Supreme Court Upholds Right to Compel Arbitration of Claims Brought Under California Private Attorneys General Act (PAGA): Decision Allows Employees and Employers to Agree to Arbitration of Individual PAGA Claims, Which Generally Will Preclude “Representative” PAGA Claims on Behalf of OthersSullivan & Cromwell LLP - June 21, 2022
Angie Moriana, a former sales representative at the cruise company Viking River Cruises, Inc. (Viking), brought individual and representative claims against Viking under PAGA in California state court, alleging that Viking failed to provide her with her final wages within 72 hours of her last day of work in violation of the California Labor Code and asserting various other Labor Code violations on behalf of other Viking employees. In her employment agreement with Viking, Moriana agreed to arbitrate any disputes arising out of her employment, and waived the right to bring any arbitration dispute as a “class, collective, or representative PAGA action.”
Viking sought to compel arbitration of Moriana’s individual claim and moved to dismiss her representative claims. The trial court denied that motion, and the California Court of Appeal affirmed, relying on the California Supreme Court’s 2014 decision in Iskanian v. CLS Transp. Los Angeles to conclude that (1) a wholesale waiver of the right to bring PAGA claims in court, rather than in arbitration, contravenes California public policy, and (2) PAGA claims may not be divided into individual claims and non-individual claims. The question before the Supreme Court was whether the FAA preempts this California precedent invalidating waivers of the right to assert representative claims under PAGA in court.
The Supreme Court’s Decision
The Court explained that PAGA’s mechanism for claim joinder “permits ‘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.” Under Iskanian, parties could not contract around this joinder because Iskanian invalidated agreements to arbitrate only individual PAGA claims. The Court found that PAGA’s “built-in mechanism of claim joinder,” together with Iskanian’s prohibition on agreements to arbitrate individual PAGA claims, is incompatible with arbitration because it infringes parties’ freedom to determine the scope of the issues subject to arbitration, thereby “violat[ing] the fundamental principle that ‘arbitration is a matter of consent.’” Because representative PAGA claims are at odds with the arbitration forum and cannot be brought in arbitration without all parties’ consent, and Iskanian prohibits parties from dividing PAGA claims into individual and representative claims, the Court concluded that Iskanian “effectively coerces parties to opt for a judicial forum rather than forgoing the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution,” which “is incompatible with the FAA.”
The Court therefore invalidated Iskanian’s prohibition on separating individual PAGA claims from representative PAGA claims, allowing Viking to compel arbitration of Moriana’s individual PAGA claim separate from her representative claims. The Court further concluded that Moriana’s representative PAGA claims could not survive in court as a matter of California law, because “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.” In other words, PAGA requires an individual cause of action as a prerequisite to bring representative claims. Therefore, the Court concluded that “the correct course is to dismiss [Moriana’s] remaining [representative] claims.”
In a brief concurrence, Justice Sotomayor noted that because the Court’s conclusion that a plaintiff must be able to bring an individual PAGA claim in court in order to also bring a representative PAGA claim was based on an interpretation of California law, California courts “will have the last word” on whether that interpretation is correct. The California legislature, she noted, can amend PAGA’s standing requirements in order to avoid cases like Moriana’s, which leave employees subject to mandatory arbitration agreements without any forum to bring representative PAGA claims. Justice Sotomayor specifically stated that “the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”
Justice Barrett also authored a concurrence, joined by Justices Kavanaugh and Roberts, which agreed that PAGA’s joinder mechanism resembled “other aggregation devices that cannot be imposed on a party to an arbitration agreement” and thus supported the majority’s conclusion, but found that the majority’s discussion of the bilateral nature of PAGA actions, and their ruling striking down Iskanian’s prohibition on severing individual and representative PAGA cases, involved “disputed state-law questions” that were “not pressed” in this case, and were “unnecessary to the result.” Justice Thomas dissented on the grounds that “the Federal Arbitration Act . . . does not apply to proceedings in state courts” and therefore “does not require California’s courts to enforce” the arbitration agreement at issue here, given its prohibition on arbitrating representative PAGA claims. For that reason, Justice Thomas said he would uphold the decision of the California Court of Appeals, which invalidated the contract term at issue and allowed Mariana’s claims to proceed in court.
As a result of the decision, California employers may be able to effectively prevent representative PAGA claims by requiring employees to agree to individual arbitration of PAGA claims, which would leave them without standing to bring representative PAGA claims in court. Still, employers should be mindful that Viking River Cruises does not put an end to representative PAGA suits for employees not subject to such mandatory arbitration clauses, who can still bring individual and representative PAGA claims in court. And, as Justice Sotomayor noted in her concurrence, California may reinterpret or amend PAGA to allow employees who have agreed to individual arbitration to nevertheless bring representative claims in court.