Despite historical judicial hostility to arbitration agreements, Congress has enunciated a national policy of enforcing arbitration agreements in Section 2 of the Federal Arbitration Act (FAA), which provides that arbitration agreements “shall be valid, irrevocable, and enforceable.” Increasingly, the coupling of arbitration agreements with class action waivers commonly found in employment agreements has generated issues in the context of representative suits, and in particular, suits brought under the Private Attorneys General Act of 2004 (PAGA). While California caselaw up until June of 2022 provided judicial protection against arbitration agreements obligating employees to waive their rights to PAGA actions, the U.S. Supreme Court’s ruling in Viking River Cruises, Inc. v. Morianaoverruled California precedent and will eviscerate the substantive purpose of a PAGA suit in the first place.
Background to California’s Contentious Private Attorneys General Act of 2004
To employees and their counsel, PAGA is a way to ensure that the Labor Code is adequately enforced against a backdrop of chronic agency understaffing. Since 2004, California PAGA has conferred statutory standing on individual employees to sue and collect civil penalties as a proxy of the Labor & Workforce Development Agency (LWDA). In this first sense, a PAGA suit is a representative or qui tam suit in which 75% of collected penalties go to the state, and 25% goes to the individual and other “aggrieved employees.”
But in a second sense, PAGA is a representative action which permits the plaintiff (the LWDA) to add as many claims against the same defendant as possible, not unlike the operation of joinder under Federal Rules of Civil Procedure Rule (FRCP) 18(a). The only difference between PAGA, from this perspective, and a true Rule 18(a) joinder, is that a PAGA suit involves joining claims from a multitude of “aggrieved employees,” rather than just the claims of a single named plaintiff. In this way, PAGA is almost like a quasi-class action, except for the technical fact that in a PAGA action, there is actually only a single plaintiff: the LWDA. Thus, PAGA is representative both in the first sense of being conducted on behalf of the LWDA and in the second sense as being representative like a class action.
While PAGA has been acclaimed as a solution to adequately enforcing the Labor Code, others have uncharitably characterized it as the “Bounty Hunter” Law. With the 9,000 plus provisions in the Labor Code which makes employers “hopelessly lost in a sea of legal confusion,” a plaintiff lawyer can run cookie-cutter PAGA suits in assembly line fashion by stacking up PAGA penalties– $100 per employee per pay period for an initial Labor code violation, and $200 per employee per pay period for each subsequent violation– with the civil and statutory penalties already provided for in the code. When considering the number of qualifying employees on behalf of whom PAGA actions can be asserted, defendant liability exposure can astronomically increase.
California’s Seminal Case on PAGA Action Waivers
In Iskanian v. CLS Transportation Los Angeles,LLC, the California Supreme Court held that California law voiding arbitration agreements with class action waivers was not preempted by the FAA. There, the court focused on the language of Section 2 of the FAA which provided an exemption from arbitration based on “such grounds as exist at law or in equity for the revocation of any contract.” The court found that such grounds did exist because public policy as embodied in PAGA was to promote the enforcement of the Labor Code through encouraging individuals to bring forth claims in representative suits. To the extent that arbitration agreements collided with this state policy as embodied in the PAGA statute, the agreements were unenforceable on the same grounds that any other contractual provision would be invalidated.
The Iskanian court further held that bifurcating arbitration proceedings into individual and non-individual proceedings thwarted the quasi-class action representative purpose of PAGA. Specifically, the court characterized PAGA as rule of expansive claim joinder which contemplated allowing the LWDA to add as many claims from aggrieved parties as was possible. That being the case, the court held that where an employer sought to compel arbitration of PAGA claims, the employer must also permit the employee to assert representative PAGA claims on behalf of the other “aggrieved employees.” This ruling effectively guaranteed plaintiffs the right to PAGA suits even in the context of arbitration proceedings.
US Supreme Court Overturns California
But things changed in favor for employers with the U.S. Supreme Court’s ruling in Viking River Cruises, Inc. v. Moriana.There, a former sales associate brought claims against her former employer, a cruise agency, alleging individual claims for failure to timely pay her final wage as well as claims on behalf of other employees at the company. The Court held that the employer was entitled to enforce the plaintiff’s arbitration agreement to the extent that it mandated arbitration of her individual PAGA claims and dismissed the remaining representative claims due to her lack of statutory standing. In reaching its decision, the Court first affirmed Iskanian’s rule about not honoring arbitration agreements that banned PAGA suits wholesale, since it would be violative of state policy as embodied in statute. To the extent that California case law supported this proposition, there was no preemption.
Second, the Court overturned Iskanian with respect to Iskanian’s secondary holding that where PAGA suits were arbitrated, both individual and non-individual claims must be arbitrated in the same proceeding. In reaching its holding, the Court explained that the FAA’s essential purpose was to permit parties to transact out of standard rules such as FRCP 18(a), in favor of “individualized arbitration procedures of their own design.” The FAA, the Court maintained, was animated by the “fundamental principle that ‘arbitration is a matter of consent.”’ Although FRCP 23 governing class actions provides built-in checks to ensure that classes are properly certified before the class action proceeds, arbitration does not have a class certification system, making it an ill-suited forum for a representative suit. Moreover, the lack of an appeals system makes any class action in the arbitration forum an especially risky ordeal for defendants. Given these high stakes and the ill-fit of arbitration to class action purposes, the Court reasoned that the appropriate rule was to compel only individual arbitration unless an employer had given their express consent to class arbitration. Applying this rule, the Court found that California state law prohibiting the bifurcation arbitration of PAGA claims was preempted by the FAA.
Impact of Viking River Cruises, Inc. on Employees and Employers
In the final estimation of Viking River Cruises, Inc., this decision could be seen as a way to restore a semblance of balance to the original PAGA structure which arguably may have inappropriately incentivized plaintiffs to sue their bosses without first availing themselves of internal grievance processes designated by their employers. But in the wake of Viking River Cruises, Inc., perhaps frivolous suits can be reduced if employers make sure to include arbitration clauses coupled with class action waivers in their contracts, along with severability clauses to salvage their arbitration agreements in case the court deems any portion to be unenforceable. On the other hand, even with the Court’s ruling in Viking River Cruises, Inc., plaintiff employees still have access to at least some vestiges of PAGA in the forum of arbitration– at least with respect to individual PAGA claims.
Moreover, Viking River Cruises, Inc. may not be the last word after all. As Justice Sotomayor suggested in her concurrence, if the US Supreme Court’s interpretation of the standing issue was incorrect, then perhaps dismissal of the non-individual claims was not required. Moreover, the California legislature could amend statutory standing in PAGA to allow the named plaintiff to have standing to assert the non-individual claims in other proceedings while moving forward with her individual claims.
It would be ideal if plaintiffs could retain some vehicle of representative action, be it PAGA or class action, which would be immunized from essentially adhesive contractual terms. Since judicial protection of less sophisticated parties to the contract can only go so far given the limitations established in Viking River Cruises, Inc. it would be advisable for the California legislature to amend PAGA’s statutory standing rules to permit individual employees to take up the claims of other aggrieved employees even after those representative claims have been dismissed. Without at least some form of representative action available to them, employees–many of whom are among the most vulnerable of today’s society–may be unable to deter deep-pocketed employers from engaging in unlawful conduct.