PIAC’s Supreme Court Review: Epic Systems Corp. v. Lewis

By:  Ken Jensen

“[A]s matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.”  Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1619 (2018)   The Supreme Court thus continued to enforce arbitration agreements consistent with its opinion in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  There, the U.S. Supreme Court held that states are restricted from requiring, on public policy grounds, a judicial forum for the resolution of claims that the contracting parties agreed to resolve by arbitration.  Specifically, Concepcion held that, under the Federal Arbitration Act, states cannot “condition the enforceability of … arbitration agreements on the availability of classwide arbitration procedures.” Id. at 1744, 1753.  The Court overruled California’s Discover Bank v. Superior Court (2005) 36 Cal.4th 148.  The Court concluded that the FAA preempted “state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives” of “promot[ing] arbitration” and “ensur[ing] that private arbitration agreements are enforced according to their terms.” Id. at 1748, 1749 (internal quotations and alteration omitted).

Epic Systems continued this to employment contracts.  The Federal Arbitration Act requires courts to enforce arbitration agreements with class action waivers according to their terms, even in the employment context.  The National Labor Relations Act (NLRA) does not articulate a contrary policy.  Its provisions protecting collective bargaining do not implicate class actions.

The only means to attack arbitration clauses is with “generally applicable contract defenses, such as fraud, duress, or unconscionability.” Concepcion, 563 U.S., at 339, 131 S.Ct. 1740; Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1622 (2018).  The California Supreme Court has ruled that all defenses to arbitration – those created by the legislature and those judicially created – are preempted after Concepcion. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 363, 327 P.3d 129, 135 (2014).

Thus, it couldn’t be more clear: class action waivers are valid.  Arbitration waivers often go beyond waiving “class actions” to waive “all representative actions.”  This phrasing is significant because there are types of representative actions that are not class action.  Specifically, in California, under the Private Attorney General Act [PAGA], employees can recover for violations of the California Labor Code.  Typically, the remedy is penalties: seventy-five percent of the civil penalties are recoverable by the State, with the remaining amount recoverable by employees.

To this point, California has been clear that such claims are not waivable.  Iskanian, supra, 59 Cal.4th at 363. The reason given for distinguishing PAGA claims from class action waivers is that PAGA claims are brought on behalf of the State, and the State is not a party to the arbitration agreement that “waived” the claim.  Therefore, under current California law, PAGA claims are not waived and can proceed in court. 

But the issue of whether the FAA preempts PAGA claims is about a clear as mud.  We see the Supreme Court trajectory from Concepcion through the recent Epic Systems case: FAA preemption for any obstacle in the law, whether legislative or court made.  The FAA governs, not California law.  What about PAGA?  

Currently pending before the California Supreme Court is Lawson v. ZB, N.A, 413 P.3d 677 (Cal. 2018), a case which could end up before the United States Supreme Court.  In the underling case, employee Lawson alleged her employer, California Bank & Trust violated various Labor Code provisions.  Lawson filed a single cause of action under PAGA, alleging she was acting as a representative and was entitled to recover from the defendant the standard penalties imposed under section 558 subdivisions (a)(1) and (a)(2) (75% and 25%).   Importantly, she also sought particular underpaid wages owed to her and other CBT employees pursuant to Labor Code 558(a)(3).

Defendant relied on the arbitration provision in her employment agreement and filed a motion to compel the representative action to arbitration.  Defendant did not ask the trial court to order arbitration of the civil penalties portion of the claim (Sections (a)(1) and (a)(2))  Instead, defendant moved to compel the recovery of underpaid wages, arguing that plaintiff could not recover a representative action underpaid wages as specified under Labor Code (a)(3).   The Fourth District ultimately ruled that because the entire claim was based on PAGA, it could not be compelled to arbitration based on Iskanian and its progeny.  Lawson v. ZB, N.A., 18 Cal. App. 5th 705, 713–14, 227 Cal. Rptr. 3d 613, 615–17 (Ct. App. 2017), as modified (Dec. 21, 2017)  The California Supreme Court granted certiori, leaving for now the question of the scope of PAGA as it relates to arbitration an open question.

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