The California Supreme Court’s Iskanian Opinion: Two Steps Forward, One Step Back

jenkinsGuest Commentary

by Kirk C. Jenkins, Sedgwick LLP*

On June 26, 2014, the California Supreme Court issued its long-awaited opinion in Iskanian v. CLS Transportation Los Angeles LLC. The decision was something of a mixed bag for the defense bar: two major steps forward in the California Supreme Court’s class action jurisprudence, but one step back of uncertain significance.

The plaintiff in Iskanian worked as a driver for the defendant in 2004 and 2005. Halfway through his employment, he signed an agreement providing that “any and all claims” arising out of his employment would be submitted to binding arbitration before a neutral arbitrator. The plaintiff agreed not to bring a representative action either in court or before the arbitrator.

A year after leaving his employment, the plaintiff filed a putative class action complaint, alleging failure to pay overtime, provide meal and rest breaks, reimburse business expenses and various other violations of the Labor Code. The defendant moved to compel arbitration and the trial court granted the motion. But while the matter was pending before the Court of Appeal, the California Supreme Court decided Gentry v. Superior Court, holding that most class action waivers were unenforceable in employment cases. The defendant dropped its motion to compel.

But four years later, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion, holding that the Federal Arbitration Act preempted the California Supreme Court’s Discover Bank rule invalidating class action waivers in most consumer contracts. The defendant renewed its motion to compel, the trial court granted the motion, and the Court of Appeal affirmed.

The majority opinion by Justice Goodwin Liu begins with the question of whether the Court’s decision in Gentry survived Concepcion. The answer, the majority held, was no. Although Gentry, unlike Discover Bank, seemed to mandate a case-by-case approach, the majority recognized that the U.S. Supreme Court has held that any procedure that interferes with the basic attributes of arbitration is preempted.

But even as it retreated from its previous resistance to most arbitration agreements, the Court reaffirmed a recent and potentially problematic opinion. Eight months ago, the Court held in Sonic-Calabasas A, Inc. v. Moreno that while waivers of administrative Berman hearings (a creature of California law in wage claims) were enforceable, the failure of an arbitration agreement to provide assorted other procedural protections for claimants was relevant to determining whether the arbitration clause was unconscionable. The Iskanian majority reaffirmed its dicta in Sonic-Calabasas, arguing that its dicta was not inconsistent with the FAA.

The majority joined the U.S. Court of Appeals for the Fifth Circuit in rejecting the NLRB’s holding in D.R. Horton that requiring a class action waiver as a condition of employment violates the National Labor Relations Act.

The Court then turned to what ended up being the principal setback for defense interests in its opinion: its handling of the Private Attorney General Act (PAGA). PAGA authorizes “aggrieved employees” to bring representative actions on behalf of all an employer’s employees for alleged Labor Code violations. The State receives three-quarters of any recovery and is bound by the judgment. The majority found that a PAGA claim was not a dispute between the employee and employer, but rather a dispute between the employer and the State. As such, the action was akin to a classic qui tam action. Resolving a split in the Courts of Appeal, the Court held that any agreement to waive any right to bring a representative PAGA action was contrary to public policy. The majority remanded the action for the parties to debate what should happen next: would the PAGA claim be arbitrated, should the PAGA and arbitrable claims be bifurcated, and was the plaintiff’s PAGA claim time-barred.

Justice Ming Chin and Marvin Baxter filed a concurring opinion, dissenting both from the majority’s insistence that the Sonic-Calabasas dicta survived Concepcion and much of the majority’s reasoning in concluding that PAGA claims could not be waived. The problem with the parties’ PAGA waiver, the concurring justices wrote, was not that a PAGA claim was not one arising from the employment, but rather that the waiver barred the parties from pursuing PAGA claims anywhere. Justice Kathryn Werdegar dissented, arguing that a blanket waiver of the right to bring class actions violates the NLRA.

Battles over California’s arbitration law will continue. Should the California Supreme Court’s decision survive a likely petition for certiorari, there may be an increase in PAGA filings. Nevertheless, the Court’s opinion leaves open the possibility that the Court might approve an agreement to arbitrate PAGA claims. The Court is considering Sanchez v. Valencia Holding Company, a case arising from a petition for arbitration in a car purchase contract. The Court is currently receiving supplemental briefing following the Court’s signal that it was considering making a definitive statement of California’s standard for unconscionability. The Court has granted review and held briefing in at least seven cases arising from the same contract at issue in Sanchez.

*Mr. Jenkins is a partner in the firm’s Chicago office.  He blogs at the firm’s Appellate Strategist Blog.

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