Wednesday, the United States Supreme Court issued a highly anticipated decision in Viking River Cruises v. Moriana.  The decision addresses the apparent conflict between the Federal Arbitration Act (FAA) and California’s jurisprudence on the state’s Private Attorneys General Act (PAGA).  In resolving the issue - deeming “individual PAGA claims” subject to arbitration - the Court unwound years of plaintiff-friendly interpretations of the Golden State’s “Sue Your Boss” law. 

The conflict between the FAA and PAGA stems from the California Supreme Court’s “Iskanian rule,” which prohibits a pre-dispute agreement to waive or otherwise limit the right to bring a representative PAGA claim.  The 2014 Iskanian decision led to a proliferation of PAGA litigation in California, including standalone “PAGA only” actions, which ostensibly involved only “representative PAGA claims” brought on behalf of the state.

The precise issue presented by Viking River was whether the FAA preempted the Iskanian rule.  While many employers were hoping the court would find the FAA allows for the wholesale waiver of the right to bring a PAGA claim, none of the Justices agreed with that position. 

However, the majority of the Justices agreed that the FAA requires the enforcement of an agreement to arbitrate an employee’s “individual PAGA claim.”  Essentially, Viking River holds that an arbitration agreement can require arbitration to resolve (1) whether an employee has standing to maintain a PAGA claim - i.e., whether they personally experienced a Labor Code violation that provides for the recovery of a civil penalty.  In reaching this conclusion, the Court dismantled California’s post-Iskanian PAGA jurisprudence and created a new framework that will have a resounding effect on PAGA litigation, even outside of the arbitration context.

Background:  The Post-Iskanian PAGA Jurisprudence

Iskanian and its progeny created a gateway for California employees and their attorneys to bypass basic pleading standards, restrictions on forum shopping, class certification requirements, and their agreements to arbitrate through PAGA actions.  The foundation of this gateway is the legal fiction that PAGA creates a unitary, indivisible cause of action through which PAGA plaintiffs act solely as an agent of the state - not as individuals - and they enforce only the state’s right to enforce the Labor Code and recover civil penalties- not any personal right they may have.

This portrayal of PAGA claims led to the California Supreme Court’s Iskanian rule.  If it is true that a PAGA claim is an indivisible claim belonging to the state, then a PAGA claim is actually a dispute between the employer and the state.  Because a PAGA claim is not a dispute between an employer and employee, the dispute cannot arise from the employment relationship and thus the PAGA claim is outside the FAA's coverage.

Following Iskanian, California courts treated PAGA plaintiffs as the full equivalent to labor law enforcement officers wielding the state’s power to investigate, prosecute, and recover civil penalties for any and all alleged Labor Code violations an employer commits against workers in California.  And courts allowed PAGA plaintiffs to bring these claims under a single “PAGA cause of action” which aggregated numerous alleged violations experienced by any number of workers (most commonly, “all non-exempt employees in California”).

Viking River:  Closing the “Gateway to Assert a Potentially Limitless Number of Other Violations” 

In Viking River, the Justices unraveled California’s “indivisible state claim” characterization of PAGA claims that created a “built-in mechanism of claim joinder.”  The Court deemed this procedural structure to be in conflict with the FAA because it unduly limits the parties’ freedom to determine the issues subject to arbitration. 

The Court resolved the conflict by concluding that a representative PAGA claim is not a single, unitary claim.  Then, the Court explained “it makes sense to distinguish ‘individual’ PAGA claims” - those providing the basis for the plaintiff’s alleged standing—“from ‘representative’ … PAGA claims arising out of events involving other employees.”  This distinction led to the Court’s holding that Iskanian’s prohibition on wholesale PAGA waivers may stand with respect to the “representative” PAGA claim, but the Iskanian-rule must give way to the FAA with respect to the “individual” PAGA claim.  Thus, arbitration agreements may be enforced to compel arbitration of an “individual” PAGA claim.

The Court opined on the fate of a “representative” PAGA claim that has been severed from the arbitrable “individual” PAGA claim.  Because a plaintiff’s standing is attached to their “individual” PAGA claim, and standing is required to maintain a “representative” PAGA claim, the Court held that the “representative” claim should be dismissed where the individual’s arbitration agreement prohibits his “individual” PAGA claims from being litigated in court.  To reach this conclusion, the Court relied on the PAGA’s standing requirement, which it interpreted as requiring the PAGA plaintiff’s “individual” PAGA claim.

California lawmakers are likely putting pen to paper now, seeking to modify the PAGA’s standing requirement to allow PAGA plaintiffs to separately maintain their individual and representative PAGA claims, or to provide for a stay of the representative PAGA claim pending the outcome of arbitration on the individual claim. 

In the meantime, employers should consider the defensive measures created by Viking River:

1. Enforcing Arbitration Agreements in Existing Cases:  First and foremost, employers with pending PAGA actions should consider moving to compel arbitration under Viking River if the parties have an arbitration agreement. 
2. Updating/Implementing Arbitration Agreements:  Employers should consider modifying existing arbitration agreements or implementing agreements to dampen the threat of PAGA litigation in California.  But monitor developments in US Chamber of Commerce v. Bonta before the Ninth Circuit, in which the fate of AB 51 - California’s law prohibiting some mandatory employment arbitration agreements -will be decided.
3. Potential Removal:  Many practitioners have not yet realized that Viking River is likely to make removal of PAGA claims more common.  If the parties are diverse, employers now have a stronger argument supporting removal of a PAGA claim.  While the Ninth Circuit’s anti-aggregation rule will apply, Viking River makes clear that Plaintiff must separately establish an “individual” PAGA claim in order to maintain the “representative” claim.  Employers may argue that the attorney fees required to establish the individual claim (standing), in addition to the plaintiff’s portion of recoverable civil penalties, exceed the amount in controversy requirement.
4. Venue Transfer:  Employers dealing with forum-shopping PAGA plaintiffs now have a basis seeking to transfer venue, despite the California Court of Appeal decision in Crestwood v. Superior Court.  In that case, the court held PAGA plaintiffs may file suit in any county where a violation occurred.  The court applied the “unified, single state claim” characterization of a PAGA claim and reasoned that the state’s claim “arises” in any county where an alleged violation was committed.  That is no more.  In Viking River, the Court explained that the “relationship between the parties is a but-for cause of any legal controversy between the parties under PAGA, and ‘arising out of' language refers to a causal relationship.”  A PAGA cause of action arises where the PAGA plaintiff experienced the violations.
5. Challenge Pleadings:  A “PAGA-only” lawsuit should largely now be a thing of the past.  Even if PAGA plaintiffs assert one case of action under PAGA, Courts must treat it as asserting separate Labor Code claims and hold plaintiffs accountable to basic pleading standards as to each underlying claim.  If a claim is devoid of any supporting factual allegation, consider a demurrer.

We will continue to monitor developments in this area, so make sure you are subscribed to our blog.