California Supreme Court Decision Expected this Summer Regarding Enforcement of Class-Action Waivers in Arbitration Agreements

June 16, 2014

In an attempt to prevent costly class-action litigation, many employers insert class-action waivers in arbitration agreements that employees sign as a condition of employment. A class-action waiver attempts to prevent an employee from filing or joining a class-action lawsuit. If an employee who signed such a waiver either files or joins a class-action lawsuit, the employer can ask the court to enforce the class-action waiver and order the employee to pursue claims in arbitration. This effectively eliminates the class action and requires the employee to bring his or her claims on an individual basis. Because of the exponential growth of damages and legal fees once a class-action lawsuit is certified, an enforceable class-action waiver is invaluable to an employer.

But despite recent decisions from the United States Supreme Court enforcing class-action waivers in arbitration agreements in cases involving consumer contracts, it is far from clear whether these waivers are enforceable in California cases involving employment contracts. Until the California Supreme Court weighs in—which is expected soon—employers must be cautious and realistic.

Two recent U.S. Supreme Court cases—AT&T Mobility LLC v. Concepcion in 2011 and American Express Co. v. Italian Colors Restaurant in 2013—suggest that the tide may be turning in favor of enforcement of class-action waivers. But the waivers in those cases were upheld under the Federal Arbitration Act (FAA), not the California Arbitration Act, and the cases arose in a consumer contract context, not an employment context. The FAA governs contractual arbitration in written contracts involving interstate or foreign commerce or maritime transactions, but not contracts for employment of transportation workers. Although these two cases are potentially good news for employers, application of these decisions may vary among employers depending upon whether their business or employees are involved in interstate commerce.

The California Supreme Court should resolve the current conflict between the California courts and the U.S. Supreme Court when it issues its decision in Iskanian v. CLS Transportation of Los Angeles, which is expected in the coming months. The California Supreme Court will decide whether California courts must follow the U.S. Supreme Court’s decision in Concepcion—by enforcing class-action waivers in arbitration agreements—or whether California courts are still bound by an earlier California Supreme Court decision, Gentry v. Superior Court. Under Gentry, California courts have refused to enforce class-action waivers in employment agreements where the employees can demonstrate that a class action would be a “significantly more effective” vehicle for enforcing their legal rights. In Iskanian, the California Supreme Court will also consider the related issue of whether arbitration agreements may override the statutory right to bring representative claims under the Labor Code’s Private Attorneys General Act of 2004 (PAGA). This eagerly anticipated decision should provide much-needed clarity to employers who rely on the enforcement of class-action waivers in arbitration agreements to limit class-action liability. Employers should stay tuned, as a decision in Iskanian is expected this summer.

In the meantime, to strengthen the enforceability of class-action waivers, and arbitration agreements generally, employers should ensure that any such waivers are explicit and should continue to review arbitration provisions with legal counsel to ensure they do not run afoul of the legal standards regarding procedural and substantive unconscionability. Employers that include class-action waivers in arbitration agreements must make sure the waiver is clear and conspicuous; includes all class, collective, or other representative action claims; and clearly states that the waiver applies not only to class actions filed in court but also to class actions brought in arbitration.