On June 15, 2022, in a blockbuster case known as Viking River Cruises, Inc. v. Moriana, the U.S. Supreme Court finally answered a burning employment law issue here in California – whether California’s rule prohibiting the use of arbitration agreements to force an employee to waive her right to bring a representative action under PAGA is preempted by the Federal Arbitration Act (FAA).
What is PAGA?
California’s Private Attorneys’ General Act, better known as “PAGA,” allows a single employee to file a lawsuit against an employer to recover civil penalties owed to the State of California for Labor Code violations suffered by that employee and all other employees.
The original concept for PAGA was a simple one: due to the State’s limited resources to enforce labor laws, the State wanted to encourage individual employees and their lawyers to do that enforcement work on their own. In exchange, the State would allow that employee, and all other “aggrieved employees” who suffered Labor Code violations, to share 25% of the civil penalties that ordinarily would have gone entirely to the State. Plus, as a way to incentivize lawyers to take PAGA cases and do this investigation work, the State would require the employer to pay the employee’s attorneys’ fees on top of all of the civil penalties imposed.
PAGA has created a costly legal nightmare for California employers, as we discussed here. Damages and attorneys’ fees awards can quickly skyrocket into the millions of dollars, even for a small business. PAGA has been so controversial that it was quickly amended within its first year (2004). It has been since been amended two more times. The U.S. Chamber of Commerce claims that PAGA imposes such harsh financial penalties that it is unconstitutional. One trial judge in California agreed and ruled PAGA unconstitutional, a case which we blogged about here. Yet PAGA still survives, as many California employers know all too well.
In an effort to protect themselves from PAGA’s devastating consequences, many California employers have tried to use arbitration agreements to get PAGA cases out of the hands of California’s notoriously liberal juries and into the more conservative hands of a private arbitrator.
But that has never been easy in California given its hostility to employee arbitration agreements.
The California’s 2014 Decision in Iskanian v. CLS Transportation
In 2014, in Iskanian v. CLS Transportation, the California Supreme Court held that, any waiver of an employee’s right to pursue a representative PAGA action violates public policy and is unenforceable in California.
On the issue of whether the FAA applied to preempt this result – and to compel arbitration of the PAGA claim – the IskanianCourt held that the FAA does not preempt the Court’s newly announced rule because the real party in interest in a PAGA claim is the State of California – not the employee. Thus, the FAA’s strong public policy favoring arbitration is not infringed, the Court ruled, because the real party in interest – the State of California – never signed any agreement to arbitrate. Although the employee did sign an agreement to arbitrate his individual PAGA claims, the Court ruled that the employee’s individual claims cannot be split from his representative claims. Thus, the employee’s entire PAGA claim survives the arbitration agreement waiver and cannot be forced into arbitration.
Thus, in California, ever since Iskanian, if a California employer were to require an employee to sign an arbitration agreement, and if that agreement contained a waiver of the employee’s right to bring a representative PAGA claim, then that portion of the arbitration agreement would be void and unenforceable. Thus, the result was that both the individual and representative portion of the employee’s PAGA claim would have to be litigated in court because the PAGA claim could not be divided into two separate parts.
In the 8 years since the California Supreme Court’s decision in Iskanian, the U.S. Supreme Court has issued many decisions focused on the issue of FAA preemption of arbitration agreements. We blogged about one of these decisions, Epic Systems Corp. v. Lewis, here. State and federal courts in California courts took up the issue in numerous other cases, which we blogged about here. And, in Kim v. Reins, the California Supreme Court confirmed Iskanian’s analysis that there was no “individual component” of a PAGA claim that could be separated from the representative claims of all aggrieved employees. We blogged about the Kim v. Reins decision here.
But the U.S. Supreme Court stayed silent about the FAA’s impact on PAGA…until now.
The Viking River Cruises v. Moriana Decision
In its June 15, 2022 decision in Viking River Cruises v. Moriana, the U.S. Supreme Court first ruled that the FAA does not preempt California’s Iskanian rule insofar as that rule prohibits an employer from using an arbitration agreement to force an employee into a wholesale waiver of her PAGA claims. Thus, California is still free to adopt a rule, like that in Iskanian, that makes certain statutory rights not waivable by contract. As a result, the Court let stand that portion of Iskanian that held that a waiver of PAGA’s representative claims was unenforceable.
However, the Iskanian rule had a second component – that is, it also prohibited an employee’s PAGA claim from being divided into its “constituent claims,” one claim for the employee’s individual penalties and another for the penalties due to all other aggrieved employees. And that second component unduly hampers arbitration, the Court ruled, because this “indivisibility rule effectively coerces parties to opt for a judicial forum rather than forgoing the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution.” By requiring employers to choose between (a) arbitrating all of the aggrieved employees claims, or none of them, this indivisibility rule was coercive and “incompatible with the FAA.” Accordingly, the Court held that the FAA preempts the Iskanian rule insofar as it precludes the “division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.”
The result was that the Court ordered the employee’s individual PAGA claim into arbitration, consistent with the terms of the arbitration agreement. The representative PAGA claims that survived – those claims of all other aggrieved employees – had to be dismissed, the Court concluded, because the PAGA plaintiff who was bound to arbitration now lacked standing to prosecute claims on behalf of other aggrieved employees.
In other words, the Court split the PAGA claim into two different components. Then, the Court sent one component – the employee’s individual claim – to arbitration and ordered the other component – the far larger, more costly representative claim for all other aggrieved employees – to be dismissed. The Court accomplished a result that Iskanian said was not allowed, all while claiming that Iskanian’s main holding was left intact and not preempted by the FAA.
Say What?
Wow. Do you need a microscope to see the Court’s hair-splitting that occurred? Does the Court’s logic seem tortured? If you’re baffled by what you just read, you’re not alone. Even the Supreme Court justices could not agree on a singular coherent rationale for reaching their decision, as evidenced by the numerous concurring opinions (and one dissent) that were filed. They agreed on the outcome by an 8 to 1 margin – that California employers must be allowed to force a PAGA claim into arbitration – but the justices could not agree to a singular rationale to get there. Thus, the sometimes-strained logic and rationale that appears in the final published opinion.
Setting aside the splintered opinion, this is a stunning result. While claiming to support the California Supreme Court’s decision in Iskanian, the U.S. Supreme Court just reached an outcome that is completely the opposite of what Iskanian required. That’s judicial slight-of-hand at its finest, rising almost to Scalia-like heights in its jaw-dropping audaciousness.
What Should California Employers Do Now?
With its tortured logic and all, Viking River Cruises is now the proverbial “law of the land.” So what should California employers do now?
As a result of the Viking River Cruises decision, all California employers finally have a weapon they can use to defend themselves from the devastating consequences of PAGA. That weapon is a properly drafted employee arbitration agreement.
California employers who currently utilize arbitration agreements with their employees should review those agreements and revise them so that they now compel employees to arbitrate their individual PAGA claims, consistent with the language from Viking River Cruises. Employers should also ensure that their arbitration agreements contain a “severability clause” like that in the Viking River Cruises agreement.
California employers who do not currently utilize employee arbitration agreements should swiftly implement them, using language tailored to match that in Viking River Cruises as well as other requirements imposed by California law.
You can read the U.S. Supreme Court’s full decision here.
