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Justices’ Arbitration Ruling Allows California Law Survival (1)

June 15, 2022, 2:52 PMUpdated: June 15, 2022, 9:57 PM

The US Supreme Court limited the reach of a unique California law allowing employees to sue over workplace violations in place of the state, while leaving the door open for state courts or lawmakers to restore it.

The Federal Arbitration Act, which governs private dispute resolution contracts, requires that an arbitration agreement can apply to an individual worker’s claims under California’s Private Attorneys General Act, separating them from claims the worker was litigating on behalf of others, the justices ruled Wednesday.

The decision overturned the prohibition on dividing PAGA claims that stemmed from a 2014 California Supreme Court ruling that class-action waivers in employees’ arbitration contracts don’t apply to PAGA claims. But the justices left in place the state court’s ban on wholesale waivers of rights under the law.

PAGA doesn’t have a mechanism for courts to hear group claims when the individual who sued is forced into arbitration, so those claims should be dismissed, the high court said in an opinion penned by Justice Samuel Alito.

“Of course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word,” Justice Sonia Sotomayor said in her concurring opinion. “Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

Sotomayor’s comment underscores that the full impact of the decision will remain unclear until state courts decide what happens to representative PAGA claims when the worker bringing the lawsuit must arbitrate their individual claims.

Monetary Incentive

She also highlighted that California lawmakers—who have an incentive to keep PAGA penalty money flowing into state coffers—can amend the law to say somebody who arbitrates an individual claim can bring representative claims in court.

PAGA allows individuals to sue on behalf of similarly situated people who work for the same employer. Aggrieved workers keep 25% of any penalties collected, with the state collecting the other 75%.

California’s recoveries under PAGA have grown in recent years across various industries, with the state raking in $88 million in penalties in 2019, according to currently available data. Several companies in the state, including those in the gig economy, have faced class actions over worker safety issues and wage-and-hour disputes.

The law draws thousands of labor challenges to court every year.

The US Chamber of Commerce, Uber Technologies Inc., Postmates Inc., and other business groups asked the high court to curb PAGA, saying that it doesn’t jibe with the FAA. Proponents of the state law, including the California attorney general, say it’s an important tool for workers to hold employers accountable.

Divided Decision

The case involves former Viking River Cruises Inc. sales representative Angie Moriana, who sued in 2018 on behalf of hundreds of workers over alleged violations of several provisions of California’s wage-and-hour laws. She waived her right to bring such a suit when she signed an agreement with the company but avoided arbitration by bringing a claim under PAGA.

But PAGA’s “joinder device” that allows aggrieved employees to include in their lawsuit claims on behalf of other workers conflicts with the FAA’s directive to enforce arbitration agreements as written, the Supreme Court said.

“Requiring arbitration procedures to include a joinder rule of that kind compels parties to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether,” Alito wrote in the majority opinion. “Either way, the parties are coerced into giving up a right they enjoy under the FAA.”

Justice Clarence Thomas dissented, citing his longstanding view that the FAA doesn’t apply to state court proceedings.

While eight justices joined the section of the opinion describing the conflict between PAGA and the FAA, Chief Justice John Roberts and Justices Amy Coney Barrett and Brett Kavanaugh didn’t sign onto the majority’s analysis of PAGA when an individual’s claims are sent to arbitration.

Much of the court’s opinion was unnecessary to the outcome of the case and discussed “disputed state-law questions as well as arguments not pressed or passed upon in this case,” Barrett wrote in a concurring opinion joined by Roberts and Kavanaugh.

Future Impact

Moriana’s attorney, Michael Rubin of Altshuler Berzon LLP, said the decision leaves room for workers to avoid the worst parts of it for them.

“This is certainly a setback for Ms. Moriana, but in the longer term, even those of us who disagree with the court’s analysis feel confident that the future impacts of this decision will be limited,” Rubin said.

The ruling turned on the specific language of the severability clause in the arbitration agreement, so the decision doesn’t have any impact on workers who don’t have that same provision in their arbitration pacts, he said.

The extent to which the decision depends on contractual language will have major importance for the many PAGA lawsuits that have been put on hold pending the Supreme Court’s decision.

But the justices based their ruling on FAA precedent and not necessarily the particular clauses in the arbitration agreement at issue in the case, said Spencer Skeen, a management-side attorney with Ogletree Deakins Nash Smoak & Stewart PC.

“If the arbitration agreement is governed by the FAA, a well-crafted arbitration agreement that provides for resolution of disputes on an individual basis only will be enforced,” Skeen said. “That’s because arbitration is a matter of consent and not coercion. States can’t coerce parties into forgoing individual arbitration, if their agreement provides for it.”

Viking River Cruises’ lawyer, Paul Clement of Kirkland & Ellis LLP, didn’t respond to requests for comment.

Sotomayor’s Prediction

More broadly, the Supreme Court’s interpretation of PAGA could be undermined by subsequent California court rulings or legislative amendments, as Sotomayor alluded to in her concurring opinion.

State courts and lawmakers have that leeway in part because California doesn’t require plaintiffs to have suffered an “injury in fact” to bring a lawsuit, as federal courts do. The California Supreme Court has ruled that workers can litigate representative PAGA claims even if they’ve settled their individual claims.

State courts handling PAGA claims could end up enforcing agreements to send individual claims to arbitration, putting the representative claims on hold, then allowing the workers to proceed with representative claims if they prevail in arbitration, said James Evans, an Alston & Bird LLP attorney who represents companies.

The issue of whether PAGA provides for court adjudication of representative claims when an individual has to go to arbitration will come before California courts before state lawmakers have a chance to amend PAGA, said Lauren Teukolsky, an attorney at Teukolsky Law PC who represents workers.

“PAGA lives to see another day,” she said.

The case is Viking River Cruises, Inc. v. Moriana, U.S., No. 20-1573, 6/15/22.

(Updated with additional reporting throughout.)

To contact the reporters on this story: Robert Iafolla in Washington at riafolla@bloomberglaw.com; Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Melissa B. Robinson at mrobinson@bloomberglaw.com; Genevieve Douglas at gdouglas@bloomberglaw.com