The US Supreme Court has issued its highly anticipated opinion in Viking River Cruises Inc. v. Moriana, on whether the Federal Arbitration Act (FAA) preempts California law that invalidates contractual waivers in arbitration agreements of the right to assert representative claims under California's Labor Code Private Attorneys General Act of 2004 (PAGA). In a victory for California employers, the Court held that although California’s rule prohibiting a wholesale waiver of PAGA claims is not preempted, individual PAGA claims can be compelled to arbitration, and once compelled, the non-individual PAGA claims brought on behalf of other individuals cannot be maintained and must be dismissed.

PAGA AND THE “ISKANIAN” RULE

PAGA (California Labor Code Section 2698 et seq.) authorizes an “aggrieved employee” to act as a private attorney general and sue employers “on behalf of himself or herself and other current or former employees to obtain civil penalties for violations of the California Labor Code. Civil suits brought under PAGA are “representative” actions where an employee sues as an “agent or proxy” of the state. As explained by the Court, PAGA allows “[a]n employee who alleges he or she suffered a single violation … to use that violation as a gateway to assert a potentially limitless number of other violations as predicates for liability.”

Under PAGA, enacted in 2004, the state of California and any aggrieved employees split the recovered civil penalties, with the employees who suffered violations entitled to 25% of the relevant penalties and California receiving the remaining 75%. Such penalties have been a lucrative revenue source for California as well as attorneys bringing these actions.

The California Supreme Court, in its opinion in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348 (2014), found class action waivers must be enforced under the FAA, but that California law prohibits waivers of the right to bring representative PAGA claims in court or arbitration. The Iskanian rule also invalidates agreements to separately arbitrate or litigate “individual PAGA claims” that an employee claims to have suffered. Since Iskanian, PAGA suits have proliferated in California as a means to assert wide-ranging representative claims in court and dodge enforceable class action waivers in arbitration agreements.

BACKGROUND

Angie Moriana, a former sales representative for Viking River Cruises Inc. accepted an agreement to arbitrate any dispute arising out of her employment. The arbitration agreement contained a waiver of the “right or authority for any dispute to be brought, heard or arbitrated as a class, collective, representative or private attorney general action, or as a member in any purported class, collective, representative or private attorney general proceeding…” The agreement included a severability clause that if a court “finds all or part of the [waiver] unenforceable, the class, collective, representative and/or private attorney general action must be litigated in [court], but the portion of the [waiver] that is enforceable shall be enforced in arbitration.”

Despite the agreement, Moriana sued Viking under PAGA on behalf of herself and other employees for alleged wage and hour violations of the California Labor Code, including those she did not personally suffer.

Viking moved to compel Moriana's “individual” PAGA claim, i.e., the claim she allegedly suffered, to arbitration and sought to dismiss the PAGA claims on behalf of others. The trial court denied the motion based on the Iskanian rule, and the California Court of Appeal affirmed. The California Supreme Court denied review. The US Supreme Court granted certiorari late last year.

THE SUPREME COURT DECISION

The Supreme Court reversed the California Court of Appeal, finding that although the “wholesale waiver of PAGA claims” was invalid under California law, “Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim.”

First, the Supreme Court noted the two distinct meanings of “representative” under PAGA. A PAGA action is “representative” because it is brought by an allegedly aggrieved employee acting as the agent or proxy of the state. However, PAGA claims can also be called “representative” when “they are predicated on code violations sustained by other employees.” As to the latter meaning of representative, the Court found that “it makes sense to distinguish ‘individual’ PAGA claims, which are premised on Labor Code violations actually sustained by the plaintiff, from ‘representative’ (or perhaps quasi-representative) PAGA claims arising out of events involving other employees.”

Within this framework, the Court first noted that “we have never held that the FAA imposes a duty on States to render all forms of representative standing waivable by contract.” The Court rejected a “categorical rule” mandating the enforcement of waivers of “representative capacity.” It noted such examples of accepted “non-class representative actions” as shareholder-derivative suits, wrongful-death actions, trustee actions, and suits on behalf of infants, whose procedures do not conflict with the principles of bilateral arbitration.

However, the Court found there was a conflict between the FAA and PAGA’s “built-in mechanism of claim joinder” by which claims of others must be included in the proceeding. The Court held that “[r]equiring arbitration procedures to include a joinder rule of that kind compels parties to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether. Either way, the parties are coerced into giving up a right they enjoy under the FAA.” As such, the effect of the Iskanian rule “is to coerce parties into withholding PAGA claims from arbitration.”

Based on this analysis, the Court found the Iskanian rule to be partly preempted by the FAA, “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” The Court ruled that the FAA does not broadly preempt California law precluding waivers of standing to bring PAGA claims, and so Viking’s waiver of PAGA claims in the arbitration agreement could not be enforced to waive outright all PAGA “representative” claims. Because Viking’s agreement had a severability clause that required enforcement in arbitration of any portion of the waiver that remained valid, and the rule that PAGA actions cannot be divided into individual and non-individual claims was preempted, Viking was “entitled to compel arbitration of Moriana’s individual claim.”

Finally, the Court addressed what the lower courts should do with Moriana’s “non-individual” PAGA claims once her individual PAGA claim was compelled to arbitration. The Court held that because PAGA civil actions must be “brought by an aggrieved employee on behalf of himself or herself and other current or former employees,” meaning “a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action,” 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.” As such, once an employee’s own dispute “is pared away from a PAGA action,” such as when it is compelled to arbitration, “PAGA does not allow such persons to maintain suit.” Therefore, the Court found that “Moriana lacks statutory standing to continue to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.”

PRACTICAL IMPLICATIONS FOR EMPLOYERS

Viking River Cruises gives California employers the opportunity to compel employees to arbitrate their individual PAGA claims and prevent the non-individual PAGA claims from being maintained. It is important for employers with existing arbitration agreements or programs to carefully review them in light of this decision. In addition to assessing whether these employers can now move to compel pending PAGA actions to individual arbitration, they should also consider whether, based on the nuanced holdings in Viking River Cruises, revisions should be made, especially as to any representative action waiver provision, any provisions that expressly address PAGA claims, or any severability clause. For employers that have not implemented arbitration agreements or programs, Viking River Cruises creates another potential benefit to arbitration that such employers should consider.

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