The battle between California courts and the U.S. Supreme Court over arbitration agreements wages on. Though California courts frequently make perfunctory statements about the strong public policy in favor of arbitration agreements, these statements are undercut by the many cases in which the courts appear to bend over backwards to find arbitration agreements unconscionable or otherwise unenforceable. This is particularly true where the arbitration agreements attempt to waive or limit class action or representative claims.

While the Supreme Court held in AT&T Mobility v. Concepcion.pdf (“Concepcion”), 563 U.S. __, 131 S. Ct. 1740 (2011), that a class action waiver is enforceable in the arbitration context, cynical observers believed that some courts, particularly in California, would try to find a way around its clear holding: that the scrutiny applied to arbitration agreements should be no different than the scrutiny applied to all other contracts and that an arbitration agreement must be enforced according to its terms. (We wrote about the Concepcion decision in a post on April 27.) In a divided ruling, the California Court of Appeal took its first swing at Concepcion, and held that arbitration agreements cannot be applied to claims brought under the California Private Attorney General Act of 2004 (“PAGA”).

In Brown v. Ralphs Grocery Co.pdf., the Court of Appeal considered the enforceability of an arbitration agreement that contained the following provision: “there is no right or authority for any Covered Disputes to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims ort disputes brought in a representative capacity on behalf of the general public.” The primary question presented was whether the Concepcioncase–which had invalidated another California decisional rule forbidding certain kinds of class action waivers–also preempted California law that PAGA claims cannot be subject to an arbitration agreement.

The majority acknowledged the long history of the U.S. Supreme Court overturning California law contravening enforcement of arbitration agreements (on various ground), but it concluded that “United States Supreme Court authority does not address a statute such a the PAGA.”

The Court’s basis for distinguishing PAGA claims from other employment claims was that PAGA claims are “in large part ‘for the benefit of the general public rather than the party bringing the action.'” Therefore, the Court (citing past cases) determined that PAGA waivers are contrary to California law. The Court found that making PAGA claims unarbitrable did not contradict the Federal Arbitration Act (“FAA”) because, unlike class actions which require a formal certification process and other procedural requirements, PAGA does not have any such requirements. Therefore, reasoned the Court, taking PAGA off the list of arbitrable disputes did not frustrate the FAA in the same way as the rule at issue in Concepcion.

This reasoning is more than arguably contrary to several pages of the analysis in Concepcion, which pointed to numerous problems with compelling the arbitration of class-wide claims, including the issue of absent parties and the fact that representative and class claims often involve much higher stakes for the employer than individual claims. Moreover, because of CCP section 1281.2 which grants courts the discretion refuse arbitration on all claims rather than split a case between civil court and arbitration (where a complaint alleges both arbitrable and non-arbitrable claims), a court might refuse arbitration merely because Plaintiff has alleged PAGA claims among a slew of other arbitrable claims. (Note: after Concepcion, there is a strong argument that the discretion afforded courts under CCP section 1281.2 is preempted by the FAA, but so far this issue has not been ruled on.)

In light of the Browndecision, employers should be aware that California courts will likely not send PAGA claims to arbitration. Further, a court may also find that a PAGA provision in an arbitration agreement is not severable (an issue left open in the Brown case) and therefore hold that the entire agreement is not enforceable. To that end, employers may consider revising existing arbitration agreements to make any PAGA provisions clearly severable.

The Bottom Line: California courts remain hostile to arbitration agreements that purport to limit class/representation claims despite the strongly worded Concepcion opinion. Employers will therefore need to exercise caution in this arena.

Authorship credit: Alastair Gamble