Over the past five or six years, we have looked at a string of major case law developments at both the state and federal levels concerning class arbitration and the enforceability of arbitration agreements in the consumer and employment context where those agreements include provisions limiting employees and consumers to individual arbitration of their claims and waivers of class action rights. What we have seen thus far is the U.S. Supreme Court taking a fairly firm stand in favor of enforcing arbitration agreements, even those waiving class action rights or limiting the parties to individual arbitration of claims, and the California Supreme Court issuing what some have called “pro-employee” and “pro-consumer” decisions by limiting the scope of arbitration to exclude PAGA claims^[1] and denying enforcement to arbitration agreements whose provisions include waivers of a consumer’s right to seek public injunctive relief on the grounds that such provisions are against California public policy and have nothing to do with arbitration at all.^[2]

In 2010, the United States Supreme Court said that consent to class arbitration may not be “read into” agreements covered by the Federal Arbitration Act because requiring class arbitration on a nonconsensual basis would interfere with the Congressional intent behind the Federal Arbitration Act (FAA). Stolt-Nielsen v. Animal Feeds Int’l Corp. (2010) 130 S.Ct. 1262 (2010). If an arbitration agreement is silent on whether a class arbitration can be brought under its terms, and there is no evidence that the parties intended to include class actions in the agreement, then a party may not be compelled under the FAA to submit to class arbitration.

In 2011, the Supreme Court expanded on the Stolt-Nielsen decision and held that the FAA’s overarching purpose is to “ensure the enforcement of arbitration agreements according to their terms.” AT & T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). The arbitration agreement in that case included a class-action waiver in a consumer contract that required the parties to arbitrate only in their “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The arbitration agreement also prohibited the arbitrator from consolidating the claims of more than one person, or from presiding over any form of representative class proceeding. In the lower court proceedings before both the district court and the Ninth Circuit, defendant’s motion to compel individual arbitration and stay the class action proceedings was denied based on application of the “Discover Bank Rule” announced by the California Supreme Court in 2005: namely, that when a class action waiver is included in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, such waivers are unconscionable as a matter of law, making the arbitration agreement unenforceable. See, Discover Bank v. Superior Court, 36 Cal. 4th 148, 162 (2005). The Supreme Court reversed the Ninth Circuit, finding that because it “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress (citation), California’s Discover Bank rule is preempted by the FAA.” 131 S.Ct. 1753.

The majority of federal appeals and district court decisions have followed Concepcion. See, e.g., Cruz v. Cingular Wireless LLC, 648 F.3d 1205 (11th Cir. 2011) (the FAA preempts a remedial consumer statute on the same grounds that it preempts the Discover Bank rule); Litman v. Cellco Partnership, 655 F.3d 225 (3rd Cir. 2011) (New Jersey law requiring the availability of class wide arbitration “creates a scheme inconsistent with the FAA” and therefore the district court properly enforced the class arbitration waiver by compelling individual arbitration); Green v. Super Shuttle Int’l, Inc., 653 F.3d 766 (8th Cir. 2011) (in a class action alleging violations of Minnesota’s overtime law, the court held that the Concepcion decision foreclosed a state law challenge to the enforcement of class action waivers).

Up until 2014, there was uncertainty in California with regard to the enforceability of class action waivers in general and with regard to the application of such waiver provisions to “representative actions” brought under California’s Private Attorney General Act (“PAGA”). In Brown v. Ralph’s Grocery, Inc., 197 Cal. App. 4th 489 (2011), the Second District Court of Appeal held that Concepcion did not apply to PAGA claims and suggested that the four-factor test established by Gentry v. Superior Court, 42 Cal. 4th 443 (2007) governed that determination.^[3] That being said, the Brown majority did not reach the issue regarding the invalidity of the class action waiver because it found that the plaintiff had failed to satisfy Gentry’s four-factor test. On the flip side, several California federal courts have held that Concepcion overruled Gentry. See, Steele v. American Mortg. Management Servs., 2012 WL 5349511 (E.D.Cal. Oct. 26, 2012); Sanders v. Swift Transp. Co. of Ariz., LLC, 834 F.2d 1033 (N.D.Cal. 2012); Lewis v. UBS Fin. Servs, 818 F.2d 1161 (N.D.Cal. 2011); Valle v. Lowe’s HIW, Inc., 2011 WL 3667441 (N.D.Cal. Aug. 22, 2011); Murphy v. DIRETV, Inc., 2011 WL 3319574 (C.D.Cal. Aug. 2, 2011). And at least two California federal courts have questioned the Brown court’s holding that the right to bring a PAGA claim cannot be waived in an arbitration agreement. See, Quevedo v. Macy’s, Inc., 798 F.Supp. 2d 1122 (C.D.Cal. 2011); Grabowski v. C.H. Robinson Co., 817 F.Supp. 2d 1159 (S.D.Cal. 2011).

In 2014, the California Supreme Court revisited the viability of Gentry after Concepcion and held that it is no longer good law, thereby eliminating the ability of California courts to invalidate class action waiver provisions contained in employment agreements on what amounted to “public policy” grounds in the labor setting. Iskanian v. CLS Transp. Los Angeles LLC, 59 Cal. 4th 348 (2014). While the demise of Gentry and Discover Bank is a boon to employers wishing to avoid class actions by including class action waivers in their arbitration provisions of their employment agreements, the California Supreme Court specifically held in Iskanian that waivers of PAGA claims are not enforceable. While one would think that forbidding the enforcement of PAGA claim waivers would, like prohibiting class action waivers, run up against FAA preemption, the California Supreme Court said otherwise:

“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.”

59 Cal. 4th at 386-387.

CLS Transportation petitioned for review by the United States Supreme Court with respect to the determination that PAGA claim waivers remained enforceable in light of the FAA and the holding in Concepcion. The legal community expected that certiorari would be granted because, in the months after Iskanian, several federal district courts in California issued decisions rejecting Iskanian.^[4] In essence, these decisions found that while California is entitled to interpret California statutes, such as PAGA, such decisions are not binding on federal courts who, likewise, have jurisdiction to interpret and apply state law. While federal courts typically defer to state supreme court decisions interpreting state laws, that is not what is going on in these decisions. Both state and federal courts were determining whether PAGA is preempted by the FAA (determined by Southland to be substantive law), and both were necessarily interpreting federal law to do so. This has resulted in an unusual split of authority because the California Supreme Court is not required to give deference to the federal court decisions, nor are the federal courts required to give deference to the California Supreme Court decision. It was thus a surprise when, on January 20, 2015, the Supreme Court denied certiorari to decide this issue. It was an even greater surprise when, a few months later, the Ninth Circuit issued a reported decision following the rule announced by the California Supreme Court in Iskanian: namely, that PAGA waivers included in arbitration clauses contained in employment agreements are unenforceable. See, Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425 (9th Cir. 2015). Before this decision, the federal district courts were disinclined to follow Iskanian and instead were applying Concepcion.