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Court of Appeal upholds class action and PAGA waiver in Employment Arbitration Agreements. Holds Concepcion invalidates Gentry

Iskanian v. CLS Transp. Los Angeles, LLC (2012) 206 Cal.App.4th 949, 142 Cal.Rptr.3d 372

Background: Plaintiff, Arshavir Iskanian, worked as a driver for defendant CLS Transportation Los Angeles, LLC (CLS). During his employment, Plaintiff signed a Proprietary Information and Arbitration Policy/Agreement” (arbitration agreement) providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator. The arbitration agreement also contained a class and representative action waiver.

In 2006, Plaintiff filed a class action complaint against CLS, alleging various wage and hourly violations. Defendant moved to compel to compel arbitration and the trial court granted its motion finding the arbitration agreement neither procedurally nor substantively unconscionable. Plaintiff appealed.

Court History: Soon after the trial court granted defendant’s motion, on August 30, 2007, California Supreme Court in Gentry v. Superior Court (2007) 42 Cal.4th 443, 165 P.3d 556 (Gentry) held that, “class arbitration waivers in employment agreements could not be enforced if court determined that class arbitration would be significantly more effective way of vindicating rights”. Subsequently, Court of Appeal issued a writ of mandate directing the superior court to reconsider its ruling in light of the Gentry decision.

Following remand, defendant voluntarily withdrew its motion to compel arbitration and parties proceeded to litigate the case. However, On April 27, 2011, the United States Supreme Court decided AT & T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 179 L.Ed.2d 742 (Concepcion) holding that, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Soon after, defendant renewed its motion to compel arbitration and dismiss the class claims, arguing that Concepcion invalidated Gentry. Trial Court found in favor Defendant and compelled arbitration of class claims. Plaintiff appealed.

Pertinent Issues addressed: The Court of Appeal, Second District, Division 2 applying Concepcion affirmed the trial court ruling enforcing the arbitration of class claims. Among other rulings, the Court of Appeal made the following key rulings:

The US Supreme Court decision in Concepcion invalidates the California Supreme Court decision in Gentry.

The Court of Appeal rejecting the Plaintiff’s argument that, the trial court should have applied Gentry to CLS’s motion stated that, “we find that the Concepcion decision conclusively invalidates the Gentry test. The Court of Appeal explained:

  • First, Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them. The Concepcion court held that nonconsensual class arbitration was inconsistent with the FAA because: (i) it “sacrifices the principal advantage of arbitration-informality-and makes the process slower, more costly, and more likely to generate procedural morass than final judgment”; (ii) it requires procedural formality since rules governing class arbitration “mimic the Federal Rules of Civil Procedure for class litigation”; and (iii) it “greatly increases risks to defendants,” since it lacks the multilevel review that exists in a judicial forum….” (Iskanian v. CLS Transp. Los Angeles, LLC (2012) 206 Cal.App.4th 949, 142 Cal.Rptr.3d 372);
  • Second, a rule like the one in Gentry- requiring courts to determine whether to impose class arbitration on parties who contractually rejected it- cannot be considered consistent with the objective of enforcing arbitration agreements according to their terms.
  • Third, in accordance with Concepcion, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” The sound policy reasons identified in Gentry for invalidating certain class waivers are insufficient to trump the far-reaching effect of the FAA, as expressed in Concepcion.

NLRB decision in D.R. Horton (2012) 357 NLRB No. 184, 2012 WL 36274, 2012 NLRB LEXIS 11 (D.R.Horton) was a not a binding authority.

The Court of Appeal rejected the Plaintiff’s reliance on D.R. Horton (2012) 357 NLRB No. 184, 2012 WL 36274, 2012 NLRB LEXIS 11 (D.R.Horton) in which the National Labor Relations Board (NLRB) found class action waivers in an arbitration agreement unenforceable. The Court of Appeal stated, “As the FAA is not a statute the NLRB is charged with interpreting, we are under no obligation to defer to the NLRB’s analysis”.

Class action and PAGA claims can be waived.  

Plaintiff argued that PAGA claims are inarbitrable and cited Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, 128 Cal.Rptr.3d 854 (Brown) in its support. In Brown, it was held by the Court of Appeal, Second District, Division 5 that the Concepcion holding does not apply to representative actions under the PAGA, and therefore a waiver of PAGA representative actions is unenforceable under California law. Rejecting plaintiff’s argument, the Court of Appeal stated as follows:

“Respectfully, we disagree with the majority’s holding in Brown. We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA. But we believe that United States Supreme Court has spoken on the issue, and we are required to follow its binding authority.” (Iskanian v. CLS Transp. Los Angeles, LLC (2012) 206 Cal.App.4th 949, 142 Cal.Rptr.3d 372)

Discussing, Southland Corp. v. Keating (1984) 465 U.S. 1 and Kilgore v. KeyBank, N.A. (9th Cir.2012) 673 F.3d 947 ) the Court of Appeal observed that, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” and “It is not possible for a state legislature to avoid preemption simply because it intends to do so.” Accordingly, the FAA preempts any attempt by a court or state legislature to insulate a particular type of claim from arbitration.

Pointers:

  • The case is a significant victory to employers who now have a Court of Appeal decision to cite** for enforcing PAGA claims arbitration. However, most likely the Supreme Court would address the conflicting opinions, until then, the case is a reminder to include PAGA and class action claims waiver in the employment arbitration agreement.

NOTE  ** The California Supreme Court has granted review for this decision on September 19, 2012, which makes this decision uncitable.