(June 27, 2022) - Lathrop GPM partner Laura Reathaford discusses the implications for California employers and workers after the U.S. Supreme Court's June 15 decision that said individual and nonindividual claims can be handled separately in actions under the state's Private Attorneys General Act.

California's Private Attorneys General Act (PAGA) has haunted employers since it was enacted in 2004. PAGA allows employees to sue employers and collect civil penalties on behalf of themselves, other current and former employees and for the State. Generally, the penalties are $100 per employee per pay period. Accordingly, and as one can easily imagine, the more employees a company employs in California, the higher the value of a threatened PAGA "representative action."

One method by which employers tried to curtail the scope of these lawsuits was by implementing mandatory arbitration agreements which contained class action and PAGA representative action waivers. Essentially, employers required that employees arbitrate any claims against the employer on an individual basis.

By doing so, the employees were never deprived of any right to collect wages and/or civil penalties for their own purported Labor Code violations. Nor were the employees deprived of collecting civil penalties for the State that flowed directly from any Labor Code violation the individual was found to have suffered. The only consequence of agreeing to individual arbitration was that the employees could not sue for and seek wages and penalties on behalf of other, unnamed employees.

In 2012, the United States Supreme Court in AT&T Mobility v. Concepcion,¹ upheld arbitration agreements containing class action waivers. This case meant that employees who signed arbitration agreements with class action waivers could not bring class action lawsuits in court. However, a question remained as to whether the Court's decision in Concepcion applied to PAGA representative claims such that employees could similarly be compelled to arbitrate individual PAGA claims.

In Iskanian v. CLS Transportation Los Angeles, LLC,² the California Supreme Court answered that question in the negative; holding that an arbitration agreement that waived an employee's right to bring a representative action under PAGA was unenforceable.

It further held that even though employees must be bound by their arbitration agreements and any rule barring enforcement would be pre-empted by the FAA, that the FAA does not preempt these PAGA waivers because, according to the Court, a PAGA action is primarily a dispute between the employer and the State because the employee brings the action on behalf of the state. Since Iskanian, California and federal courts have repeatedly held that Iskanian prohibits an agreement to arbitrate PAGA claims; meaning that all PAGA claims must be litigated in Court.

The employer in Iskanian and other employers since have sought to have this decision reversed. However, the U.S. Supreme Court repeatedly declined review; until December 2021 when it took up the question in Viking River Cruises, Inc. v. Moriana.³

On June 15, 2022, the U.S. Supreme Court in Moriana essentially reversed Iskanian. While the Court agreed that the FAA "does not mandate the enforcement of waivers of representative capacity as a categorical rule," the Court recognized that employees who have agreed to arbitrate their claims on an individual basis, must honor those agreements.

Accordingly, and to the extent Iskanian prevents an employee from agreeing to arbitrate his individual claims, even those under PAGA, Iskanian's holding is preempted by the FAA. Critically, the Court found that such a prohibition "unduly circumscribes the freedom of parties to determine 'the issues subject to arbitration' and 'the rules by which they will arbitrate,' … and does so in a way that violates the fundamental principle that 'arbitration is a matter of consent'…."

Having determined that employees must honor their individual claims to arbitrate, the Court was faced with another important question: what happens to the representative claims under PAGA? In response to this question, the Court keenly observed that there are two kinds of "representative" claims under PAGA: those where the employee "represents" the interests of the state and those where the employee represents the interests of other employees.

The Court aptly concluded that an agreement to individually arbitrate claims does not impede the employee's ability to represent the State's interest; it simply curtails the employee's ability to represent others. That said, where an employee has agreed to arbitrate individual claims only, the Court held that

"State law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate." Such a law "could defeat the ability of parties to control which claims are subject to arbitration."

Accordingly, the Court held that, "Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana's individual PAGA claim." And, if Moriana's individual PAGA claim was compelled to arbitration, the Court held that the "correct course was to dismiss" her remaining non-individual claims because "PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding" and Moriana, by virtue of agreeing to arbitrate all of her individual claims, does not have standing to arbitrate on behalf of anyone else.

This last statement appears to have left the door open for legislative amendment. In fact, Justice Sotomayor wrote a very brief concurring opinion where she encouraged the California legislature to amend PAGA (within Constitutional limits) in order to correct the Supreme Court's interpretation of PAGA and/or any potential gaps in PAGA representative standing. Only time will tell whether the California legislature answers this call.

Until this happens, the Court's decision in Moriana is the right one insofar as it forces employees to honor their agreements to arbitrate on an individual basis.

It is also true that PAGA does not provide a procedure for a court to retain jurisdiction in a separate proceeding where an individual plaintiff has committed to arbitrate all of his or her individual claims. For this reason, it only makes sense that employees who have signed individual arbitration agreements should be precluded from any litigation in court, whether that litigation be on a representative or any other basis.

This result also begs the question: why can't an employee agree to individually arbitrate any claim; even one where the state has even a tangential interest? As the Supreme Court in Moriana recognized, the purpose of arbitration is to efficiently resolve the claims between the two contracting parties. And there is no automatic right for one employee to represent the interests of hundreds or even thousands of other employees.

However, as this litigation and plenty of others show, plaintiffs believe and have argued that they are somehow losing a fundamental right simply because they have been precluded from representing the interests of other people when they agree to individual arbitration.

In this way, a representative waiver under PAGA in an arbitration agreement is no different than a class action waiver in an arbitration agreement: it simply allows the parties to choose a forum for their disputes and forces the employee to prove his or her individual claims without being able to leverage hefty exposure with large scale "representative" litigation. All Morina does is force employees to arbitrate individual claims where they have agreed to do so. It is hard to argue with this logic.

Finally, and from a big picture perspective, it is well perceived that PAGA litigation has been abused by plaintiffs and the plaintiffs' bar. Most of the time, because the state receives 75% of the proceeds and the attorneys receive all of their fees, the individual (and named) employees receive very little from any PAGA settlement or judgment.

Forcing an individual to arbitrate his or her PAGA claims alongside the individual's wage claims only makes sense and could easily result in an overall greater recovery for individual employees than allowing PAGA claims to proceed on any representative basis in court.

As a result, Moriana will likely encourage more employers to implement mandatory arbitration agreements in the workplace. And, if individual employees recognize they will likely benefit more from arbitrating their own claims instead of filing costly "representative" claims on behalf of unnamed individuals, perhaps we will see less litigation over the employee's choice of forum and more recovery for employees who have legitimate wage and hour claims against their employers.

1 563 U.S. 333 (2011),

2 59 Cal. 4th 348 (Cal. 2014).

3 No. 20-1573, (U.S. June 15, 2022).