On June 15, 2022, the United States Supreme Court issued its much anticipated decision in Viking River Cruises, Inc. v. Moriana. The Supreme Court held that California’s rule invalidating pre-dispute agreements waiving the right to bring “representative” claims under the Private Attorneys General Act of 2004 (PAGA) is partially preempted by the Federal Arbitration Act (FAA). The decision raises some difficult questions that will need to be resolved in future litigation, but it should provide employers with a powerful tool to limit PAGA claims.

PAGA and the Concepcion and Iskanian Decisions

To understand the Court’s holding in Viking River Cruises, some background and history is necessary.

PAGA is a California statute that permits an “aggrieved employee” to sue his or her employer to collect civil penalties on behalf of the state for violations of the California Labor Code for which there would ordinarily be no private right of action. Cal. Lab. Code §§ 2698, et seq. For most alleged Labor Code violations, PAGA imposes a civil penalty in the amount of $100 per employee, per pay period in which the violations occur. Cal. Lab. Code § 2698(f)(2). Of the penalties recovered in a PAGA action, 25% are awarded to the employees against whom the violations were committed, and 75% are awarded to the California Labor Workforce and Development Agency. Cal. Lab. Code § 2699(i). California courts have interpreted PAGA to permit a single employee who has suffered any one alleged Labor Code violation to claim penalties for any and all violations that may have been committed against other employees even if they did not personally experience them. Huff v. Securitas Sec. Servs. USA, Inc., 23 Cal. App. 5th 745 (2018).

In 2011, the United States Supreme Court held that the FAA preempts state law rules invalidating class action waivers in arbitration agreements. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). Concepcion involved a consumer class action and held that due to class actions’ procedural complexity, inclusion of absent-party claims, and high stakes, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” Id. at 344. Therefore, courts are required to compel individual, bilateral arbitration of any claims covered by an arbitration agreement, unless the parties expressly agree to class or collective proceedings. See Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019). The Supreme Court later confirmed that Concepcion’s holding applies to arbitration agreements between employers and employees. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018).

However, the California Supreme Court held in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014), that pre-dispute waivers of an employee’s ability bring a “representative” PAGA action violate California public policy and are unenforceable, including waivers found in otherwise valid arbitration agreements. Although PAGA claims resemble class actions in many respects, Iskanian held that the rule it established did not run afoul of the FAA. The Ninth Circuit subsequently held that Iskanian’s rule is consistent with the FAA and Concepcion, albeit on different grounds than Iskanian itself. Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015).

As a result, PAGA litigation exploded as plaintiffs’ attorneys sought to evade the effect of arbitration agreements requiring individual non-representative proceedings. The issue in Viking River Cruises was whether Iskanian is preempted by the FAA.

Viking River Cruises’ Holding

Angie Moriana worked for Viking River Cruises as a Sales Representative. She executed an arbitration agreement that required her to arbitrate any dispute she had with her employer and 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. It also contained a severability clause specifying that if the waiver was found invalid, any class, collective, representative, or PAGA action would presumptively 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 only action in state court alleging that she was not timely paid her final wages upon separation and several other wage and hour claims predicated on violations experienced by other Viking employees. Viking moved to compel arbitration of Moriana’s “individual” PAGA claim and to dismiss the other PAGA claims. The trial court denied the motion and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims.

The Supreme Court reversed and held that Iskanian’s ban on pre-dispute contractual waivers of PAGA “representative” claims is preempted in some respects, but not others.

The Court noted that California courts confusingly use the term “representative” to refer to two distinct concepts. On the one hand, a PAGA claim is “representative” in the sense that the real party in interest is the state of California, and the employee-plaintiff acts as its agent. But PAGA also includes what the Supreme Court characterized as a “claim joinder” rule permitting a plaintiff to collect civil penalties predicated on violations committed against other employees, and California courts use the term “representative” to describe this attribute of the statute as well.

The Supreme Court held that Iskanian’s rule prohibiting waiver of a “representative” claim in the first sense is consistent with the FAA. The Court held that Concepcion does not stand for the proposition that all forms of proceedings in which one party represents another’s interests interfere with the fundamental attributes of arbitration. Unlike a class action where one plaintiff can represent the interests of potentially thousands of individuals, in a PAGA case there is only a single represented party: the California Labor Workforce and Development Agency. This fact, along with other procedural differences between PAGA actions and class actions, led the Court to distinguish Concepcion and hold that California may require that arbitration or litigation of PAGA claims be “representative” in the sense that the plaintiff represents the state’s interests.

However, the Court found that Iskanian’s requirement that a PAGA plaintiff be permitted to join alleged Labor Code violations against other employees is preempted when the procedure conflicts with the terms of an arbitration agreement. The Court characterized claims for civil penalties arising from alleged Labor Code violations committed against the plaintiff as the plaintiff’s “individual PAGA claims” and held that an employer and employee may contractually agree to limit arbitration to just these “individual” claims and exclude “’representative’ (or perhaps quasi-representative) PAGA claims arising out of events involving other employees.” The Court rejected the plaintiff’s argument that a PAGA action always consists of a single, indivisible claim, finding instead that Iskanian required “compulsory” “joinder” of claims the parties never agreed to arbitrate in violation of the FAA.

The Court concluded that the plaintiff’s individual PAGA claims must be compelled to arbitration under the terms of the parties’ agreement, and that the “representative” PAGA claims asserting violations against non-party employees that remained in court must be dismissed. The holding that the non-individual PAGA claims must be dismissed was based on the Court’s interpretation of PAGA’s statutory standing rule requiring a PAGA plaintiff to be an “aggrieved employee.” Cal. Lab. Code § 2699(a). PAGA defines an “aggrieved employee” as “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.” Cal. Lab. Code §§ 2699(c). The Supreme Court construed this to mean that “a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action,” so the Court’s holding all of the plaintiff’s individual PAGA claims were arbitrable required dismissal of her non-individual claims in court.

What’s Next?

Viking River Cruises is a dense and difficult decision that is certain to generate much further ligation.  One significant open issue, identified by Justice Sotomayor’s concurrence, is whether California courts will determine that the Supreme Court misconstrued PAGA’s standing requirement, and what will become of a plaintiff’s non-individual PAGA claims if they do and all individual claims are compelled to arbitration. Justice Sotomayor’s concurrence also suggested that the California legislature could modify PAGA’s statutory standing rules even if the Supreme Court interpreted them correctly. For now, employers should be able to compel arbitration of a PAGA plaintiff’s claims to the extent they arise from alleged Labor Code violations committed against the plaintiff personally, and employers will be in a strong position to argue that this requires dismissal of the remaining PAGA claims in court. Employers should review their arbitration agreements to ensure that they require arbitration of employees’ individual PAGA claims consistent with the language and concepts used in Viking River Cruises, and that the agreements do not contain any language that could be construed as excluding PAGA claims or requiring litigation of individual PAGA claims in the event a complete “representative waiver” is found invalid.