Iskanian v. CLS Transp. L.A., LLC - 59 Cal. 4th 348, 173 Cal. Rptr. 3d 289, 327 P.3d 129 (2014)

Rule:

The Federal Arbitration Act (FAA) does not prevent states through legislative or judicial rules from addressing the problems of affordability and accessibility of arbitration. But the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The rule in Gentry v. Superior Court (2007) 42 Cal.4th 443, considering whether individual arbitration is an effective dispute resolution mechanism for employees by direct comparison to the advantages of a class action, runs afoul of this latter principle. Thus, the FAA preempts the rule.

Facts:

The trial court granted an employer's motion to compel individual arbitration of a former employee's wage and hour claims and dismissed with prejudice the employee's class claims and Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.) representative claims. The arbitration agreement contained a class action and representative action waiver. After a California decision invalidated some class action waivers in employment arbitration agreements, the employer voluntarily withdrew its motion to compel arbitration, renewing the motion only after the United States Supreme Court ruled that the Federal Arbitration Act preempted state rules invalidating class waivers in arbitration agreements. The Court of Appeal affirmed.

Issue:

Did the Federal Arbitration Act (FAA) preempt a state law rule that restricted enforcement of terms in arbitration agreements?

Answer:

Yes.

Conclusion:

The Supreme Court reversed and remanded, concluding that the FAA preempted the rule in Gentry v. Superior Court and that the class action waiver was valid. Federal labor law protection of concerted activity by employees did not conflict with the FAA. The employer did not waive arbitration by pursuing litigation when case law foreclosed arbitration. However, it was contrary to public policy (Civ. Code, §§ 1668, 3513) to require employees to waive the right to bring an action for civil penalties. According to the Court, the Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698 et seq.) representative claims did not interfere with the FAA because they were qui tam actions outside the scope of 9 U.S.C. § 2. There was no separation of powers violation.