In Viking River Cruises, Inc. v. Moriana, plaintiff worked for Viking as a sales representative in Los Angeles.  Plaintiff sued Viking alleging various Labor Code violations and sought to recover PAGA penalties on a representative basis.  However, when she started working for Viking, she agreed to resolve all employment issues with Viking in arbitration, and the parties would use individual procedures rather than class or representative action procedures such as PAGA.  Viking sought to compel Moriana’s individual claims to arbitration, but the trial court and the California Court of Appeal denied Viking’s request, citing the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles, LLC. The California Court of Appeal noted that it “must follow the California Supreme Court, unless the United States Supreme Court has decided the same question differently.” Therefore, Viking petitioned the United States Supreme Court to review the case, arguing that Iskanian is preempted by federal law under the Federal Arbitration Act (FAA) and the U.S. Supreme Court holdings in AT&T Mobility v. Concepcion and Epic Systems Corp. v. LewisAs we reported earlier, the U.S. Supreme Court issued its decision on June 15, 2022, finding that the FAA preempts California’s prohibition on the employer’s ability to implement arbitration agreements with PAGA waivers.  Here are five issues California employers need to know about the Viking decision:

1. Arbitration agreements containing class action and PAGA waivers are enforceable by California employers.

In this case, Viking River Cruises implemented an arbitration agreement that was signed by the plaintiff, Angie Moriana.  The agreement contained a “Class Action Waiver,” setting forth that the parties could not bring any class, collective, or representative PAGA actions in arbitration.  The agreement also contained a severability clause, stating that if any portion of the class action waiver was found to be invalid, that portion of the agreement would not be enforceable, but the remainder of the agreement would be “enforced in arbitration.”  As discussed below, the U.S. Supreme Court upheld the PAGA waiver found in the arbitration agreement implemented by Viking.

While arbitration agreements can be enforeable, California employers must be aware that arbitration agreements are routinely struck down by courts if they are not properly drafted. For example, a California court held in Ajamian v. CantorCO2e, that an arbitration agreement was not enforceable because it required the employee to waive statutory damages and remedies.  In addition, the agreement in that case only allowed the employer to recover its attorney’s fees if successful, not the employee.  Challenging the enforceability of arbitration agreements in California courts will likely increase give the U.S. Supreme Court’s holding in Viking.

2. The U.S. Supreme Court noted PAGA’s unique nature.

In the decision, the U.S. Supreme Court noted how PAGA departs from the normal rules “by granting the power to enforce a subset of California public law to every employee in the State.  This combination of standing to act on behalf of a sovereign and mandatory freeform joinder allows plaintiffs to unite a massive number of claims in a single-package suit.”

The Supreme Court noted that, “[a]rbitration is poorly suited to the higher stakes of massive-scale disputes” created by PAGA.  For example, arbitration does not offer “multilayered review”, and there are risks of “in terrorem” settlements (similar to class actions).

3. The U.S. Supreme Court found that PAGA conflicts with the Federal Arbitration Act given the PAGA waiver in the arbitration agreement implemented by Viking.

The U.S. Supreme Court held that PAGA’s “procedural structure” conflicts with the FAA because of PAGA’s “built-in mechanism of claim joinder.”  Because PAGA “permits ‘aggrieved employees’ to use the Labor Code violations they personally suffered as a basis to join to the action any claims that could have been raised by the State in an enforcement proceeding.”  Next, the Court explained that the California Supreme Court’s holding in Iskanian, “prohibits parties from contracting around this joinder device because it invalidates agreements to arbitrate only ‘individual PAGA claims for Labor Code violations that an employee suffered.”  Therefore, the Supreme Court held that, “This prohibition on contractual division of PAGA actions into constituent claims 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.”  The Supreme Court concluded that “[f]or that reason, 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.”

4. Enforceability of arbitration agreements will be challenged going forward.

Employers implementing arbitration agreements must be careful to utilize agreements that fall within Viking’s holding and comply with California law as well.  For example, as we have written about previously, California courts have routinely found that arbitration agreements contained in employee handbooks are not enforceable.  Moreover, simple technical details such as having a clear signature by the employee on the agreements, and if there is a signature line for the company to counter sign the agreement, it should be fully completed by the company.

5. This may not be the last PAGA decision – watch for developments from California courts or from the California Legislature.

Justice Sotomayor’s concurring opinion in Viking made it clear that this is not likely the last decision regarding PAGA.  Justice Sotomayor stated that “[o]f course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.  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.”