In a Big Win for California Employers, the United States Supreme Court Opens the Door to Enforcement of Arbitration Agreements in PAGA Cases

06.15.2022

On June 15, 2022, the United States Supreme Court issued the much-awaited decision in Viking River Cruises, LLC v. Moriana (“Viking River”) opening the door to individual arbitration of Private Attorneys General Act of 2004 (“PAGA”) claims in California, a door previously shut by the California Supreme Court.

Prior to Viking River, the California Supreme Court in Iskanian v. CLR Transp. Los Angeles, LLC, 59 Cal.4th 348 (2014) held that PAGA actions could not be compelled to individual arbitration even when an arbitration agreement between the employer-defendant and employee-plaintiff would otherwise include such a claim.

The United States Supreme Court held in Viking River that while Iskanian’s prohibition on wholesale waivers of PAGA claims is not preempted by the Federal Arbitration Act, Iskanian’s rule that PAGA actions cannot be divided into individual and non-individual claims is preempted, so that in this case, the employer was entitled to compel arbitration of the plaintiff’s individual claim.

Background

Angie Moriana, a former employee of Viking River Cruises, LLC (“Viking”) filed a PAGA action against her former employer in California state court seeking civil penalties and claiming that Viking failed to provide her with her final wages within the time frame required by the California Labor Code. She also asserted a wide array of other Labor Code violations (minimum wage, overtime, meal periods, rest periods, timing of pay, and pay statements) allegedly sustained by other Viking employees. Viking moved to compel arbitration of Moriana’s “individual” PAGA claim. The trial court denied the motion, and the California Court of Appeal affirmed, largely based upon the decision in Iskanian and the cases that have followed, holding that categorical waivers of PAGA standing are contrary to California state policy and such claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims.

The U.S. Supreme Court’s Viking River Decision

Justice Alito issued a 4-part opinion for the Court[1] reversing the Court of Appeal decision. In reaching the decision, the Court noted California law recognized PAGA actions as a “representative action” in two distinct ways. In the evolving lexicon developed from the statute, such an action is “representative” because it is brought by an employee on behalf of (as an agent or proxy) of the State of California, and also “representative” in that it is predicated on Labor Code violations sustained by other allegedly aggrieved employees. In this second way, the Court distinguished an “individual” PAGA claim (one premised on the Labor Code violations actually sustained by the plaintiff) from “representative” PAGA claims (premised on other employees). The Court also recognized that PAGA standing—allowing the employee bringing the claim to seek penalties involving other employees, not just herself—was effectively a “rule of claim joinder.”

The Court held (supported by five justices) that to the extent the Iskanian decision prohibits the waiver of the second category of “representative” PAGA claims, it is not preempted by the FAA.

But the Court further held (supported by eight justices) that the FAA preempted PAGA’s built-in mechanism of claim joinder. Specifically, the Court stated:

[S]tate law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.

Accordingly, Iskanian’s indivisibility rule—the “individual” PAGA claim not being divisible from the “representative” PAGA claim—is incompatible with the FAA.

In applying these holdings to the facts of the case, the Court found (supported in this part by five justices) that the agreement between Viking and Moriana purported to waive “representative” PAGA claims. To the extent this provision was construed as a wholesale waiver of PAGA under Iskanian, the provision remained invalid under Iskanian. But a “severability clause” in the agreement provided that if the waiver provision is invalid in some respect, any “portion” of the waiver that remains valid must still be “enforced in arbitration.” Based on this severability clause, the Court concluded, Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim.

The final question the Court addressed was what the lower courts should do with the Plaintiff’s non-individual claims. The Court indicated that under its holding those claims may not be dismissed just because they are “representative.” Rather, because of PAGA’s standing requirement—that a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action—once Plaintiff’s “individual” claims are compelled to arbitration “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” Thus, the correct course is to dismiss the remaining “representative” claims.

Justice Sotomayor’s Concurring Opinion

Justice Sotomayor issued a rather interesting concurring opinion in which she indicated that the Court’s conclusion about there being “no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding” was based upon the Court’s reading of California law. She added “if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word,” all but inviting California courts to reach (or attempt to reach) a different conclusion. She also added, “if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits,” appearing to directly invite the California Legislature to legislate around the Court’s decision.

What’s Next

Parties, counsel, and the courts will likely wrestle for some time over how this decision impacts pending and future cases and also to what extent it applies to arbitration agreements employers currently have with their employees. Determining whether an arbitration agreement has within its scope an “individual” PAGA claim versus a wholesale waiver of a “representative” PAGA claim will likely dominate the discussion, and result in and an increase of motion practice. Also, the impact of an appropriate severability provision will be important to the end result, especially to the extent an agreement is not clear.
It is anticipated that the California Legislature will revise the PAGA statute to alter the PAGA standing requirement in a way that would provide a mechanism to adjudicate the non-individual PAGA claims once an individual PAGA claim has been compelled to arbitration.
Employers need to evaluate their arbitration agreements going forward and work with experienced counsel to craft the agreements to include within their scope individual PAGA claims as well as provisions to prevent agreements from being interpreted as wholesale waivers of “representative” PAGA claims, and to maneuver through the minefield of other provisions that could prevent the enforcement of arbitration agreements between employees and their employers.

For more information about this case, and/or legal obligations related to arbitration agreements, we encourage contacting the authors of this alert, or your regular AALRR counsel.

[1] The number of justices voting in favor of each part varied from 5 to 8, depending on the part. Justice Thomas was the lone dissent, succinctly stating his consistent opinion that the FAA does not apply to proceedings in state courts.