California Court of Appeals Upholds Arbitration Agreement With Class Action Waivers

By Michael S. Kun and Aaron F. Olsen

Earlier this week, the California Court of Appeals issued a ruling in Iskanian v. CLS Transportation Los Angeles, LLC that illustrates how the legal landscape in California has shifted in favor of enforcing arbitration agreements with class action waivers.   This, of course, is a welcome development for employers with operations in California, which have been besieged by class action lawsuits alleging wage-and-hour violations for the past 10+ years.

In 2006, the plaintiff in Iskanian filed a putative class action complaint against his employer alleging various California Labor Code violations.  The plaintiff had signed an arbitration agreement agreeing to arbitrate any claims arising out of his employment.  The arbitration agreement contained a class and representative action waiver in which the plaintiff agreed that he would not bring any claims as a class action or as a representative action.

In March 2007, the trial court granted the employer’s motion to compel arbitration.  However, the plaintiff appealed the decision in light of the California Supreme Court’s   decision in Gentry v. Superior Court, which held that a class action waiver provision in an arbitration agreement should not be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.” Thus, the California Court of Appeals in Iskanian ordered the trial court to reconsider its ruling.  Accordingly, the defendant withdrew its motion to compel arbitration, and the parties proceeded to litigate their case.  In October 2009, the Court granted Plaintiff’s motion to certify the case as a class action.

In April 2011, several years after the Court of Appeals had ordered the trial court to reconsider its prior order granting defendant’s motion to compel arbitration, the United States Supreme Court decided AT&T Mobility, LLC v Concepcion, which reiterated the rule that the principal purpose of the Federal Arbitration Act (“FAA”) is to ensure that arbitration agreements are enforced according to their terms and held that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  Shortly thereafter, the Iskanian defendant renewed its motion to compel arbitration and to dismiss the class claims, arguing that Concepcion  was new law that overruled Gentry.  This time, the California Court of Appeals agreed with the defendant and held that the arbitration agreement and the class and representative action waivers were effective.  Thus, the Court of Appeals upheld the trial court’s order granting the defendant’s motion to compel arbitration and dismissed the plaintiff’s class claims.

Importantly, in Iskanian, the California Court of Appeals expressly declined to follow the NLRB’s controversial decision in D.R. Horton, wherein  the NRLB held that an employers’ mandatory agreement requiring that all employment-related disputes be resolved through individual arbitration (and disallowing class or collective claims) violated the National Labor Relations Act.   In rejecting the plaintiff’s argument, the Iskanian Court noted that Concepcion made no exception for employment-related disputes.

Importantly, the Iskanian Court also held that representative claims brought under California’s Private Attorneys General Act (“PAGA”) – sometimes referred to as the “Bounty Hunter Law” or the “Sue Your Boss Law” --can be waived in arbitration agreements.  The California Court of Appeals disagreed with the opinion in Brown v. Ralphs Grocery Store, which held that Concepcion does not apply to representative actions under PAGA.  Once again, this is a welcome development as many plaintiff’s lawyers have attempted to minimize Concepcion by arguing that even if employees can waive their right to bring a class action, they cannot waive their right to bring representative actions.  However, the disagreement between the Iskanian and Brown Courts about PAGA claims seems to guarantee that the issue will have to be resolved by the California Supreme Court.