Including PAGA Representative Action Waivers in Arbitration Agreements Post-Iskanian

After the California Supreme Court’s recent decision in Iskanian v. CLS Transportation, which held that PAGA representative action waivers are unenforceable under California law, employers have struggled with whether to retain such waivers in their arbitration agreements.  The answer to whether such waivers should be retained is not as straightforward as one might expect.

First of all, notwithstanding Iskanian, it is not a foregone conclusion that such waivers are unenforceable. Several California Federal District Court decisions have declined to follow Iskanian and have enforced a PAGA representative action waiver. In the latest decision, Langston v. 20/20 Companies,the court explained that while the California Supreme Court’s interpretation of PAGA is controlling, but its interpretation of the Federal Arbitration Act is not – federal courts are left to interpret federal statutes like the FAA. Accordingly, the court in Langston declined to follow Iskanian’s holding that the FAA does not apply to PAGA representative action waivers. Instead, it held that the FAA preempts California’s rule prohibiting representative PAGA waivers because that rule treats arbitration agreements disfavorably. Three other federal district courts in California have also recently come to the same conclusion: Ortiz v. Hobby Lobby Stores, Chico v. Hilton Worldwide, and  Fardig v. Hobby Lobby Stores.

However, despite the trend of upholding PAGA representative action waivers in federal courts, a state court is bound to follow Iskanian’s interpretation of PAGA and the FAA. Additionally, if a California court finds inclusion of an unenforceable PAGA waiver unconscionable the court has discretion to either sever the offending provision or if it finds that the “unconscionability permeates the entire agreement,” to  find that the whole agreement is unenforceable. In that event, no part of the agreement to arbitrate will be enforced.

Thus, an employer’s prospects for enforcing a PAGA representative action waiver may depend largely on the forum in which the issue is litigated. That is, at least for now – in late September CLS Transportation filed a petition for certiorari with the United States Supreme Court arguing that Iskanian got it wrong on the FAA issue. The Supreme Court has not yet acted on the petition. Employers should consider consulting with counsel about whether and how to carefully revise their existing arbitration agreements.