Supreme Court strikes down California rule barring individualized arbitration of California PAGA claims
Yesterday, the Supreme Court held in Viking River Cruises, Inc. v. Moriana (pdf) that the Federal Arbitration Act preempts a California rule invalidating arbitration agreements that provide for arbitration of an employee’s own claims under California’s Private Attorney General Act (PAGA), but waive the employee’s ability to assert PAGA claims affecting others.
The decision is enormously important to companies seeking to enforce workplace arbitration agreements in California. The decision also provides businesses with powerful arguments that California laws restricting arbitration in the consumer setting are preempted as well. (Disclosure: we filed an amicus brief (pdf) in support of the petition on behalf of the Chamber of Commerce of the United States of America, the California Chamber of Commerce, and the National Federation of Independent Business Small Business Legal Center.)
Background
Under California’s PAGA statute, an employee affected by violations of the California Labor Code can sue her employer to obtain civil penalties. The employee also can seek civil penalties for violations affecting other employees—including violations of Labor Code provisions not suffered by the plaintiff. The employee retains 25% of the penalties and the remaining 75% is paid to the state. California courts characterize PAGA claims as analogous to qui tam actions.
In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that an arbitration agreement is invalid under California law if the agreement limits PAGA claims to violations affecting the claimant alone and prevents the claimant from asserting violations experienced by other employees. The Iskanian court also held that the FAA does not preempt this state-law rule because, in its view, PAGA claims are asserted on behalf of the State, which is not bound by workers’ arbitration agreements.
In a later case, Sakkab v. Luxotica Retail North America, Inc., the Ninth Circuit agreed that the FAA does not preempt the Iskanian rule—but for a different reason. In the Ninth Circuit’s view, the Iskanian rule was permissible because representative PAGA claims could be arbitrated using informal procedures that the Ninth Circuit considered to be materially different from class procedures. Therefore, according to the Ninth Circuit, the Iskanian rule did not violate the principles set forth in the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion and its progeny, which established that the FAA’s protection of individualized arbitration preempts state-law rules barring waiver of class and collective actions.
Viking River Cruises v. Moriana arose out of this legal background. The plaintiff is an employee who had agreed to arbitrate disputes on an individual basis, and waived any right to bring class, collective, or representative proceedings. She then filed a PAGA claim against her employer, asserting that she hadn’t received her final paycheck within the required time period and that the employer had committed multiple other unrelated California Labor Code violations with respect to other employees. The employer moved to compel arbitration of her individual PAGA claim and preclude the claims asserted on behalf of other employees. The trial court denied the motion, holding that Iskanian precludes waivers of PAGA claims and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable representative claims. The California Court of Appeal affirmed that order. Subsequently, the U.S. Supreme Court granted review.
The Supreme Court’s decision
By an 8-1 vote, the Supreme Court reversed the state court, concluding that the FAA preempts California’s Iskanian rule.
In an opinion written by Justice Alito, joined in full by Justices Breyer, Sotomayor, Kagan, and Gorsuch, and joined in part by Chief Justice Roberts and Justices Kavanaugh and Barrett, the Supreme Court held that the FAA bars California from refusing to enforce arbitration agreements that call for individualized arbitration of PAGA claims—limiting the arbitration to alleged violations affecting the individual claimant.
As a starting point, the Court observed that the employee did not defend the California Supreme Court’s conclusion in Iskanian itself that its state-law rule survives preemption because the PAGA claims are asserted on behalf of the State and therefore outside the coverage of the FAA. Instead, as the Supreme Court explained, PAGA claims arise out of the employment relationship.
The Court then reaffirmed two key aspects of its FAA precedents. First, the FAA sets forth “an equal-treatment principle,” under which “the FAA preempts any state rule discriminating on its face against arbitration—for example, a law prohibit[ing] outright the arbitration of a particular type of claim.”
Second, “even rules that are generally applicable as a formal matter are not immune to preemption by the FAA” if “state law could be used to transform ‘traditional individualized … arbitration’ into the ‘litigation it was meant to displace’ through the imposition of procedures at odds with arbitration’s informal nature.” That second type of preemption—which protects “individualized arbitration” as “arbitration’s traditional form”—was at the core of the Court’s decisions in AT&T Mobility v. Concepcion and the follow-on rulings in American Express Co. v. Italian Colors Restaurant and Epic Systems Corp. v. Lewis.
Viking River turned on this second type of FAA preemption.
The plaintiff defended Iskanian by arguing that PAGA was simply a new substantive cause of action. In plaintiff’s view, there are no separate representative PAGA claims, merely a single indivisible PAGA claim.
The Court acknowledged that “the FAA does not require courts to enforce contractual waivers of substantive rights and remedies,” rejecting the defendant’s argument that the FAA should be interpreted to protect the enforceability of an agreement waiving all PAGA claims—including Labor Code violations affecting the plaintiff.
But the Court held that California’s rule invalidating agreements waiving arbitration of representative PAGA claimsnonetheless is preempted because it coerces parties into agreeing to something very different from traditional individualized arbitration—mandating the arbitration of issues that they never agreed to arbitrate. The Court explained that one of the reasons why “class procedures cannot be imposed [on arbitration] by state law” is that such a state law “present[s] unwilling parties with an unacceptable choice between being compelled to arbitrate using procedures at odds with arbitration’s traditional form and forgoing arbitration altogether.” State law cannot “coercively impose arbitration in contravention of the ‘first principle’ of our FAA preemption: that ‘arbitration is strictly “a matter of consent.”’”
Applying that principle, the Court held that California’s Iskanian rule imposed that precise type of coercion. The Court explained that “a PAGA action asserting multiple code violations affecting a range of different employees does not constitute ‘a single claim’ in even the broadest possible sense.” By combining these different claims into a single PAGA claim, PAGA effectively has a “built-in mechanism of claim joinder.”
Reaffirming and expanding on its prior preemption precedents, the Court held that the FAA does not permit California to impose a regime in which “[t]he 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.” Such a result—conditioning arbitration on allowing a claimant to seek remedies in arbitration on behalf of other employees—“is incompatible with the FAA.”
The Court added that a “state rule imposing” this “expansive rule of joinder,” rather than allowing parties to “contract around” it, “would defeat the ability of parties to control which claims are subject to arbitration.” California’s rule thus “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 Court continued, “the parties are coerced into giving up a right they enjoy under the FAA.”
Moreover, the Court explained, “[l]iberal rules of claim joinder presuppose a backdrop in which litigants assert their own claims and those of a limited class of other parties who are usually connected with the plaintiff by virtue of a distinctive legal relationship.” PAGA “departs from that norm by granting the power to enforce a subset of California public law to every employee in the State,” which “allows plaintiffs to unite a massive number of claims in a single-package suit.”
The Court therefore held that the FAA requires enforcement of the parties’ agreement to arbitrate only the plaintiff’s individual PAGA claim. The Court further held that, because California law “provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding,” the lower court was required to dismiss the plaintiff’s non-individual PAGA claims.
Justice Sotomayor authored a concurrence, joining the Court’s opinion in full but arguing that California may in the future revisit its law on employees’ standing to assert non-individual PAGA claims in court.
Justice Barrett authored a concurrence, joined by Justice Kavanaugh and joined in large part by Chief Justice Roberts, stating that much of the Court’s discussion was unnecessary to the result, given that “reversal is required under our precedent because PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement.”
Justice Thomas authored a dissent, adhering to his long-standing view that the FAA does not apply in state courts.
Implications for PAGA litigation
The Supreme Court’s decision in Viking River Cruises represents a significant victory for businesses. Since Iskanian was decided in 2014 and Sakkab was decided in 2015, employers subject to suit in California have faced a massive increase in the number of PAGA lawsuits.
Employers with agreements for individual arbitration should now be able to compel arbitration of individual PAGA claims and obtain the dismissal of remaining non-individual PAGA claims seeking penalties on behalf of other employees.
The plaintiffs’ bar, picking up on Justice Sotomayor’s separate opinion, may urge the California Legislature to change the statutory standing rule for PAGA actions to permit an employee (or anyone else) to assert in court PAGA claims based on Labor Code violations suffered by others even though the plaintiff does not seek recovery for a violation that he or she suffered.
That would be an exceedingly odd claim. And it resembles an approach that California previously tried, and subsequently rejected, in the context of consumer lawsuits. Before 2004, any person (injured or not) could sue on behalf of the general public under California’s Unfair Competition Law. The absence of standing requirements predictably led to an avalanche of abusive lawsuits. In response, in 2004, California voters enacted Proposition 64, which declared that plaintiffs bringing UCL claims must have “suffered injury in fact and … lost money or property as a result of” the challenged conduct. Given that history, California should be wary of going down that route again.
If it did, there would be a substantial argument that the FAA preempts such claims—a question that the Supreme Court did not have to reach in Viking River Cruises. After all, Concepcion and its progeny make clear that an arbitration agreement’s class action waiver precluded class proceedings in arbitration and in court—because permitting court actions would undermine the agreement to arbitrate. As the Ninth and Eleventh Circuits both observed in rejecting the argument that states can still forbid individual arbitration if the class action would proceed in court rather than arbitration, “[e]ven a cursory reading of the opinion reveals that the Concepcion Court described the ‘fundamental’ changes brought about by the shift from bilateral to class arbitration to show that non-consensual class procedures are inconsistent with the FAA—not to argue for increased class action litigation.” There accordingly is a strong argument that the FAA itself would preclude litigation in court of a “representative-only” PAGA claim when the parties to an arbitration agreement have agreed to individualized arbitration.
Implications for consumer litigation
Beyond the context of employment litigation, Viking River Cruises likely will have positive ripple effects in consumer cases in California.
California’s Unfair Competition Law, False Advertising Law, and the Consumers Legal Remedies Act permit plaintiffs to obtain, in addition to individualized relief, “public injunctive relief,” which the California Supreme Court defined in McGill v. Citibank, N.A. as relief that “‘by and large’ benefits the general public … and that benefits the plaintiff, ‘if at all,’ only ‘incidental[ly]’ and/or as ‘a member of the general public.’”
McGill involved the enforceability of an arbitration agreement in which the parties agreed to permit only individualized injunctive relief and waived any right to public injunctive relief. The California Supreme Court held that state law invalidated the waiver of public injunctive relief and concluded that the FAA did not preempt that state-law rule. The court concluded that the anti-waiver principle was a generally applicable contract rule and that the FAA did not require enforcement of agreements to waive a remedy provided by state law.
The Ninth Circuit reached the same conclusion in Blair v. Rent-a-Center, relying entirely on its prior decision in Sakkab involving PAGA claims (discussed above), which limited the preemption principle recognized in Concepcion and its progeny to attempts to impose class and collective-action procedures in arbitration. In recent years, many consumer class actions filed in California have included claims purporting to seek public injunctive relief in an effort to avoid arbitration.
Viking River Cruises, however, gives businesses a substantial argument that McGill and Blair are no longer good law. The Supreme Court’s decision confirms that a state cannot create a cause of action that (1) entitles an individual to seek relief on behalf of others; (2) declares the individualized component of the claim indivisible from the representative component; and then (3) conditions enforceability of arbitration agreements on allowing the entire indivisible claim to proceed in arbitration. Such a rule improperly “coerces parties into forgoing their right to arbitrate by conditioning that right on the use of a procedural format that makes arbitration artificially unattractive.”
California’s McGill rule exhibits this very defect: statutory public-injunction claims under California law combine a claim for an individual injunction on behalf of the named plaintiff with an injunction for relief on behalf of the general public that benefits only third parties. Under Viking River Cruises, California cannot insist on tying together these individual and non-individual injunctive claims to prevent the enforcement of agreements for individual arbitration. Accordingly, businesses facing such claims should be entitled to compel arbitration of the named plaintiff’s claim for an individualized injunction and to dismissal of the remaining request for an injunction sought on behalf of only third parties.
Plaintiffs’ lawyers may try to argue that this result runs afoul of the statement in Viking River Cruises that “the FAA does not require courts to enforce contractual waivers of substantive rights and remedies.” But public injunctive relief is not a remedy for the claimant—as defined by the California Supreme Court, that relief is to benefit third parties, with the claimant made whole by separate individualized relief, typically damages but sometimes including individualized injunctive relief remedying harm that the claimant suffered or might suffer in the future.
Public injunctive relief closely resembles the relief provided to absent class members in a class action seeking injunctive relief—such as in a Rule 23(b)(2) class action in federal court. Concepcion and its progeny make clear that the FAA protects the enforceability of agreements waiving any right to obtain such relief—confirming that the “substantive rights and remedies” Viking River Cruises refers to are limited to rights and remedies relating to a claimant’s own harm.
In addition, this issue can be addressed in the same way the Viking River Cruises resolved the question of representative PAGA claims. Because the claimant can and will obtain full individualized relief in arbitration, she would lack statutory standing to bring a claim for injunctive relief in court—under the standing requirement discussed above—and therefore any claim for public injunctive relief would have to be dismissed.
Conclusion
Viking River Cruises reaffirms and expands the FAA’s protection of individualized, bilateral arbitration. And it does so with an eight-Justice majority, in sharp contrast to the 5-4 decisions in Concepcion, American Express, and Epic Systems. By rejecting arguments that would undermine those precedents, and preventing the use of PAGA to circumvent them, the Court made clear that it will remain vigilant in reining-in States’ attempts to circumvent the FAA.
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