Will employers get to arbitrate California’s exploding representative action lawsuits?

The U.S. Supreme Court has another opportunity to finally end the battle over the enforceability of pre-dispute arbitration agreements with waivers of representative actions under the California Private Attorneys General Act.

This battle was borne from the California Supreme Court's ruling in Iskanian v. CLS Transportation Los Angeles LLC, 2014 DJDAR 8037, which held that employers cannot compel representative claims under PAGA to arbitration. PAGA allows "aggrieved employees" to seek civil penalties on a representative basis for California Labor Code violations ordinarily recoverable by the state. Iskanian held that because, "the state is always the real party in interest in the suit" (analogizing to qui tam actions like the federal False Claims Act), arbitration agreements with PAGA Waivers are unenforceable under California law as against public policy since the state is not a party to such agreements. The U.S. Supreme Court has been asked yet again to review -- and reverse -- the holding of Iskanian in Viking River Cruises, Inc. v. Moriana, 20-1573 (S.Ct., pet. for cert. filed May 10, 2021).

In Viking River Cruise, Moriana was a sales representative for the company in Los Angeles. At the start of her employment she agreed to arbitrate all employment-related disputes and waived her right to bring a "representative or private attorney general action." After her employment was terminated, she filed a PAGA representative action on behalf of hundreds of Viking River's current and former employees. Viking River moved to compel individual arbitration and stay the court proceedings. The Los Angeles Superior Court denied the motion, and the Court of Appeal affirmed. The lower courts cited Iskanian, upholding that an employee's right to bring PAGA claims cannot be waived. The California Supreme Court denied Viking River's petition for review, and Viking River sought relief from the U.S. Supreme Court.

In its petition, Viking River argues that the Iskanian rule cannot be reconciled with the U.S. Supreme Court's other arbitration decisions because PAGA claims are, "no more compatible with traditional bilateral arbitration agreements and the characteristic features of arbitration than class actions."

In other words, PAGA is legally equivalent to a class action and therefore PAGA claims can indeed be waived -- just as the Supreme Court has held that class actions may be waived. Viking River argues that the court must take this case in light of the 9th U.S. Circuit Court of Appeal's refusal to overturn Iskanian in their divided 2015 decision in Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015), where the majority's reasoning was based on the fact PAGA claims are not governed by federal civil procedure rule 23 and don't require the same formal procedures as class actions. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and Epic Systems Corp v. Lewis, 138 S. Ct. 1612 (2018), The Supreme Court held that when parties agree to resolve their disputes by individualized arbitration rather than by class actions, those agreements are fully enforceable under the Federal Arbitration Act. Viking River asserts that Iskanian was not good law in light of Concepcion and now should be overturned in the wake of Epic in 2018.

Moriana's arguments center on the concept that PAGA claims are not "individual" claims which can be arbitrated. Moriana further argues that as the appellate court noted courts cannot split a representative claim into arbitrable individual claims and non-arbitrable representative claims, so PAGA claims should be adjudicated on a representative basis in court.

The appellate decision emphasizes that the trial court's denial of the motion to compel arbitration is consistent with how California courts have applied Iskanian. The Court of Appeals reasoned that because Epic did not involve a state PAGA claim, the decision did not invalidate the Iskanian rule that PAGA claims are not subject to arbitration. Instead, the appellate court distinguished the issue in Epic, arguing Epic holds that mandatory arbitration does not violate employee's rights under federal law to engage in concerted activity by waiving their right to bring a class action. The court cited dicta in Epic noting the "judicial antagonism towards arbitration" that could result in "new devices and formulas" seeking to prevent individual arbitration, but stressed that PAGA is not such a judicially constructed device.

The Court of Appeal seemed to miss the point that in Concepcion the California Supreme Court ruled that the FAA preempts state laws that stand as an obstacle to the accomplishment and execution of arbitration agreements.

Substantial implications hang in the balance. With more than 15 PAGA notice letters submitted every day, California employers are threatened with millions of dollars in liability because PAGA claims are not currently forced into arbitration. Viking River and the organizations that have submitted amicus curiae briefs seek to halt what they view as an end-run around arbitration agreements. Amicus briefs have been filed by Washington Legal Foundation, Retail Litigation Center, California New Car Dealers Association, the Chamber of Commerce, and the Restaurant Law Center. Their briefs emphasize the large number of employers that require employees agree to arbitration, but because of Iskanian are increasingly unable to enforce them against PAGA claims -- and therefore are at risk for millions of dollars in liability. Employers' exposure to what are often seen as "gotcha" PAGA lawsuits threatening the survival of many businesses would be placed on the same footing as class actions, because each employee would need to pursue their California Labor Code violation claim individually in arbitration.

Conversely, the California Supreme Court and the California legislature will be on the defensive if certiorari is granted. Moriana's allegations are commonplace -- violations of the California Labor Code (unpaid wages, overtime, meal and rest breaks, etc.) that employees frequently bring in state court. When brought under PAGA, these actions bring millions of dollars to state coffers; the California Labor & Workforce Development Agency received $88 million in PAGA penalties in 2020 alone -- more than the previous three years combined (75% of the penalties in PAGA cases go to the state of California, even when the case settles). Further, California courts have followed Iskanian and its 9th Circuit affirmation in Sakkab, so a finding of preemption by the U.S. Supreme Court would represent a substantial reversal.

Moriana -- and plaintiffs' attorneys -- will be duly concerned if certiorari is granted because that would suggest that the U.S. Supreme Court views the California courts' current application of PAGA as incompatible with its arbitration precedents. A substantive ruling that PAGA cannot be used as an end-run around compliant and legally enforceable arbitration agreements could push thousands of cases in the California courts into binding arbitration and preempt other states from passing similar representative action frameworks to avoid arbitration. But so far, the U.S. Supreme Court has been disinterested in interfering with state laws on arbitration so we will have to wait and see. 