The U.S. Supreme Court issued its highly anticipated opinion in Viking River Cruises, Inc. v. Moriana on June 15, 2022, finding that the Federal Arbitration Act preempts portions of California’s PAGA statute.  In an 8 to 1 ruling, the Court reasoned that claims brought under the California Private Attorneys General Act (“PAGA”) can be split into individual PAGA claims belonging to the individual plaintiff and non-individual PAGA claims brought on behalf of other individuals not involved or present in the action.  Based on this division, the Court concluded that an employee’s individual PAGA claims may be compelled to arbitration.  Moreover, the Court found that once an employee’s individual claims are compelled to arbitration, any remaining non-individual PAGA claims brought on behalf of individuals not present in the action cannot be maintained due to lack of standing and those claims must be dismissed.

By way of background, the California Legislature enacted PAGA to assist in enforcement of California’s Labor Code. PAGA enlists employees as private attorneys general to enforce California labor law and authorizes any “aggrieved employee” to initiate an action against an employer on behalf of themselves and other aggrieved employees.  Under California precedent, a PAGA suit is a “representative action,” meaning the employee sues as an “agent or proxy” of the State.  See Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 380 (2014). California precedent also permits a kind of claim joinder under a PAGA suit, where an aggrieved employee may use an alleged, single violation to join other claims against an employer. In practice, therefore, the scope of a PAGA action can be quite expansive.

In Viking River Cruises, respondent Angie Moriana was employed by Viking River Cruises, Inc. When Moriana was hired, she executed an agreement to arbitrate disputes arising out of her employment. This agreement contained a “Class Action Waiver,” providing that the parties could not bring a dispute as a class, collective, or representative PAGA action. The agreement further provided a severability clause, stating that if the Class Action Waiver was found invalid, any class, collective, or representative PAGA action would be litigated; if any portion of the Class Action Waiver remained valid, however, such portion would be enforced in arbitration.

Once Moriana ended her employment with Viking, she filed a PAGA action, alleging failure to provide her final wages within 72 hours. Moriana also asserted additional claims, allegedly sustained by other Viking employees. Viking moved to compel arbitration of Moriana’s “individual” PAGA claim and to dismiss Moriana’s other PAGA claims. The California Court of Appeal—guided by precedent in Iskanian—affirmed the trial court’s denial of the motion, finding that waivers of PAGA standing are contrary to California public policy, and PAGA claims cannot be split into “individual” claims and “representative” claims.

In its June 15, 2022 ruling, the U.S. Supreme Court reversed the California Court of Appeal’s decision, finding that a conflict exists between PAGA and the Federal Arbitration Act (“FAA”), stemming from PAGA’s claim joinder mechanism. Under Iskanian’s precedent, parties were prohibited from contracting around the PAGA joinder mechanism because it invalidated agreements to arbitrate “individual” PAGA claims. The Court determined, however, that such a prohibition restricts parties’ freedom to determine which issues shall be arbitrated, violating the “fundamental principle” that arbitration is a matter of consent. The FAA, the Court held, preempts California’s application of PAGA, and the FAA instead allows Moriana to agree to arbitrate her “individual” PAGA claim.

The Court continued that, while the non-individual PAGA claims may not be dismissed simply because they are “representative” claims, once an individual claim has been committed to a separate proceeding, PAGA provides no mechanism for a court to adjudicate a non-individual claim. The Court reasoned 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.” The Court concluded that Moriana, therefore, lacks standing to continue her non-individual claims in court.

In sum, the Supreme Court’s decision provides welcome relief and additional guidance to employers using arbitration agreements.  That said, given California’s long-standing hostility towards arbitration (both judicially and in the legislature), it is reasonable to anticipate there will continue to be developments and new challenges relating to the enforceability of arbitration agreements in California.  Employers should continue to work with their counsel to monitor and adapt to this ever-changing area of the law.

For questions relating to this decision, please reach out to Chuck Seyfarth, cseyfarth@nullohaganmeyer.com, or any member of the O’Hagan Meyer team.

Authored by: Chuck Seyfarth and Hannah Sager