Federal Arbitration Act Preempts California Law on PAGA Claims; Rehearing Sought

PAGA: A Sharp Sword for California Employee-Plaintiffs

Enacted to help California enforce its Labor Code, PAGA¹ has at least two features that make it a uniquely powerful tool for California employees seeking legal recourse against their employer. First, it permits any “aggrieved employee” to sue their employer or former employer on behalf of the state of California for Labor Code violations and obtain monetary penalties that otherwise would be recoverable only by the state.² Second, as interpreted by California courts, PAGA standing permits an employee to “seek any civil penalties the state can, including penalties for violations involving employees other than the PAGA litigant herself.”³

In essence, therefore, PAGA allows an employee who alleges that she has suffered a single violation under the Labor Code to then assert “potentially limitless” other claims against her employer — even if she never suffered the violations underlying those other claims herself.⁴ Coupled with PAGA’s statutory penalties (which accumulate on a per-employee, per-pay-period basis) and provision for attorneys’ fees, the financial risk to employers faced with potential PAGA claims can be extremely high.⁵

The California Supreme Court has also interpreted the statute to effectively prohibit agreements to arbitrate PAGA claims, further strengthening the plaintiff-friendly statute. In Iskanian v. CLS Transportation Los Angeles,⁶ which the Viking River decision examines at length, the California high court held that parties cannot waive “representative” standing (that is, a plaintiff’s right under PAGA to act on behalf of the state of California) by agreement.⁷ It further held that agreements to separately arbitrate or litigate individual PAGA claims were invalid.⁸ In effect, therefore, California law prohibited “efforts to split PAGA claims into individual and representative components.”⁹ As a result, employers lacked any meaningful way to prevent any individual PAGA claim from ballooning into a massive action involving allegations of violations that were not even suffered by the plaintiff him- or herself.

FAA Preemption of Iskanian and Dismissal of Nonindividual PAGA Claims

In Viking River, the Supreme Court confronted an arbitration agreement that Viking River Cruises had with its employees, including Angie Moriana. The agreement contained a “class action waiver” providing that she would arbitrate all employment-related claims and that in any arbitration, she waived her right to bring a class, collective, or representative PAGA claim. The agreement had severability language stating that if the waiver were deemed invalid, any class, collective, or representative PAGA claim would proceed in court — but if any part of the waiver remained valid, it would be “enforced in arbitration.”¹⁰

Justice Samuel Alito wrote the majority opinion for the Court; four justices joined the opinion in full, and three others joined in part. Holding that the portion of Iskanian that prohibited PAGA claims from being split into its individual and representative parts “unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration’ and ‘the rules by which they will arbitrate,’” the Supreme Court held that the FAA preempted that California rule.¹¹ The Iskanian rule, by permitting joinder of all possible PAGA claims against an employer once a plaintiff raised a single such claim, would require the parties to either withhold PAGA claims from arbitration or to arbitrate representative PAGA claims that they never agreed to arbitrate, neither of which is permissible under the FAA.¹²

Under that holding, the Viking River plaintiff’s individual PAGA claims would have to be arbitrated.¹³ That left open the question of what to do with the nonindividual PAGA claims that she asserted. In a critical portion of the decision, the Supreme Court stated that in its view (of California law), PAGA did not permit an individual plaintiff to proceed in court on her nonindividual claims once her individual claims were relegated to arbitration.¹⁴ So, once Moriana’s individual PAGA claims were committed to arbitration, she “lack[ed] statutory standing to continuing to maintain her non-individual claims in court, and the correct course is to dismiss her remaining claims.”¹⁵

Two Concurrences, a Dissent, and a Rehearing Petition

Although eight justices voted with the majority and joined at least part of Justice Alito’s opinion, three short and separate opinions were filed. Justice Sonia Sotomayor, writing for herself only, wrote to emphasize that the portion of the Court’s opinion that required dismissal of the nonindividual claims (after the individual claims were sent to arbitration) was the Supreme Court’s interpretation of California law.¹⁶ Thus, as she noted, California would have the last word on such issues. If the Supreme Court’s interpretation of California law is ultimately wrong, California courts will correct it; if that interpretation is right, the California legislature might modify PAGA to give plaintiffs additional options to pursue Labor Code claims.¹⁷

Justice Amy Barrett, whom Justice Brett Kavanaugh and Chief Justice John Roberts joined, wrote a brief concurrence to note that she would have decided the case on simpler grounds. In her view, “PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement.”¹⁸ Justice Clarence Thomas filed a solo dissent in which he adhered to his longstanding view that the FAA does not apply to state-court proceedings, stating that he would have upheld the California rule on that ground.¹⁹

As noted above, the July 6 rehearing petition argues that while the Court was fully within its power to decide the preemption issue at the core of the case, it should not have interpreted a clause in the contract “severing” invalid portions of the arbitration clause from valid portions.²⁰ Echoing Justice Sotomayor’s concurrence, the petition also contends that the Court should not have interpreted state law regarding the dismissal of nonindividual claims — and, in fact, the Court’s resolution of that issue was contrary to prior California Supreme Court decisional law on the issue.²¹ The petition requests not full rehearing but only that the Court modify its opinion to expressly not decide those “disputed” state-law questions, which were not within the question presented to the Court nor briefed before it.²²

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Subject to the disposition of the rehearing petition, the Viking River decision shifts the PAGA landscape dramatically by offering a way for employers to limit potential PAGA claims. Following the decision, employers may consider having employees sign arbitration agreements that specifically require arbitration of individual PAGA claims. As Justice Sotomayor’s concurrence notes, California courts or legislators may ultimately alter PAGA (or the interpretation thereof), but as it stands now, Viking River is a favorable decision for employers.

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¹ Cal. Lab. Code § 2698, et seq.

² Id. § 2699(a). Generally, 75% of any such recovery goes to the state of California; the remaining 25% goes to the aggrieved employee(s).

³ See Viking River Cruises, Inc. v. Moriana, No. 20-1573 (June 15, 2022), at 4-5 (quoting ZB, N.A. v. Superior Court, 448 P. 3d 239, 243–244 (2019)) (emphasis added).

⁴ Id.

⁵ Cal. Lab. Code § 2699(f)-(g).

⁶ 327 P. 3d 129, 148 (Cal. 2014).

⁷ Viking River, No. 20-1573, at 6-7 (discussing Iskanian).

⁸ Id.

⁹ Id. at 7 (quoting Kim v. Reins Int’l Cal., Inc., 459 P.3d 1123, 1132 (Cal. 2020)).

¹⁰ Id. at 5.

¹¹ Id. at 18 (quoting Lamps Plus, Inc. v. Varela, 587 U.S. ___, ___, 139 S.Ct. 1407, 1416 (2019) (slip op., at 7)).

¹² Id. at 19-20.

¹³ Id. at 21.

¹⁴ Id.

¹⁵ Id.

¹⁶ Viking River, No. 20-1573 (Sotomayor, J., concurring).

¹⁷ Id. at 1-2 (Sotomayor, J., concurring).

¹⁸ Viking River, No. 20-1573 (Barrett, J., concurring).

¹⁹ Viking River, No. 20-1573 (Thomas, J., dissenting).

²⁰ Reh’g Pet., Viking River, No. 20-1573 (July 6, 2022), at 1-2.

²¹ Id. at 9-11.

²² Id. at 10-11.