Executive Summary: In a stunning 8-1 decision that is expected to reverberate throughout the entire California business community, the United States Supreme Court on June 15, 2022 held that a state court ruling, which previously prevented California employers from compelling individual arbitration of an employee’s claims under California’s Private Attorneys’ General Act (“PAGA”) was preempted by the Federal Arbitration Act. The High Court’s decision is a rare, but significant, victory for employers that – at least for now – will provide some comfort to businesses hoping to rein in some of the more toxic and abusive litigation practices in California.
The background to this decision derives from a unique state labor law that had allowed employees in the Golden State to self-deputize themselves as agents for the state’s labor enforcement agency. Originally enacted in 2004 as a means of enforcing the state’s labor laws, PAGA sought to incentivize private litigants by providing a percentage of any recovery to those allegedly harmed by an employer’s labor practices, while also awarding attorney’s fees and costs to any prevailing plaintiff’s attorneys. Despite its best intentions, in the nearly two decades since its inception, PAGA has evolved into a toxic legal practice that ultimately resulted in both small and large employers being shaken down by plaintiffs’ lawyers – sometimes in the hundreds of millions of dollars. What made PAGA even worse was the near absence of legal guardrails that could have curbed such abuse, given that the law did not require plaintiffs to prove how their claims were common among other employees, as required by the mechanism for class actions; or even that they suffered the same violations as other employees. In 2014, the state supreme court held that employers could not avoid being sued under PAGA by seeking arbitration agreements with representative action waivers from their employees.
That state court ruling, Iskanian v. CLS Transportation, remained the law until the High Court intervened.
The case before the United States Supreme Court was Viking River Cruises v. Moriana. It arose from a former sales agent who had sued her employer, Viking River Cruises, under PAGA for multiple labor code violations on behalf of other employees. Viking River subsequently sought to dismiss the suit, arguing that the plaintiff had signed an arbitration agreement that had waived her right to bring her claims through a class or representative proceeding, but the lower courts rejected its argument based on the state supreme court’s ruling in Iskanian. Viking River ultimately appealed to the High Court, which reversed the lower courts’ decisions.
In so doing, the High Court provided a complicated legal analysis that found that, because a plaintiff could not litigate PAGA both individually and on behalf of other employees, the law was preempted by the Federal Arbitration Act. Then, because PAGA offered no mechanism for allowing a plaintiff to litigate their individual and representative PAGA claims separately, the Supreme Court remanded the case with directions for the lower court to dismiss the plaintiff’s PAGA claim.
Employers' Bottom Line: Despite the win, the High Court’s ruling may ultimately be seen as a pyrrhic victory, since many legal experts are opining that the decision left open the possibility for the state legislature to amend the law. Even so, employers are now urged to review any arbitration agreements they may have with their employees.