Yesterday, the California Supreme Court issued its muchanticipated arbitration opinion in Iskanian v. CLS Transportation of Los Angeles, an appeal which concerned the impact of AT&T Mobility LLC v. Concepcion on class action and representative action waivers in employment arbitration agreements.

The Iskanian opinion tackled several subjects but began with an analysis of Concepcion’s impact on California’s prohibition against class action waivers in wage and hour cases.  Several years ago, in Gentry v. Superior Court, the California Supreme Court concluded that class action waivers in employment agreements to arbitrate state statutory wage and hour claims could be invalidated as a matter of California public policy if individual arbitration would not as effectively vindicate the employee’s substantive state rights.  Gentry also determined that the Federal Arbitration Act (FAA) did not preempt this prohibition against class action waivers.

Iskanian now holds that, under Concepcion, the FAA “preempts Gentry’s rule against employment class waivers.”  Iskanian also holds that federal labor law does not foreclose enforcement of a class action waiver in an employment arbitration agreement.

But the Iskanian opinion concludes that, where an arbitration agreement compels the waiver of a representative claim under the Private Attorneys General Act (PAGA)—which permits employees to bring representative civil actions against their employers to recover civil penalties for certain violations of the Labor Code—this waiver is contrary to California’s public policy and therefore unenforceable.  According to the Court’s majority opinion, PAGA permits employees to recover these penalties on behalf of the state and thus, in the majority opinion’s view, the FAA does not preempt this prohibition against representative action waivers because the FAA focuses on the resolution of private disputes whereas a PAGA action is a dispute between an employer and the state.  (Justice Chin’s concurring opinion agreed that the waiver of a PAGA representative action was unenforceable but did so based on a different rationale.)

It will be interesting to see whether the case makes its way to the United States Supreme Court, and if so, whether that court rejects the Iskanian opinion’s prohibition against waivers of representative PAGA actions.  Notably, in direct conflict with the Iskanian opinion, many California federal district courts have held that waivers of a representative PAGA action are enforceable under the FAA.  Consequently, after Iskanian, motions to compel the arbitration of PAGA claims on an individual basis may now receive a far warmer reception in California’s federal district courts than they will in California’s state courts.  This conflict between state and federal courts over matters of federal preemption could potentially persuade the U.S. Supreme Court to step in and resolve the conflict.

Moreover, the bases that led Iskanian to prohibit representative action waivers are in conflict with federal law.   For example, Justice Liu’s majority opinion concludes that the FAA does not preempt this prohibition after analogizing PAGA claims to qui tam actions brought under federal laws like the False Claims Act (FCA).  But if this analogy meant to imply that parties cannot be compelled to arbitrate FCA claims, that conclusion appears to be at odds with several federal court decisions holding that FCA claims are subject to arbitration under the Federal Arbitration Act.  (See, e.g., Deck v. Miami Jacobs Business College Co. (S.D.Ohio Jan. 31, 2013) 2013 WL 394875, at pp. *6-*7.)  As one federal court has explained, “[w]hile [an] FCA action [is] necessarily ‘brought in the name of the Government,’ ” the action “still represents a claim belonging” to the non-governmental plaintiffs.  (Id. at p. *7; see also United States v. Bankers Ins. Co. (4th Cir. 2001) 245 F.3d 315, 324-325 [“Statutory civil claims are subject to the arbitration process, and the Government has demonstrated no valid basis for placing the FCA claim in a different category”].)  The majority opinion also concludes that the prohibition against representative action waivers falls outside the FAA’s coverage because, in the majority opinion’s view, PAGA claims are disputes between an employer and the state.  But, as Justice Chin’s concurring opinion explains, this premise cannot be squared with U.S. Supreme Court precedent.

[Full disclosure: Horvitz & Levy filed an amicus brief in support of the employer in Iskanian, arguing that the FAA preempts Gentry after Concepcion.]