In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) that PAGA claims are proxy actions brought on behalf of the state to enforce the Labor Code, not disputes between an employer and an employee, and therefore contractual waivers of PAGA representative claims in favor of individual arbitration violate the state’s public policy and cannot be enforced. The arbitration agreement at issue in the Viking River case had a severability clause “specifying that if the [class, collective and representative action waiver] was found invalid, such a dispute would presumptively be litigated in court . . . and any ‘portion’ of the waiver that remained valid would be ‘enforced in arbitration.’” The trial court rejected Viking River’s motion to sever the PAGA representative’s individual claim and compel it into arbitration and to dismiss the non-arbitrable PAGA representative claims. The Court of Appeal affirmed based on Iskanian, reasoning that PAGA actions cannot be split into arbitrable and non-arbitrable claims in this way.
In Viking River, the Supreme Court held that the Federal Arbitration Act (FAA) preempts Iskanian’s holding to the extent it is “a rule of claim joinder—allowing a party to unite multiple claims against an opposing party in a single action.” Importantly, the Supreme Court expressly did not overrule California’s ban on PAGA waivers generally and said the general ban “is not preempted by the FAA.” Instead, the Court held that “Iskanian’s rule that PAGA actions cannot be divided into individual and nonindividual claims is preempted, so Viking was entitled to compel arbitration of Moriana’s individual claim.” The practical effect of this, however, as the Court acknowledged, is that the PAGA claim must be dismissed from the court action. This is because “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 . . . .” Moreover, a PAGA plaintiff whose individual claim has been compelled to arbitration “would lack statutory standing to maintain her non-individual claims in court,” so the only “correct course” would be to dismiss the remaining non-individual claim.
In its reasoning, the majority opinion rejected the positions of both of the parties and developed its own analysis:
First, the Court emphasized the principle that arbitration is strictly a matter of consent, and no party may be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the parties agreed to do so. Viking River argued that the Court’s FAA precedents require enforcement of contractual provisions waiving the right to bring PAGA actions because PAGA creates a form of class or collective proceeding. The ban on PAGA waivers presents parties with an impermissible choice: either arbitrate disputes using a form of class procedures or do not arbitrate at all. Moriana contended that PAGA creating a unitary private cause of action is irreconcilable with the structure of the statute and the ordinary legal meaning of the word “claim,” and PAGA is nothing more than one substantive cause of action.
The U.S. Supreme Court disagreed with both parties. The Court pointed out that non-class representative actions in which a single agent litigates on behalf of a single principal are part of the basic structure of much of substantive law, e.g., shareholder-derivative suits, wrongful-death actions, trustee actions, etc. Unlike procedures distinctive to multiparty litigation, single-principal, single-agent representative actions are “bilateral” because they involve the rights of only the absent real party in interest and the defendant, and litigation need only be conducted by the agent-plaintiff and the defendant. Thus, the Court rejected the notion that PAGA was like a class or collective proceeding.
Second, the Court noted that a conflict between PAGA’s procedural structure and the FAA exists, given PAGA’s built-in mechanism of claim joinder. PAGA allows “aggrieved employees” to use the Labor Code violations they personally suffered as a basis to join to the action any claims that could have been raised by the state in an enforcement proceeding. Because Iskanian precludes parties from contracting around this joinder device, as it invalidates agreements to arbitrate only individual PAGA claims, this prohibition unduly restricts the freedom of parties to determine the issues subject to arbitration and the rules by which they will arbitrate. The fundamental principle that arbitration is a matter of consent is violated by Iskanian’s ban on contractual division of PAGA actions into constituent claims. Parties are effectively coerced into withholding PAGA claims from arbitration (unable to enjoy the benefits of the private dispute resolution they each consented to) and are forced to opt for a judicial forum and endure the procedural rigor of the courts.
Why it matters: Employees with enforceable arbitration agreements may now be compelled to arbitrate PAGA claims on an individual basis and may be required to dismiss the non-individual portion of the PAGA action. However, this likely will not be the last word on PAGA waivers. This afternoon, for example, California State Senator Dave Cortese tweeted that he is prepared to author legislation to work around the U.S. Supreme Court’s decision. Further, while Viking River is overall a win for employers, it is imperative that employers examine their arbitration agreements to ensure the enforceability of the agreement, given that this ruling does not uphold a per se representative waiver. Employers should consult with counsel to evaluate the enforceability of their agreements to ensure that they are protected to the highest degree possible.
To see Manatt’s prior commentary on this case, click here and here.