California High Court Holds That Federal Arbitration Act Preempts Arbitration Agreements with Class Action Waivers

The California Supreme Court, in Iskanian v. CLS Transportation Los Angeles, LLC, recently overturned precedent holding that class action waivers in arbitration agreements are unenforceable in California. Citing AT&T Mobility LLC v. Concepcion et ux, California’s high court strengthened the enforceability of class action waivers in arbitration agreements by holding that the Federal Arbitration Act (FAA) preempts the state’s refusal to enforce such a waiver on grounds of public policy or unconscionability.

In Iskanian, the plaintiff filed a class action and representative complaint on behalf of himself and other employees asserting a number of wage-and-hour violations. The defendants initially moved to compel arbitration based upon a class and representative action waiver contained in the arbitration agreement executed by all employees, but the defendants withdrew their motion after the California Supreme Court decided Gentry v. Superior Court, which held that class action waivers in employment arbitration agreements are invalid under certain circumstances.

During the course of the litigation, however, the United States Supreme Court decided Concepcion, which held that arbitration agreements with mandatory class action waivers are generally enforceable, notwithstanding contrary state law. The defendants then renewed their motion to compel arbitration, which was granted and affirmed on appeal. The California Supreme Court also affirmed, finding that Concepcion had abrogated Gentry and that arbitration agreements containing class action waivers are generally enforceable. The California Supreme Court observed that Concepcion held that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA,” and explained that “states cannot require a procedure that interferes with fundamental attributes of arbitration[.]” The California Supreme Court held that, “[u]nder the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.” As such, the Court held that Iskanian’s class action claims are subject to binding arbitration on an individual basis.

Notably, the Supreme Court carved out an exception for the California Private Attorneys General Act (“PAGA”), which permits workers to sue on behalf of other current or former workers to recover penalties for violations of the California Labor Code. The Court found that “the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state‘s behalf.” As such, the Court concluded that the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.

Overall, the California Supreme Court recognized that Concepcion expands the FAA’s ability to preempt earlier decisions restricting the enforcement of mandatory arbitration provisions with class action waivers. This decision provides another example of the trend of favoring arbitration, particularly in the class action context. Stay tuned to this blog for additional developments in class action defense.