U.S. Supreme Court Hands California Employers a Huge Win: Under the Federal Arbitration Act, Arbitration Agreements with Class Action Waivers Require Arbitration of PAGA Claims

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In a landmark 8-1 ruling, the U.S. Supreme Court, in Viking River Cruises, Inc. v. Moriana (No. 20-1573, June 15, 2022), provided California employers with much needed relief from the onslaught of wage-hour claims brought under the California Labor Code Private Attorneys General Act of 2004, Cal. Labor Code sections 2698 et seq. (the “PAGA”). The Court emphasized the preemptive effect of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (the “FAA”), finding that the FAA preempts a rule of California law that invalidates arbitration agreements containing waivers of the right to assert representative PAGA claims. The Court overruled the California Supreme Court’s rule to the contrary in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 380 (2014). The immediate impact of Viking River is to authorize motions by California employers utilizing mandatory arbitration agreements with class action waivers to dismiss PAGA claims brought in court or, alternatively, to compel arbitration of them.

PAGA authorizes “aggrieved employees” to act as private attorneys general to enforce California’s wage and hour law. PAGA has resulted in a proliferation of private lawsuits brought by such private attorneys general on behalf of themselves and other current or former employees to obtain civil penalties that previously could have been recovered only by the State in an enforcement action brought by California’s Labor and Workforce Development Agency (the “LWDA”).

In reversing the California courts, the Court reasoned that PAGA’s built-in mechanism of claim joinder conflicts with the FAA. The Iskanian rule unduly circumscribes the freedom of parties to determine “the issues subject to arbitration” and “the rules by which they will arbitrate,” and does so in a way that violates the fundamental principle that “arbitration is a matter of consent.” State law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the anticipated arbitration by introducing claims that the parties did not jointly agree to arbitrate.

The Court found that although the FAA did not preempt Iskanian’s prohibition on wholesale waivers of PAGA claims, the FAA preempted the Iskanian rule that PAGA actions cannot be divided into individual and non-individual claims. Accordingly, Viking River was entitled to compel arbitration of Ms. Moriana’s individual PAGA claim. PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once a court has ordered an individual claim to arbitration. Under PAGA’s standing requirement, a plaintiff has standing to maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action. As a result, Moriana lacked statutory standing to maintain her non-individual claims in court, and the correct course was to dismiss her remaining representative PAGA claims.

In her concurring opinion, Justice Sotomayor suggested that the majority opinion in Viking River is not the last word on PAGA claims:

In its analysis of the parties’ contentions, the Court also details several important limitations on the preemptive effect of the Federal Arbitration Act (FAA). As a whole, the Court’s opinion makes clear that California is not powerless to address its sovereign concern that it cannot adequately enforce its Labor Code without assistance from private attorneys general.

The Court concludes that the FAA poses no bar to the adjudication of respondent Angie Moriana’s “non-individual” PAGA claims, but that PAGA itself “provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” Thus, the Court reasons, based on available guidance from California courts, that Moriana lacks “statutory standing” under PAGA to litigate her “nonindividual” claims separately in state court. Of course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word. Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits. With this understanding, I join the Court’s opinion.

Key Takeaways
  • California employers facing PAGA actions filed in court may move to dismiss them or, alternatively, to compel arbitration if they have enforceable arbitration agreements with class and representative action waivers.
  • California employers should consider adopting a mandatory arbitration program with class and representative action waivers as a preemptive defense to PAGA actions.
  • Stay tuned for potential further action by the California Legislature to amend the PAGA and for the California courts to interpret and apply it to future cases.

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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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