On June 23, 2014, the California Supreme Court issued an opinion that further supports the enforceability of class action waivers in arbitration agreements. In Iskanian v. CLS Transportation Los Angeles, LLC, Case No. No. S204032, 2014 WL 2808963 (Cal. June 23, 2014), the California Supreme Court held that (1) state law cannot invalidate employment agreements that contain class action waivers; and (2) an employee’s right to bring a representative action as a private attorney general is unwaivable. The opinion provides additional clarity for those seeking to enforce class action waivers in arbitration agreements, even outside the employment context.
Class Action Waivers in Arbitration Clauses are Enforceable
California courts have historically opposed the inclusion of class action waivers in arbitration agreements, holding that class action arbitration waivers in consumer contracts of adhesion were unenforceable. Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). And, two years after Discover Bank, holding that certain class action waivers in employment agreements were unconscionable where those waivers would undermine an employee’s statutory rights. Gentry v. Superior Court, 42 Cal. 4th 443 (2007).
But in 2011, the United States Supreme Court overturned Discover Bank, finding that “requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011). Courts have since differed on how to apply Concepcion. Interpreted broadly, Concepcion could mean that the Federal Arbitration Act (“FAA”) preempts any attempts by states to invalidate arbitration agreements based on including class action waivers. Interpreted narrowly, Concepcion could mean only that states may not categorically prohibit the inclusion of class action waivers in arbitration agreements, but some class action waivers may be invalid as unconscionable.
At least in the employment context, litigants have continued to argue that class action waivers may be rendered unconscionable and unenforceable where they strip a litigant of statutory rights. See, e.g., Kinecta Alternative Financial Solutions, Inc. v. Superior Court, 205 Cal. App. 4th 506, 516 (2012) (citing Gentry with approval); Truly Nolen of America v. Superior Court, 208 Cal. App. 4th 487, 507 (2012).
In the Iskanian matter, the plaintiff sought to represent a class of other employees against his employer for failure to pay overtime, provide meal and rest periods, and issue complete wage statements. Iskanian contended that Concepcion permitted states to make case-by-case analyses of whether class action waivers are unconscionable. Defendant moved to dismiss based on arbitration agreements signed by the employees that prohibited employee class action claims in arbitration or otherwise. Iskanian argued that Gentry survived the Supreme Court’s preemption ruling in Concepcion, because the Gentry holding was narrower than the broad ban in Discover Bank, and the validity of class arbitration should hinge on whether arbitration will be practical to vindicate the rights of affected employees when compared to individual proceedings.
The California Supreme Court rejected this argument, finding that the United States Supreme Court had overruled Gentry, and that states may not invalidate class action waivers in employment arbitration agreements. In doing so, the court explained that class action waivers remain enforceable “even if an individual [arbitration] proceeding would be an ineffective means to prosecute certain claims.” Id. at *5. The Iskanian court further emphasized that, “even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA.” Id. at *4. The court was not convinced that Concepcion was limited only to categorical bans on class action arbitration waivers.
The Statutory Right to Bring Representative Private Attorney General Actions for Labor Violations is Unwaivable
The court, however, carved out an important exception regarding employment agreements. Iskanian argued that he could bring a representative action under the California Labor Code’s Private Attorney General Act of 2004 (“PAGA”). PAGA permits an employee to bring a civil action against an employer for Labor Code violations. Highlighting constrained government enforcement resources and the statute’s roots in public policy, the court held that an employee’s right to a PAGA action is unwaivable. The court also held that the FAA’s goal to encourage dispute resolution is not at odds with the unwaivable right of an employee to bring a PAGA action on behalf of the state, in part because the FAA focuses on providing a forum to resolve private disputes, whereas PAGA involves a state labor agency.
The Bottom Line
So what does this mean for class action waivers in arbitration agreements in California? The California Supreme Court’s opinion in Iskanian brings more certainty around the enforceability of these class action waivers. Litigants will face an uphill battle attempting to argue that such waivers should be invalidated as unconscionable.
However, unconscionability remains a viable argument against motions to compel arbitration. Those seeking to enforce class action waivers in arbitration agreements should ensure that such agreements survive scrutiny under procedural and substantive unconscionability analyses. Among other things, those drafting arbitration provisions in contracts should draw specific attention to the contract’s arbitration provision and ensure the arbitration terms are not unreasonably one-sided. They should also consider the practical ramifications of each provision of an arbitration agreement. Though provisions may seem facially neutral, they may heavily favor one side over the other when applied, supporting an argument that the arbitration agreement should be invalidated as unconscionable. If the parties may only appeal initial decisions exceeding $50,000, and only the drafter of the agreement could conceivably have a claim worth that amount, a court may find such provision as unreasonably one-sided.
The ultimate enforceability of arbitration agreements will continue to be a source of dispute in courts, but with the Iskanian holding, parties can feel more confident about the enforceability of class action waivers in arbitration agreements.
By: Anna Hsia + Daniel Lieberman
Photo by Ryan McGuire of Bells Design on Gratisography
