Representative Private Attorneys General Act (“PAGA”) claims can be divided between arbitrable individual claims and non-arbitrable representative claims the United States Supreme Court said today in a significant decision likely to have a major impact on California employers.

The Laws at Issue

The Court’s holding in Viking River Cruises, Inc. v. Moriana rests on the interplay between PAGA, a California law; the FAA, a federal law; and Iskanian, a California Supreme Court decision.

PAGA creates a private cause of action for collection of civil penalties previously only enforceable by the State.  Prior to PAGA’s enactment, only California’s Labor and Workforce Development Agency (“LWDA”) could bring actions for civil penalties against employers for violations of California Labor Code.  In 2004, the Legislature enacted the PAGA, which allows “aggrieved employees” to bring such enforcement actions on behalf of the state.  PAGA allows an aggrieved employee to collect civil penalties for violations of the Labor Code that they themselves allegedly experienced, as well as for violations sustained only by “other current or former employees.”  The scopes of such PAGA suits are enormous and often seek millions of dollars in civil penalties.

The Federal Arbitration Act (“FAA”) is a federal law that makes arbitration agreements “valid, irrevocable, and enforceable” and which “preempts any state rule discriminating on its face against arbitration.”  Under the FAA, arbitration is considered a matter of consent, and parties are generally free to decide the rules by which they will arbitrate and the issues that will be arbitrated.  Thus, state rules cannot require arbitration of a claim, issue, or dispute outside the consent of the parties.

The California Supreme Court’s decision in Iskanian discussed the interplay between PAGA and the FAA.  The relevant issue involved an arbitration agreement that contained a “class action waiver,” by which the employee agreed to submit all disputes to arbitration on an individual basis and to waive any right to a representative action before the arbitrator.  Pursuant to that agreement, the employer sought to compel the individual portion of the plaintiff’s PAGA claim to arbitration—i.e., the portion based solely on Labor Code violations experienced by the plaintiff.  The Iskanian Court determined the individual portion could not be compelled pursuant to the waiver because such a waiver is not enforceable as to a PAGA action.  The crux of the Court’s reasoning was that a PAGA claim cannot be divided into arbitrable individual claims and non-arbitrable representative claims because the action is a single claim for civil penalties brought entirely on behalf of the state.  As such, Iskanian held that either the entire PAGA claim had to be tried in court or sent to arbitration.  Any waiver as to the non-individual portion was unenforceable.  The United States Supreme Court today disagreed.

Facts of Viking River Cruises

Angie Moriana (“Moriana”) was a former employee of Viking River Cruises, Inc. (“Viking”).  As part of her employment contract, she signed an agreement to arbitrate any dispute arising out of the contract.  That agreement contained a “class action waiver” by which the parties agreed they could not bring any dispute into arbitration as a class, collective, or representative PAGA action.  The agreement stated that if the class action waiver was found invalid, any representative action would proceed in court, but it also contained a “severability clause” which provided that if any “portion” of the arbitration agreement was found valid, it would be enforced in arbitration.

After her termination, Moriana brought a PAGA action against Viking.  Moriana asserted a sole violation of the California Labor Code as against her but also a “wide array” of other alleged violations sustained by other Viking employees.  Viking moved to compel arbitration of the “individual” portion of Moriana’s PAGA claim.  The trial court denied the motion (and the Court of Appeal affirmed), basing its ruling on the California Supreme Court’s opinion in Iskanian, which held that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable representative claims.

The United States Supreme Court Holds PAGA Claims Are Divisible.

The United States Supreme Court reversed the Court of Appeal, holding the portion of Iskanian dealing with the indivisibility of individual portions of a PAGA claim is preempted by the FAA.  In so finding, the Court rejected the argument that each PAGA cause of action is a singular claim:  “[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.’”  Rather, the Court cited to California precedent for the view that PAGA is a procedural mechanism that “permits ‘aggrieved employees’ to use the Labor Code violations they personally suffered as a basis to join to the action any claims that could have been raised by the State in an enforcement proceeding.”

Within that backdrop, the Court explained that any prohibition on the ability of parties to divide a PAGA action into constituent claims “unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration and ‘the rules by which they will arbitrate.’”  In effect, the Iskanian indivisibility rule forces parties that wish to arbitrate PAGA claims to submit to the State’s expansive rules regarding joinder of claims pertaining to other aggrieved employees.  In other words, “[t]he only way for parties to agree to arbitrate one of an employee’s PAGA claims is to also ‘agree’ to arbitrate all other PAGA claims in the same arbitral proceeding.”  Such a coercive result is “incompatible with the FAA,” and is therefore preempted by it.  Accordingly, parties may agree to arbitrate individual portions of the FAA as part of a valid arbitration agreement.

The Court further explained that once a plaintiff’s individual PAGA claims are sent to arbitration, the “representative” claims remaining in Superior Court (brought as to Labor Code violations sustained by other employees) must be dismissed.  The Court held that “[w]hen an employee’s own 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.”

In sum, the Court held: (1) employees may agree to arbitrate PAGA claims on an individual basis, (2) where such an agreement has been made, the individual component of any PAGA claim—i.e., the portion based on violations of the Labor Code actually endured by the plaintiff—must be separated from the “representative” portion and sent to arbitration, and (3) the “representative” portion of the PAGA claim must be dismissed for lack of statutory standing.

Viking River Cruises Limitations

 There are two limitations to the holding in Viking River Cruises:

First, the Court did not overrule the portion of Iskanian that held waivers as to the entire right to a PAGA claim (as opposed to just the non-individual portion) are unenforceable.  The waiver in Viking River Cruises indeed had such a blanket waiver.  However, it was saved by a “severability clause” that provided “if the waiver provision is invalid in some respect, any ‘portion’ of the waiver that remains valid must still be ‘enforced in arbitration.’”  The Court held such a severability clause would save the waiver provision, but, without it, the agreement would have been unenforceable because it waived a “substantive right” in its entirety.

Second, in a concurring opinion, Justice Sotomayor left open the possibility that the California courts or Legislature may decide differently with respect to the Court’s final point on dismissal of the representative claims: “Of course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.  Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”  This roadmap for the Legislature will likely lead to a modification of the PAGA standing requirements soon and therefore the Viking River Cruises holding’s respite for California employers may be short-lived.

Takeaways for California Employers

For now, California employers should review their arbitration agreements to confirm that their agreements are compliant with Viking River Cruises.

Employers should also be aware that, as Justice Sotomayor cautioned, the California courts or the California Legislature may take action in the future to chip away at this holding.  Specifically, the legislature may add additional procedural protections to PAGA or amend the statutory standing requirements.

This article is for general information only and should not be relied upon as legal advice.  Attorney advertising.