U.S. Supreme Court Holds Individual PAGA Claims Are Arbitrable
In a decision employers across California have been waiting for since December (see our initial article on this issue), the United States Supreme Court held this morning in Viking River Cruises, Inc. v. Moriana, that the Federal Arbitration Act (“FAA”) “preempts the rule of Iskanian insofar as it precludes division of Private Attorneys General Act (PAGA) actions into individual and non-individual claims through an agreement to arbitrate.” In a nutshell, a valid arbitration agreement with a PAGA representative action waiver can now be used to compel the plaintiff’s “individual” PAGA claim to arbitration and dismiss the “non-individual” PAGA claim.
[A note on terminology – the Supreme Court identified an “unfortunate feature” of the PAGA lexicon: the two meanings of “representative.” A PAGA claim is “representative” in the sense that the named plaintiff acts as a representative, or agent, of the state. It is also “representative” in the sense that the named plaintiff asserts claims sustained by other employees. To clear up this confusion, the Court used, and so do we, the term “non-individual” to refer to the latter meaning.]
The case stems from a lawsuit filed by Angie Moriana, a former sales representative for Viking River Cruises Inc. When she was hired, Moriana signed an arbitration agreement that contained a “Class Action Waiver” providing that in any arbitral proceeding, the parties could not bring any disputes as a class, collective, or representative PAGA action. When Moriana filed a PAGA claim against Viking, Viking moved to compel arbitration of Moriana’s “individual” PAGA claim and to dismiss her “non-individual” PAGA claim. The superior court, affirmed by the California Court of Appeal, denied the motion.
The denial was compelled by the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), in which the court held that arbitration agreements waiving the right to bring PAGA representative actions (that is, splitting PAGA actions into “individual” and “non-individual” components) are unenforceable. Since Iskanian, courts have consistently rejected employers’ attempts to enforce these types of representative action waivers in employment arbitration agreements.
The Court’s Decision
Today, the Supreme Court, in a nearly unanimous opinion, held that the rule that PAGA actions cannot be divided into individual and non-individual claims is preempted by the FAA. The Court reasoned that there is a conflict between PAGA’s procedural structure, whereby employees can 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, and the FAA’s guiding principle that parties have the freedom to determine the issues subject to arbitration and the rules by which they will arbitrate. Because of this conflict, “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 arbitration by introducing claims that the parties did not jointly agree to arbitrate.” Put another way, “[a] state rule imposing an expansive rule of joinder in the arbitral context would defeat the ability of parties to control which claims are subject to arbitration.”
So where does that leave Moriana’s claims? Viking is entitled to enforce its arbitration agreement with Moriana to the extent it mandated arbitration of Moriana’s individual PAGA claim. What about the non-individual claims? As the Court saw it, “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding. . . . As a result, Moriana lacks statutory standing to continue to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.”
This case radically changes the PAGA landscape. For nearly a decade, Iskanian has been an obstacle to using arbitration agreements with representative action waivers to compel individual, but not non-individual, PAGA claims to arbitration. Viking River has removed this obstacle.
Employers should not expect Viking River to be the final word on this topic. We expect that there will be efforts both in the courts and the state legislature to find ways around the decision, and we will be monitoring those efforts closely. Justice Sotomayor’s concurrence, for example, offers up suggestions to the California courts and legislature to dull the otherwise positive result from today. But for the moment, Viking River is a big win for employers.