Iskanian Decision Yields Opinion Of Four, Plus Justice Chin, Concurring, Plus Justice Werdegar, Concurring And Dissenting
In a much-awaited decision, the California Supreme Court has ruled that a state's refusal to enforce a class action waiver on grounds of public policy or unconscionability is preempted by the Federal Arbitration Act (FAA), but that the FAA does not preempt a state law that prohibits waiver of Labor Code Private Attorneys General Act of 2004 (PAGA) representative actions in an employment contract. Iskanian v. CLS Transportation Los Angeles, LLC, No. S204032 (Sup. Ct. June 23, 2014).
Class Action Waiver
In a majority opinion penned by Justice Lui, with Chief Justice Cantil-Sakauye and Justices Corrigan and Kennard concurring, the court holds that Gentry v. Superior Court, 42 Cal.4th 443 (2007) has been abrogated by SCOTUS precedent. The Justices reject the argument that the employee class action waiver is unlawful under under the National Labor Relations Act.
PAGA Representative Action.
"in a somewhat fuzzy area regarding FAA preemption of California statutory rights to file a court action – especially in those instances where the beneficiary of the statutory right may include the public, and not just the individual who is a party to the arbitration agreement. Example: Private Attorney General Act (PAGA) employment claims.”
Not so fuzzy anymore with respect to PAGA.
The Iskanian majority explains that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.” The PAGA action is analogous to a qui tam action, brought by an individual, but benefitting the public. Furthermore, the majority concludes that a PAGA action does not frustrate the FAA’s objectives:
“Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents . . . that the employer has violated the Labor Code.”
Concurrences and Dissent.
Justice Chin agrees that Gentry is inconsistent with SCOTUS precedent interpreting the FAA, while disagreeing with some of the majority’s reasoning. He does not agree that the approach to unconsionability of a majority of the court “may ‘be' squared’ with the high court’s FAA decisions.” While agreeing the PAGA waiver is unenforceable, Justice Chin takes a different route to get there: he believes that “the conclusion that the arbitration agreement here is invalid insofar as it forbids Iskanian from asserting his statutory right under PAGA in any forum does not run afoul of the FAA.”
Justice Werdegar agrees that Iskanian’s PAGA claims are not foreclosed by his employment contract or by the FAA. But she believes that “[t]oday’s class waivers are the descendants of last century’s yellow dog contracts.” She believes that the enforcement of class waivers in employment contracts violates the employees’ rights to collective action, and thus constitutes an unfair labor practice.
BLAWG BONUS: Justice Werdegar explains that employment contracts prohibiting collective action date to the 19th century, and were first known as “ironclads,” also as “yellow-dog contracts.” Wikipedia explains:
“A yellow-dog contract . . . is an agreement between an employer and an employee in which the employee agrees, as a condition of employment, not to be a member of a labor union. In the United States, such contracts were, until the 1930s, widely used by employers to prevent the formation of unions, most often by permitting employers to take legal action against union organizers. In 1932, yellow-dog contracts were outlawed in the United States under the Norris-LaGuardia Act.”
Further note: Before the Norris-LaGuardia Act, SCOTUS declared an act banning yellow-dog contracts unconstitutional in Adair v. United States, 208 U.S. 161 (1908).