California Supreme Court Rules that Employers May Require Employees to Arbitrate Employment Disputes Rather Than Go to Court, Even if the Arbitration Agreement Contains a Class Action Waiver

On Monday, June 23, 2014, the California Supreme Court issued its decision in the closely watched case of Iskanian v. CLS Transportation Logistics Inc.  In a 4-3 opinion, the Court finally agreed that the Federal Arbitration Act ("FAA") permits employers to require that employees agree to resolve most employment disputes through arbitration, rather than by taking such claims to court.  Individual arbitration can be required, even if that employee claim is being brought as part of a class action complaint. 

In doing so, the California Supreme Court "abrogated" its earlier decision in Gentry v. Circuit City Stores, Inc. (2007) 42 Cal.4th 443.  In Gentry, the California Supreme Court essentially invalidated class action waivers in employment contracts requiring arbitration.  Now, the California Supreme Court finally has accepted the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. __ [131 S.Ct. 1740] which held that any state court ruling, statute or common law practice that “stands as an obstacle” to arbitration under the FAA, is preempted by federal law.  In Concepcion, the Supreme Court concluded that “requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” (Id., 131 S.Ct. at p. 1748.)  In ruling on Iskanian, the California Supreme Court held that under the Concepcion logic, the FAA preempts Gentry’s rule against employment class waivers.  Thus, the presence of a class action waiver no longer invalidates an arbitration agreement. 

The California Supreme Court went even further, however, and also rejected Iskanian's argument that his employer's arbitration agreement requiring that arbitrations be conducted on an individual basis (as opposed to a class claim) was an "unfair labor practice" under the National Labor Relations Act.  Iskanian's argument on this point was based on a prior decision by the National Labor Relations Board in D.R. Horton Inc. v. Cuda (2012) 357 NLRB No. 184, which had declared such arbitration contracts to be "unfair labor practices."  The Supreme Court agreed that in light of the "liberal federal policy favoring arbitration," the NLRB's restraint on arbitration set forth in D.R. Horton could not stand.

The decision, however, is not a complete win for employers.  The Supreme Court carved out a dubious distinction that still allows an employee to pursue claims under the  Private Attorney General Act (PAGA), notwithstanding the existence of an arbitration agreement.  As many employers know, PAGA is a California statute that permits individual employees to enforce certain Labor Code claims as “representatives” of all California employees.  The Supreme Court based this distinction on its view that “the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the State Labor and Workforce Development Agency.”  Only time will tell whether this "distinction" will survive.

"All in all, this is a good day for California employers," says Kronick Shareholder Rex Darrell Berry, who argued the Gentry case for Circuit City before the Supreme Court in 2007.  "The California Supreme Court finally has come into step with the vast majority of other state and federal appellate courts to consider this issue, and employers who have been worried about the enforceability of their arbitration programs will breathe easier."  California employers who do not currently have employment arbitration programs should strongly consider whether now is the time to adopt one.


If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Rex D. Berry, David W. Tyra and Laura Izon Powell | 916.321.4500