US Supreme Court To Take on California’s Hostility to Arbitration

In a case with significant implications for companies with California employees, as well as companies selling goods and services to consumers in California, the U.S. Supreme Court has agreed to hear an appeal of a California court ruling validating a major loophole in the general federal rule enforcing agreements to individual arbitration.

On December 15, the U.S. Supreme Court agreed to hear a case on whether the Federal Arbitration Act (FAA) preempts California’s rule prohibiting waivers of California Private Attorneys General Act (PAGA) claims in individual arbitration agreements. PAGA allows employees to file “private attorney general” lawsuits against their employers to pursue civil penalties on behalf of themselves, other employees, and the state of California.

Previously in 2014, the California Supreme Court held in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014) that an arbitration agreement cannot include a mandatory waiver of the ability of an individual to bring a private attorney general action under PAGA. The California Supreme Court reasoned that PAGA actions allow an employee to step into the shoes of the state, and since the state did not sign the arbitration agreement, such waivers are unenforceable. PAGA claims allow an individual to recover awards based on per person, per pay period, which can lead to exponential awards for both plaintiffs and their counsel. This anti-arbitration ruling was affirmed by the U.S. Court of Appeals for the Ninth Circuit, which rejected arguments that this anti-arbitration rule was contrary to U.S. Supreme Court precedent validating the primacy of arbitration under the FAA over prior incarnations of California’s hostility to arbitration.

In the present case, Viking River Cruise, Inc., v. Moriana, No.20-1573, U.S. 6280 (Dec 15, 2021) plaintiff Moriana worked for defendant Viking River as a sales representative. She brought a PAGA representative action, alleging Viking River violated several state labor code violations. However, the plaintiff had signed an arbitration agreement with the company when she began her employment in which she agreed to bring any claims only individually in arbitration. Viking River moved to compel arbitration, which was denied by both the trial court and the Court of Appeals. The California Supreme Court denied the employer’s petition for review.

Viking River then petitioned the Supreme Court for certiorari. Viking River argued that Iskanian directly conflicts with Supreme Court precedent AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) and Epic Sys. Corp. v. Lewis, 138 U.S 1612 (2018). Both cases held that arbitration agreements barring class actions are enforceable. The Supreme Court granted review and will decide “[w]hether the Federal Arbitration Act requires enforcement of a bilateral agreement providing that an employee cannot raise representative claims, including under PAGA.”

The Supreme Court’s willingness to hear the Viking River appeal has obvious direct implications for companies with California employees who have programs calling for individualized arbitration of dispute. The case also has major implications for any company offering goods or services to California consumers. In another strand of authority, California consumer protection statutes have been held to allow plaintiffs to obtain “public injunctive relief,” and California courts have held that the purported right to seek public injunctive relief cannot be waived in favor of individual arbitration. The so-called “McGill rule” was announced in McGill v. Citibank, N.A., 393 P.3d 85, 87 (Cal. 2007) and the subject of much litigation since. Given the near identity of the analysis used by California courts to invalidate individual arbitration of disputes to allow PAGA claims against employers to go forward, at stake in Viking River will not only be PAGA claims, but also the legal underpinnings for California’s attempt to undercut individual arbitration agreements in consumer protection cases in favor of claims for “public” injunctive relief.

This case has far reaching consequences for both employers and companies offering goods and services in California. Troutman Pepper will continue to monitor and provide updates on this case and others considering the enforceability of PAGA and “public injunctive relief” waivers in arbitration agreements.

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