Justices Scrutinize California Worker Law’s Arbitration Limits

The U.S. Supreme Court heard arguments over whether a unique California law that allows employees to bring actions on behalf of the state overrides a federal preference for arbitration, as the justices weigh the power of actions asserting labor code violations.

The court appeared divided Wednesday on whether the Federal Arbitration Act, which governs pacts involving private dispute resolution, preempts California’s Private Attorneys General Act.

At stake is whether the thousands of cases brought under PAGA each year can allow employees to circumvent arbitration and force a slew of labor claims into court, including in myriad cases filed against gig economy employers and big box retailers.

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

Wednesday’s argument also drew a demonstration from a California business coalition in front of the Supreme Court. Small business owners are at risk of being sued under PAGA for technicalities, the coalition says, with some members calling the law “draconian.”

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. An agreement she signed with the company waived her right to bring such a suit, but a 2014 California Supreme Court ruling allows class actions under PAGA to circumvent an employer’s arbitration agreement.

Questions from the Bench

Justices Elena Kagan, Sonia Sotomayor, and Stephen Breyer appeared skeptical of Viking attorney Paul Clement’s argument that high court precedent upholds employers’ right to enforce arbitration agreements. Other justices quizzed both sides about the effects of PAGA and whether it clashed with Supreme Court precedent in favor of the FAA.

“That’s what the state has decided is necessary to enforce its labor laws, ‘We don’t have the capacity to do it ourselves. We need private people to it it,’” Kagan said. " It’s a state decision to enforce its own labor laws in a particular way. Your position is that the state can’t make that decision?” she asked Clement, a former U.S. Solicitor General.

He responded that the state policy is not “sacrosanct,” and that it allows cases of hundreds of employees claiming violations of the labor code would be untenable to handle in arbitration, rather than in a state court. He explained that practically, the law prevents arbitration because of those limits, which clashes with high court precedent that bolsters the FAA.

“This federal statute does impose limits on the state,” Clement said. “The state doesn’t have free reign.”

Moriana’s attorney, Scott Nelson, argued that PAGA is neutral on arbitration, but Viking’s employment contract explicitly prohibits employees from bringing these types of claims “for any amount, in any forum.” The FAA doesn’t conflict with PAGA in these cases, he said, because arbitration remains an option under the law for employers.

“My argument is also that if California affords an individual right to recovery, my premise is that the FAA cannot be used as a mechanism to diffuse that right,” Nelson said.

PAGA Penalties

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%. The California Supreme Court has held that workers can bring a PAGA case even if they agreed to send employment disputes to individual arbitration proceedings.

California’s PAGA recoveries 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 for worker safety issues and wage and hour disputes.

Justice Samuel Alito also asked about why California chose “this particular structure.”

“But California chose to do it in this particular way. Do you have any idea why they did? Why did they tie it to somebody who has a contractual relationship?” Alito asked Clement.

Chief Justice John Roberts too posed a question about the structure of the law.

“This is what strikes me as one—one difference is that this is not her cause of action. This is the state’s cause of action. It is an action—it’s the attorney general’s action. She’s acting not really as—would be acting not simply as herself but as a delegee of the attorney general and would be securing a recovery for the state, as well as for other employees.”

Breyer raised an analogy and asked whether the California’s amounted to putting a spider next to certain claims, then legislating that nothing with a spider could be arbitrated. He asked essentially about whether the law intended to shield cases from arbitration, which wouldn’t be enforceable, or whether it was neutral, as Moriana’s attorney suggested.

“We’d have to go back and see whether they put that spider on it in order to be hostile to arbitration or whether it was something that applied to a lot of laws, had nothing to do with arbitration,” he said.

Sotomayor asked Nelson that if PAGA prevents a company from arbitrating a claim, how it could possibly not conflict with Supreme Court precedent that holds up arbitration agreements.

Kagan asked him about the effect of striking down PAGA, and what that would do to the power of an individual to bring claims on behalf of the state. She also asked whether qui tam actions or whistleblower lawsuits brought on behalf of the government would be affected as well.

Nelson responded that invalidating PAGA would implicate those types of cases as well as shareholder derivative actions.

Kirkland & Ellis LLP represents Viking River Cruises. The Law Offices of Kevin T. Barnes and Public Citizen Litigation Group represents Moriana.

The case is Viking River Cruises, Inc. v. Moriana, U.S., No. 20-1573, oral argument 3/30/22.