“C” Is for Consent When It Comes to Arbitration in California: U.S. Supreme Court Holds that Representative Action Waivers Are Enforceable to Compel “Individual” PAGA Claims to Arbitration

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Last week, the United States Supreme Court issued its long-awaited decision in Viking River Cruises, Inc. v. Moriana (US 20–1573 6/15/22) (“Moriana”). The singular question presented to the Court was whether the Federal Arbitration Act (“FAA”) requires enforcement of arbitration agreements waiving an employee’s right to assert “representative” claims under California’s Private Attorneys General Act (“PAGA”). In response, the Court provided two answers: (1) wholesale waivers of an employee’s right to bring any PAGA claims in any forum will not be enforced; yet (2) arbitration agreements can require an employee to arbitrate their own individual PAGA claims, leaving the absent employees’ claims subject to dismissal.

For context, PAGA is a decades-old law that allows private citizens to step into the shoes of the Labor Commissioner, essentially turning “aggrieved” employees into bounty-hunters for the State’s Labor and Workforce Development Agency (“LWDA”). Specifically, PAGA litigants are authorized to recover civil penalties on behalf of the State for certain Labor Code violations, which would otherwise be recoverable only by the Labor Commissioner. If successful, employees receive a 25 percent share of civil penalties recovered, with the remaining 75 percent going to the LWDA. And another thing, PAGA allows for the recovery of attorneys’ fees and costs, which are often exponentially larger than the underlying civil penalties and statutory damages recovered—leaving no surprise as to why PAGA has become such a popular vehicle for plaintiffs’ attorneys.

While the question presented in Moriana was seemingly straightforward, the Court’s answer was surprisingly nuanced, incredibly thoughtful, and frankly a brilliant interpretation of both PAGA and the FAA. In essence, the Court succinctly identified and then resolved a central issue that California litigants have been grappling with for years: the term “representative” in fact has two separate and distinct meanings under PAGA—a simple enough concept that proved fundamental to the Court’s decision.

On the one hand, the Court explained, PAGA claims are “representative” in the sense that PAGA-plaintiffs act as representatives of the State of California. In this context, the Court was clear that the FAA does not preempt PAGA’s prohibition on categorical pre-dispute PAGA waivers, meaning, employers cannot use PAGA waivers to require employees to give up entirely their right to bring any claims under PAGA. 

At the same time, however, PAGA claims are “representative” in the sense that PAGA-plaintiffs can also act as representatives of hundreds or thousands of other absent employees, some of whom are alleged to have suffered completely different Labor Code violations than the plaintiff.

With this in mind, the Court found that arbitration agreements can split the representative plaintiff’s individual claims apart from their non-individual/“group” claims (i.e., those of other allegedly aggrieved yet absent employees), rejecting in part the California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles, LLC (“Iskanian”), 59 Cal. 4th 348 (2014), which found individual versus non-individual PAGA claims “indivisible” from each other and therefore not subject to arbitration at all.

In other words, a properly drafted arbitration agreement can now require employees to arbitrate disputes on an individual basis only—including PAGA claims. The Court went on to hold that employees who sign such agreements lack standing to maintain group claims on behalf of other absent workers, requiring dismissal of any non-individual PAGA claims.

The Court repeated a critical concept throughout its 22-page opinion: arbitration is “strictly a matter of consent,” meaning employers must consent to facing non-individual PAGA claims in arbitration. As the Court noted, “PAGA’s built-in mechanism of claim joinder is in conflict with the FAA” and necessarily runs afoul of the very “prototype of the individualized and informal form of arbitration protected from undue state influence by the FAA.”

This decision presents yet another reason for California employers to: (1) strongly consider implementing arbitration agreements with their employees, with appropriate class, collective, and representative action waivers in place; and (2) ensure these agreements have clear and meaningful severability provisions, so that any (mis)interpretation of these waivers will not affect the purpose and enforceability of the agreement as a whole.

Employers who already have arbitration agreements in place are well advised to consult with counsel immediately to make sure any such agreements provide the maximum protection available against representative PAGA actions.

The Supreme Court’s decision may be found here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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