California Supreme Court on Arbitration Agreements: Class-Action Waivers OK, but PAGA Claims Unwaivable
This week, the California Supreme Court issued its highly anticipated opinion in Iskanian v. CLS Transportation Los Angeles, LLC. The decision was a partial victory for employers: the Court clarified that class-action waivers in arbitration agreements may be enforced, but it also held that employers cannot obtain the waiver of an employee’s right to bring a “representative” claim under California’s Private Attorney General Act of 2004 (PAGA).
Iskanian resolved a split amongst California courts as to whether the U.S. Supreme Court’s 2011 ruling in Concepcion v. AT&T Mobility overruled an earlier California case – Gentry v. Superior Court – that said courts could evaluate class-action waivers on a case-by-case basis. The Iskanian Court addressed whether the Federal Arbitration Act (FAA) allowed state courts to refuse to enforce arbitration agreements in order to promote important state interests, such as California’s wage-and-hour laws. The plaintiff in Iskanian argued wage claims were cost-prohibitive for an individual to bring, so class actions were needed to enforce California’s unwaivable labor rights.
The California Supreme Court concluded that the FAA trumps these state-law interests. Because the FAA mandates the enforcement of legal arbitration agreements, California labor laws cannot require procedures that are “incompatible with arbitration.” Therefore, California courts are not free to rely on public policy to reject class action waivers. The Court also rejected the argument that class action waivers violated employees’ rights to engage in “concerted activity” under National Labor Relations Act.
The case was not a total win for employers, however, as the Court determined that employees cannot waive the right to bring claims under the PAGA. Iskanian held that the FAA’s purpose is to preserve arbitration’s “efficient forum for the resolution of private suits.” PAGA “deputizes” employees so they can assert claims for civil penalties on behalf of the state of California. Since PAGA claims are not “private suits” but state enforcement claims, the Court reasoned, the FAA does not apply and an employee’s waiver of rights to pursue PAGA claims on behalf of other employees is not enforceable.
What This Means
Iskanian allows employers to include class action waivers in arbitration agreements. To be enforceable, these agreements still must comply with existing legal standards including mutuality, allocation of costs, and preservation of statutory rights to attorneys’ fees.
However, it is now established that such class action waivers cannot include a waiver of an employees’ right to bring PAGA claims. Therefore, employees with valid arbitration agreements can still seek civil penalties for Labor Code violations, and they can do so on behalf of themselves and all other allegedly aggrieved employees. As a result, employers with valid class action waivers in arbitration agreements could find themselves litigating wage claims in two separate forums.
The potential of parallel wage claims is a new wrinkle in this area. Employers should consider this along with all the other pros and cons of arbitration agreements, and ensure that their agreements do not otherwise violate California law against unconscionable contracts.
by Matthew R. Jedreski and Fred M. Plevin.
Fifth Circuit Upholds Legality of Class Action Waivers in Arbitration Agreements
Last week the Fifth Circuit Court of Appeals held that the National Labor Relations Act (NLRA) does not prohibit arbitration agreements waiving the right of employees to pursue employment claims on a class or collective basis. The court’s decision rejected last year’s ruling by the National Labor Relations Board (NLRB) that home builder D.R. Horton violated the NLRA by requiring its employees to sign such agreements. The case is D.R. Horton, Inc. v. NLRB, 5th Cir., No. 12-60031, 12/3/13.
The underlying NLRB decision invalidating class and collective action waivers was issued on January 3, 2012. The NLRB held that class actions qualify as “concerted activities for the purpose of collective bargaining or other mutual aid or protection….” The NLRB reasoned that because the NLRA protects the right of employees to engage in such “concerted activities,” D.R. Horton violated by NLRA by requiring employees to waive their right to bring class actions.
In rejecting the NLRB’s analysis, the Fifth Circuit noted that while the NLRA protects concerted activity, there is nothing in the NLRA explicitly guaranteeing the right of employees to bring class actions. Further, the court found no evidence that Congress intended the NLRA to override the Federal Arbitration Act (FAA), which generally mandates that arbitration agreements be enforced according to their terms.
Although many courts throughout the country have refused to follow the NLRB’s D.R. Horton analysis, the Fifth Circuit’s reversal of the actual D.R. Horton decision should seriously undermine the argument that the NLRA prohibits class action waivers in arbitration agreements. The NLRB may no longer follow its own D.R. Horton analysis within the Fifth Circuit (Louisiana, Mississippi and Texas), and federal courts in other circuits have already displayed disfavor towards it. The NLRB may simply abandon its D.R. Horton analysis, or it could petition the United States Supreme Court to review the Fifth Circuit’s decision. Recent United States Supreme Court decisions, including AT&T Mobility v. Concepcion, have championed the FAA’s strong policy in favor of arbitration agreements—including agreements with class action waivers—so the NLRB is unlikely to find relief there.
Although this decision seriously undermines one argument against class action waivers, there are others that remain unsettled. Employers considering whether to implement an arbitration program that includes class and collective action waivers should proceed with caution.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
2nd Circuit Upholds Class Action Waiver to Preclude Collective FLSA Claims
By: Tracey Holmes Donesky and Christina Sans
On August 9, 2013, the Second Circuit applied the Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant to hold that an employee cannot invalidate a class-action waiver in an arbitration agreement when the waiver removes the financial incentive to pursue a claim under the FLSA. The decision-Sutherland v. Ernst & Young LLP-is an important victory for employers because it confirms that the American Express holding applies to wage-and-hour claims, and held that there is no statutory “right” under the FLSA to collective action claims.
In American Express, the agreement between the credit card company and merchants included an arbitration clause, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.” The merchants brought a putative class action alleging antitrust violations, and submitted evidence that the expert analysis necessary to prove their antitrust claims would cost at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be $12,850, and under $40,000 even if trebeled.
The Supreme Court held that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” nor do such laws “evince an intention to preclude a waiver of class-action procedure.” The Court also explained that federal law does not secure a “nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23” or by invoking a class mechanism in arbitration. The merchants argued that the class waiver barred “effective vindication” of their federal statutory rights, because they had no economic incentive to pursue their claims individually. The Court recognized its prior decisions indicating that arbitration agreements could be struck down if they prevented effective vindication of statutory rights, but explained that this exception applied only when parties’ right to pursue a claim was affected. For example, the exception would apply if an agreement prohibited the assertion of certain claims, or if filing and administrative fees attached to arbitration made access to the forum impracticable. But financial impediments to proving a claim did not meet this exception.
American Express addressed antitrust claims, but the Court did suggest that its holding would apply equally to employment arbitration agreements. In reaching its decision, the Court noted that in Gilmer—a 1991 case under the Age Discrimination in Employment Act—the Court “had no qualms enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the [ADEA], expressly permitted collective actions.”
The Second Circuit followed the Supreme Court’s directive. In Sutherland, the plaintiff-employee entered into an arbitration agreement with a class-action waiver at the time of hire. She subsequently brought a putative class action against her employer under the FLSA and New York Labor Law seeking to recover unpaid overtime wages. The employer filed a motion to compel individual arbitration. The employee argued that the costs and fees associated with prosecuting her claims individually would “dwarf her potential recovery of less than $2,000.” The district court was persuaded by her arguments and denied the employer’s motion.
The Second Circuit reversed. The court determined that the FLSA does not contain a “contrary congressional command” preventing class waiver. Although the FLSA specifically authorizes collective actions, the court noted that individual class members must affirmatively opt-in, and therefore an employee has the power to waive participation as well. The court noted that the FLSA collective action provision was akin to the collective action provision of the ADEA in Gilmer, and that the Third, Fourth, Fifth, Eighth and Ninth Circuits had all previously concluded that the FLSA does not preclude the waiver of collective claims. The Second Circuit determined that the employee’s “effective vindication” argument was precluded by American Express—the fact that individual arbitration would be prohibitively expensive does not permit a court to invalidate a class waiver. The court—like other courts to have addressed the issue—refused to follow D.R. Horton, Inc., in which the National Labor Relations Board (NLRB) held that a waiver of the right to pursue FLSA claims collectively in any forum violates the National Labor Relations Act (NLRA). The Second Circuit determined it owed no deference to the D.R. Horton opinion because the opinion trenched upon a federal statute and policy unrelated to the NLRA (the FAA).
The Southerland decision reaffirms the increasing body of caselaw upholding enforceability of class waivers in employment arbitration agreements. Importantly, class waivers can be enforced even if plaintiffs can establish that their costs would greatly exceed any recovery. Of course, employers and counsel should take care when drafting arbitration agreements to ensure enforceability. For instance, agreements may not be upheld if fees or other requirements make access to the forum impracticable. In Southerland, the court noted that the applicable arbitration agreement authorized the arbitrator to award a prevailing employee attorneys’ fees, as provided by applicable law or in the interests of justice. Such balancing provisions may also help ensure enforceability.
National Labor Relations Board Decision Challenges Legality of Class Action Waivers
Last week, the National Labor Relations Board (NLRB) ruled that an arbitration agreement signed as a condition of employment, which prohibited the filing of joint, class, or collective actions in arbitration or in court, violated the National Labor Relations Act (NLRA), and thus was unenforceable. This decision casts substantial uncertainty on the viability of class action waivers in arbitration agreements between employers and employees.
In D.R. Horton, Inc. and Michael Cuda, 357 NLRB No. 184 (Jan. 3, 2012), a construction superintendent attempted to initiate a nationwide class arbitration on behalf of similarly situated superintendents, alleging that his employer was misclassifying its superintendents as exempt from overtime under the Fair Labor Standards Act. The employer sought to avoid the arbitration because the arbitration agreement between the parties barred collective claims. In response, the employee filed a claim with the NLRB alleging that the arbitration agreement violated his rights under the NLRA, which protects employees’ rights to engage in concerted action for mutual aid and protection. An administrative law judge agreed with the employer and dismissed the claim. However, the NLRB reversed the dismissal, holding that the mandatory waiver of any class actions violated the National Labor Relations Act.
The key determination underlying the NLRB’s holding was that employees’ ability to engage in collective and class actions qualifies as “concerted activity” under Section 7 of the NLRA. It was important in this case that the arbitration agreement did not simply bar class arbitration, but went so far as to prohibit class actions of any sort, in any forum. It is also important to note that even employees of non-unionized employers enjoy the protections of Section 7 of the NLRA.
By defining class actions as concerted activity, the NLRB was able to distinguish this case from recent federal case law that seems to compel the opposite result (and which was cited in the original decision to dismiss the complaint). Specifically, the NLRB went to great lengths to distinguish the United States Supreme Court’s recent decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), in which the Court ruled that a California law barring class-action waivers in arbitration agreements conflicted with the Federal Arbitration Act. (See related E-Update here.) In D.R. Horton, the NLRB declared that its ruling did not conflict with the Concepcion decision for several independent reasons. For example, the NLRB reasoned that a requirement that employees’ work-related claims must be resolved through arbitration solely on an individual basis amounts to a requirement that employees forgo a right guaranteed by the NLRA, which protects employees’ rights to “engage in… concerted activities for the purpose of collective bargaining or other mutual aid or protection….” The NLRB also opined that an arbitration agreement that violates employees’ rights under the NLRA is against public policy and therefore, unenforceable. In addition, the Board swept aside the argument that the Federal Arbitration Act permitted class waivers in arbitration agreements, by observing that the Norris-LaGuardia Act, which is the federal law that renders unenforceable any private agreement prohibiting someone from lawfully assisting in a lawsuit arising out of a labor dispute, was passed seven years after the Federal Arbitration Act.
What This Means
This decision is an unexpected and serious complication in the law regarding the enforceability of class action waivers in arbitration agreements. After Concepcion, employers felt empowered to include class action waivers in arbitration agreements. It is now an open question whether class action waivers can be enforced, and employers considering whether to implement an arbitration program including a class action waiver must do so very carefully. Several important issues still must be resolved either through judicial review of the D.R. Horton decision itself, or through continued development of these issues in other cases. Among other things, it will be important for a federal court to consider the conflict of laws issues addressed by the NLRB, and for a court to consider whether the potential violation of the National Labor Relations Act identified in this decision can be addressed by a court in response to an attempt to compel an individual arbitration, as opposed to in an unfair labor practice proceeding brought before the NLRB. Until these and other open issues are resolved, employers should proceed with caution in either seeking to enforce existing class arbitration limitations, or implementing a program involving arbitration agreements containing class action waivers.
Authored by Fred Plevin and Matthew Jedreski of Paul, Plevin, Sullivan & Connaughton LLP