SCOTUS Bids FAArewell to Prohibition of Representative PAGA Waivers Contained in Arbitration Agreements

Seyfarth Synopsis: On June 15, 2022, in Viking River Cruises v. Moriana, the United States Supreme Court ruled that individual claims under the California Private Attorneys General Act (“PAGA”) can be compelled to arbitration under the Federal Arbitration Act, partially preempting the California Supreme Court’s longstanding and contrary Iskanian decision.

Facts

Angie Moriana was hired by Viking River as a sales representative.  She executed an agreement to arbitrate any dispute arising out of her employment.  The agreement contained a “Class Action Waiver” providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action.  

The arbitration agreement also contained a “severability clause” specifying that if the class action waiver was found invalid, any class, collective, representative, or PAGA action presumptively would be litigated in court.  But, under that severability clause, if any “portion” of the waiver remained valid, it would be “enforced in arbitration.”

After her employment ended, Moriana filed a PAGA action against her former employer, alleging individual PAGA claims, as well as “representative” PAGA claims on behalf of other aggrieved employees.

The California Lower Court Decisions

Viking River moved to compel arbitration of Moriana’s individual claims and to dismiss her representative claims, based on the terms of the arbitration agreement, including the waiver of representative PAGA actions.

The trial court denied Viking River’s motion to compel arbitration, holding that categorical waivers of PAGA standing are contrary to public policy and that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable representative claims.  This decision was based on the decision of the California Supreme Court in Iskanian v. CLS Transp. Los Angeles.  The California Court of Appeal affirmed the trial court’s decision denying the motion to compel, and Viking River petitioned the United States Supreme Court for a writ of certiorari.

The United States Supreme Court’s Decision

The Supreme Court reversed the lower court decision and held that the FAA preempts Iskanian’s rule that PAGA claims cannot be divided into individual and non-individual actions through an arbitration agreement.  Because individual PAGA claims can be split from separate, “representative” PAGA claims, the Court held that Viking River was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim.

Given that Moriana’s individual PAGA claims were required to be enforced in arbitration, the Court then concluded that Moriana lacked statutory standing to continue to maintain her representative PAGA claims in court, and the correct course was to dismiss her remaining claims.  The rationale for this holding is that “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” (i.e., arbitration). 

Under PAGA’s standing requirement, plaintiffs can maintain representative PAGA claims “only by virtue of also maintaining an individual claim in that action.”  So, “if an employee’s own individual dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”

The Court, however, held that a waiver of “representative” PAGA claims was still invalid under Iskanian if construed as a “wholesale waiver” of such PAGA claims, and that this aspect of Iskanian was not preempted by the FAA.

In concurrence, Justice Sotomayor highlighted the uncertainty and questions that still linger for how representative PAGA claims can proceed.  Justice Sotomayor noted the majority opinion’s holding that the FAA poses no bar to the adjudication of “non-individual” PAGA claims and that Moriana lacks “statutory standing” under PAGA to litigate her “non-individual” claims separately in state court. 

However, Justice Sotomayor warned that the Court’s “understanding of state law” on this issue may be wrong, and that “California courts, in an appropriate case, will have the last word.”  Alternatively, Justice Sotomayor hinted that if the lack of standing was correct, then the “California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

What Viking River Means for Employers

The decision is a nuanced one, and it is important to carefully evaluate whether any changes need to be made to existing arbitration agreements.  While employees can waive the ability to pursue a representative PAGA claim on behalf of other employees, an arbitration agreement that waives the employee’s ability to bring an individual PAGA claim would still be unenforceable under Iskanian.  If an arbitration agreement includes a waiver of individual PAGA claims, then the outcome may depend on whether the arbitration agreement includes a severability clause like the one at issue in Viking River.

Important to the Supreme Court’s decision was that Viking River’s severability clause provided that if the PAGA waiver was invalid, then any portion of the waiver that remains valid must be enforced in arbitration.

As individual PAGA claims can now be compelled to arbitration at the same time as representative PAGA claims can be excluded from the arbitration proceeding, employers should evaluate the scope of their PAGA waivers.

Going forward, PAGA waivers in arbitration agreements should be clear that there is no waiver of the right to bring a PAGA claim for violations allegedly suffered individually by the employee, but that there is a waiver of the right to bring a PAGA claim involving violations allegedly suffered by other employees.

What’s Next

The California Legislature may accept Justice Sotomayor’s invitation to amend PAGA to expand who can bring a PAGA claim.  Currently, only “aggrieved employees” can bring a PAGA claim, but the Legislature may attempt to permit anyone in the public to bring a PAGA claim, like what existed with the Unfair Competition Law prior to Proposition 64.  If the Legislature took such action, it likely would be met with legal challenges based on existing FAA jurisprudence. 

California employers utilizing arbitration agreements should be on the lookout for whether the 9th Circuit will grant en banc review of its decision in Chamber of Commerce v. Bonta, involving whether the FAA preempts AB 51, which prohibits employers from requiring certain arbitration agreements as a condition of employment.