June 16, 2022 US Supreme Court Overrules California Supreme Court and Holds PAGA Claims Subject to Arbitration
On Wednesday, the United States Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana. In an 8 to 1 decision, the Supreme Court ruled that California’s existing rule invalidating contractual waivers of the right to assert representative claims under California's Labor Code Private Attorneys General Act (“PAGA”) is preempted by the Federal Arbitration Act (“FAA”). This means that arbitration agreements may compel employees to arbitrate their PAGA claims on an individual basis, and prevent employees from asserting representative PAGA claims in arbitration or in court.
Viking River Cruises, Inc. v. Moriana
Angie Moriana was employed by Viking River Cruises (“Viking”). Moriana signed an arbitration agreement in which she agreed to arbitrate any individual claims against Viking, and waived any rights to bring a class or representative action, including a representative PAGA action. The agreement also included a severability clause preserving other portions of the agreement should any portion be found invalid. Moriana filed a civil complaint alleging PAGA violations on her own behalf and on behalf of other employees. Viking moved to compel arbitration of Moriana’s individual PAGA claims, and to dismiss her representative PAGA claim.
Both the trial court and the California Court of Appeal ruled against Viking. These rulings were consistent with a 2014 decision by the California Supreme Court that individual and representative PAGA claims cannot be severed, and that terms in arbitration agreements that purport to waive an employee’s right to bring a representative PAGA suit are unenforceable. (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 383.) Since the Iskanian decision in 2014, it has been settled law in California that employers cannot rely on an arbitration agreement to prevent an employee from bringing a PAGA claim in court, both on behalf of the individual employee and in a representative capacity.
In Viking River, the U.S. Supreme Court overruled key aspects of the California Supreme Court’s Iskanian decision. The Court held that the “FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” In reaching this conclusion, the Supreme Court relied on the FAA’s preemption of state rules “prohibiting outright the arbitration of a particular type of claim” and FAA principles compelling arbitration where “there is a contractual basis for concluding that the party agreed to do so.” The Supreme Court ultimately concluded that under the FAA, an employee’s individual PAGA claims can be forced into arbitration. The Supreme Court also ruled that since PAGA provides no mechanism for a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding, an employee who is required to bring individual PAGA claims in an arbitration proceeding does not have standing to assert representative PAGA claims in court.
Based on these rulings, the Supreme Court said that Moriana was required to litigate her individual claim for PAGA penalties in arbitration, and because the arbitration agreement precluded a class or representative claim in arbitration, Moriana could not expand her arbitration claim to other employees. Finally, since Moriana lacked standing to litigate her representative PAGA claim in court, those claims should be dismissed.
What This Means
The Supreme Court’s decision is a positive development for employers who have arbitration agreements with employees that (1) provide for the arbitration of PAGA claims, (2) do not allow for an employee to bring a class or representative claim in arbitration, and (3) have a “severability” clause stating that if any terms of the agreement are unenforceable, the remainder of the agreement is valid. The decision means that if the arbitration agreement contains the right provisions, employees will no longer be able to file “PAGA only” actions in court, preserve their PAGA claims for adjudication by a court while they arbitrate other employment claims, or pursue PAGA claims on a representative basis.
The decision should also be useful in pending PAGA litigation, as it provides an opportunity for employers with arbitration agreements to obtain the dismissal of parallel PAGA litigation in court and force the employee’s individual PAGA claim into arbitration.
Of course, the specific provisions of the arbitration agreement will be important. Any employer wishing to take advantage of the Viking River decision should carefully assess the language in their arbitration agreement.
What The Future Holds
The Supreme Court’s decision may not be the final word on this issue. First, as suggested by Justice Sotomayor in her concurring opinion, the California legislature can amend PAGA to allow an employee to prosecute a representative PAGA claim in court even if the employee’s individual claim is subject to arbitration. This can be achieved by modifying the scope of statutory standing under PAGA to include employees who no longer possess disputed individual PAGA claims.
Second, the Ninth Circuit is still considering a petition for rehearing in Chamber of Commerce v. Becerra, the preemption challenge to the anti-arbitration statute California enacted in 2019, known as AB 51. The Ninth Circuit was awaiting the Viking River decision before deciding how to proceed. If upheld by the Ninth Circuit, AB 51 would prohibit employers from requiring applicants or employees to sign arbitration agreements as a condition of employment, or from requiring that existing employees agree to a modification of an arbitration agreement to take advantage of the Viking River decision.
Employers with arbitration agreements should assess whether the agreement is consistent with the factors identified in Viking River that provide a basis for compelling arbitration of individual PAGA claims and dismissing representative PAGA claims. However, until the AB 51 issue is resolved, employers who conclude their existing arbitration agreements would require modifications to take advantage of Viking River should consider the risks involved in attempting to revise existing agreements.
If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.