Supreme Court Rules FAA Ahead of California Ban on Waiver of Joint PAGA Claims

On June 15, 2022, the Supreme Court ruled in Viking River Cruises v. Moriana that a rule in California law that prohibits contractual waivers of claims under the California Attorney General Act is invalid insofar as it applies to a plaintiff employee bringing an action on behalf of others employees.

Background

Under California’s Private Attorney General Act (PAGA), an employee may act as a private attorney general to recover civil penalties from an employer for violating California’s labor code. A plaintiff in a PAGA action is considered to be acting as an agent of the state, with 75% of the recovery going to the state. A PAGA action is similar to a class action or class action in that the employee seeks damages as a representative of other employees. This case involves the interaction between the actions of PAGA and the FAA.

The Respondent Angie Moriana worked as a sales representative for the Applicant Viking River Cruises for approximately one year. After leaving the company, she filed a PAGA lawsuit against Viking, alleging that she and other Viking employees had suffered California Labor Code violations. Viking invoked Moriana’s employment contract, which required him to bring any employment disputes to individualized arbitration, and he decided to impose individual arbitration and dismiss Moriana’s non-individual claims.

Viking and Moriana disagreed on the line of precedent that should govern the relationship between a PAGA claim and the FAA. In 2014, the California Supreme Court determined that an arbitration agreement was inapplicable to a PAGA claim because such an agreement would constitute a waiver of state protections. iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129 (California 2014). In effect, iskanian held that because each PAGA claim is understood to be the state’s claim and the state has not agreed to arbitrate, such claim cannot be the subject of an arbitration agreement and is not under the control of the FAA. Before the United States Supreme Court, Moriana argued that California law has clearly and consistently invalidated contractual waivers of the ability to bring a representative claim in any forum and that the arbitration agreement should not be applied with regard to the PAGA action of Moriana.

Viking, on the other hand, argued that the iskanian rule is pre-empted by the FAA and that the application of the iskanian rule in California is inconsistent with Supreme Court precedent, including AT&T Mobility LLC v. Design563 US 333 (2011), and Epic Systems Corp. v. lewis, 138 S.Ct. 1612 (2018). In those cases, the Supreme Court held that the FAA preempted California statute’s exclusion of bilateral arbitration with respect to class action lawsuits and class action lawsuits, respectively. Relying on these cases, Viking argued that PAGA claims are also preempted by the FAA and that Moriana’s arbitration agreement with Viking should be enforced.

The trial court denied Viking’s motion to compel arbitration, and the California Court of Appeals upheld. After the California Supreme Court denied certiorari, the U.S. Supreme Court granted review to determine whether the FAA required enforcement of a bilateral arbitration agreement providing that an employee may not raise representative claims, including under PAGA.

The Supreme Court decision

In an 8-to-1 decision, the Supreme Court reversed the decision of the California Court of Appeals and found that the iskanian The rule is pre-empted by the FAA “to the extent that it prevents the division of PAGA actions into individual and non-individual claims through an arbitration agreement.” Justice Alito wrote the majority opinion, joined by Justices Breyer, Sotomayor, Kagan and Gorsuch, with Chief Justice Roberts and Justices Kavanaugh and Barrett joining in part. Justices Sotomayor and Barrett also filed concurring opinions, the latter being joined by Justice Kavanaugh and in part by Chief Justice Roberts. Justice Thomas dissented.

The majority opinion explained that the word “representative” is used in the PAGA context in two different senses – first, in that the employees are acting as representative agents of the state, and second, in that a PAGA action may be brought on behalf of other employees. In the first sense, every PAGA action is representative, but in the second sense, a PAGA action can be individual (arising from the plaintiff’s own injury) or representative (alleged violations suffered by other employees). With respect to the second category, the Court noted that it would be inconsistent with the FAA to require a party to submit to class arbitration when it would have accepted only traditional bilateral arbitration. Under the FAA, parties have control over the matters they choose to submit to arbitration, and allowing additional claims through this type of class joinder would eliminate that control.

The Court found that the same was not true for the first category of cases — where the plaintiff acts as an agent of the state. In coming to this conclusion, the Court disagreed with Viking’s suggestion that the iskanian the total ban on the rule on PAGA waivers is pre-empted by the FAA because all PAGA claims are representative. Instead, the Court found that a single agent acting for a single principal is consistent with bilateral arbitration.

Based on this distinction, the Court ruled that the FAA was ahead of the iskanian rule with respect to non-individual complaints, but that iskanian rule remains valid insofar as it prohibits a “global waiver of PAGA claims” on the basis that the plaintiff is acting as an agent of the state. Accordingly, the Court concluded that Viking has the right to compel arbitration regarding Moriana’s individual claim, and once that claim is severed from non-individual claims, Moriana no longer has standing to litigate non-individual claims in court. .

In a brief agreement, Judge Sotomayor noted that California courts have “the final say” on whether the court’s understanding of California law with respect to standing is correct, and that the legislature California may modify the PAGA requirements for non-individual actions within the limits of the California and federal constitutions.

Judge Barrett also wrote separately, joining the court’s opinion only with respect to its discussion of the inconsistency between joining claims under PAGA and FAA. She wrote in agreement to say she would go no further than that and considered the remaining discussion – including discussion of Moriana’s ability to litigate non-individual claims – unnecessary. Justice Kavanaugh joined in endorsement of Justice Barrett in full and Chief Justice Roberts joined in part. Unlike Justices Barrett and Kavanaugh, however, the Chief Justice joined in the Court’s discussion of the history of the iskanian rule and the facts involved in this dispute.

Judge Thomas dissented on the grounds that he does not consider the FAA to apply to proceedings in state courts. He would thus have upheld the judgment of the California Court of Appeals.

Consequences

The Viking River Cruises The decision is another in a series of cases in which the Supreme Court favors the application of an arbitration agreement more strongly than California courts. The opinion is notable in that it garnered the support of eight of the nine judges, in whole or in part. But the court did not fully accept Viking’s position on the FAA’s preventive effect, and the disagreement among the judges on standing issues makes the full impact of the ruling uncertain. In particular, the concurring opinions leave the door open for California courts or the legislature to modify the scope of an employee’s statutory status under PAGA to allow him or her to bring non-individual claims in court.

It also remains to be seen how this decision will affect California’s AB 51, which prohibits the use of binding arbitration agreements as a condition of employment. In response to a challenge to this law, the Ninth Circuit upheld the ban, United States Chamber of Commerce v. bonta13 F.4th 766 (9th Cir. 2021), but he adjourned a request for rehearing en banc pending the Viking River Cruises opinion. Employers should continue to monitor these issues and ensure that existing arbitration agreements reflect any changing circumstances.

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