California Supreme Court’s Decision in Iskanian
In Viking River, the federal high court addressed whether California precedent prohibiting waivers of PAGA proceedings, as exemplified by the decision of the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 327 P.3d 129 (2014), cert. denied, 135 S. Ct. 1155 (2015), were preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq.
In Iskanian, the California Supreme Court determined that an action under PAGA was a type of representative, qui tam action and thus, by virtue of California statute and the state’s public policy, was not waivable. The Iskanian court reasoned that a PAGA suit was not a dispute “arising out of” the contractual relationship between the plaintiff and his employer within the meaning of the enforcement mandate of the FAA, 9 U.S.C. § 2. Instead, because a PAGA suit is brought by the employee as a private attorney general on behalf of the state, it was a “dispute between an employer and the state,” and thus, in the view of the Iskanian court, was not covered by the FAA.
The Iskanian court went on to address the prospect of “single-claimant arbitration under PAGA for individual penalties”—the result ultimately compelled in Viking River with respect to the “individual” PAGA claims presented there. The court in Iskanian concluded that individualized arbitration would “not result in the penalties contemplated under the PAGA to punish and deter employer practices that violate the rights of numerous employees under the [California] Labor Code,” and that “bring[ing] individual claims for Labor Code violations in separate arbitrations [would] not serve the purpose of the PAGA.”
Thus, the California court ruled in Iskanian that an arbitration agreement requiring an employee, acting as a representative of the state, to give up the right to bring a PAGA action was contrary to public policy. The U.S. Supreme Court denied certiorari in Iskanian, 135 U.S. 1155 (2015), but seven years later reviewed the case closely in Viking River.
U.S. Supreme Court’s Interpretation of California Law in Viking River
In Viking River, the U.S. high court concluded that California’s prohibition of waivers of PAGA’s representative enforcement mechanism—its banning of waivers purporting to override PAGA’s authorization of an aggrieved employee to sue on behalf of the state—did not itself conflict with the FAA. This aspect of PAGA and California precedent applying it thus were not preempted. The Court acknowledged that PAGA enables a single employee to represent the state as “a principal with a potentially vast number of claims at its disposal.” But the Court ruled that such proceedings under PAGA did not depart sufficiently from traditional “bilateral arbitration”—as the Court envisioned it, for example, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 685 (2010)—to warrant application of cases such as Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), mandating enforcement under the FAA of waivers of class or collective proceedings. The Court thus left intact Iskanian’s rule that pre-dispute waivers of the right to bring a “representative” PAGA claim on behalf of the state are unenforceable. “If there is a conflict between California’s prohibition on PAGA waivers and the FAA,” the Court said, “it must derive from a different source.”
The Court found that “different source” and held that the FAA did preempt the rule of Iskanian insofar as it precluded division, by operation of the arbitration agreement’s severability clause, of PAGA actions into “individual” and “non-individual” claims. In the terminology the Court adopted for its analysis of PAGA, “individual” PAGA claims are those concerning the plaintiff’s own employment conditions; a plaintiff’s “non-individual” PAGA claims are those involving working conditions of “other employees.”
So dividing the claims, the Court overruled Iskanian in part by holding that a PAGA plaintiff may be compelled to arbitrate “individual” PAGA claims. The Court rejected the reasoning of Iskanian that a dispute under PAGA was outside the scope of the FAA as not one arising under a contract between the employee and the employer.
Then, interpreting California state law, the Court held that the plaintiff lacked statutory standing to maintain her “non-individual” PAGA claims. As the federal high court interpreted the California statute, PAGA provided no mechanism to enable a court to adjudicate the “non-individual” claims once the “individual” claims had been committed to a separate, arbitral proceeding. Under PAGA, as the Court construed it in Viking River, a plaintiff “has standing to maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action.” Because the plaintiff in Viking River had to arbitrate her “individual” PAGA claims, she lacked statutory standing to maintain her “non-individual” claims in court, and the Court directed that those claims be dismissed.
Justice Sotomayor’s Concurrence in Viking River
In a concurring opinion, Justice Sotomayor agreed with the majority decision, but she noted that California was not powerless to address its sovereign concern that it cannot adequately enforce its Labor Code without assistance from private attorneys general. The Court had based its decision to require dismissal of the plaintiff’s “non-individual” PAGA claims on its interpretation of California state law. Justice Sotomayor wrote that the California Supreme Court, as the highest authority regarding the meaning of that state law, would in an appropriate case have the “last word” on whether a PAGA plaintiff lacked standing to pursue her “non-individual” claims in state court. Alternatively, Justice Sotomayor commented, the California legislature would be free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.
Commentators have noted that the California Supreme Court’s decision in Adolph could have a huge impact on the continuing viability of the PAGA statute. In Adolph, the plaintiff expressly requested that the California Supreme Court address whether California law allowed an aggrieved party forced into arbitration to maintain standing to pursue representative, non-individual PAGA claims in court—which of course may be far more lucrative for employee-side counsel (and far more costly for employers) than individualized arbitration. The California Supreme Court agreed to do so, in limiting briefing to that very issue.
The California high court in Adolph could of course agree with the reasoning of the U.S. Supreme Court in Viking River. Conversely, the California court could decide that California law provides that, once an employee is an aggrieved party under PAGA, the employee still has standing and may pursue “non-individual” representative PAGA claims in court, while pursuing his or her “individual” PAGA claims in arbitration.
Should the California Supreme Court agree with Viking River’s interpretation of PAGA, the California legislature, as noted by Justice Sotomayor in her concurrence, could still decide to revise the statute by expressly granting standing to a plaintiff to pursue “individual” PAGA claims in arbitration and “non-individual” PAGA claims in court. If either the state’s high court or its legislature grants this right, California employers may find themselves defending PAGA claims brought by the same individual in two different forums at the same time.
Ultimately, however Adolph is resolved, California voters may have the final “last word” on the future of PAGA. Two days after the state’s high court granted review in Adolph, the California secretary of state determined that the proposed California Fair Pay and Employer Accountability Act (FPEAA) had secured sufficient valid signatures to qualify as a statewide ballot initiative for the November 5, 2024, general election ballot in California. If passed by California voters, the proposed FPEAA would, among other things, repeal the provisions of PAGA allowing employees to file lawsuits on behalf of themselves and other employees to recover monetary penalties for California Labor Code violations, and return exclusive enforcement power to the California labor commissioner. Notably, according to legislative analysis accompanying the secretary of state’s announcement of the ballot measure, likely increases in state costs to enforce California labor laws, should FPEAA be passed, could exceed $100 million per year.