The Supreme Court ruled on Wednesday in Viking River Cruises Inc., v. Moriana that the Federal Arbitration Act (FAA) preempted in part California’s “Private Attorney Generals Act” (PAGA). The majority opinion by Justice Alito nonetheless hinted that the legislature may have leeway to amend the statute and perhaps avoid FAA preemption.
In 2004, the California legislature enacted PAGA to increase enforcement of the state labor code. First, PAGA enables individual plaintiff-employees to sue their employer on behalf of the state for labor violations in a principal-agent structure. Second, PAGA includes a joinder device that permits plaintiff-employees to join claims on behalf of other fellow current or former employees. As part of the public nature of the claim, in a successful PAGA suit, the California Labor and Workforce Development Agency receives 75 percent of the award while the affected employees receive the remaining 25 percent. California courts have posited that in a PAGA suit, although an employee is the plaintiff, the state is the party in interest.
In Viking River Cruises, plaintiff Angie Moriana filed a PAGA claim against her former employer for failing to pay her final wages within 72 hours. She also joined several additional labor code violations on behalf of her former coworkers. Viking moved to compel arbitration, arguing that Moriana’s employment agreement included an arbitration clause that waived her ability to bring a class action, collective action, or PAGA claim. The state trial court denied Viking’s motion under the California Supreme Court “Iskanian rule” that PAGA waivers are contrary to California public policy.
The Supreme Court, considering whether the FAA preempted the Iskanian rule and therefore required arbitration of Moriana’s claims, broke the rule in two parts, in accordance with the two parts of PAGA. First, the Court found, the Iskanian rule prohibited waiving PAGA standing; in other words, it forbade the employee-plaintiff from waiving the ability to bring a suit on behalf of the state for a labor code violation. Second, the Court found the Iskanian rule prohibited the plaintiff-employee’s individual wage violation claim from being separated from those of the other employee’s claims and individually arbitrated. The Court considered each part of the rule separately to determine whether it was in conflict with, and preempted by, the FAA.
Analyzing the first part of the Iskanian rule, the Court held that the FAA is not in conflict with the principal-agent structure of PAGA that enables plaintiffs to represent the state in lawsuits. The Court noted that “actions in which a single agent litigates on behalf of a single principal are part of the basic architecture of much of substantive law”; they include “shareholder-derivative suits, wrongful-death actions, [and] trustee actions.” The Court rejected the defendant’s argument that the principal-agent structure of PAGA is in conflict with bilateral arbitration. In other words, the Court found it was entirely possible for parties to arbitrate claims that may have principal-agent structures. As Justice Sotomayor noted within her concurrence, the majority provided “several important limitations on the preemptive effect of the [FAA].” For example, the majority explained that while the Court’s FAA jurisprudence established that states cannot interfere with “bilateral arbitration,” this principle does not definitively require arbitration to occur strictly between exactly two parties. Chief Justice Roberts, Justice Kavanaugh, and Justice Barrett did not join this part of the opinion; the justices, in a concurrence penned by Justice Barrett, expressed that the case should have been decided entirely on the second prong of the Iskanian rule, without addressing the principal-agent nature of the claim.
Turning to the second part of the Iskanian rule, all but Justice Thomas agreed that the FAA preempted the Iskanian rule to the extent it forbade disaggregating and arbitrating Moriana’s individual claim from those of her coworkers. The Court found that by prohibiting the claims from being disaggregated, the Iskanian rule required Viking to arbitrate not only Moriana’s claim, but also all of the joined claims, exposing Viking to greater risk and forcing Viking to arbitrate claims that it had not consented to arbitrating within its initial agreement. Under the Court’s holding in Concepcion, which held that class arbitration is inconsistent with the “traditionally individualized form” of arbitration, and that “arbitration is poorly suited to the higher stakes of massive-scale disputes,” the FAA preempted the PAGA joinder device and required that Moriana’s claim be separable, and arbitrable, apart from the claims of the other employees. Else, the Court found, PAGA would “coerce parties to opt for a judicial forum” in violation of the FAA. Justice Alito wrote: “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.”
But if Moriana must pursue her claim in arbitration, what happens to those of the other employees whose claims had been joined to Moriana’s? The majority found that PAGA “provided no mechanism to adjudicate non-individual PAGA claims”; because her individual claim was subject to arbitration, Moriana lacked standing to litigate the joined claims. As a result, the Court recommended that the trial court dismiss the severed claims of Moriana’s fellow employees. Again, Chief Justice Roberts, Justice Kavanaugh, and Justice Barrett found this part of the opinion unnecessary and would have instead remanded such that the state court would determine what course of action to take.
Justice Sotomayor, again, noted within her separate concurrence that the Court had left both the state court and the California legislature with reason for hope. The California state courts, as the arbiters of state law, could find that PAGA did provide Moriana with standing to pursue the claims on behalf of her fellow employees. Alternatively, the California legislature could conceivably amend the statute to create a mechanism for a plaintiff to have standing to pursue PAGA claims on behalf of fellow employees even if the plaintiff’s individual claim must be arbitrated.