The U.S. Supreme Court has once again confirmed that the Federal Arbitration Act (FAA) preempts incompatible state laws that preclude contracting parties from controlling which claims are subject to arbitration.  Ruling in favor of the employer in Viking River Cruises, Inc. v. Moriana, the Court held that the California courts erred in refusing to compel arbitration of an employee’s individual claim under the State’s Private Attorneys General Act (PAGA).

PAGA authorizes any “aggrieved employee” to bring an action against a former employer “on behalf of himself or herself and other current or former employees” to obtain civil penalties that previously could have been recovered only by the State in an administrative enforcement action.  There are two components to a PAGA action: “individual” PAGA claims are premised on Labor Code violations actually sustained by the plaintiff, while “representative” PAGA claims are premised on events involving other employees.  In a 2014 decision, Iskanian v. CLS Transp. Los Angeles, LLC, the California Supreme Court held that predispute agreements that waive the right to bring representative PAGA claims are invalid as a matter of public policy and that individual and representative PAGA claims cannot be resolved separately.    

The employment agreement in Viking River 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, or representative PAGA action would be litigated in court, but if any portion of the waiver remained valid, it would be enforced in arbitration.  After leaving her position at Viking, Moriana filed a PAGA action alleging that the company failed to provide her with final wages within 72 hours as required by the California Labor Code.  Her complaint also asserted a wide array of other code violations allegedly sustained by other Viking employees.  Viking moved to compel arbitration of Moriana’s individual PAGA claim and to dismiss her representative PAGA claims.  The trial court denied Viking’s motion and the Court of Appeal affirmed, holding that under Iskanian, PAGA claims could not be split into arbitrable individual claims and non-arbitrable representative claims.

In an opinion by Justice Alito (in which all of the other Justices but Justice Thomas joined or concurred in part), the U.S. Supreme Court reversed, holding that Iskanian was preempted by the FAA insofar as it imposed an “expansive rule of joinder in the arbitral context” that precluded the parties from dividing PAGA actions into individual and representative claims in their arbitration agreement.  The Court emphasized:

A state rule imposing an expansive rule of joinder in the arbitral context would defeat the ability of parties to control which claims are subject to arbitration.  Such a rule would permit parties to superadd new claims to the proceeding, regardless of whether the agreement between them committed those claims to arbitration.  Requiring arbitration procedures to include a joinder rule of that kind compels parties to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether.  Either way, the parties are coerced into giving up a right they enjoy under the FAA ….

When made compulsory by way of Iskanian, the joinder rule internal to PAGA functions in exactly this way.  Under that rule, parties cannot agree to restrict the scope of an arbitration to disputes arising out of a particular “transaction” or “common nucleus of facts.” …. If the parties agree to arbitrate “individual” PAGA claims based on personally sustained violations, Iskanian allows the aggrieved employee to abrogate that agreement after the fact and demand either judicial proceedings or an arbitral proceeding that exceeds the scope jointly intended by the parties. 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.  The effect of Iskanian’s rule mandating this mechanism is to coerce parties into withholding PAGA claims from arbitration …. Iskanian’s indivisibility rule effectively coerces parties to opt for a judicial forum rather than “forgo[ing] the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution.” …. This result is incompatible with the FAA.

As support for its holding, the Court cited its previous landmark FAA preemption decisions in AT&T Mobility LLC v. Concepcion, Epic Systems Corp. v. Lewis, and Lamps Plus, Inc. v. Varela.

Although the Court found that Moriana’s representative claims were not preempted by the FAA due to PAGA’s “unique features,” it concluded that those claims should nevertheless be dismissed for lack of statutory standing since “PAGA provides no mechanism to enable a court to adjudicate … [representative] PAGA claims once an individual claim has been committed to a separate proceeding.”  Accordingly, the Court reversed the judgment of the California Court of Appeal and remanded the case for further proceedings not inconsistent with its opinion.

However, this is not the last word on representative PAGA actions.  Justice Sonia Sotomayor concurred with the majority, but added that the ruling relies on the Court’s view that PAGA does not permit a plaintiff to proceed in court with non-individual claims, if her individual claims are arbitrable.  California’s courts and legislature are best suited to address a PAGA plaintiff’s standing to litigate “non-individual” claims.  She wrote:

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.

It remains to be seen how California responds to these invitations.