This Report summarizes opinions issued on June 15, 2022 (Part I).
Opinion: Viking River Cruises, Inc. v. Moriana, 20-1573
Viking River Cruises, Inc. v. Moriana, 20-1573. In an 8-1 decision, the Court held that the Federal Arbitration Act (FAA) preempts California’s Private Attorneys General Act (PAGA) to the extent state law precludes arbitration agreements from dividing PAGA actions into individual and non-individual claims. PAGA allows an “aggrieved employee” to bring a representative action against her employer on behalf of the state for Labor Code violations against herself and other employees. Viking River Cruises included a waiver provision in its employment contract with Angie Moriana providing that in any arbitral proceeding the parties could not bring any dispute as a class, collective, or representative PAGA action. A severability clause stated that if the waiver was found invalid, any such action would be litigated in court, but any portion of the waiver that remained valid would be enforced in arbitration. Moriana filed a PAGA action in state court asserting wage violations against herself and other employees. Viking moved to compel arbitration of Moriana’s individual PAGA claim and to dismiss her claims relating to other employees. The trial court denied that motion, and the California Court of Appeal affirmed based on Iskanian v. CLS Transp. Los Angeles, LLC, 327 P.3d 129 (Cal. 2014), holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable non-individual claims. The Supreme Court reversed in an opinion by Justice Alito.
The California Legislature enacted PAGA to address a deficit in the enforcement of the state’s Labor Code by allowing employees to act as private attorneys general. PAGA actions are “representative” in two ways. First, the employee-plaintiff acts as an agent of the state. Under California law, PAGA does not create any private rights or private claims for relief. Instead, a PAGA suit is a representative qui tam action in which the employee acts as an agent of the state, which is “always the real party in interest.” Second, although the plaintiff must bring at least one “individual” claim involving herself, she may bring additional “non-individual” claims for Labor Code violations involving other employees. Iskanian prohibits waivers of the first type of representative claim as contrary to public policy; parties cannot waive an employee’s standing to bring a PAGA claim at all (either in court or arbitration). Iskanian also invalidates agreements to separately adjudicate individual and non-individual PAGA claims. Thus, under California law, the wholesale waiver of PAGA standing was invalid, and the severability clause ordinarily would send Moriana’s individual PAGA claim to arbitration and the non-individual claims to litigation (where it would be dismissed because, without an individual claim, Moriana would lack standing). But because California law (Iskanian) prohibits division of a PAGA action into individual and non-individual claims, the state courts refused to send Moriana’s claim to arbitration.
The Supreme Court explained that the FAA was enacted in response to judicial hostility to arbitration. Under the FAA, states cannot create rules that discriminate against arbitration, for example, by forbidding arbitration of a particular type of claim. Since arbitration is a matter of consent, parties may agree to arbitrate some claims and not others, and a party cannot be forced to submit to class arbitration unless the party contractually agreed to do so. Viking argued that Iskanian forces on parties the impermissible choice to either (1) arbitrate all disputes using a form of class procedure incompatible with the FAA and classic bilateral arbitration, or (2) not arbitrate at all. Meanwhile, Moriana argued that PAGA creates nothing more than a unitary private cause of action. The Court disagreed with both. Contrary to Moriana’s position, PAGA allows employees to assert multiple claims on behalf of the state. Viking, on the other hand, was incorrect that PAGA claims resemble class actions whose procedures are incompatible with arbitration. To the contrary, a PAGA action involves a single real party in interest bringing numerous claims, as opposed to one party bringing the same claim on behalf of multiple absent third parties. As such, PAGA actions need not consider issues inherent in class actions such as adequacy of representation, numerosity, commonality, or typicality. And although the prototypical form of arbitration is conducted by and on behalf of the two named parties, nothing in the FAA categorically prohibits an agent from litigating on behalf of a principal. Accordingly, found the Court, the FAA does not prohibit PAGA actions on the ground that it permits employees to bring representative actions on behalf of the state. To that extent, PAGA is valid and the waiver in this case was invalid.
But although parties may not contract away the right to bring a PAGA action at all, the Court found a conflict between the FAA and PAGA’s “built-in mechanism of claim joinder,” which allows an aggrieved employee to join violations suffered by other employees. California’s prohibition against contractually dividing individual and non-individual PAGA actions limits parties’ freedom to determine which issues are subject to arbitration, violating the principle that arbitration is a matter of consent. Although a party generally may join as many claims as it has against an opposing party, the FAA allows parties to individualize arbitration procedures even if bifurcated proceedings are the inevitable result. The Court held that Iskanian violates the FAA by preventing parties from agreeing to restrict the scope of arbitration. “The 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.” Iskanian therefore coerces parties into withholding PAGA claims from arbitration, which is incompatible with the FAA. Thus, “the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.”
The Court reversed the California courts based on the contract in this case. The parties’ PAGA waiver was invalid to the extent it would prohibit Moriana from bringing PAGA claims at all. But based on the agreement’s severability clause, Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim. The lower courts refused to do so because California law prohibits dividing individual and non-individual claims, but that rule is preempted by the FAA because it would force Viking to arbitrate claims involving other employees. As the Court understood California law, 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.” Because Moriana’s individual claim must be severed from the other employees’ claims, she no longer has standing to maintain those claims in court, and the California court should dismiss those remaining claims.
Justice Sotomayor concurred, writing that “the Court’s opinion makes clear that California is not powerless to address its sovereign concern that it cannot adequately enforce its Labor Code without assistance from private attorneys general.” Justice Sotomayor noted that if the Court’s understanding of state law was wrong, and Moriana in fact has standing to enforce non-individual claims under PAGA, California courts “will have the last word.” Even if the Court correctly interpreted state law, the California Legislature “is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”
Justice Barrett wrote a concurring opinion joined by Justice Kavanaugh and joined in part by Chief Justice Roberts. All three agreed that “PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement,” but they believed that significant portions of the Court’s opinion were unnecessary and addressed disputed questions of state law as well as arguments that were not properly before the Court. Justice Thomas dissented, citing his previous dissents in which he expressed his view that the FAA does not apply to proceedings in state courts.