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Noted with Interest: Supreme Court Holds that PAGA Claims Can Be Compelled to Individual Arbitration

September 02, 2022
Business Litigation Reports

On June 14, 2022, the United States Supreme Court issued an 8-1 decision in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022), holding that claims brought under the California Private Attorneys General Act (“PAGA”) can be split into individual PAGA claims and representative PAGA claims, thereby allowing employee PAGA claims to be compelled to individual arbitration. The Supreme Court further held that, because of PAGA’s standing requirements, when an employee’s individual PAGA claims are compelled to arbitration, the employee loses standing to bring any representative PAGA claims in court, effectively foreclosing employees from pursuing such representative claims where the employee is subject to an agreement requiring individual arbitration. On the basis of preemption under the Federal Arbitration Act (“FAA”), the decision reversed a California Supreme Court ruling that categorical waivers splitting PAGA claims into arbitrable “individual” claims and nonarbitrable “representative” claims was contrary to California policy.

Summary of PAGA

PAGA was enacted by the California Legislature in 2004 to address a concern that the state’s Labor and Workforce Development Agency, which had the authority to bring enforcement actions to impose civil penalties against employers for violations of the Labor Code, did not have sufficient resources to compel the appropriate level of employer compliance. Accordingly, PAGA permits individual employees aggrieved by a Labor Code violation to bring private actions on the state’s behalf. Under PAGA, the employee can seek civil penalties on behalf of themselves and other current or former employees for various Labor Code violations.

In 2014, the California Supreme Court issued a decision precluding employers from enforcing pre-dispute arbitration agreements to the extent the agreements require employees to arbitrate PAGA claims on an individual basis—i.e., where the arbitration agreement forecloses the ability to pursue civil penalties on behalf of other allegedly aggrieved employees. Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014). Iskanian held that, although employees could waive their right to participate in class actions, they could not waive the right to bring a PAGA action on behalf of the state. The court further suggested that individual PAGA claims could not be arbitrated because bringing these claims in separate arbitrations would not serve the deterrence purpose of PAGA. The court subsequently held, based on Iskanian, that a PAGA claim could not be divided into arbitrable individual claims and non-arbitrable representative claims because a PAGA action is a single claim for civil penalties brought on behalf of all aggrieved employees. Kim v. Reins, 9 Cal. 5th 73 (2020).

Background of Viking River Cruises Action

The plaintiff, Angie Moriana, was a former sales representative for Viking River Cruises. In connection with her employment, Moriana signed a mandatory bilateral arbitration agreement in which she agreed to arbitrate claims arising out of her employment. The arbitration agreement contained a “class action waiver,” which precluded both class actions and representative actions brought under PAGA.

At the conclusion of her employment, Moriana filed a PAGA claim in California state court alleging the company had failed to timely pay her final wages. She asserted a single violation of the California Labor Code on her own behalf in addition to a “wide array” of representative claims on behalf of all current and former aggrieved employees with Labor Code claims against Viking River Cruises. Viking moved to compel arbitration of Moriana’s individual claim and to dismiss her representative claims. The state court denied Viking’s motion, basing its decision on Iskanian’s holding that a PAGA claim could not be split into arbitrable individual and non-arbitrable representative claims, and noting that—as a result—the entire claim was outside the coverage of the FAA.

Supreme Court Decision

The United States Supreme Court partially reversed the California Supreme Court’s decision in Iskanian, holding that the FAA preempted Iskanian to the extent the case prohibited dividing PAGA claims into individual and representative claims. In particular, the Court held that, given PAGA’s expansive joinder rules, which permit the joinder of other aggrieved employees’ claims regardless of whether the underlying arbitration agreement committed those claims to arbitration, the indivisibility rule “unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration’ and ‘the rules by which they will arbitrate.’” Viking River Cruises, Inc., 142 S. Ct. at 1912. Such a result would be incompatible with the FAA.

The Court rejected the idea that a PAGA cause of action premised on multiple different Labor Code violations is a singular claim, holding instead that “a PAGA action asserting multiple code violations affecting a range of different employees does not constitute ‘a single claim’ in even the broadest possible sense, because the violations asserted need not even arise from a common ‘transaction’ or ‘nucleus of operative facts.’” Id. at 1919-20. As a result, the Court determined Moriana’s individual claim could be separated and compelled to arbitration.

The Supreme Court further held that “[u]nder PAGA’s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action.” Because the plaintiff was required to arbitrate her individual PAGA claim, the Court held she lacked standing to maintain her representative claims in court, and therefore dismissed those claims.

Notably, however, Justice Sotomayor’s concurring opinion left open the possibility that the Court’s holding may be temporary, stating that “the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.” It remains to be seen whether and how the California legislature will respond to the Viking River Cruises decision.

Impact of Decision

Going forward, and in the absence of any further judicial or legislative action, employers should keep in mind several important practical implications of this decision.

  • Every California employer should have an attorney review their existing arbitration agreements to account for this decision. Many arbitration agreements exclude PAGA claims because of Iskanian’s prohibition against individual arbitration of those Because arbitration is a matter of contract, if an arbitration agreement contains such a PAGA exclusion, employers will be forced to litigate their PAGA claims in court, regardless of the Supreme Court’s recent decision.
  • California employers should consider implementing arbitration agreements to the extent they do not already have such agreements in The Supreme Court’s decision now provides a way for employers to minimize the risk of representative PAGA claims with a properly drafted arbitration agreement.
  • Consistent with Justice Sotomayor’s concurring opinion, employers should prepare for a possible amendment to PAGA which could, among other things, provide a PAGA plaintiff with standing to assert non-individual claims when their individual claims are ordered to arbitration.