner.

CLS moved to compel arbitration, and in March 2007 a state trial court granted the motion, finding Iskanian's arbitration agreement with the employer was not unconscionable. Iskanian appealed, and the California Court of Appeal remanded the case for further consideration after the state supreme court held in Gentry v. Superior Court, 42 Cal. 4th 443, 13 WH Cases2d 722 (Cal. 2007), that a class action waiver could be unconscionable under state law.

The U.S. Supreme Court in April 2011 decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 79 USLW 4279 (2011), finding that a California rule of law classifying most waivers of classwide arbitration in consumer contracts as unconscionable was preempted by the FAA and therefore unenforceable.

Concepcion overturned Discover Bank v. Superior Court, 36 Cal. 4th 148 (Cal. 2005), which had permitted some class waivers to be invalidated on state law grounds of unconscionability.

The state appeals court eventually held that Gentry was not consistent with “the far-reaching effect of the FAA, as expressed in Concepcion,” and ruled CLS's class action waiver was enforceable.

Iskanian sought review in the state supreme court, and the justices agreed to hear the case.

FAA Preempts Gentry Rule

Liu wrote that in Gentry, the court held that a class action waiver may be unenforceable and that courts evaluating such waivers under California law should consider “the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members' right to overtime pay through individual arbitration.”

Iskanian argued that Gentry was still viable after Concepcion, but the California justices rejected the contention by a 6-1 vote.

“The high court in Concepcion made clear that even if a state law rule against consumer class waivers were limited to ‘class proceedings [that] are necessary to prosecute small-dollar claims that might otherwise slip through the legal system,' it would still be preempted because states cannot require a procedure that interferes with fundamental attributes of arbitration ‘even if it is desirable for unrelated reasons,' ” Liu wrote.

“Under the logic of Concepcion,” the state supreme court found, “the FAA preempts Gentry's rule against employment class waivers.”

NLRB's Horton Ruling Not Persuasive

The court was not persuaded by Iskanian's argument, supported by some amicus briefs to the court, that the class action waiver was invalid under the NLRA.

The National Labor Relations Board decided in D.R. Horton Inc., 357 N.L.R.B. No. 184, 192 LRRM 1137 (2012), that an employer interfered with the federal labor law right of employees to engage in concerted activity for their mutual aid or protection, and therefore committed an unfair labor practice under the NLRA, by maintaining a mandatory arbitration agreement that waived the rights of employees to participate in class or collective actions.

However, the U.S. Court of Appeals for the Fifth Circuit denied enforcement of the board's Horton order (737 F.3d 344, 197 LRRM 2637 (5th Cir. 2013)), and the California Supreme Court agreed with the Fifth Circuit's position.

“As the Fifth Circuit explained,” Liu wrote, “neither the NLRA's text nor its legislative history contains a congressional command” prohibiting the enforcement of class action waivers consistent with the FAA.

PAGA Claim Held Not Preempted

However, the justices found that claims by CLS employees under the state's Private Attorneys General Act raised different issues and required a different ruling.

Under PAGA, the court said, an employee may bring an action personally and on behalf of current and former employees to recover civil penalties for violations of the state Labor Code. Of the penalties, the court said, 75 percent goes to the Labor and Workforce Development Agency, while employee plaintiffs can receive specified penalties. “A PAGA representative action is therefore a type of qui tam action,” the court wrote.

Under state law, Liu wrote, “an employee's right to bring a PAGA action is unwaivable,” and “an employment agreement [that] compels the waiver of representative claims under the PAGA … is contrary to public policy and unenforceable as a matter of state law.”

The court found that California's rule against PAGA waivers is not inconsistent with the Federal Arbitration Act because “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.”

Citing the text and legislative history of the FAA, Liu said it is focused on private disputes. He found that nothing in the legislation or the U.S. Supreme Court's interpretation of the FAA suggested the federal statute preempts a state law proceeding like California's that provides for payments to a state agency.

“Simply put,” Liu wrote, “a PAGA claim lies outside the FAA's coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship.”

The court said there were a number of unresolved issues about the PAGA claim, including procedures and a dispute about whether claims on behalf of about 200 CLS employees and former employees are time-barred. The court remanded the case for further proceedings.

Two Justices Take Narrower PAGA View

Justice Ming W. Chin, joined by Justice Marvin R. Baxter, wrote a concurring opinion. Chin said he disagreed with the majority's view that PAGA claims fall “outside” the coverage of the FAA. Calling it a “novel theory, devoid of case law support,” he said it was not necessary to take such an approach.

“[T]here is case law support—from the high court itself—for the conclusion that the arbitration agreement here is unenforceable because it purports to preclude Iskanian from bringing a PAGA action in any forum,” Chin wrote. He said he would agree on that basis that the PAGA was not preempted by the FAA.

One Dissenting Vote on Class Action Waiver

Justice Kathryn Mickle Werdegar wrote a separate concurring and dissenting opinion. Werdegar joined with the court on the PAGA claim, but wrote that she would reverse the appeals court and revive Iskanian's class action claim.

Agreeing with the NLRB that a prohibition on class and collective actions interferes with the statutory right of employees to engage in group action, the dissent said CLS's argument “rests on the notion that the FAA should be interpreted to operate as a super-statute, limiting the application of both past and future enactments in every particular.”

Asserting that the text and legislative history of federal labor statutes “show no such deference” to the FAA, Werdegar wrote “[t]he right of collective action they codify need not yield.”

Glenn A. Danas, Ryan H. Wu, Raul Perez, and Katherine Ward Kehr of Capstone Law APC in Los Angeles, along with Scott L. Nelson in Washington, represented Iskanian. David F. Faustman, Yesenia M. Gallegos, and Ruwani N. Munaweera of Fox Rothschild LLP in Los Angeles represented CLS.

To contact the reporter on this story: Lawrence E. Dubé in Washington at ldube@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://op.bna.com/dlrcases.nsf/r?Open=ldue-9lcp2w.