June 23, 2014

Half a loaf in California's latest arbitration decision

By Deborah J. La Fetra Senior Attorney

After decades of anti-arbitration decisions reversed by the United States Supreme Court, the California Supreme Court today, in Iskanian v. CLS Transportation Los Angeles, LLC, bowed to the inevitable and acknowledged it could no longer place obstacles to the enforcement of employment contracts that require employees to arbitrate their workplace disputes.  The case arose when Arshavir Iskanian was hired as a chauffeur by CLS Transportation, a limousine company, and he signed an employment agreement to resolve all employment-related disputes in individual arbitration, with no possibility of a class or representative action.  After he left the company, Iskanian filed a class action and representative suit under the California’s Private Attorney General Act, alleging violations of the Labor Code.  The court denied CLS Transportation’s motion to compel individual arbitration.

Today, in a 4-3 opinion authored by Justice Liu, and joined by Justices Cantil-Sakauye, Corrigan and Kennard, the court accepted that the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion—which forbids any state statute or common law practice that “stands as an obstacle” to arbitration protection under the Federal Arbitration Act—abrogated the state court’s 2007 ruling in Gentry v. Superior Court that invalidated class action waivers in employment contracts requiring arbitration.  The demise of Gentry was the key point on which Pacific Legal Foundation filed its amicus brief in support of CLS Transportation.

Moreover, the court rejected the plaintiff’s claim that an employment contract requiring individual arbitration was an unfair labor practice under the National Labor Relations Act.  This claim was based on a decision by the National Labor Relations Board in D.R. Horton v. Cuda, which had declared arbitration contracts to be unfair labor practices, but that decision was subsequently reversed by the Fifth Circuit Court of Appeals, relying on Concepcion.  The Iskanian court agreed with the reasoning of the Fifth Circuit (and many other courts that have considered the issue).

However, the court held that regardless of the arbitration provision, Iskanian may invoke the Private Attorney General Act (PAGA) to bypass his employment contract and assert his claims in court.  PAGA is a 2004 statute that “deputizes” individual employees to enforce Labor Code violations and allows them to do so as “representatives” of all employees.  Monetary penalties assessed against an employer in a PAGA action are divided between the employees (who receive 25%) and the state (which receives 75%).  The court held that PAGA statutory rights are unwaivable because a waiver would “exempt” the employer “from responsibility for [its] own … violation of law” and, therefore, despite Iskanian signing a contract that forbade “representative actions,” such a waiver violates public policy and is invalid.  The court closed the circle by holding that its interpretation of PAGA does not frustrate the objections of 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.”

Justice Chin concurred in all the legal holdings of the main opinion, but parted ways with some of the majority’s reasoning.  Justice Werdegar concurred with the PAGA holdings and otherwise dissented as she would also have accepted Iskanian’s arguments to retain Gentry’s validity and that a class action waiver is an unfair labor practice.

Given the split nature of the decision—accepting both parties’ arguments in part—the court remanded the case for further proceedings, to figure out whether (1) the parties agree on a single forum for resolving the PAGA claim and the other claims; (2) if not, whether it is appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation; and (3) whether, if such bifurcation occurs, the arbitration should be stayed pending resolution of the PAGA claim.

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