Employee’s Class Action Waiver Held Enforceable

Second Quarter 2012Articles California Update

In a closely watched case, Iskanian v. CLS Transportation, 206 Cal.App.4th 949(2012), a California Court of Appeal dealt with the trifecta of questions surrounding an employee’s waiver of class and representative actions in an arbitration agreement:

  1. Is the California Supreme Court’s opinion in Gentry v. Superior Court, 42 Cal.4th 443 (2007) (barring class waivers) still good law?
  2. If so, would representative claims under the Private Attorney General Act survive?
  3. Are class action waivers barred by the protection of “concerted activity” in the National Labor Relations Act?

In a victory for employers, the three judge panel answered “no” to all three questions.

For several years class action waivers were considered unenforceable under Gentry, which was based on an earlier California Supreme Court opinion, Discover Bank v. Superior Court, that struck down arbitration agreements in consumer contracts as “unconscionable.” In April 2011, however, the U.S. Supreme Court overruled Discover Bank in its decision AT&T Mobility v. Concepcion . The high court held that Discover Bank was pre-empted by the Federal Arbitration Act (FAA), which requires that an arbitration agreement must be enforced “according to its terms.” In Iskanian, the employer argued that Gentry was also overruled because it was based entirely on Discover Bank. The trial court agreed, and the Court of Appeal affirmed.

Whither Gentry?

The court in Iskanian reasoned that one cannot read the words on the pages of the Concepcion opinion without seeing the writing on the wall. The U.S. Supreme Court’s rejection of California’s restrictions on arbitration was so broad that it sweeps away Gentry. Whatever state policy reasons “identified in Gentry for invalidating certain class action waivers are insufficient to trump the far-reaching effect of the FAA as expressed in Concepcion.”

An Exception for PAGA?

The plaintiff argued that the class action waiver was invalid with respect to the claims brought pursuant to the Private Attorneys General Act (PAGA). He argued that a PAGA representative action is different than a class action because it protects “public rights,” as one divided Court of Appeal opinion, Brown v. Ralphs Grocery Company, 197 Cal.App.4th 489 (2011), had previously held. The defense argued that the dissent in Brown was the better reasoned approach. The court in Iskanian agreed and held that “following Concepcion, the public policy reasons underpinning the PAGA do not allow a court to disregard a binding arbitration agreement.”

Protected “Concerted Activity”?

The National Labor Relations Board (NLRB), the agency that interprets federal labor law, recently held in a controversial decision that a class action waiver on its face violates an employee’s right to engage in “concerted activity” under Section 7 of the National Labor Relations Act (NLRA). The case was D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 6, 2012). The plaintiff in Iskanian urged the court to follow the NLRB and invalidate the class action waiver. The defense countered that there was no evidence in the record of Iskanian engaging in “concerted activity,” and that the class action mechanism is in fact the opposite of concerted activity because it relieves the class plaintiff of any obligation to consult with other putative members of the class. The court held that the NLRB’s interpretation was contrary to Concepcion and other U.S. Supreme Court precedent and that in any event the court was not bound by an NLRB decision.

What Now?

The Court of Appeal recently denied rehearing in Iskanian, and we expect the plaintiff to appeal the decision to the California Supreme Court. If the state high court takes the case, it could set up a showdown with the U.S. Supreme Court.