Co-authored by Christina F. Jackson and Julie G. Yap

While employers have been waiting patiently for the California Supreme Court’s decision regarding the enforceability of class and representative action waivers in arbitration agreements, last week, a California federal court jumped into the fray and held that state law rules are powerless against the broad preemptive power of the Federal Arbitration Act (“FAA”).  Specifically, the court concluded that—under the FAA and the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion—class and representative action waivers in arbitration agreements cannot be invalidated by state law.

In Fardig v. Hobby Lobby Stores, Inc., the non-exempt employee plaintiffs argued that the binding arbitration agreements they entered into with their employer were unenforceable under state law.  The plaintiffs asserted that the broad language in the agreement—waiving their rights to bring any class action, collective action, or joint claims—was contrary to: (1) the California Supreme Court’s ruling in Gentry v. Superior Court; (2) their “right” to bring collective claims under California’s Private Attorney General Act (“PAGA”); and (3) the National Labor Relations Act.  In response, the employer moved for an order compelling the plaintiffs to comply with the binding arbitration agreements, including the waiver provisions.

The court sided with the employer.  As previously discussed in other posts (here and here), California state courts have created a collage of varying conclusions as to whether Gentry remains good law after Concepcion.  In Fardig though, the court joined the majority of California federal courts holding that Concepcion overrules Gentry.  In Gentry, the California Supreme Court held that a class action waiver should not be enforced if a court determined that “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.”  However, the Fardig court simply and pointedly concluded that “Gentry does not survive Concepcion.”

The district court then concluded that the FAA’s broad policy in encouraging arbitration preempts any state law rule requiring arbitration agreements to permit collective PAGA actions.  The district court rejected the plaintiffs’ assertion that the California Supreme Court’s decision in Sonic Calabasas A., Inc. v. Moreno (“Sonic II”), created a “carve-out” for PAGA claims from the requirements of the FAA.  Specifically, the district court noted that Sonic II articulated that the test for determining whether a state rule is preempted following Concepcion is the “extent to which the rule ‘interfere[s] with the fundamental attributes of arbitration.’”  The district court concluded that there are “various ways in which representative PAGA actions do in fact burden the fundamental attributes of arbitration,” including creating “a slower, more costly process” and requiring “defendants to run the risk that an erroneous decision on a PAGA claim on behalf of many employees would go uncorrected given the absence of multilayered review.”

Finally, the district court held that the agreements were enforceable despite the National Labor Relations Board’s decision in D.R. Horton, Inc. concluding that an agreement precluding class claims regarding employees’ wages, hours, or working conditions violated the National Labor Relations Act.  Contrary to the NLRB’s position, the court held that the NLRB’s reasoning conflicted with the FAA and Concepcion—“strongly favoring enforcement of arbitration agreements and strongly against striking class waiver provisions.”

While employers continue to wait for the California Supreme Court to address the three substantive unconscionability arguments raised and rejected by the district court in Fardig, the district court’s decision serves as guidance. This case paints preemption as a dominant force when it comes to waivers in arbitration agreements and gives employers a persuasive opinion in support of preemption arguments—at least in federal court … for now.