In Iskanian v. CLS Transportation, ___ Cal.4th ___  (June 23, 2014), the California Supreme Court reversed the ruling of the Los Angeles County Superior Court (Judge Hess), and subsequent affirmation by the California Court of Appeal that an employee’s representative action under California’s Private Attorneys General Act, Cal. Lab. Code, § 2968 et seq. (“PAGA”), can be waived through an arbitration agreement.

Plaintiff was a driver for defendant employer who, after he became employed, signed an agreement providing that any claims arising out of his employment would be submitted to binding arbitration. The arbitration agreement also contained a provision that Plaintiff would not assert any class or representative action claims, and would not seek to represent the interests of any other person, against defendant. Nevertheless, roughly a year after his employment ended, plaintiff filed a class action complaint on behalf of himself and other employees in which he asserted that defendant failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, and pay final wages in a timely manner.

The trial court granted defendant’s subsequent motion to compel arbitration but after the California Supreme Court’s decision in Gentry v. Superior Court, 42 Cal.4th 443 (2007), the Court of Appeal issued a writ of mandate directing the superior court to reconsider its ruling.  On remand, defendant voluntarily withdrew its motion to compel arbitration, and the parties proceeded to litigate the case. During that action, plaintiff filed a consolidated first amended complaint in which he re-asserted his class claims but also brought them in a representative capacity under PAGA.  The trial court subsequently granted plaintiff’s motion for class certification.

But then the United States Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011), which invalidated the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) (restricting consumer class action waivers in arbitration agreements). Soon after, defendant renewed its motion to compel arbitration and dismiss the class claims, arguing that Concepcion also invalidated Gentry. The trial court once again ruled in favor of defendant, ordering the case into individual arbitration and dismissing the class claims with prejudice. The Court of Appeal affirmed, concluding that Concepcion did, indeed, invalidate Gentry. The appellate court also concluded that the Federal Arbitration Act (“FAA”) precludes states from withdrawing claims from arbitration and that PAGA claims must be argued individually, not in a representative action, according to the terms of the arbitration agreement. Finally, the court upheld the trial court‘s finding that CLS had not waived its right to compel arbitration. Plaintiff appealed.

The California Supreme Court agreed, finding that Concepcion did, in fact, preempt Gentry. The court also determined that the National Labor Relations Board’s decision in D.R. Horton Inc. & Cuda, 357 NLRB No. 184 (2012) (holding that that the National Labor Relations Act generally prohibits class action waivers of wage claims) did not apply. The court further rejected plaintiff’s argument that defendant had waived its right to arbitrate when it withdrew its motion to compel, as the pretrial proceedings did not result in any cognizable prejudice to plaintiff. Thus, plaintiff’s class claims were waived.

The court disagreed, however, that plaintiff’s PAGA claims were waived, as “ . . . an employee‘s right to bring a PAGA action is unwaivable.” Thus, “an employment agreement [that] compels the waiver of representative claims under the PAGA, . . . is contrary to public policy and unenforceable as a matter of state law.”  Further, the court disagreed that the PAGA claims were preempted by the FAA: “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 — either the Labor and Workforce Development Agency or aggrieved employees — that the employer has violated the Labor Code.” Indeed, “the FAA aims to promote arbitration of claims belonging to the private parties to an arbitration agreement. It does not aim to promote arbitration of claims belonging to a government agency, and that is no less true when such a claim is brought by a statutorily designated proxy for the agency as when the claim is brought by the agency itself. The fundamental character of the claim as a public enforcement action is the same in both instances. We conclude that California‘s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency‘s interest in enforcing the Labor Code, does not interfere with the FAA‘s goal of promoting arbitration as a forum for private dispute resolution.”