The California Supreme Court continued its ongoing reassessment of the relationship between the Federal Arbitration Act (FAA) and California’s laws and public policies. 

Issues of Federal Preemption 

In Iskanian v. CLS Transportation Los Angeles , the Court held that California may not rely on its public policies as the basis for invalidating an employee’s agreement to resolve his or her claims on an individual basis through binding arbitration.   Even if class action waivers function as exculpatory clauses by making it unlikely that employees with small-value claims will be able to effectively enforce their employment rights, class actions waivers must be given their full force and effect under the FAA.

Two years after the United States Supreme Court in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] expressly rejected the public policy grounds relied upon by the California Supreme Court in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, to invalidate a class action waiver in the consumer context, the Court in Iskanian now has expressly overruled Gentry v. Superior Court (2007) 42 Cal.4th 443.  Thus, whether a class action waiver is part of a consumer contract (Discover Bank)or part of an employer’s arbitration agreement (Iskanian), public policy arguments and, with limited exceptions, unconscionability arguments, cannot be used to challenge the waiver’s validity under the FAA.

The California Supreme Court also held that the enforcement of class action waivers under the FAA does not violate sections 7 and 8 of the National Labor Relations Act (which give employees the right to “engage in other concerted activities” for their  “mutual aid or protection”).  Given “the FAA’s liberal policy favoring arbitration,” the sections 7 and 8 of NLRA must yield, the Court explained.

The Labor Code Private Attorneys General Act is Not Subject to Waiver

With respect to representative claims under the California Private Attorney’s General Act (PAGA”), however, the Iskanian Court came to a different conclusion.  Unlike private employment disputes between one employee and one employer involving statutory damages and specific civil penalties, PAGA claims are pursued by individuals serving as a proxy or agent of the state and are used to collect penalties (primarily) on behalf of California, not damages on behalf of individuals.

Finding that PAGA lawsuits are a type of qui tam action, the California Supreme Court held that the FAA does not preempt the PAGA.  Consequently, California may enforce laws that invalidate agreements that purport to result in a waiver of an employee’s right to prosecute claims as a private attorney general under the PAGA.  The right to bring a PAGA action is unwaivable.  How PAGA can be prosecuted, whether in arbitration, in bifurcated proceedings, or otherwise, remains to be answered.

The Conversation Continues

The dialogue between the United States Supreme Court and the California Supreme Court over issues relating to the FAA, arbitration and class proceedings is fascinating and ongoing.  Will the California courts now see the dramatic increase in PAGA case filings forewarned in 2004 when the PAGA was dubbed by business groups and the defense bar as a bounty hunter’s law?  Will Iskanian survive, or will the United States Supreme Court be called upon to again evaluate the reach of the FAA in California?  The conversation continues.