Navigating the shoals of California law on arbitration agreements has been exceedingly difficult. The California Supreme Court has maintained a long tradition of general antipathy to mandatory arbitration, and has been particularly hostile to arbitration agreements that limit a plaintiff’s ability to pursue a class action. For example, Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), invalidated class action arbitration waivers contained in consumer contracts, and Gentry v. Superior Court, 42 Cal. 4th 443 (2007), set forth a stringent test for determining whether class action waivers should be upheld in the employment context.
So does that mean not to bother with class action waivers in California? That remains unclear. The U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act (FAA) preempts any state law that burdens the right of the parties to agree to arbitrate. Concepcion overruled Discover Bank, but did not specifically address Gentry. Whether Gentry was also overruled by Concepcion is one of the issues currently before the California Supreme Court in the Iskanian case, discussed below.
This year, the California high court spoke again on the subject of enforcement of arbitration agreements. In Sonic-Calabasas A, Inc. v. Moreno (No. S17445, Oct. 17, 2013), the high court reminded us that, even after Concepcion, arbitration clauses may be invalidated if they are unconscionable, and suggested that the same facts a court might have cited before to argue that state public policy invalidates an arbitration agreement might still be cited to argue that the agreement is unconscionable, without running afoul of the FAA. (Sonic-Calabasas and its shadow-boxing with Concepcion is discussed in more detail here.)
Have state courts clarified the issue? Nope. The California Court of Appeal has hopped on the confusion bandwagon by issuing inconsistent rulings concerning the arbitrability of representative claims brought under the Labor Code Private Attorneys General Act (“PAGA”). In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), a Court of Appeal ruled that PAGA claims are not subject to arbitration, in that the FAA governs only private arbitration, while PAGA claims are brought on behalf of state labor law enforcement agencies, with the plaintiff acting as the state’s “proxy or agent.” But then in Iskanian v. CLS Transportation Los Angeles, 206 Cal. App. 4th 949 (2012), review granted, another division of the Court of Appeal held that the FAA, as interpreted Concepcion, does apply to representative PAGA claims, and preempts any state law rule that would invalidate an otherwise valid arbitration agreement. Unfortunately for employers, the California Supreme Court has granted review in Iskanian, but has declined to review Brown.
My head hurts and I’m back to square one with no enforceable class action waiver, right? Don’t toss that waiver in the trash just yet. One California Court of Appeal, not content to wait for the California Supreme Court’s ruling in Iskanian, has tackled the PAGA question itself in Goss v. Ross Stores (No. A133895, October 31, 2013). In this (unfortunately) unpublished opinion, the court held that Concepcion does indeed apply to representative PAGA claims, and overturned the trial court’s holding that such a waiver was unenforceable under Brown. In doing so, the Goss court rejected Brown’s reasoning as being incompatible with Concepcion. The Goss court also decided that the plaintiff’s claims for injunctive relief under the California Unfair Competition law were likewise subject to arbitration. In doing so, the Goss court rejected the trial court’s reliance on Cruz v. PacificCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (holding UCL claims not arbitrable because they were brought to prevent harm to the public), asserting that Cruz was invalidated by Concepcion, as recognized in Nelson v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115 (2012).
Goss, though unpublished, signals that the very muddy tide is turning in favor of employers in regard to enforcement of class action arbitration waivers. While the California Supreme Court continues to push back against Concepcion, and may do so again when it releases its decision in Iskanian, it has been forced to do so on narrower and narrower grounds.
Workplace Solutions: Class action waivers in the employment arena remain potentially viable, although obstacles to clear sailing remain (including the unresolved issues raised by the NLRB in the D.R. Horton case, 357 NLRB No. 184). Under the guidance of the U.S. Supreme Court, one can look forward to the day when properly crafted arbitration agreements containing class action waivers will be generally enforceable in California. In the meantime, employers utilizing mandatory arbitration agreements should consult with their counsel regularly to ensure these agreements are up to date and reflect the latest developments in the law.