U.S. Supreme Court Upholds Employer Arbitration Clause in a Narrow Opinion, but the Future of Federal Arbitration Act Preemption Remains Uncertain
June 16, 2022
Stroock Client Alert
The U.S. Supreme Court has issued its long-anticipated opinion in Viking River Cruises, Inc. v. Moriana, No. 20-1573, 2022 WL 2135491 (June 15, 2022), addressing whether the Federal Arbitration Act (“FAA”) preempts a California law designed to keep certain kinds of employment cases in court. The Court ruled in favor of the employer, upholding a collective-action waiver within the employer’s arbitration agreement and stating that claims under California’s Private Attorneys General Act (“PAGA”) must be arbitrated on an individual basis. However, the Justices left unanswered how far FAA preemption extends, or even whether the California Legislature may amend PAGA to again allow class-like claims despite an arbitration agreement to the contrary. A continuing area of uncertainty, potentially to be addressed in a future case, is whether claims for public injunctive relief under California consumer protection statutes also may be barred pursuant to an arbitration agreement that contains a collective-action waiver.
Viking River focused intensely on the unique nature of PAGA claims. PAGA permits employees to sue for violations of employment law on behalf of California’s Labor and Workforce Development Agency (“LAWDA”) and to recover statutory penalties both for themselves and for similarly situated workers, without formally seeking class certification. Because a significant amount of the penalty is paid to the government, California courts have consistently held that PAGA claims are public in character and therefore an arbitration agreement cannot bar the employee from pursuing PAGA claims on behalf of other employees. Nor, despite the many similarities between PAGA cases and employment class actions, can an employer argue that a class action waiver limits the employee to seeking penalties only on an individual basis. See Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014).
In Viking River, the employer sought to challenge Iskanian and similar authorities as barred by the FAA. The employer contracted with its employees to require arbitration of all claims, and for all arbitrations to be conducted on a non-class, non-representative basis. The employer argued that under longstanding Supreme Court FAA precedent, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), a state cannot forbid a class action waiver in an arbitration agreement. According to the employer, PAGA proceedings are sufficiently class-like as to fall within the AT&T Mobility rule, and for that reason employees could be required to arbitrate only their own individual claims, and to forego enforcement of other employees’ rights in the same arbitration. In response, the employee argued that the public nature of a PAGA claim, as well as LAWDA’s financial interest in the outcome of a proceeding based on alleged violations of multiple employees’ rights, rendered Iskanian’s non-arbitrability rule exempt from FAA preemption and not subject to AT&T Mobility. In short, the employee argued that PAGA promoted an important California public policy, and that the Supreme Court should not permit employers to weaken that policy through arbitration agreements.
The majority of Justices rejected both sides’ arguments, and charted a middle path. The Viking River opinion holds that employees can be required to arbitrate their individual claims for PAGA penalties. Moreover, the arbitration agreement’s prohibition on the employee’s seeking penalties on behalf of other employees also is enforceable. PAGA, the Court held, was an improper attempt to coerce parties out of exercising their rights under the FAA to arbitrate their disputes. Thus, the arbitration agreement at issue in Viking River was upheld. Additionally, the Supreme Court ruled that because PAGA itself does not permit an employee to assert other employees’ rights when he or she chooses to pursue only individual claims, the lower courts should dismiss the portion of the claim seeking to recover penalties on behalf of others. All Justices agreed with this result, except for Justice Thomas, whose long-time position has been that the FAA has no application to state-court proceedings.
Nevertheless, the opinion may not be a clear victory for employers or for businesses that use arbitration agreements in other contexts. The Supreme Court left open a path for the California Legislature to keep the public aspect of a PAGA claim out of arbitration. According to the Supreme Court, there was nothing inherently improper about keeping a claim out of arbitration, to the extent it was pursued by the employee on behalf of the government agency, LAWDA, which had not itself consented to arbitration. PAGA’s improper feature was its claim-splitting prohibition, which had the effect of rendering no portion of the claim arbitrable. The Court suggested that if the California Legislature allowed a PAGA claim to be split between its individual and public aspects, the FAA might not bar an employee from pursuing claims on behalf of others. For example, if a claim-splitting provision were to be enacted, the employee might be required to pursue his individual claim in arbitration, but might still retain some rights to act as an agent of LAWDA in court and seek relief on behalf of other employees there. In a concurrence, Justice Sotomayor stated clearly that she would approve of virtually any amendment to PAGA that allowed the public claim to be pursued outside arbitration. Even so, the Viking River majority opinion confirms that the FAA forbids legislative efforts to coerce parties not to exercise their federal rights to have a lawful arbitration agreement enforced.
Many businesses had hoped that Viking River would shed light on the long-disputed question of whether the FAA preempts California’s judicially created rule that a consumer arbitration agreement is unconscionable unless it permits a plaintiff to pursue claims for public injunctive relief under the Unfair Competition Law or the Consumers Legal Remedies Act. See McGill v. Citibank, 2 Cal. 5th 945 (2017). Under the McGill rule, an arbitration agreement must either allow the arbitrator to grant injunctive relief on behalf of the public at large, or allow the public injunctive relief claim to be severed and pursued independently in court, but if the agreement purports to bar public injunctive relief in any forum, then the plaintiff cannot be compelled to arbitrate his individual claims. Viking River does not address whether McGill is sufficiently hostile to arbitration as to be barred by the FAA, and plaintiff-side attorneys can be expected to argue that Viking River’s discussion of severance supports a finding that McGill survives FAA scrutiny. The counterargument is that even with severance, McGill has a sufficiently coercive effect on arbitration as to conflict with the FAA’s pro-arbitration goals.
The concurring opinions suggest disagreement within the Court as to how far FAA preemption extends, and whether California’s McGill rule pertaining to public injunctive relief might be inconsistent with the FAA. It is clear that Justice Sotomayor would uphold McGill against an FAA challenge. Justice Barrett, however, joined only the portions of the Viking River opinion focusing on the coercive nature of PAGA actions, and in a separate concurrence she observed that the arbitration agreement and its class action waiver must be upheld “because PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement.” Thus, she may well conclude that claims for public injunctive relief under California law are sufficiently class-like to run afoul of the FAA. Her observation was joined by Justice Kavanaugh and Chief Justice Roberts.
Reading the Justices’ analyses carefully, it seems that there is probably one vote to uphold McGill, three to strike it down and four (including the newly confirmed Ketanji Brown Jackson) undecided. Justice Thomas’s view may be the greatest puzzle, as he takes a broad view of FAA preemption in federal cases, but also states that the FAA does not apply at all in state-court cases. See AT&T Mobility, 563 U.S. at 353-57 (Thomas, J., concurring). His vote in a case challenging McGill may well depend on where the case originated before reaching the Supreme Court.
This fascinating area of the law continues to develop, and companies may wish to review their existing agreements to assess how Viking River and other recent precedents may bear on its enforceability in particular cases.
June 16, 2022
Stroock Client Alert
The U.S. Supreme Court has issued its long-anticipated opinion in Viking River Cruises, Inc. v. Moriana, No. 20-1573, 2022 WL 2135491 (June 15, 2022), addressing whether the Federal Arbitration Act (“FAA”) preempts a California law designed to keep certain kinds of employment cases in court. The Court ruled in favor of the employer, upholding a collective-action waiver within the employer’s arbitration agreement and stating that claims under California’s Private Attorneys General Act (“PAGA”) must be arbitrated on an individual basis. However, the Justices left unanswered how far FAA preemption extends, or even whether the California Legislature may amend PAGA to again allow class-like claims despite an arbitration agreement to the contrary. A continuing area of uncertainty, potentially to be addressed in a future case, is whether claims for public injunctive relief under California consumer protection statutes also may be barred pursuant to an arbitration agreement that contains a collective-action waiver.
Viking River focused intensely on the unique nature of PAGA claims. PAGA permits employees to sue for violations of employment law on behalf of California’s Labor and Workforce Development Agency (“LAWDA”) and to recover statutory penalties both for themselves and for similarly situated workers, without formally seeking class certification. Because a significant amount of the penalty is paid to the government, California courts have consistently held that PAGA claims are public in character and therefore an arbitration agreement cannot bar the employee from pursuing PAGA claims on behalf of other employees. Nor, despite the many similarities between PAGA cases and employment class actions, can an employer argue that a class action waiver limits the employee to seeking penalties only on an individual basis. See Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014).
In Viking River, the employer sought to challenge Iskanian and similar authorities as barred by the FAA. The employer contracted with its employees to require arbitration of all claims, and for all arbitrations to be conducted on a non-class, non-representative basis. The employer argued that under longstanding Supreme Court FAA precedent, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), a state cannot forbid a class action waiver in an arbitration agreement. According to the employer, PAGA proceedings are sufficiently class-like as to fall within the AT&T Mobility rule, and for that reason employees could be required to arbitrate only their own individual claims, and to forego enforcement of other employees’ rights in the same arbitration. In response, the employee argued that the public nature of a PAGA claim, as well as LAWDA’s financial interest in the outcome of a proceeding based on alleged violations of multiple employees’ rights, rendered Iskanian’s non-arbitrability rule exempt from FAA preemption and not subject to AT&T Mobility. In short, the employee argued that PAGA promoted an important California public policy, and that the Supreme Court should not permit employers to weaken that policy through arbitration agreements.
The majority of Justices rejected both sides’ arguments, and charted a middle path. The Viking River opinion holds that employees can be required to arbitrate their individual claims for PAGA penalties. Moreover, the arbitration agreement’s prohibition on the employee’s seeking penalties on behalf of other employees also is enforceable. PAGA, the Court held, was an improper attempt to coerce parties out of exercising their rights under the FAA to arbitrate their disputes. Thus, the arbitration agreement at issue in Viking River was upheld. Additionally, the Supreme Court ruled that because PAGA itself does not permit an employee to assert other employees’ rights when he or she chooses to pursue only individual claims, the lower courts should dismiss the portion of the claim seeking to recover penalties on behalf of others. All Justices agreed with this result, except for Justice Thomas, whose long-time position has been that the FAA has no application to state-court proceedings.
Nevertheless, the opinion may not be a clear victory for employers or for businesses that use arbitration agreements in other contexts. The Supreme Court left open a path for the California Legislature to keep the public aspect of a PAGA claim out of arbitration. According to the Supreme Court, there was nothing inherently improper about keeping a claim out of arbitration, to the extent it was pursued by the employee on behalf of the government agency, LAWDA, which had not itself consented to arbitration. PAGA’s improper feature was its claim-splitting prohibition, which had the effect of rendering no portion of the claim arbitrable. The Court suggested that if the California Legislature allowed a PAGA claim to be split between its individual and public aspects, the FAA might not bar an employee from pursuing claims on behalf of others. For example, if a claim-splitting provision were to be enacted, the employee might be required to pursue his individual claim in arbitration, but might still retain some rights to act as an agent of LAWDA in court and seek relief on behalf of other employees there. In a concurrence, Justice Sotomayor stated clearly that she would approve of virtually any amendment to PAGA that allowed the public claim to be pursued outside arbitration. Even so, the Viking River majority opinion confirms that the FAA forbids legislative efforts to coerce parties not to exercise their federal rights to have a lawful arbitration agreement enforced.
Many businesses had hoped that Viking River would shed light on the long-disputed question of whether the FAA preempts California’s judicially created rule that a consumer arbitration agreement is unconscionable unless it permits a plaintiff to pursue claims for public injunctive relief under the Unfair Competition Law or the Consumers Legal Remedies Act. See McGill v. Citibank, 2 Cal. 5th 945 (2017). Under the McGill rule, an arbitration agreement must either allow the arbitrator to grant injunctive relief on behalf of the public at large, or allow the public injunctive relief claim to be severed and pursued independently in court, but if the agreement purports to bar public injunctive relief in any forum, then the plaintiff cannot be compelled to arbitrate his individual claims. Viking River does not address whether McGill is sufficiently hostile to arbitration as to be barred by the FAA, and plaintiff-side attorneys can be expected to argue that Viking River’s discussion of severance supports a finding that McGill survives FAA scrutiny. The counterargument is that even with severance, McGill has a sufficiently coercive effect on arbitration as to conflict with the FAA’s pro-arbitration goals.
The concurring opinions suggest disagreement within the Court as to how far FAA preemption extends, and whether California’s McGill rule pertaining to public injunctive relief might be inconsistent with the FAA. It is clear that Justice Sotomayor would uphold McGill against an FAA challenge. Justice Barrett, however, joined only the portions of the Viking River opinion focusing on the coercive nature of PAGA actions, and in a separate concurrence she observed that the arbitration agreement and its class action waiver must be upheld “because PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement.” Thus, she may well conclude that claims for public injunctive relief under California law are sufficiently class-like to run afoul of the FAA. Her observation was joined by Justice Kavanaugh and Chief Justice Roberts.
Reading the Justices’ analyses carefully, it seems that there is probably one vote to uphold McGill, three to strike it down and four (including the newly confirmed Ketanji Brown Jackson) undecided. Justice Thomas’s view may be the greatest puzzle, as he takes a broad view of FAA preemption in federal cases, but also states that the FAA does not apply at all in state-court cases. See AT&T Mobility, 563 U.S. at 353-57 (Thomas, J., concurring). His vote in a case challenging McGill may well depend on where the case originated before reaching the Supreme Court.
This fascinating area of the law continues to develop, and companies may wish to review their existing agreements to assess how Viking River and other recent precedents may bear on its enforceability in particular cases.
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