California Case Law Regarding Arbitration of PAGA Representative Actions

In Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, the California Supreme Court considered whether its holding in Gentry v. Superior Court (2007) 42 Cal.4th 443 survived AT&T Mobility LLC v. Concepcion (2011). The issue arose in the context of an arbitration agreement signed by plaintiff Iskanian during his employment with CLS. The agreement provided that "any and all claims" arising out of Iskanian's employment were to be submitted to binding arbitration, and contained a waiver of the right to bring class and representative actions, as follows: "'Except as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.'" (59 Cal.4th at pp. 360-361.) After he ceased working for CLS, Iskanian sued CLS for a variety of Labor Code violations, including failure to pay overtime, provide meal and rest breaks, and reimburse business expenses. (Iskanian, supra, 59 Cal.4th at p. 361.) Iskanian brought his claims as an individual and putative class representative seeking damages, and also in a representative capacity under Private Attorneys General Act of 2004 (PAGA) seeking civil penalties. CLS petitioned to compel arbitration, and the trial court granted the petition. The Court of Appeal affirmed. (Ibid.) The Supreme Court agreed with the Court of Appeal only in part. For reasons not relevant to the present appeal, the court held that California law as articulated in Gentry (i.e., that an arbitration waiver of the right to bring a class action is unenforceable as a matter of state law under some circumstances) was preempted by the FAA with regard to Iskanian's class claims. (Iskanian, supra, 59 Cal.4th at pp. 364-365.) However, it reached a different result with regard to Iskanian's PAGA claims. It explained that a PAGA representative action is a type of qui tam action because an aggrieved employee's action under PAGA "'functions as a substitute for an action brought by the government itself'" and is "'"fundamentally a law enforcement action designed to protect the public and not to benefit private parties."'" (Id. at p. 381.) Thus, an employee's right to bring a PAGA action is unwaivable: "The Legislature's purpose in enacting the PAGA was to augment the limited enforcement capability of the Labor and Workforce Development Agency (LWDA) by empowering employees to enforce the Labor Code as representatives of the LWDA. Thus, an agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code. . . . . . . The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state's interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations." (Id. at p. 383.) The court explained that the Supreme Court in Concepcion made clear that state law rules against consumer class waivers are preempted by federal law because states "cannot require a procedure that interferes with fundamental attributes of arbitration 'even if it is desirable for unrelated reasons.'" (Iskanian, supra, 59 Cal.4th at p. 364.) Thus, "under the logic of Concepcion, the FAA preempts Gentry's rule against employment class waivers." (Ibid.) The court rejected CLS's contention that the arbitration agreement did not violate public policy because it prohibited only representative claims, not individual PAGA claims. It explained: "Whether or not an individual claim is permissible under the PAGA, a prohibition of representative claims frustrates the PAGA's objectives. As one Court of Appeal has observed: 'Assuming it is authorized, a single-claimant arbitration under the PAGA for individual penalties will not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the Labor Code. That plaintiff and other employees might be able to bring individual claims for Labor Code violations in separate arbitrations does not serve the purpose of the PAGA, even if an individual claim has collateral estoppel effects. Other employees would still have to assert their claims in individual proceedings.' " (Iskanian, supra, 59 Cal.4th at p. 384.) Thus, the court concluded that where an employment agreement compels the waiver of representative claims under PAGA, it is contrary to public policy and unenforceable as a matter of state law. The court next considered whether the state law rule prohibiting waiver of representative PAGA claims was preempted by the FAA. It concluded it was not. The court explained that the FAA creates an efficient forum for the resolution of private disputes, whereas a PAGA action is a public dispute between an employer and the state LWDA. Thus, "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. It is a dispute between an employer and the state, which alleges directly or through its agents--either the LWDA or aggrieved employees--that the employer has violated the Labor Code." (Iskanian, supra, 59 Cal.4th at pp. 386-387.) The court considered finally the forum in which Iskanian's representative claims would proceed. Because it concluded that the arbitration agreement "gives us no basis to assume that the parties would prefer to resolve a representative PAGA claim through arbitration," it ordered those claims to litigation unless the parties agreed otherwise. (Iskanian, supra, 59 Cal.4th at p. 391.) The court noted that its resolution--ordering only the individual damages claims to arbitration--"raises a number of questions: (1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims? (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to Code of Civil Procedure section 1281.2? " (Iskanian, supra, 59 Cal.4th at pp. 391-392.) The parties "have not addressed these questions and may do so on remand." (Ibid.) In sum: The court held that "under the logic of Concepcion, the FAA preempts Gentry's rule against employment class waivers." (Id. at p. 364.) The court explained: "The fact that Gentry's rule against class waiver is stated more narrowly than Discover Bank's rule does not save it from FAA preemption under Concepcion. 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.' It is thus incorrect to say that the infirmity of Discover Bank was that it did not require a case-specific showing that the class waiver was exculpatory. Concepcion holds that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA." (Iskanian, supra, at p. 364, quoting Concepcion, supra, 131 S. Ct. at p. 1753.) The Supreme Court also considered whether the class action waiver was invalid under the NLRA and concluded in light of the FAA's "'liberal federal policy favoring arbitration"' (Concepcion, supra, 131 S. Ct. at p. 1745), that sections 7 and 8 of the NLRA do not represent "'"a contrary congressional command""' "overriding the FAA's mandate ." (Iskanian, 59 Cal.4th at p. 373.) The Supreme Court observed that its conclusion was "consistent with the judgment of all the federal circuit courts and most of the federal district courts that have considered the issue." (Ibid.)