Supreme Court Refuses to Review California Supreme Court Arbitration Decision

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Broken Contract, Ended ArbitrationFor the second time, the United States Supreme Court refused to hear a challenge to the California Supreme Court’s holding that state Private Attorney General Act (“PAGA”) claims cannot be compelled to arbitration, despite language in employment arbitration agreements containing class action or representative action waivers. On June 1, 2015, the U.S. Supreme Court denied a petition for review in Bridgestone Retail Operations, LLC v. Milton Brown, et. al. (No. 14-790), letting the state Supreme Court’s decision in Iskanian v. CLS Transportation, 59 Cal. 4th 348 (2014), prohibiting the arbitration of PAGA claims, stand.

In Iskanian, the California Supreme Court reversed a lower court’s decision to compel the plaintiff employee’s PAGA claims to arbitration on an individual basis, holding that the waiver of the right to bring a representative action under PAGA is unenforceable. Under PAGA, employees can sue employers for penalties based on violations of the California Labor Code. PAGA representative claims may be brought on behalf of the PAGA representative and other similarly situated current and former aggrieved employees, allowing for a representative action similar to a class action. The employee representative acts as a proxy for the State of California. The Court found that, while class action waivers may be upheld generally, an arbitration agreement requiring an employee, as a condition of employment, to give up the right to bring a representative PAGA action is contrary to public policy and therefore unenforceable as a matter of State law. The Court reasoned that, because a PAGA claim is not a dispute between an employer and an employee arising from a contractual relationship, but rather between an employer and the State resulting from alleged violations of the California Labor Code, the Federal Arbitration Act (“FAA”) does not preempt a State law that prohibits waiver of PAGA actions in employment contracts.

After the California Supreme Court decision, the employer in Iskanian subsequently filed a petition for review to the U.S. Supreme Court, which was denied in January 2015.

The Bridgestone case had been stayed pending the California Supreme Court’s decision in Iskanian, as both cases involved employees attempting to bring representative PAGA actions against their former employers, despite having signed arbitration agreements barring class or representative action arbitration of employment claims. Bridgestone was subsequently vacated and remanded so that Iskanian could be applied.

As in Iskanian, the employer in Bridgestone similarly filed a petition for review to the U.S. Supreme Court, arguing that the California Supreme Court’s decision in Iskanian was in conflict with both the FAA and the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 563 U.S. 321 (2011), which held that the FAA preempts California state law prohibiting class action waivers in arbitration agreements. The Bridgestone plaintiffs responded that the employer’s petition for certiorari raised the same arguments regarding FAA preemption that were asserted in the Iskanian petition, and that no new issues were raised to warrant review. The U.S. Supreme Court apparently agreed, refusing to hear the Bridgestone case on review.

The U.S. Supreme Court’s denial of certiorari in Bridgestone seems to settle the issue, once and for all, that PAGA claims cannot be compelled to arbitration in California. However, there remains a divide in California federal courts over whether PAGA waivers are enforceable. Several federal district courts in California have rejected the state Supreme Court’s reasoning in Iskanian, arguing that such waivers must be upheld under the FAA. The Ninth Circuit Court of Appeals will soon issue a decision regarding the viability of PAGA waivers in federal court, leaving open the possibility that the U.S. Supreme Court will be inclined to resolve the issue in the future. But for now, employers in California will be required to litigate representative actions under PAGA in State court, and will not be able to insulate themselves from class-wide liability for PAGA claims by including class or representative action waivers in arbitration agreements.

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