California’s Private Attorneys General Act (PAGA) has so far evaded arbitration agreements. Now, the Supreme Court of the United States will take up Viking River Cruises, Inc. v. Moriana to determine whether the Federal Arbitration Act (FAA) “requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.”
PAGA is a private enforcement mechanism that deputizes “aggrieved employees” to bring lawsuits to recover civil penalties for California Labor Code violations on behalf of themselves, other employees and the State of California. PAGA “representative actions” allow plaintiffs’ counsel to bring the claims of hundreds or thousands of employees in one action without having to satisfy the class certification standards.
This sweep is significant because PAGA provides for penalties calculated on a per pay period basis for each employee. Thus, technical violations of the California Labor Code quickly translate into seven-figure exposures. For example, the PAGA penalty for wage statement violations is $250 per employee per pay period for the initial violation and $1,000 for each subsequent violation, which nets over $6 million in penalties for a workforce of 250 employees.
California’s Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) that PAGA claims are not covered by the FAA because such claims are law enforcement actions brought on behalf of the State. The US Court of Appeals for the Ninth Circuit has concurred.
In Viking River Cruises, Inc. v. Moriana, the employer sought review from the Supreme Court, contending that the holding in Iskanian directly conflicts with the Supreme Court’s holdings in AT&T Mobility LLC v. Concepcion, 563 US 333 (2011) and Epic Systems Corp v. Lewis, 138 S.Ct. 1612 (2018). There, and elsewhere, the Supreme Court has held that, under the FAA, courts must enforce arbitration agreements according to their terms, including terms that provide for individualized proceedings and waive representative or class proceedings.
A favorable ruling for California employers could change the landscape by allowing employers to implement and enforce arbitration agreements with PAGA waivers. In short, it would allow arbitration agreements to control PAGA claims on parity with all other statutory employment claims under state and federal law. A decision from the Supreme Court is expected by June 2022.
Government prosecutions, of course, cannot be compelled into arbitration. See, e.g., EEOC v. Waffle House, Inc., 534 US 279 (2002). But, PAGA seeks to end-run that narrow exception—a device that, if permitted, would permit every state to carve out claims from arbitration by similar legislation. So far, the Supreme Court has had zero tolerance for such public policy exceptions to the broad sweep of the FAA. See, e.g., Marmet Health Care Center, Inc. v. Brown, 565 US 530 (2012).
California courts struggle in accepting the FAA’s sweep. This is likewise evident in Chamber of Commerce of United States v. Bonta, 13 F.4th 766 (9th Cir. 2021) where the Ninth Circuit held that California’s law attempting to ban mandatory employment arbitration agreements is not entirely preempted by the FAA. En banc review by the full Ninth Circuit has been requested; if denied, Supreme Court review can be expected to follow.
McDermott Will & Emery lawyers not only know how to draft arbitration agreements but also how to sell their enforcement in court.