CA Employers: Good News from the US Supreme Court PAGA Actions May Be Subject to Arbitration After All

by Lizbeth (Beth) V. West
The Labor & Employment Law Blog

The long-awaited decision by the US Supreme Court in Viking River Cruises, Inc. v. Moriana was issued on June 15, 2022, and brings some good news for California employers. The issue before the court was whether the Federal Arbitration Act (FAA) preempts a rule of California law that invalidates contractual waivers (e.g. arbitration agreements) of the right to assert representative claims under California’s Private Attorneys General Act (PAGA).

Summary of PAGA:

Under PAGA, employees – as private attorneys general – have the right to enforce California labor law. By its terms, PAGA authorizes any “aggrieved employee” to initiate an action against an employer “on behalf of himself or herself and other current or former employees” to obtain civil penalties that previously could have been recovered only by the State in an enforcement action brought by California’s Labor and Workforce Development Agency (LWDA). California precedent holds that a PAGA suit is a “representative action” in which the employee plaintiff sues as an “agent or proxy” of the State. An employee with PAGA standing may “seek any civil penalties the state can, including penalties for violations involving employees other than the PAGA litigant herself.”

Summary of the FAA’s Enforcement of Arbitration Agreements:

Section 2 of the FAA makes arbitration agreements valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.  The US Supreme Court explained that section 2 of the FAA contains two clauses: “An enforcement mandate, which renders agreements to arbitrate enforceable as a matter of federal law, and a savings clause, which permits invalidation of arbitration clauses on grounds applicable to ‘any contract’ [e.g. fraud or unconscionability) … but not on legal rules that ‘apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’”  Thus, according to the Court, the FAA “preempts any state rule discriminating on its face against arbitration – for example, a law ‘prohibit[ing] outright the arbitration of a particular type of claim.’”

Factual and Procedural Summary of the Viking Case:

After resigning, Moriana filed a PAGA action against her former employer Viking River Cruises (Viking), alleging that the company failed to pay her final wages within 72 hours of her final day of employment as required by the California Labor Code. She also asserted a wide array of other wage and hour violations allegedly sustained by other Viking employees, including minimum wage, overtime, and meal and rest period violations.

Moriana’s employment contract with Viking contained a mandatory arbitration agreement. Important here, that agreement contained both a “class action waiver” providing that the parties could not bring any dispute as a class, collective, or representative action under PAGA, and a severability clause specifying that if the class action waiver was found invalid, such a dispute would presumptively be litigated in court. Under the severability clause, any “portion” of the waiver that remained valid would be “enforced in arbitration.”

Viking moved to compel arbitration of Moriana’s individual PAGA claim and to dismiss her other non-individual PAGA claims. Applying precedent from the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC (59 Cal. 4th 348), the California trial court denied that motion and the court of appeal affirmed the denial, holding that categorical waivers of PAGA standing are contrary to California policy and that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable representative (non-individual) claims. The US Supreme Court granted certiorari to decide whether the FAA preempts the California rule.

US Supreme Court’s Holding in Viking:

The Court found that a conflict between PAGA’s procedural structure and the FAA exists due to the statute’s built-in mechanism of claim joinder. This mechanism permits an “aggrieved employee” to use the California Labor Code violation they personally suffered (e.g. their individual claim) as a basis to join to their action, any claims that could have been raised by the State (e.g. the non-individual claims) in an enforcement proceeding.

Additionally, the Court found that rule from the Iskanian decision prohibiting parties from contracting around this joinder mechanism by invalidating agreements to arbitrate only individual PAGA claims, unduly circumscribes the freedom of the parties to determine the issues subject to arbitration and the rules by which they will arbitrate. The Court explained that Iskanian’s prohibition on wholesale waivers of PAGA claims is not preempted by the FAA. However, the Court said that Iskanian’s rule that PAGA actions cannot be divided into individual and non-individual claims (e.g. representative claims on behalf of similarly-situated employees) is preempted. Thus, Viking was entitled to compel arbitration of Moriana’s individual claim.

The remaining question then was what the lower courts should do with Moriana’s non-individual PAGA claims. The Court said that those claims are not subject to dismissal simply because they are representative claims, but noted that 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. More importantly, however, the Court found that under PAGA’s standing requirement, a plaintiff has standing to maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action. The Court said that “when an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such person to maintain a suit.” As a result, the Court found that Moriana lacked statutory standing to maintain her non-individual claims in court once her individual claims were compelled to arbitration, and the correct course was to dismiss her remaining non-individual PAGA claims.

Takeaway:

The Viking decision is great news for California employers who have enforceable arbitration agreements with employees that require they arbitrate their workplace disputes, including wage and hour and PAGA claims. However, employers should remain mindful of two things:

  1. As Justice Sotomayor reminded the Court in her concurring opinion, if the Court’s understanding of the standing requirement under PAGA is correct, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.
  2. There remains an open question as to whether or not mandatory arbitration agreements in employment are enforceable in California. The controversial Assembly Bill (AB) 51 went into effect in 2020 prohibiting California employers from requiring employees to waive their right to pursue an action in court which effectively banned mandatory arbitration agreements. The legislation specifically provided that the law did not apply to agreements subject to the FAA, but there remains some confusion as to whether or not mandatory arbitration agreements are enforceable in California. AB 51 was quickly challenged in court and an injunction on its enforcement was granted by a federal US District Court. However, the Ninth Circuit reversed the injunction (in part) in September 2021, lifting the injunction. A petition for rehearing was filed with the Ninth Circuit but the court deferred any further argument on the issue until the U.S. Supreme Court issued its decision. Now that the Viking decision has been issued, we anticipate that the Ninth Circuit will soon revisit the issue of enforceability of AB 51 and provide some further guidance to employers.

We will continue to monitor developments in both the California Legislature and the Ninth Circuit regarding PAGA standing and the enforceability of mandatory arbitration agreements in employment. Stay tuned.