On June 15, the U.S. Supreme Court finally brought closure to the long-running, unsettled issue of whether California’s prohibition against arbitration agreement waivers of the right to bring representative actions under the California Labor Code Private Attorneys General Act (PAGA) is preempted by the Federal Arbitration Act (FAA). California’s appellate courts and the Ninth Circuit Court of Appeals have long held that such waivers are unenforceable under California state law (the Iskanian Rule). In Viking River Cruises, Inc. v. Moriana (U.S.S.C. Case No. 20-1573) (Viking River Cruises), the Supreme Court held that while the FAA does not preempt the Iskanian Rule’s prohibition on wholesale waivers of PAGA claims, the FAA does preempt the Iskanian Rule insofar as that rule precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.

PAGA and the Iskanian Rule

Under PAGA, employees who allege that they were subjected to at least one violation of the California Labor Code can sue employers on behalf of other allegedly “aggrieved employees” to recover civil penalties (and attorneys’ fees and costs) for any number of violations. PAGA civil penalties are generally awarded per pay period per aggrieved employee, and thus quickly pyramid when a plaintiff seeks to represent a large number of aggrieved employees regarding a multitude of alleged violations. While employers can face millions of dollars in penalties for technical violations of the Labor Code, the aggrieved employees receive little of the recovery — 75 percent goes to the California Labor and Workforce Development Agency (LWDA) and the remaining 25 percent goes to the aggrieved employees. Cal. Lab. Code § 2699(i). Indeed, it is usually the plaintiff’s counsel who benefits the most in a PAGA action because of the availability of prevailing plaintiff attorneys’ fees awards under PAGA.

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court held that any waiver of an employee’s right to pursue PAGA claims, either at all or in court, violates California public policy and is unenforceable under California law. It further held that the FAA does not preempt its judicially created rule prohibiting PAGA waivers because a PAGA action is not a dispute between an employer and an employee; instead, it is a dispute between the employer and the State wherein the employee bringing the PAGA action is merely serving as the State’s proxy. The following year, in Sakkab v. Luxottica Retail North America, 803 F.3d 425 (9th Cir. 2015), the federal Ninth Circuit Court of Appeals issued a split 2-1 decision adopting the Iskanian Rule. Since Iskanian, California and federal courts alike have held that the Iskanian Rule mandates that employees cannot be compelled to arbitrate any aspect of their PAGA claims.

Over the ensuing years, the U.S. Supreme Court denied numerous petitions for certiorari seeking a decision on whether the FAA preempts the Iskanian Rule — notwithstanding the Supreme Court’s otherwise strong interest in FAA preemption issues as demonstrated by the number of decisions it has issued on the topic since it decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and Epic Systems Corp. v. Lewis, 138 S.Ct. 612 (2018) (Epic).

The Supreme Court agrees to address whether the FAA preempts the Iskanian Rule

Viking River Cruises Inc. (Viking) offers and sells voyages on a leading ocean and river cruise line. Angie Moriana worked as a sales representative for Viking in California. During her onboarding with Viking and prior to her first day of work, Moriana electronically accepted Viking’s Terms and Conditions Agreement (TCA), which incorporated Viking’s Dispute Resolution Protocol (DRP).

In accepting the TCA, Moriana agreed to submit “any dispute arising out of or relating to [her] employment” with Viking to binding individual arbitration pursuant to the DRP. The DRP includes this class, collective and representative action waiver:

There will be no right or authority for any dispute to be brought, heard or arbitrated as a class, collective, representative or private attorney general action, or as a member in any purported class, collective, representative or private attorney general proceeding, including, without limitation, uncertified class actions (“Class Action Waiver”); provided, however, that you may opt out of the Class Action Waiver by clicking this box [ ] before you click below to acknowledge this TCA.

Moriana did not elect to opt out of the Class Action Waiver in the DRP when she accepted the TCA.

After her employment ended, Moriana filed a PAGA representative action against Viking seeking an award of civil penalties on behalf of herself and other “aggrieved current and former employees” for various alleged violations of the California Labor Code related to their employment with Viking. Viking moved to compel the PAGA action to individual arbitration and to stay the state court proceedings pending completion thereof, relying primarily on the argument that Epic “effectively overruled” Iskanian because the latter is “irreconcilable” with the former and thus preempted by the FAA.

Relying on Iskanian and its progeny, the trial court denied Viking’s motion, and the California Court of Appeal affirmed in an unpublished opinion, holding that Epic did not abrogate Iskanian because “[t]he cause of action in Epic ‘differ[ed] fundamentally from a PAGA claim’ in that the real party in interest in a PAGA claim is the state [and not the employee].” The Court of Appeal noted that even post-Epic, California courts continue to find pre-dispute waivers of PAGA claims in arbitration agreements unenforceable. Thus, it held that notwithstanding “Epic’s warning about impermissible devices to get around otherwise valid agreements to individually arbitrate claim … , Iskanian remains good law.” The California Supreme Court declined to further review the issue.

Viking filed a petition for writ of certiorari with the U.S. Supreme Court — which was granted.

The Supreme Court holds that the FAA preempts the Iskanian Rule’s prohibition on contractual division of PAGA actions into individual and representative claims

In an 8-1 decision in which each of the Court’s liberal justices joined, the Supreme Court held that the FAA preempts the Iskanian Rule insofar as that rule precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.

First, the Court rejected Viking’s argument “that Iskanian’s prohibition on [wholesale] PAGA waivers is inconsistent with the FAA.” The Court reiterated that “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.’” It also noted that, “under [its] decisions, even rules that are generally applicable as a formal matter are not immune from preemption by the FAA.” But the Court noted that it has “never held that the FAA imposes a duty on States to render all forms of representative standing waivable by contract.” In other words, FAA precedent “does not mandate the enforcement of waivers of representative capacity as a categorical rule”; it requires that the parties decide how they will arbitrate or litigate claims that arise between them. Thus, the Iskanian Rule is not preempted insofar as it precludes the wholesale waiver of PAGA claims in an agreement to arbitrate.

Second, the Court addressed Iskanian’s “prohibition on contractual division of PAGA actions into constituent claims” and held that such a prohibition “unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration’ and ‘the rules by which they will arbitrate,’ … and does so in a way that violates the fundamental principle that ‘arbitration is a matter of consent’ … .” Based on its prior decisions, including Lamps Plus and Stolt-Nielsen, the Court reasoned that “state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.” Such a law “could defeat the ability of parties to control which claims are subject to arbitration.”

The Court noted that “[i]f the parties agree to arbitrate ‘individual’ PAGA claims based on personally sustained violations, Iskanian allows the aggrieved employee to abrogate that agreement after the fact and demand either judicial proceedings or an arbitral proceeding that exceeds the scope jointly intended by the parties.” It then recognized something that defense counsel have been arguing for years: “The effect of Iskanian’s rule mandating this mechanism is to coerce parties into withholding PAGA claims from arbitration.” Because “Iskanian’s indivisibility rule effectively coerces parties to opt for a judicial forum rather than forgo[ing] the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution,” it “is incompatible with the FAA.” Accordingly, the Court held that “the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.”

Finally, the Court reversed the California Court of Appeal’s decision and remanded the case for further proceedings consistent with its opinion. It noted that “[t]he agreement between Viking and Moriana purported to waive ‘representative’ PAGA claims. Under Iskanian, th[at] provision was invalid if construed as a wholesale waiver of PAGA claims. And under [the Court’s] holding, that aspect of Iskanian is not preempted by the FAA, so the agreement remains invalid insofar as it is interpreted in that manner.” However, “Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim.” Moreover, if Moriana’s individual PAGA claim was compelled to arbitration, the Court dictated that the “correct course was to dismiss” her remaining non-individual claims because “PAGA 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 impact of Viking River Cruises on pending and future PAGA actions

While the Supreme Court’s decision in Viking River Cruises provides employers with safe passage for compelling individual arbitration of plaintiffs’ individual PAGA claims, employers should not expect that PAGA plaintiffs subject to arbitration agreements containing representative action waivers will submit to individual arbitration voluntarily. Instead, employers likely will need to file motions to compel individual arbitration, both to pending actions with PAGA representative action claims and to new actions asserting such claims. To that point, employers can expect three potential arguments in opposition to their motions to compel individual arbitration: (1) for cases that have been pending and are being litigated up to this point, that the employer has waived its right to compel arbitration by not seeking to do so sooner; (2) that express or implied contractual carve-outs in existing arbitration agreements make PAGA claims outside the scope of the agreement’s covered claims; and (3) that California’s AB 51 renders such agreements unenforceable, although that issue and to what extent it is preempted by the FAA is presently before the Ninth Circuit. In addition, plaintiffs are also likely to turn to mass arbitrations to weaponize employers’ arbitration agreements with enforceable PAGA action waivers against them in order to mitigate the holding of Viking River Cruises. Further, it is possible that this decision will be a catalyst for increased governmental enforcement actions against employers, whether by the California Labor Commissioner and/or state or county prosecutorial agencies. Finally, expect legislative action at both the state and federal levels in an attempt to circumvent or abrogate the impact of Viking River Cruises.

Notwithstanding the foregoing, strong arguments exist to successfully resist or oppose such efforts. Employers with arbitration agreements should immediately review those documents with employment counsel to assess what, if any, updates should be made to them. Employers without arbitration agreements should evaluate with employment counsel whether Viking River Cruises now provides a compelling reason to implement them for their employers.