A few weeks ago, we hinted at the possibility that the United States Supreme Court may overturn parts of the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014). Our prediction was spot on as the US Supreme Court did just that in a big win for employers.
Historically, California employees could avoid their arbitration clauses in part by asserting claims brought under California’s Private Attorney General Act (“PAGA”). PAGA allows employees to stand in the shoes of the State of California to enforce particular Labor Code violations that were – before the enactment of PAGA – only enforceable by the California Labor Workforce Development Agency.
PAGA authorizes aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations. The aggregation of PAGA civil penalties can create substantial financial liabilities for employers and, until the Court’s recent decision last week, employers could do little to minimize this exposure by virtue of well-crafted arbitration clauses.
The California Supreme Court in Iskanian previously held that an arbitration clause cannot force an employee to waive a representative action under the PAGA and any such arbitration provision was contrary to California public policy and unenforceable under state law. The Iskanian Court also held that this public policy rule did not run afoul of the Federal Arbitration Act (“FAA”) because the FAA was limited to arbitration agreements between private parties, such as employers and employees, but PAGA claims exist between the State of California and employers, and thus individual employees are without authority to waive or modify the State of California’s rights under PAGA.
VIKING RIVER CRUISES, INC. V. MORIANA
On June 15, 2022, the United States Supreme Court decided Viking River Cruises, Inc. v. Moriana (“Viking River Cruises”), No. 20-1573, 2022 WL 2135491 (U.S. June 15, 2022). The case stemmed from an arbitration agreement between the plaintiff-employee Angie Moriana and her employer, Viking River Cruises, Inc. Viking River Cruises, Inc. sought to enforce the arbitration agreement which purported to waive “representative” actions, including Moriana’s PAGA claim.
The U.S. Supreme Court ruled that the arbitration agreement required the arbitration of Moriana’s individual PAGA claims. In so ruling, the Court held that “[the] FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” In short, Viking River Cruises was entitled to enforce the parties’ arbitration agreement to the extent that it mandated arbitration of Moriana’s individual PAGA claim.
The Supreme Court recognized that its decision left other questions unaddressed. The Court explicitly acknowledged that “[t]he remaining question is what the lower courts should have done with Moriana’s non-individual claims.” The Court noted that its holding would not require such representative claims to be dismissed. PAGA, however, does not appear to leave any “mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding” because PAGA limits statutory standing to only those individuals who are contemporaneously maintaining an individual PAGA claim.
The Court’s remedy to this quandary was simple. Although its decision does not require the dismissal of Moriana’s non-individual PAGA claims, the limits of statutory standing under PAGA do, in fact, demand the dismissal of non-individual PAGA claims. Therefore, unless and until the California legislature modifies the limits of statutory standing under PAGA, well-drafted arbitration clauses can likely (in effect) force employees to waive their statutory right to bring PAGA claims for violations unrelated to themselves, and otherwise compel the arbitration of their individual PAGA claims.
The Court also appeared to leave unaddressed the question of whether an employee can even agree to arbitrate PAGA claims on a pre-dispute basis. Indeed, Viking River Cruises overturned Iskanian only “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” Viking River Cruises appeared to leave all other aspects of Iskanian intact.
Viking River Cruises is an overall victory for employers hoping to minimize their exposure to PAGA penalties. This decision will allow employers to limit the cost and risk that is inherent in any PAGA representative action. Employers should consult with employment counsel to update the scope of their arbitration agreements to compel arbitration of individual PAGA claims. Employers without arbitration agreements may consider entering into arbitration agreements that limit their exposure to PAGA claims asserted by their employees on a representative basis. Additionally, employers with existing arbitration agreements containing representative action waivers should consider the implication of Viking River Cruises on any pending lawsuits brought by an employee who voluntarily entered into arbitration agreements that required arbitration of representative actions, such as PAGA claims.