U.S. Supreme Court: FAA Preempts California Labor Law to Extent It Prevented Enforcement of Individual Arbitration Agreement

California’s Labor Code Private Attorneys General Act of 2004 (PAGA) authorizes “aggrieved employees” to sue their employer on behalf of themselves “and other current or former employees” to obtain civil penalties that previously could only have been recovered through an action brought by the state of California. As interpreted by California courts, the statute effectively provides a rule of claim joinder, permitting a party to unite multiple claims against a defendant in a single action.

In the case before the court, a former employee filed a PAGA action against Viking River Cruises, alleging it had violated California’s Labor Code by failing to provide her final wages within 72 hours of her termination. Her complaint also asserted a wide array of other Labor Code violations allegedly suffered by other Viking employees, including violations relating to minimum wage payments, overtime, rest periods, and meal periods.

The plaintiff’s employment contract with Viking included an agreement to arbitrate any dispute arising out of her employment and a “class action waiver” providing that, in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action. The employment agreement also included a severability clause stating that in the event the class action waiver was held to be invalid, any “portion” of the waiver that remained valid would be “enforced in arbitration.”

Relying on the arbitration agreement, Viking moved to compel arbitration of the employee’s “individual” PAGA claim, i.e., the claim she asserted she had suffered, and to dismiss the “class” PAGA claims asserted on behalf of other employees. The trial court denied the motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be severed into arbitrable individual claims and nonarbitrable class claims. Viking petitioned for, and the U.S. Supreme Court granted, certiorari. And the Supreme Court has now reversed.

The court grappled with California case law, including Iskanian v. CLS Transportation Los Angeles LLC. After considering FAA jurisprudence, the court overruled California law only to the extent it held that arbitration agreements may not selectively apply to “individual PAGA claims” but not “class” claims. The court determined that the application of Iskanian forced the contracting parties in this case into an unacceptable choice: either accept “class action arbitration” of all claims, including those of employees not a party to the arbitration agreement, or forego arbitration altogether. But the court recognized that arbitration procedures are “poorly suited to the higher stakes of massive-scale disputes” involved in class actions due in part to the absence of “multilayered review” making it more likely that errors will go uncorrected, and the fact that the “vast number of claims entail the same risk of ‘in terrorem’ settlements that class actions entail.” As a result, Iskanian’s “indivisibility rule effectively coerces parties to opt for a judicial forum” to resolve their dispute rather than the arbitral procedure they had contractually agreed upon to settle disputes between themselves. This was incompatible with the FAA, and the court reversed on this ground.

The court further held that, given that the parties must arbitrate the individual PAGA claim, the employee’s non-individual PAGA claims must be dismissed because PAGA does not provide an employee standing to assert non-individual claims in the absence of an individual claim in the same action.

Viking River Cruises, Inc. v. Moriana, No. 20-1573 (U.S. June 15, 2022).