What Could be the Impact on Your Business?

Is an arbitration agreement that purports to waive the right to bring a Private Attorneys General Act (PAGA) claim unenforceable under California law, as the California Supreme Court held years ago in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014); or does the Federal Arbitration Act (FAA), which favors enforcing bilateral arbitration agreements according to their terms, preempt California law, invalidating Iskanian?  

This is the question posed by Viking River Cruises, Inc. v. Moriana, Case No. 20-1573, which came before the U.S. Supreme Court for oral argument on March 30, 2022.  A decision is expected within the next few weeks or about two months from the argument date. 

Case Analysis

The petitioner in  Viking River Cruises argued that the  Iskanian rule is preempted by the FAA, relying on a line of Supreme Court precedents, most notably AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) and Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), that upheld arbitration agreements that purport to waive the right to bring class or collective actions, and held that state law rules to the contrary are preempted by the FAA.

One of the narrower questions raised is whether Iskanian is distinguishable from cases like Epic Systems because it involves PAGA, rather than a private class action.  PAGA permits any individual employee to sue his or her employer and assert claims and to recover civil penalties on behalf of the State for any of the employer’s violations of the California Labor Code.

Proponents of finding preemption and invalidating Iskanian say the cases are indistinguishable, because both deal with “representative” actions, and the policy of enforcing arbitration agreements as written applies just the same.  Others, like the respondent in Viking River Cruises, argue that Iskanian is not controlled by Epic Systems, as a PAGA claim is distinguishable from a class-action lawsuit in several respects – rather than a purely private action, it is a statutory enforcement action in which the plaintiff steps into the shoes of the state. 

We believe, and most Supreme Court analysts agree, that the conservative justices are leaning toward the former argument (invalidating Iskanian and enforcing waivers as written, pursuant to the FAA), while the more liberal justices are leaning in the other direction.  In particular, at oral argument, Chief Justice John Roberts, and Justices Samuel Alito and Amy Conan Barrett indicated their intentions to enforce the waiver clause at issue.  Justices Elena Kagan and Sonya Sotomayor indicated otherwise.  Notably, seven of the nine justices currently on the Court participated in the  Epic Systems decision, with four justices (Roberts, Gorsuch, Thomas, and Alito) joining the majority and three justices (Breyer, Sotomayor, and Kagan) joining the dissent. Six of those justices (all but Gorsuch) also took part in similar, earlier cases and split along the same lines.  Thus, it is expected that a majority of the high court (Roberts, Alito, Barrett, Thomas, Gorsuch, and Kavanaugh) will rule that PAGA waivers are enforceable. 

What Does This Mean for California Businesses ?

A ruling that PAGA waivers are enforceable could herald a sea change in the current deluge of PAGA claims against employers.  But employers should not expect such a decision to do away with any representative actions by employees.  

First, employers need to ensure that PAGA waivers are sufficiently clear to be enforceable. 

Second, it is likely that the plaintiffs’ bar will seek a workaround, by, for instance, filing a series of individual actions in arbitration against an employer in lieu of an action under PAGA.  Because most arbitration agreements require the employer to pay for all arbitration costs and most arbitration providers require such costs to be paid in advance, employers may be faced with paying tens of thousands of dollars per claim in arbitration costs regardless of the outcome.  

Given these prohibitive costs, employers may prefer to revert to resolving such claims through class actions.  

Third, as Justice Roberts pointed out during oral argument on the Viking River Cruises case, the California legislature could revive PAGA actions simply by amending the statute to allow for “any resident” to assert a PAGA claim rather than “aggrieved employees” alone; employers can insist that their employees enter into mandatory arbitration agreements but cannot insist that the public at large do the same.  

 (Note that, although certain whistleblower laws do allow unaggrieved private citizens the ability to sue on behalf of the Attorney General for certain offenses to the state at large, such as fraud committed against government programs, the California legislature may not find it appropriate to allow unaggrieved parties to sue a company for Labor Act violations.) 

If you have any questions or need any additional information on this topic, please call Kristin A. Mattiske-Nicholls or Arif Virji at Carle, Mackie, Power & Ross LLP - (707) 526-4200.