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SCOTUS Rules Arbitration Agreements Can Waive PAGA Claims

In a highly-anticipated opinion released yesterday, Viking River Cruises, Inc. v. Moriana, the Supreme Court of the United States ruled that arbitration agreements between employers and employees can both send an employee’s claims under the Private Attorneys General Act, or PAGA, to binding private arbitration and prevent the employee from litigating Labor Code violations allegedly suffered by other employees. The immediate effect is a win for California employers with properly drafted arbitration agreements, but the opinion may signal the start of a new phase in the long-running arbitration wars rather than the decisive victory some employers hoped for.

As background, the PAGA is a California state law that allows employees to bring lawsuits seeking civil penalties on behalf of the State for Labor Code violations allegedly suffered by the plaintiff and other employees. By combining the harms allegedly suffered by a group of employees into one lawsuit, PAGA claims bear some resemblance to class actions, a procedural mechanism used not only in California but throughout the country to allow one or more “class representatives” to bring claims on behalf of others for a variety of harms, including the same wage and hour violations covered by the PAGA. Because they can turn on the same factual disputes and legal questions, PAGA claims and wage and hour class action claims are often combined into single lawsuits, but the two also remain procedurally and conceptually different from one another.

The U.S. Supreme Court has repeatedly held that class action waivers in arbitration agreements must be enforced even if state law prohibits such waivers, because the Federal Arbitration Act (FAA) generally requires arbitration agreements to be enforced as written and preempts state laws that single out arbitration agreements as less enforceable than any other contract. The practical effect is to preclude employees who execute such agreements from combining their employment law claims with those of other similarly situated employees using class action procedures. But a 2014 California Supreme Court ruling, Iskanian v. CLS Transporation Los Angeles, LLC, held PAGA waivers in arbitration agreements to be unenforceable, leaving even employers with ironclad class action waivers exposed to these damaging lawsuits. The nation’s high court left the Iskanian rule undisturbed for several years, until it agreed to hear the Viking River cruise line’s appeal of lower court rulings denying its bid to compel a former employee’s PAGA claims to arbitration based on the Iskanian precedent.

As one might expect from an 8-1 ruling with two concurring opinions and a dissent, the Viking River opinion raised nearly as many questions as it answered. The Court reversed, ruling that Moriana’s individual PAGA claims must be compelled to arbitration and that his non-individual PAGA claims for violations allegedly suffered by others must then be dismissed for lack of standing—the result Viking River and California employers following the case had hoped for.

But the majority of justices also held that the FAA did not preempt Iskanian’s basic rule that “wholesale” waivers of PAGA claims are invalid, rejecting Viking River’s contention that PAGA claims are no different from class actions for arbitration purposes. Instead, the Court reached its result by overruling Iskanian’s less-appreciated holding that PAGA claims cannot be split into individual and non-individual claims. Accordingly, the Court remanded with instructions to refer only Moriana’s individual claims to binding arbitration, because Viking River had never agreed to arbitrate her non-individual claims. Those non-individual claims in turn required dismissal because the PAGA statute and California court procedures did not allow a plaintiff to litigate PAGA claims associated with other employees in civil court while their own claims were in arbitration, requiring dismissal of the non-individual claims but potentially leaving the door open for statutory amendments that could allow subsequent claims to proceed in civil court. Three conservative justices concurred in the result but signaled they would have more fully overruled Iskanian. Justice Thomas, writing alone, maintained his somewhat idiosyncratic view that the FAA does not apply in state court at all.

The opinion gave many more nuances for employment law practitioners to pore over in the coming weeks and months. But for employers, the important takeaway is that arbitration agreements, for the time being, can now provide stronger protection against PAGA lawsuits. Qualified counsel should review arbitration agreements currently in use carefully to ensure they provide maximum protection in light of Viking River, while employers who have not yet implemented arbitration agreements have even more reason to do so.