The Changing Face of Employment Arbitration Agreements in California

Posted Feb 19 2015 by Matthew Schechter

Arbitration.  A simple word, but one that, in the context of employment agreements, was typically a “dirty” word in the eyes of California courts.  Indeed, for many years, state courts could be seen as openly hostile to employment arbitration agreements, finding all sorts of ways – typically as some form of procedural or substantive unconscionability – to invalidate such agreements, thereby allowing employees to proceed with claims in court before a jury.  Although the tide is changing – in large part due to two key decisions: AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 321 and Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348 – it is not wholly smooth sailing.

Conception struck the first blow when it held that the Federal Arbitration Act (FAA) preempted California law which prohibited arbitration agreements that excluded class actions, effectively invalidating Discover Bank v. Superior Court (2005) 36 Cal.4th 148.  Put another way, as a result of Conception, defendants could enforce arbitration agreements that required a plaintiff to bring a claim as an individual rather than as a class action.  While Conception did not result in a wave of arbitration agreements that suddenly were enforced, it did lead to decisions that were more arbitration friendly.  Thus, for example, in two different employment cases, appellate courts  affirmed the enforcement of “delegation clauses,” meaning that an arbitrator – not the court – would rule on any issue about the enforceability of an arbitration agreement.  Such clauses – pre-Conception – were typically voided as substantively unconscionable.

If Conception were the initial strike, the next major blow was last summer’s decision by the California Supreme Court in Iskanian.  With Discover Bank no longer good law, Iskanian did away with an extension of that decision, Gentry v. Superior Court (2007) 42 Cal.4th 443.  As applied by the lower courts, Gentry acted to invalidate class action waiver provisions in employment arbitration agreements in wage and hour cases.  With Discover Bank and Gentry now both inapplicable, employers can include class action waivers in arbitration agreements presented to employees, as California’s invalidation of such waivers is preempted by the FAA.

Iskanian, though, while acknowledging that class action arbitration waivers were now enforceable, also held that waivers of representative claims under California’s Private Attorney General Act (PAGA) remained null and void, or, at least in California courts they do.  Further complicating the arbitration question in California is a combination of federal district courts ignoring Iskanian and instead applying Conception to hold that waivers of PAGA representative actions are just as enforceable as the class action waivers, and the U.S. Supreme Court’s decision in January, 2015 not to review Iskanian, thereby leaving it as controlling law at the state level. 

What does this mean?  Well, besides a likely uptick in conflicting opinions from state and federal courts on the validity of PAGA representative waivers, it is also likely to mean parties will make every effort to forum shop. 

From an employer’s perspective, the employer will continue to include class action and representative PAGA action waivers in employment agreements.  Plaintiffs who seek to bring a representative PAGA action will, as a result, not only sue in state court – where Iskanian controls – but also make every effort to plead only state causes of action, as well as seek to defeat diversity, so as to try to prevent employers from removing the case to federal court where a waiver of any such representative action will likely be enforced. 

The question of which court will consider the waiver issue is not the only hurdle to consider.  In Montano v. The Wet Seal Retail, Inc. (2015) 232 Cal.App.4th 1214, the court held that an employment arbitration agreement which contained both a PAGA and class action waiver, as well as a non-severability clause, resulted in the invalidation of the entire arbitration clause and the denial of a motion to compel arbitration due to the inability to sever the PAGA waiver from the class action waiver.  Whether or not the same result will be reached if an arbitration agreement simply lacks a severability clause remains an open question. 

Also of interest is how state courts will handle cases where a representative PAGA action is asserted, but individual arbitrable claims are also involved.  Will the PAGA claims and others go forward in one forum, or will the different claims have to be bifurcated, with the PAGA claims proceeding in court and the individual claims moving along the arbitration track?  And, if bifurcation is selected, then there is the question of which track goes first – litigation or arbitration – and if any stay is necessary for the matter in second position. 

In the end, while Conception and Iskanian clarified some things with respect to arbitration, Iskanian’s take on PAGA waivers and the U.S. Supreme Court’s denial of review have acted to keep things muddied as to other issues.  While the U.S. Supreme Court will probably need to weigh in at some point, one may only speculate when that may be.  Until then everyone will have to wait and watch to see how the courts work through these new questions and where the law on arbitration (and PAGA claims) takes us.

 

Matthew Schechter is an attorney with McManis Faulkner whose practice focuses on employment law. His trial experience allows him to advocate effectively for his clients both in and out of the courtroom and at all stages of litigation.  For more information, please visit mcmanislaw.com.