In the wake of AT&T Mobility LLC v. Concepcion, the California Supreme Court granted review in three cases involving significant arbitration issues, including key questions about whether the Federal Arbitration Act preempts California law concerning the enforceability of arbitration agreements.
In Iskanian, the Second District of the California Court of Appeal had affirmed an order compelling individual arbitration in a putative class/representative action alleging, among other things, that the defendant had failed to pay overtime and provide required meal and rest breaks. For more background on the grant of review and the decision below, please see our prior blog post here.
The Chamber’s amicus brief (pdf) to the California Supreme Court explains why the court of appeal was correct.
The starting point of our argument is the U.S. Supreme Court’s decision in Concepcion, which held that the FAA prevents states from refusing to enforce arbitration agreements that require individualized proceedings. As the Supreme Court explained, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
Critical to the Supreme Court’s holding was its recognition that “class arbitration” “is not arbitration as envisioned by the FAA” and “lacks its benefits.” That is so for multiple reasons. Class arbitration “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” And because class arbitration involves the same high stakes as a judicial class action without any meaningful opportunity for judicial review, it is “hard to believe” that any company would willingly agree to it. Finally, when Congress enacted the FAA in 1925, the arbitration that it contemplated necessarily was individual arbitration. “[C]lass arbitration was not even envisioned by Congress when it passed the FAA in 1925,” as it “is a ‘relatively recent development.”’
For these reasons, as the Ninth Circuit explained in Coneff v. AT&T Corp. (pdf), Concepcion establishes “that individualized proceedings are an inherent and necessary element of arbitration.” We argue that virtually all of the Iskanian plaintiff’s arguments against arbitration fail in light of this principle. Here’s a summary of the points we make in our brief:
- The California Supreme Court’s decision in Gentry v. Superior Court—upon which Iskanian relies—cannot stand in light of Concepcion. Gentry authorized a court to refuse to enforce an arbitration agreement whenever the court determined, as a matter of California public policy, that class procedures—rather than individual arbitration—are a more desirable means of resolving an employment dispute. But that holding cannot be squared with Concepcion’s determination that, under the FAA, enforcement of an agreement to arbitrate cannot be conditioned on the availability of class procedures, no matter how much a state might desire them.
- The FAA requires rejection of the plaintiff’s contention that he is entitled to proceed in court with representative claims under California’s Private Attorney General Act (“PAGA”). We explain in detail why—just as class arbitration is not the type of arbitration that the FAA contemplates—so-called “representative” PAGA actions are also inconsistent with arbitration. PAGA is a bit of an odd duck; the statute authorizes private plaintiffs to bring actions for civil penalties, both on their own behalf and on behalf of other employees, for violations of California’s Labor Code. Any proceeds are shared, with 25 percent of the penalties going to the “aggrieved employees” and 75 percent to a state agency. Iskanian argues that this curiously structured statute allows him to avoid FAA preemption, but as we explain in the brief, Concepcion’s clear holding is not so easily evaded: the FAA preempts any state-law rule that would either prevent all arbitration of PAGA claims or that would condition enforcement of the arbitration agreement on Iskanian’s ability to pursue representative claims in arbitration.
- Iskanian is wrong in asserting that the federal National Labor Relations Act (“NLRA”)—as recently interpreted by the National Labor Relations Board (“NLRB”) in the D.R. Horton case (pdf) —precludes enforcement of his arbitration agreement. That NLRB decision may be overturned by the U.S. Court of Appeals for the Fifth Circuit; virtually all other courts to confront the question have rejected the NLRB’s conclusions, and for good reason: Decades of U.S. Supreme Court precedent—including, most recently, CompuCredit Corp. v. Greenwood—establish that the NLRA does not contain the clear, “contrary congressional command” needed to override the FAA’s mandate to enforce as written agreements to arbitrate on an individual basis.
- Iskanian also raises an argument we have seen quite frequently since Concepcion—namely, that the defendant waived its right to compel arbitration by not sufficiently raising an arbitration defense prior to the decision in Concepcion. But both federal and California cases erect a strong presumption against waiver, and that presumption cannot be overcome because, until Concepcion was decided, it was futile for businesses to seek enforcement of agreements to arbitrate on an individual basis in California in light of Gentry, Discover Bank v. Superior Court (prohibiting class waivers in consumer arbitration agreements), and their progeny.
A dozen additional amicus briefs have been filed, more or less evenly divided between the two sides of the case. The parties will respond in mid-June. In addition, the U.S. Supreme Court’s pending decision in the American Express v. Italian Colors Restaurant case is likely to prompt a round of supplemental briefing. It will likely be at least a few months before oral argument is scheduled. But this is certainly a case that employers in California—as well as other businesses that face class actions in that state—will want to watch.
In the meantime, for those who are interested, our amicus briefs in the two other cases pending before the California Supreme Court are available here: Sanchez v. Valencia Holding Co. (pdf), No. S199119; Sonic Calabasas A Inc. v. Moreno (pdf), No. S174475.