Viking River Cruises: The Supreme Court scuttles use of California’s PAGA to navigate around arbitration

Arbitration has been successfully used in many cases to avoid class actions over the years.  This has been received with enthusiasm by some and consternation by others.  The latest line of cases used to forbid use of arbitration clauses to avoid representative actions has just been scuttled by the Supreme Court in Viking River Cruises, Inc. v. Moriana, 596 U.S. ___, No. 20-1573 (June 15, 2022).

Background

First some background.  Apparently not sharing the United States Supreme Court’s enthusiasm for using arbitration clauses to foreclose class actions by consumers and employees, a number of courts have rejected such use of arbitration clauses.  For example, the Ninth Circuit upheld a trial court’s refusal to order arbitration because an arbitration clause disallowing class actions was unconscionable and unlawful under California law.  But the United States Supreme Court held that state laws that forbid agreements that forestall class action arbitration are preempted and invalid under the Federal Arbitration Act of 1925 (“the FAA”).  AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

Similarly, addressing an employment claim in EPIC Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018), the Supreme Court held that the FAA requires courts to enforce arbitration agreements according to their terms, “including terms providing for individualized proceedings.”  Agreements forbidding class claims control. 

Enter California’s PAGA

California has a Private Attorneys General Act, PAGA for short.  PAGA allows  an aggrieved employee to initiate an action against a former employer “on behalf of himself or herself and other current or former employees” to obtain civil penalties.  Before PAGA these penalties could only have been recovered in an enforcement action brought by California’s Labor and Workforce Development Agency.  A plaintiff in a PAGA action sues as a proxy of the state and can place multiple claims against an employer in a single action. 

PAGA claims became popular in California as a way to combat arbitration clauses forbidding class or representative actions. This was particularly true after the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129, 148 (2014). There the court held that pre-dispute agreements to waive the right to bring representative PAGA claims are invalid as a matter of public policy. 

The Viking River Cruises case

Angie Moriana filed a PAGA action against Viking River Cruises, her former employer, for a violation of the California Labor Code, claiming she had not been paid her final wages within 72 hours, as required by California law. She also brought claims for other violations of the code as to other employees.  Ms. Moriana had two key clauses within the arbitration provisions of her employment agreement: 1) a class action waiver clause forbidding class actions and representative actions under PAGA, and 2) a severability clause stating that if the waiver is found invalid, the case would be litigated in court.

Let’s digress a moment; you may find this interesting.  The second clause was likely a reaction to a new strategy plaintiffs’ counsel began to employ in arbitration.  Faced with clauses forbidding class arbitration, they began filing thousands of individual arbitrations. Typically, corporate defendants are bound to pay the cost of arbitration.  So, when thousands of cases are filed, the employers began to face millions in arbitration fees.  When faced with requests by the respondent corporations to avoid arbitration and therefore this expense, courts have not been sympathetic.  See, e.g., Abernathy v. DoorDash, No.  C 19-07545 WHA (N.D. Cal. Feb. 20, 2020).  For more on all this, see my recent article at Daveadr.com, “Is Arbitration on the Ropes? Not Yet,” April 2022.  The last clause appears designed to avoid the huge expense filing of mass arbitrations can pose to employers.

Now, back to the heart of the case.  Viking moved to dismiss Ms. Mariana’s PAGA claim under the first clause and to arbitrate her individual claim.  The trial court denied the motion.  The California Court of Appeals affirmed.  It said that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims.  That decision was in line with the holding of the California Supreme Court in Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129, 148 (2014), that pre-dispute agreements to waive the right to bring representative PAGA claims are invalid.

The Supreme Court reins in the PAGA rule

On review of the Viking River Cruises case, the Supreme held that the FAA preempts the rule of California law that invalidates contractual waiver of the right to assert representative PAGA claims in arbitration. 

It began by noting that the FAA was “enacted in response to judicial hostility to arbitration.”  The FAA makes arbitration agreements as enforceable as any other contract. Thus, while courts may invalidate arbitration agreements based on defenses like fraud or unconscionability, it may not invalidate them based on legal rules that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. 

It then held that the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. Based on the severability clause in the parties’ agreement, Viking was entitled to enforce the agreement that mandated arbitration of Ms. Moriana’s individual PAGA claim.  But the lower courts refused to do so based on the rule that PAGA actions cannot be divided into individual and non-individual claims.  This was error.  The rule allowing a party to insert PAGA claims in arbitration means the parties are required to either arbitrate claims they never agreed to arbitrate, or to give up arbitration altogether to avoid such claims.  Either way, “the parties are coerced into giving up a right they enjoy under the FAA.” 

What was to become of the PAGA claims that could no longer be brought in arbitration?  They had to be dismissed.  To have standing to bring representative claims under PAGA, the plaintiff must have an individual claim.  Because that claim had to be pursued separately in arbitration, Ms. Moriana no longer had standing to bring a PAGA claim.

Thus, the upshot of the case was Ms. Moriana could pursue her individual claim in arbitration, but the PAGA claims simply went away.

The end of PAGA claims?

Viking River Cruises probably marks the end of using California’s PAGA to overcome arbitration clauses forbidding representative actions – for now.  Of course, that will depend in part on exactly how the arbitration clause at issue is written.

But in her concurrence, Justice Sotomayer threw out a lifeline.  She noted that the PAGA claims were dismissed in the case because PAGA didn’t provide standing unless a plaintiff had an accompanying individual claim. Thus, it was PAGA – and not the FAA – that mandated dismissal of Ms. Moriana’s PAGA claims.  But the California Legislature may, said Justice Sotomayer, be able to change standing under PAGA, within state law and constitutional limits. That could result in PAGA claims going forward even if a plaintiff’s individual claims had to be arbitrated.  Depending on the California legislature, PAGA’s voyage may continue in the future.