By George H. Friedman, SAA Publisher & Editor-in-Chief

In the second arbitration-related decision of the week, the Court on June 15 held 8-1 in Viking River Cruises, Inc. v. Moriana, No. 20-1573, that California’s Private Attorney General Act (“PAGA”) was in part preempted by the Federal Arbitration Act (“FAA”), insofar as PAGA allowed employees to evade bilateral predispute arbitration agreements (“PDAA”). The lone dissenter was Justice Thomas, who held to his long-standing view that the FAA does not apply in state courts.

The Opinion at first blush seems murky, starting out with:

“ALITO, J., delivered the opinion of the Court, in which BREYER, SOTOMAYOR, KAGAN, and GORSUCH, JJ., joined, in which ROBERTS, C. J., joined as to Parts I and III, and in which KAVANAUGH and BARRETT, JJ., joined as to Part III. SOTOMAYOR, J., filed a concurring opinion. BARRETT, J., filed an opinion concurring in part and concurring in the judgment, in which KAVANAUGH, J., joined, and in which ROBERTS, C. J, joined as to all but the footnote. THOMAS, J., filed a dissenting opinion.”

We’ll help readers grasp the core holdings (it’s not as confusing as it first seems), but we encourage readers to read the Opinion and peruse some of the many excellent commentaries and analyses.

Case Below: The Extent of the FAA Preemption of State Laws

We reported in December 2021 that the Supreme Court had granted Certiorari in four cases involving arbitration, among them Viking River. Specifically, the Court agreed to review of Moriana v. Viking River Cruises, Inc., No. B297327 (Cal. Ct. App. 2020), pet. for review den., No. S265257 (Cal. 2020). We covered this case in detail in SAA 2021-47 (Dec. 16) and in a feature article, After a Lull in 2021, a Busy Year Ahead Arbitration-wise for SCOTUS, 2021:48 Sec. Arb. Alert 1 (Dec. 23, 2021). To review, we have reported many times on Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348, 327 P.3d 129 (Calif. 2014), Cert. den., 135 S.Ct. 1155 (2015), where a divided 4-3 California Supreme Court – complete with partial concurrences and dissents – held that an employee could pursue claims against their employer under the California Private Attorneys General Act (“PAGA”), despite the existence of an arbitration agreement waiving such claims (see, for example, SAA 2015-01 and SAAs 2014-41 & -24). But did the U.S. Supreme Court’s subsequent decision in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), holding that class or collective action waivers are enforceable under the FAA, implicitly overrule Iskanian? In the case below, the Court of Appeal held:

“…. Epic’s warning about impermissible devices to get around otherwise valid agreements to individually arbitrate claims notwithstanding, Iskanian remains good law. We therefore reject Viking's characterization of PAGA claims as a transparent device to preclude individualized arbitration proceedings and follow Iskanian, which instead viewed predispute PAGA waivers precluding PAGA actions in any forum as attempts to exempt employers from responsibility for violations of the Labor Code” (footnote omitted).

Issue Before SCOTUS

The May 2021 Petition in Viking River asked: “Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.”

The Oral Argument

With a full complement of Justices, the March 30 argument (the transcript is here; audio recording is here) focused squarely on the preemptive effect of the FAA as defined by Concepcion, Epic Systems, and Lamps Plus, versus California’s right to enforce its labor laws via private attorneys general using PAGA. The Court’s pro-arbitration wing was very quiet, with the bulk of the questions coming from Justices Breyer, Kagan and Sotomayor. Our prescient editorial comment was:  “This might just mean that there are enough votes to find PAGA is preempted by the FAA, so the pro-PDAA Justices saw no need to jump in (although Justice Thomas posed his usual question about the applicability of the FAA in State courts).” Justice Sotomayor observed that PAGA was enacted before (ed: in 2004) the decisions in Concepcion, Epic Systems, and Lamps Plus, thus undermining any argument that PAGA was enacted to work around those holdings. Viking’s counsel Paul D. Clement responded that PAGA was moribund before the SCOTUS rulings, and that PAGA use exploded thereafter with 17 such cases now being filed every day. He also raised an interesting point: if PAGA-type laws were important to the states as an effective labor law enforcement mechanism, why did no other states file Amicus Briefs? He described the law as an “outlier” – a point that seemed to resonate with Justice Gorsuch. For a comprehensive “chapter-and-verse” analysis, we recommend that readers peruse these March 30 posts: Adding a Claim, and Avoiding Arbitration:  The Supreme Court Reviews California’s Private Attorneys General Act, appearing in the CPR Blog; and Supreme Court Weighs Employer’s Challenge to California Labor Law in the LA Times. 

SCOTUS Majority: FAA Partially Preempts PAGA

The majority Opinion in Viking River was authored by Justice Alito. The Opinion has several parts, with shifting groups of Justices signing on in part. There are also concurrences and as mentioned above, the expected Thomas dissent. But here’s the bottom line on FAA preemption of PAGA: five Justices find that the part of the California statute allowing employees to avoid individual bilateral PDAAs is preempted by the FAA:

“We hold that the FAA preempts the rule of Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. This holding compels reversal in this case.”

But PAGA is not completely preempted:

“The agreement between Viking and Moriana purported to waive ‘representative’ PAGA claims. Under Iskanian, this provision was invalid if construed as a wholesale waiver of PAGA claims. And under our holding, that aspect of Iskanian is not preempted by the FAA, so the agreement remains invalid insofar as it is interpreted in that manner.”

Eight Justices agreed to this language:

“Iskanian’s indivisibility rule effectively coerces parties to opt for a judicial forum rather than ‘forgo[ing] the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution.’ Stolt-Nielsen, 559 U. S., at 685; see also Concepcion, 563 U. S., at 350–351. This result is incompatible with the FAA.”

(ed: *The Court noted that California is free to amend PAGA to conform to the Viking River holding. **For two excellent analyses of this decision, see these June 15 blog posts: Supreme Court Holds That The Federal Arbitration Act Requires Enforcement Of Agreements To Arbitrate Individual Claims Under California’s Labor Code Private Attorneys General Act, Gibson Dunn Blog; and Supreme Court Limits California’s PAGA Law on Employment Claims, Preempting It in Part under the Federal Arbitration Act, CPR Blog. ***For a summary of this Term’s decisions involving arbitration, see our coverage elsewhere in this Alert.)