US Supreme Court: Federal Arbitration Act preempts California’s Iskanian rule prohibiting individual arbitration of PAGA claims

Last week, the United States Supreme Court issued its decision in Viking River Cruises, Inc. v Moriana, 2022 WL 2135491 (June 15, 2022).  In an 8-1 decision written by Justice Samuel Alito, the Court concluded the Federal Arbitration Act (FAA) preempts the California Supreme Court’s decision in Iskanian v CLS Transp. Los Angeles, LLC, 58 Cal.4th 380 (2014), to the extent it prevents parties from arbitrating claims under the California Private Attorneys General Act (PAGA) on an individual basis.

The key rulings of the Court are as follows:

• The Court found Iskanian uses “representative” in two senses. First, Iskanian uses “representative” to distinguish between “individual” PAGA claims, which Iskanian held could not be arbitrated, and “representative” PAGA claims, which sought civil penalties for all Labor Code violations with respect to all employees. The Court held the FAA does preempt the Iskanian rule to the extent it does not allow parties to agree to arbitrate PAGA claims on an individual basis.
• Second, PAGA is a “representative action” because the PAGA plaintiff represents the state in pursuing civil penalties for violations of the Labor Code. The FAA does not preempt the Iskanian rule requiring PAGA to be arbitrated on a “representative” basis in this sense. Likewise, the FAA does not preempt California from prohibiting the waiver of PAGA claims simply because the PAGA plaintiff represents the state.
• The Court also held that California law does not allow representative PAGA claims to be maintained in the absence of an individual PAGA claim in the same proceeding, and so PAGA representative claims should be dismissed for lack of statutory standing when individual PAGA claims are compelled to arbitration.

Factual and procedural background

Plaintiff Angie Moriana worked for Viking River Cruises, Inc. (Viking) as a sales representative who had entered into a mandatory arbitration agreement requiring her to submit any dispute arising out of her employment to binding arbitration. The plaintiff’s agreement contained a class waiver prohibiting the parties from bringing any dispute as a class, collective or representative action under PAGA. The agreement also included a severability clause, providing that, if any part of the waiver was found to be invalid, those disputes would be litigated in court, but the remainder would be enforced in arbitration.

The plaintiff filed suit against Viking in the Los Angeles County Superior Court alleging violations of the California Labor Code under a single PAGA cause of action.  While the only claim pertaining to the plaintiff was that Viking failed to timely provide her with final wages after she left the company, her PAGA claim also encompassed other Labor Code violations for overtime pay and non-compliant meal and rest periods, which were allegedly suffered by other “aggrieved employees.”

Viking moved to compel arbitration of plaintiff’s individual PAGA claims and dismiss her non-individual PAGA claims based on the US Supreme Court’s decision in Epic Systems Corp. v Lewis, 138 S.Ct. 1612 (2018) (Epic Systems). Relying on Iskanian, the trial court denied Viking’s motion, holding the class action waiver prohibiting the parties from arbitrating representative actions under PAGA was contrary to California public policy and the PAGA action could not be split into arbitrable “individual” claims and non-arbitrable “representative” claims.

The California Court of Appeal affirmed the trial court’s holding, and the California Supreme Court denied review. After years of denying certiorari or declining to hear other similar cases challenging the arbitrability of PAGA claims, the US Supreme Court granted certiorari in Viking to decide whether the FAA preempts the Iskanian rule invalidating contractual waivers of the right to assert representative claims under PAGA.

Supreme Court clarifies “principal” and “secondary” rules established by Iskanian

In Iskanian, the California Supreme Court held that pre-dispute agreements waiving the right to bring “representative” PAGA claims are invalid as a matter of public policy. Owing to the unique nature of PAGA actions “prompt[ing] the development of an entire vocabulary unique to the statute,” the Supreme Court in Viking found it necessary to distinguish the two ways “representative” is used in PAGA actions.

In the first sense, the Supreme Court acknowledged that “California precedent holds that a PAGA suit is a ‘representative action’ in which the employee plaintiff sues as an ‘agent or proxy’ of the state.” Unlike other provisions in the California Labor Code which create rights actionable through private causes of action, Iskanian held PAGA did not create any private rights or claims belonging to employees in their “individual capacities,” but rather it “gives employees a right to assert the State’s claims for civil penalties” where the state is always “real party in interest in the suit.” The Court found that Iskanian prohibits waivers of “representative” PAGA claims in the first sense (Iskanian’s “principal rule”) because it prohibited parties “from waiving representative standing to bring PAGA claims in a judicial or arbitral forum.”

PAGA claims may also be characterized as “representative” when they are predicated on Labor Code violations sustained by employees other than the PAGA plaintiff.  PAGA contains a rule of “claim joinder” permitting an employee with statutory standing to assert multiple claims for penalties with respect to the violations of the Labor Code rights of other employees against an employer under a single cause of action.

Such a rule “radically expands the scope of PAGA actions” because “[a]n employee who alleges he or she suffered a single violation is entitled to use that violation as a gateway to assert a potentially limitless number of other violations as predicates for liability.” Using “representative” in the second sense, the Court found Iskanian adopted a “secondary rule” that invalidates agreements “to separately arbitrate or litigate ‘individual PAGA claims for Labor Code violations that an employee suffered,’ on the theory that resolving victim-specific claims in separate arbitrations does not serve the deterrent purpose of PAGA.”

Supreme Court upholds Iskanian’s principal rule prohibiting waivers of representative standing to pursue PAGA claims

In analyzing the Iskanian rules, Justice Alito explained that the Court has interpreted Section 2 of the FAA (9 U.S.C. § 2) to have two clauses: an “enforcement mandate,” which renders agreements to arbitrate enforceable as a matter of federal law, and a “saving clause,” which permits invalidation of arbitration clauses on grounds applicable to “any contract.” Together, these rules establish “an equal-treatment” principle: A court may invalidate an arbitration agreement based on “generally applicable contract defenses” like fraud or unconscionability, but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

Viking argued the Court’s decisions in AT&T Mobility LLC v Concepcion, 563 U.S. 333 (2011) and Epic Systems required enforcement of PAGA representative action waivers on the grounds that PAGA creates a form of class or collective proceeding. But the Court found that a PAGA action was not the same as a class action because the PAGA plaintiff is only representing the state and not adjudicating individual claims of multiple third parties, which require special class procedures to ensure the class plaintiff can adequately represent these claims.

While PAGA plaintiffs represent a principal (the state) with potentially a vast number of claims, which can greatly increase risks to defendants, “our precedents do not hold that the FAA allows parties to contract out of anything that might amplify defense risks.” Moreover, while bilateral arbitration is “the prototype of the individualized and informal form of arbitration protected from undue state interference by the FAA,” nothing in the FAA “establishes a categorical rule mandating enforcement of waivers of standing to assert claims on behalf of absent principals.” Indeed, “[n]on-class representative actions in which a single agent litigates on behalf of a single principal are part of the basic architecture of much of substantive law,” such as shareholder-derivative suites, wrongful-death actions or trustee actions, among others.

The Court concluded that “nothing in our precedent suggests that in enacting the FAA, Congress intended to require States to reshape their agency law to ensure that parties will never have to arbitrate in a proceeding that deviates from ‘bilateral arbitration’ in the strictest sense.” The Court further concluded that Iskanian’s “principal rule” was not preempted by the FAA, and Viking was not entitled under the FAA to enforce waivers of PAGA claims.

Supreme Court holds Iskanian’s secondary rule, making individual and representative PAGA claims indivisible, is preempted by the FAA

As to Iskanian’s secondary rule – that, because a PAGA claim represents all claims of Labor Code violations the employer committed against its employees, PAGA could not be arbitrated on an individual basis – the Court  held that “a PAGA action asserting multiple code violations affecting a range of different employees does not constitute ‘a single claim’ in even the broadest possible sense, because the violations asserted need not even arise from a common ‘transaction’ or ‘nucleus of operative facts.’” In this respect, “our cases hold that States cannot coerce individuals into forgoing arbitration by taking the individualized and informal procedures characteristic of traditional arbitration off the table.” As to what constitutes “coercion,” the Court acknowledged that “[l]itigation risks are relevant to that inquiry” insofar as the state conditions the right to arbitrate on “a procedural format that makes arbitration artificially unattractive.”

In answering its own question of “whether PAGA contains any procedural mechanism at odds with arbitration’s basic form,” the Court did find “a conflict between PAGA’s procedural structure and the FAA,” which “derives from the statute’s built-in mechanism of claim joinder.” This is because “Iskanian’s secondary rule prohibits parties from contracting around this joinder device because [California law] invalidates agreements to arbitrate only ‘individual PAGA claims for Labor Code violations that an employee suffered.’” Yet, the “most basic corollary of the principle that arbitration is a matter of consent is that ‘a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration.’”

It is for this reason that “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” – especially such a mechanism that “would permit parties to superadd new claims to the proceeding, regardless of whether the agreement between them committed those claims to arbitration.” (Emphasis supplied.) “This combination of standing to act on behalf of a sovereign and mandatory freeform joinder allows plaintiffs to unite a massive number of claims in a single-package suit.” Consequently, “Iskanian’s indivisibility rule,” which “effectively coerces parties to opt for a judicial forum” rather than arbitration, is “incompatible with the FAA.”

Applying the above to the case at bar, the Court ruled the lower courts should have permitted Viking to compel arbitration of plaintiff’s individual PAGA claim. And, even assuming the class action waiver constituted a wholesale waiver of PAGA claims that was invalid in part, the severability clause in the arbitration agreement should have operated to enforce any part of the waiver that remained valid and preserve Viking’s right to compel arbitration of Plaintiff’s individual PAGA claim.

As to plaintiff’s “representative” PAGA claims the parties did not consent to arbitrate, the Court stated that, while its holding does not require dismissal of the claims based on their “representative” nature alone, “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.” Accordingly, Plaintiff’s “representative” PAGA claims should be dismissed for lack of statutory standing when her individual PAGA claims are compelled to arbitration.

Key takeaways

While the Viking decision presents a victory for California employers long prevented from compelling PAGA claims to individual arbitration, prudent employers will prepare for the possibility of a legislative response to the ruling, which may take the form of amending PAGA to include additional mechanisms for litigating “representative” PAGA claims in court, even if the plaintiff is compelled to arbitrate their individual PAGA claims.

Nevertheless, employers in California may consider seizing the opportunity to review their existing PAGA litigation to determine whether any claims may now be compelled to arbitration or dismissed for lack of standing.  Employers are also encouraged to review and revise any existing arbitration agreements and the scope of their class/representative action waivers in light of the Viking decision. Viking underscores the critical importance of severability clauses in preserving a party’s right to compel arbitration, particularly as the rules regarding PAGA and other representative litigation are set to evolve.

We will continue to monitor legislative and courtroom developments in the wake of Viking. Please reach out to your DLA Piper contact or the authors if you have questions about the Viking decision and how it may impact your business or ongoing litigation.