To Arbitrate, or Not to Arbitrate: Viking Cruises v. Moriana

The U.S. Supreme Court’s recent Viking Cruises v. Moriana decision broadens the impact of PAGA claim arbitration clauses in employment agreements, potentially restricting the ability of employees in California to litigate claims under the Private Attorneys General Act.

California’s Private Attorneys General Act (“PAGA”) enables employees to sue their employers for labor or health and safety violations on behalf of the State. Any proceeds are split between the State and the aggrieved employee or employees.

Prior to the Court’s Viking Cruises decision, California law specifically permitted an employee to file a PAGA claim as an agent of the Attorney General’s office on behalf of themselves and others — even if their individual, non-PAGA claim was compelled to arbitration — as held in Iskanian v. CLS Transp. Los Angeles LLC, 58 Cal. 4th 380 (2014). Because representative PAGA suits joined claims on behalf of potentially hundreds of current and former employees, the potential recovery for plaintiff’s attorneys could be millions of dollars depending on the number and nature of Labor Code violations. The Supreme Court, however, held that Iskanian conflicted with the Federal Arbitration Act (“FAA”), which broadly permits parties to contractually agree to arbitration. With the holding in Viking Cruises, employers now have the right to demand individual PAGA claims be arbitrated, making the ability to file non-individual PAGA claims much more difficult.

Procedural History 

In Viking Cruises, Plaintiff entered into an arbitration agreement that contained a contractual waiver for any dispute to be brought, heard, or arbitrated as a class, collective, representative, or private attorney general action. The arbitration agreement also included a severability clause which stated that if a court found part of the waiver unenforceable, the class, collective, representative, and/or private attorney general action would be litigated in court while the enforceable portion of the arbitration agreement would be arbitrated. Plaintiff filed a PAGA claim on behalf of herself and other employees for wage and hour violations. Defendant filed a motion to compel Plaintiff’s individual PAGA claim to arbitration and dismiss the PAGA claims on behalf of the other employees. The trial court denied Defendant’s motion to compel, and the Court of Appeal affirmed the dismissal on the basis that categorical waivers of PAGA standing were contrary to state policy and PAGA claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims. The Supreme Court reversed the Court of Appeal decision —holding that per the Federal Arbitration Act, PAGA claims can in fact be split into arbitrable individual claims and nonarbitrable “representative” claims.

Supreme Court Holding

The primary issue for the Court was PAGA’s joinder mechanism that allowed joinder of non-individual claims in PAGA actions. In the 8-1 decision authored by Justice Alito, the Court held the Federal Arbitration Act preempted this joinder mechanism and Iskanian’s prohibition on contractual divisions of PAGA actions, since it violated the essential principle that arbitration is a matter of consent between both parties. The Court explained that state law cannot condition the enforceability of an agreement to arbitrate on the availability of a procedural mechanism that would allow a party to introduce claims in arbitration the parties did not jointly agree to arbitrate. In other words, a state cannot impose a rule that coerces parties to agree to arbitrate individual claims that would also require them to arbitrate a potentially unlimited number of claims (PAGA claims here) in the same arbitration proceeding.

However, the Court upheld Iskanian’s prohibition on wholesale PAGA claim waivers. While Defendant argued that Iskanian’s prohibition on wholesale claim waivers was inconsistent with the FAA since PAGA created an inherently representational form of action and Iskanian forced the parties to arbitrate under PAGA’s procedures or forgo arbitration altogether, the Court disagreed. The Court explained it had never ruled that the FAA imposed a duty on states to render all forms of representative standing waivable by contract. Additionally, the Court held there was no evidence suggesting Congress intended the states to reshape their agency law governing who could assert representative claims on behalf of whom to ensure parties will never have to arbitrate disputes in a proceeding that deviates from bilateral arbitration.

The Court ultimately held employees may agree to arbitrate PAGA claims on an individual basis; however, the individual component of a PAGA claim based on injuries personally suffered by the individual (Labor Code violations) must be separated from the “representative” portion of a PAGA claim that alleges violations for numerous individuals. Because the severability clause in this case entitled the parties to arbitrate Plaintiff’s individual PAGA claim and no mechanism existed in PAGA allowing a court to adjudicate non-individual, representative claims without the individual claim still remaining in the suit, the Court ruled Plaintiff no longer had standing to bring her representative PAGA suit and it was dismissed.

Implications

The long-term implications of this ruling are not entirely clear. In the meantime, employers will likely have to amend their arbitration agreements to compel binding arbitration for individual PAGA claims for new employees. Additionally, plaintiff attorneys bringing non-individual, representative PAGA claims will have to re-evaluate their clients’ standing to bring suit and will likely have to withdraw several of their claims if there is a binding arbitration agreement pertaining to individual PAGA claims. However, as Justice Sotomayor highlighted in her concurrence, the California legislature could modify the scope of statutory standing under PAGA to permit an individual who does not have an individual claim to bring a PAGA representative action. This depends entirely on how the California legislature views the outcome of this ruling. While California has generally passed legislation favorable to employees, the proliferation of representative PAGA claims since Iskanian has highlighted the negative impact these suits have had on employers defending multiple lawsuits for essentially the same cause of action.

Moreover, the loophole in Iskanian served more to benefit plaintiff’s attorneys in being able to recover large sums for technical violations employees may not have even been aware of rather than giving employees an avenue to recover for individual harms. Based on this, the California legislature may be hesitant to alter PAGA’s standing requirements, so as to force plaintiff’s attorneys to build a stronger case before filing a representative PAGA action. However, until the short-term impacts of this ruling are known, it is difficult to predict whether the California legislature will contemplate taking any action.