Wednesday, July 2, 2014

Gentry Falls, But PAGA Waivers Are Still Void

Iskanian v. CLS Transp., No. S204032 (Cal., as modified, June 26, 2014)

This is yet another arbitration preemption decision in the wake of AT&T v. Concepcion, 563 U.S. 321 (2011). The California Supreme Court holds that its prior opinion in Gentry v. Superior Court, 42 Cal. 4th 443 (2007)—which says class action waivers in employment agreements are generally unenforceable—is preempted under the FAA. But the court goes on to decide that the FAA does not preempt state law that prohibits waiver of representative actions under the Labor Code Private Attorney General Act.

The case essentially presents four issues: (1) Does Concepcion kill off Gentry; (2) do class action waivers in employment agreements violate the National Labor Relations Act; (3) did defendants waive their right to compel arbitration when they moved to compel at the outset of the case, withdrew their request when Gentry published, but then four years later, renewed their request when Concepcion called Gentry into doubt; and (4) are plaintiffs’ PAGA claims arbitrable. According to the opinion of the court written by Justice Liu, joined by the Chief Justice, Justice Corrigan, and recently retired Justice Kennard, sitting by designation: Yes, no, no, and no.

The first issue is pretty easy. Concepcion said that the FAA preempted the Cal. Supremes’ Discover Bank holding that class action waivers in consumer agreements are unconscionable. Given that, it’s not much of a shock that Gentry’s holding roughly the same thing about class action waivers in employment agreements was similarly doomed. Plaintiffs try to cobble together some arguments to the contrary. But most of them essentially boil down to complaints that Concepcion is unfair and doesn’t make sense. The California Supreme Court, however, is not in much of a position to do anything about that.

Perhaps the most interesting part of this discussion is the Court’s distinguishing of its recent decision in Sonic Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013) (“Sonic II”), which distinguished Concepcion. The court explains that the whole point of Sonic II is that when state law provides legal protections that are not fundamentally inconsistent with arbitration—such as, in Sonic II, so-called Berman protections for wage claims—an arbitration agreement’s failure to preserve those protections can be considered in deciding whether the agreement is substantively unconscionable. But that rule does not apply when the relevant procedures are fundamentally inconsistent with arbitration, such as the class action protections afforded by Discover Bank and Gentry.  As Justice Liu reads Concepcion, when state law protections, even substantive-ish ones, are inconsistent with arbitration, any rule that they can’t be waived is preempted under the FAA as an obstacle to arbitration. (Justice Chin’s concurrence, joined by soon-to-be-retired Justice Baxter, takes issue with this part of the discussion and reiterates that, for the reasons in his Sonic II dissent, that case was wrongly decided.)

The second argument is interesting. It’s based on a 2012 NLRB opinion that essentially compares class action waivers in employment agreements to yellow dog contracts that once required employees to waive their right to form unions. According the NLRB, forcing employees to forfeit their rights to act collectively, including by collectively litigating, violates the NLRA and the Norris-LaGuardia Act. Since contracts violating these provisions are void, that falls within the FAA’s savings clause Because the Norris-LaGuardia Act was enacted seven years after the FAA, and included a provision that any “acts and parts of acts in conflict with the provisions of this chapter are repealed” the inconsistency resulted in an implied repeal of the FAA, at least as applied to class action waivers in employment contracts.

Unfortunately for the NLRB, and plaintiffs, the NLRB decision was overturned by the Fifth Circuit Court of Appeals, whose reasoning the court largely adopts here. A bar on class actions in the NLRA is much like a bar on class actions in Discover Bank—it’s an arbitration-burdening obstacle to the FAA, and thus not a “grounds as exist at law or in equity for the revocation of any contract.” Thus, the only way the NLRA bars class action waivers is if it implicitly repeals the FAA. The court is reluctant to find an as-applied implied repeal, particularly when the subject of the repeal is a practice—class actions—that did not really exist at the time either the NLRA or the FAA was enacted. Further, the U.S. Supreme Court has declined to find that references several other statutory schemes to class action-type procedures—such as the Age Discrimination and Employment Act and the Fair Labor Standard Act—rendered claims under those schemes immune from arbitration.

(Justice Werdegar dissents on this point. She doesn’t find the 5th Circuit opinion convincing, and agrees with the NLRB.)

As to the waiver, defendants where in the process of litigating the arbitrability of the plaintiff’s claims in the court of appeal when Gentry came down. Seeing the writing on the wall, they stopped. But when Concepcion was decided, they renewed their efforts to kick the case into arbitration. The ensuing years were mostly spent fighting about class cert. Plaintiffs argue that all of the time spent fighting in court waiver defendants right to compel arbitration. But the court doesn’t agree. Clearly unjustified or unreasonable delay can waive arbitration. But delay based on temporary futility is neither unreasonable nor unjustified. The court thus endorses “futility as grounds for delaying arbitration” as a defense to waiver. And since defendants did not voluntarily avail themselves of any material procedural aspects of litigation that are not available in arbitrations, defendants did not waive their right to arbitrate.

Finally, the court addressed the PAGA issue. PAGA provides for a qui tam-like procedure where a plaintiff can stand in the shoes of the state to sue his employer for violations of labor law, including violations that affected other employees at the same company. A PAGA case seeks civil fines. Seventy-five percent of recovered fines go to the state, 25 percent to the plaintiff.
The parties agreed that plaintiffs’ PAGA claims were “representative” actions, and were thus barred by the class action waiver in the arbitration agreement. Reviewing a number of provisions in the Civil and Labor Codes, the court concludes that PAGA claims can’t be waived, since they are, in many ways, claims brought on behalf of the state. So, as far as state law goes, waivers of the right to bring PAGA representative actions are unenforceable.

The question, then, is that rule preempted by the FAA under Concepcion. The court says no, because it finds the FAA inapplicable to PAGA claims. The FAA addresses claims that arise out of contractual arrangements between the parties. PAGA claims, on the other hand, concern relations between employers and the State of California.  Relying on EEOC v. Waffle House, Inc., 534 U.S. 279 (2002), which held that an employee’s arbitration agreement did not preclude the EEOC from bringing claims on behalf of the employee, since the EECO is not a party to that agreement. The court finds that the fact that the state’s interests are being represented by the employee in a qui tam capacity does not alter that arrangement. Nothing in the FAA suggests that Congress intended to place limits on the ability of states to deputize their citizens to assert the state’s police power. (The opinion goes on to find that PAGA is not a violation of the separation of powers.)

Justice Chin, joined by Justice Baxter concurs in this part of the opinion without joining it. He agrees that the waiver of representative claims can’t be enforced as to the PAGA. But his reasoning is somewhat different, because he thinks that the Court’s analysis won’t square with Concepcion. If I read it correctly, is point is essentially that (1) all PAGA claims are representative; (2) by barring representative actions in the arbitration, the agreement bars arbitrating PAGA claims; (3) because the contract waives the right to bring substantive claims (as opposed to just a procedural benefit like the ability to bring class actions) it is unenforceable as against public policy. Since a contract that bars bringing PAGA claims in any forum is generally a grounds to make any contract unenforceable, it falls within the savings clause in 9 U.S.C. § 2, which preserves general state law defenses like fraud, duress, and unconscionablity. As Justice Chin explains, under this analysis, had the arbitration agreement preserved plaintiff’s right to bring representative PAGA claims in the arbitration, it could have been enforced.

Reversed and remanded.

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