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U.S. Supreme Court Declines to Hear Appeal of California Ruling that Arbitration Agreements Cannot Waive Claims Under the State’s Private Attorneys General Act

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On January 20, 2015, the U.S. Supreme Court declined to hear a challenge to a California Supreme Court ruling that employees could not, through arbitration agreements, waive representative claims under the state’s Private Attorneys General Act (PAGA). PAGA allows private citizens to step into the shoes of the government and sue for workplace violations on behalf of California’s Labor and Workforce Development Agency. Such plaintiffs can recover a share of any penalties recovered by the state. Workers can sue on behalf of themselves and other current and former employees in representative suits.

In Iskanian v. CLS Transportation Los Angeles LLC, the California Supreme Court held that arbitration agreements with mandatory class waivers are generally enforceable in light of the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, which established that the Federal Arbitration Act (FAA) preempted state laws finding such waivers unenforceable. However, in Iskanian, the California Supreme Court reasoned that agreements waiving workers’ rights to bring PAGA actions undermined the purpose of the statute and disabled a key enforcement mechanism for the state’s labor code.

The decision in Iskanian stemmed from a 2006 suit filed by former CLS Transportation limousine driver Arshavir Iskanian. Iskanian, who had signed an arbitration agreement with the company, brought a proposed wage class action under PAGA against CLS.

The California Supreme Court found that employees bringing representative claims against their employers are actually bringing those claims on behalf of the state, rather than the employees themselves. For that reason, the court found that the arbitration agreements signed by the employees did not preempt state law.

After the California Supreme Court ruled in Iskanian’s favor on June 23, 2014, CLS filed a petition for certiorari on September 22, 2014, asking the U.S. Supreme Court to review the decision. CLS argued that California’s courts and legislature had a history of ignoring the preemptive effect of the Federal Arbitration Act.

The U.S. Supreme Court’s decision to decline CLS’s petition is expected to increase the number of representative claims under PAGA and to incentivize defendants to remove such actions to federal courts. Law 360 quoted Nicholas Woodfield, Principal and General Counsel of The Employment Law Group, P.C., in a story about the implications of the Iskanian ruling:

Several federal district courts recently have refused to apply Iskanian, instead requiring the employees to arbitrate their PAGA claims, . . . As such, it is almost certain that we will see more employers trying to remove PAGA cases to federal court, as the federal courts are not bound by the California Supreme Court’s decision.

Illustrating this point, on October 17, 2014, the U.S. District Court for the Central District of California granted a defendant’s motion to compel arbitration in Langston v. 20/20 Cos. Inc., holding that the FAA preempts California’s rule against arbitration agreements in which the right to bring representative PAGA claims is waived.

However, in March 2014, the U.S. Court of Appeals for the Ninth Circuit determined that Chase Investment Services Corporation could not remove a PAGA suit to federal court. In Bauman v. Chase Investment Services Corp., the Ninth Circuit concluded that PAGA actions are not similar enough to class actions under Rule 23 of the Federal Rules of Civil Procedure to warrant removal from state court.

The California Supreme Court, on the same day it decided Iskanian, also held in Bridgestone Retail Operations LLC v. Milton Brown that representative claims under PAGA cannot be waived. Bridgestone has petitioned for certiorari as well, although the chances of the Court granting that petition now appear slim.

The state Supreme Court found that employees bringing representative claims against their employers are actually bringing those claims on behalf of the state, rather than the employees themselves. Therefore, the court found that the arbitration agreements signed by the employees did not preempt state law.

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