**UPDATE: On January 20, 2015, the U.S. Supreme Court DENIED the Petition for Writ of Certiorari in the Iskanian matter, leaving the CA Supreme Court’s controversial decision in place.**
U.S. Supreme Court precedent protecting the enforceability of arbitration agreements under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”), could soon be significantly narrowed. During its January 9, 2015, conference, the Supreme Court considered the petition for a writ of certiorari in the case CLS Transportation Los Angeles, LLC v. Iskanian, No. 14-341, which addresses the applicability of the FAA to representative suits under California’s Private Attorney General Act (“PAGA”). The California Supreme Court’s decision, which held that the FAA does not preempt California’s prohibition on waivers of certain representative actions in employment contracts, threatens to undercut the established rule that arbitration agreements are valid and enforceable.
The FAA requires that a commercial contract’s provision that claims arising under the contract be settled in arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. That provision is important in the context of enforcing arbitration agreements that waive a litigant’s ability to pursue class or other representative actions.
In the landmark case AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court applied Section 2 of the FAA to invalidate a California law restricting consumer class action waivers in arbitration agreements. In that case, consumers had brought a putative class action against AT&T, despite the fact that their cell phone contract contained an arbitration clause. The California Supreme Court held that consumers must be allowed to engage in class-wide arbitration regardless of whether the contract at issue waived the right to class litigation. The U.S. Supreme Court reversed, holding that “requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” 131 S. Ct. at 1748. The Court noted that “[t]he ‘principal purpose’ of the FAA is to ‘ensure that private arbitration agreements are enforced according to their terms.’” Id.
The California Supreme Court’s holding in Iskanian may limit the protections articulated in Concepcion, however. That case, which was decided in June of 2014, involved an employee who brought a representative suit under PAGA, which permits an employee to represent a class on behalf of the government. PAGA suits are different from other class actions, the California Supreme Court suggested, because these suits are brought “to protect the public and not to benefit private parties,” and they function as “a type of qui tam action.” Iskanian, 327 P.3d 129, 147-48 (Cal. 2014). The California Supreme Court held that an employment contract requiring an employee to waive his or her right to bring a PAGA representative action would be against public policy; thus, PAGA suits are exempt from the FAA’s general rule that arbitration agreements are enforceable as written.
This exception for employee suits as “private attorneys general” could have wide-reaching consequences if it is upheld. California’s PAGA applies in the context of employment actions, but it is easy to imagine similar laws cropping up across the United States authorizing private attorneys general to bring suits concerning any number of consumer issues, from payday loan claims to violations of the Telephone Consumer Protection Act.
If nothing else, the exception articulated in Iskanian represents an obstacle to the full enforcement of arbitration agreements under the FAA in California, so any entity regularly executing consumer contracts containing arbitration agreements should be aware of this exception.
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