Today, the California Supreme Court issued its much-anticipated decision in Iskanian v. CLS Transportation Los Angeles, LLC, No. S204032 (Cal. June 23, 2014) (click here for a copy of the decision). The underlying merits involved an employment dispute regarding overtime wages and meal and rest breaks, and an arbitration agreement signed by employees prohibited the use of collective or representative actions. The plaintiff employee filed individual and putative class claims against the employer CLS, alleging violations of California labor laws and unfair business practice laws, and the plaintiff employee also brought claims in a representative capacity under California’s Labor Code Private Attorneys General Act (PAGA).
Today’s Iskanian decision held that the FAA preempts the California Supreme Court’s prior holding in Gentry. In 2007, the California Supreme Court issued its Gentry case, which invalidated class action waivers in employment arbitration agreements in some circumstances, particularly where a class waiver would interfere with the effective vindication of an employee’s rights. However, the FAA now preempts this Gentry holding. The Iskanian court’s preemption analysis relied on the U.S. Supreme Court’s decision in Concepcion, which held that the FAA preempts states from mandating procedures incompatible with fundamental attributes of arbitration, and class procedures are inconsistent with arbitration, which is supposed to involve streamlined, simple, expeditious proceedings. Because the Gentry rule would invalidate class waivers and thereby impose complex class procedures on arbitration, the FAA as construed in Concepcion preempts California’s Gentry rule.
Although the FAA preempts California’s Gentry rule, the California Supreme Court in Iskanian found that the FAA would not displace all state law, particularly, PAGA’s representative actions. The California Supreme Court found that class waiver provisions are invalid as against public policy in connection with PAGA representative actions, and the FAA would not preempt these public policy findings or prevent a PAGA representative action. Under PAGA representative actions, an employee plaintiff acts as a proxy for the state’s labor law enforcement agencies; in effect, a PAGA representative action is a dispute between an employer and a state enforcement agency. The Iskanian court reasoned that the FAA’s objectives are to provide for resolution of private disputes, not disputes involving a public agency. Thus, PAGA representative actions do not undermine, and are not preempted by, the FAA. The Iskanian court found the US Supreme Court’s 2002 decision in Waffle House to be analogous. In Waffle House, the US Supreme Court held that an arbitration agreement between an employer and employee would not bar the federal Equal Employment Opportunity Commission (EEOC) from pursuing an enforcement action since the EEOC was not a party to the arbitration agreement. Similarly, the arbitration agreement between the employer and employee in Iskanian would not bar a PAGA representative action, which is in effect a dispute between a state agency and employer.
The California Supreme Court’s decision is also interesting to me because the court examines, to a limited degree, the original intent behind the FAA. The court mentions that the literal text of the FAA seems to cover only contract disputes, but the US Supreme Court in Mitsubishi expanded the FAA to cover statutory disputes. Also, the California Supreme Court cited the FAA’s legislative history to show that the FAA was intended to cover ordinary merchant disputes, not disputes involving a government agency. I wish the California Supreme Court would have gone a step further and recognized that the FAA was never intended for employment disputes.