U.S. Supreme Court sides with employers over arbitration of PAGA claims

In a major victory for California employers, on June 15, 2022, the United States Supreme Court held in Viking River Cruises, Inc. v. Moriana, that the Federal Arbitration Act (“FAA”) preempts California law and that “individual claims” brought under California’s Private Attorneys General Act (“PAGA”) can be subject to arbitration. Under the Supreme Court’s ruling, California employees subject to an arbitration agreement cannot circumvent arbitration simply because their  claim was filed as a PAGA action. 

Prior to this decision, the California Supreme Court’s 2014 ruling in Iskanian v. CLS Transp. Los Angeles LLC controlled the law on this issue. Iskanian held that an employee’s PAGA action, which included claims that were “predicated on code violations sustained by other employees” (i.e., “representative claims”), as well as claims on behalf of the employee as an individual (i.e, “individual claims”), could not be split into two separate actions, and the “individual claims” could not survive an arbitration agreement that contained a class action waiver. In other words, the Iskanian decision provided that “individual claims” could not be brought to arbitration separate and apart from the “representative claims” that were filed together under one PAGA action, and, therefore, the entire PAGA action had to be adjudicated in court.

The Supreme Court’s decision in Viking River Cruises held that the FAA preempts California law, in part, and that claims brought under PAGA can in fact be split so that the “individual claims” are subject to arbitration. The Court further provided that once the employee’s “individual claim” under PAGA is sent to arbitration, the employee does not have standing under California law to continue in any remaining “representative claims,” (i.e., claims brought by the employee under PAGA that “are predicated on code violations sustained by other employees”), either in court or in arbitration. 

This essentially means that once an employee becomes subject to arbitration on his or her “individual claim,” the employee’s remaining PAGA claim becomes “split” and the employee resultingly lacks standing to bring the remaining “representative claim” under PAGA. Per Justice Alito, this lack of standing stems from the fact that, “[u]nder PAGA’s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action…[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.”

In its ruling, the Court provided employers with a “green light” to craft arbitration agreements in such a way that reduces the risk of being exposed to “representative claims” brought under PAGA. As the Court explained, an “individual claim” that becomes subject to an arbitration agreement in turn disposes of any non-individual claims, or “representative claims,” that cannot be subject to arbitration per PAGA’s standing requirement. 

In sum, this decision (for the time being) provides California employers with some relief on this issue: the FAA preempts California law such that “individual clams” brought by an employee against an employer under PAGA can lawfully be subject to arbitration. “Representative claims”, however,  cannot be subject to arbitration, and once an individual claim brought under PAGA is successfully brought to arbitration pursuant to an arbitration agreement, the employee lacks standing to pursue any remaining non-individual PAGA claims. However, by clarifying that an employee lacks standing to maintain non-individual PAGA claims in court after an employee’s “individual claims” are brought to arbitration pursuant to an arbitration agreement, the Court left open the opportunity for the California legislature to amend PAGA to address this “standing” loophole.  In the meantime, California employers may wish to  consider adjusting the language in their arbitration agreements to fully capitalize on the Court’s holding.

Zoe Spector, Chuck Poplstein and John Viola are attorneys in Thompson Coburn’s Labor & Employment group.