listen to this post

On July 17, 2023, the Supreme Court of California decided an important issue of state law raised by the United States Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022). Cruises on the Viking River found that the Federal Arbitration Act (FAA) requires the execution of an agreement to arbitrate California Attorneys General Act (PAGA) claims arising out of alleged violations of the California Labor Code against the named plaintiff, notwithstanding California’s prior authority that PAGA claims cannot be “divided” into “representative” and “individual” components. In a brief paragraph at the end of his decision to Cruises on the Viking River, the United States Supreme Court held that a PAGA plaintiff lacks legal standing to pursue PAGA claims arising from alleged Labor Code violations committed against other employees when claims arising from violations against the named plaintiff have been “disposed of” to arbitration. However, because statutory standing is a matter of state law, state courts were not bound by the US Supreme Court’s interpretation, a point Justice Sotomayor signaled in a concurrence. In Adolph v. Uber Techs., Inc.At the. S274671, 2023 WL 4553702 (2023), the California Supreme Court disagreed with the U.S. Supreme Court’s interpretation of the PAGA standing requirement and held that a PAGA plaintiff retains standing to sue for alleged violations of the Labor Code committed against non-party employees when claims arising out of alleged violations against the plaintiff have been compelled to arbitrate.

The California Attorneys General Act

PAGA is a California state statute that allows an “injured employee” to file a lawsuit to recover civil penalties for violations of the California Labor Code “on behalf of himself and other current or former employees.” Civil penalties that are recoverable under PAGA would only be enforced by state agencies in the absence of the statute. Of the penalties recovered in a PAGA action, 75% are awarded to the California Labor & Workforce Development Agency and 25% are awarded to affected employees, and plaintiffs’ attorneys may also seek to recover their attorneys’ fees and costs. Before Cruises on the Viking River, California courts have held that agreements to arbitrate individual class claims are enforceable, but agreements to arbitrate individually PAGA claims are not. In the context of class action, arbitration agreements serve as a powerful tool to limit the scope of claims that can be brought against employers, and Cruises on the Viking River gave the promise that they can serve the same function in PAGA cases.

O adolph Decision

The California Supreme Court in adolph started by recognizing Viking River Cruises’ holding that the FAA supersedes California’s rule that “PAGA claims may not be divided into individual and non-individual claims.” The California Supreme Court has adopted the terminology of the United States Supreme Court in referring to PAGA claims arising from alleged violations of the Labor Code against the named plaintiff as “individual PAGA claims” and PAGA claims arising from alleged violations against other employees as “non-individual PAGA claims”. adolph held that to be entitled to pursue non-individual PAGA claims, the plaintiff must satisfy only two requirements: the plaintiff must be someone (1) “who was employed by the alleged infringer” and (2) “against whom one or more of the alleged violations were committed.” These two permanent elements flow from the PAGA definition of “injured employee” and the prior decision of the California Supreme Court in kim v. Reins Int’l California, Inc., 9 cal. 5th 73 (2020).

The California Supreme Court held that under the statutory definition of an “injured employee,” a PAGA plaintiff whose individual PAGA claims are bound to arbitration under Cruises on the Viking River does not lose legitimacy to enforce non-individual PAGA claims in court. The Court drew an analogy with its decision in kim that a plaintiff settling an individual non-PAGA claim for damages does not lose standing to enforce PAGA claims. Although kim addressed only the permanent impact of the does not pay Individual damage claims, the Supreme Court of California ruled that the situation in kim was sufficiently similar to a plaintiff whose individual PAGA claims are compelled to arbitration to find that “(a) arbitrating a plaintiff’s individual PAGA claim does not nullify the fact of infringement or extinguish the plaintiff’s status as an injured employee.”

Defendant Uber raised a number of arguments against that conclusion, which the California Supreme Court rejected. Uber argued that when an individual PAGA claim is compelled for arbitration, the claim is no longer present in the lawsuit and therefore the plaintiff does not meet the standing PAGA requirement as he is no longer a person “against whom one or more of the alleged violations” in the lawsuit “was committed”. The California Supreme Court was not persuaded by this argument and held that an order compelling individual claims to arbitration does not “separate” them from the action. The Court also rejected Uber’s arguments that the PAGA wording, providing that PAGA claims can be brought “on its own behalf and that of other current or former employees” imposes an additional permanent element beyond the legal definition of “injured employee” and that the plaintiff must have a financial interest in a PAGA claim.

Uber also argued that allowing non-individual PAGA claims to proceed in court while individual PAGA claims proceed in arbitration would result in the plaintiff’s status as an “injured employee” being re-examined after arbitration on the same matter, in violation of the FAA and Cruises on the Viking River. The California Supreme Court found this concern to be unfounded because “the lower court may exercise its discretion to stay non-individual claims pending the outcome of the arbitration pursuant to section 1281.4 of the Code of Civil Procedure,” and any arbitral award finding that the plaintiff is not an injured employee would be binding on the court upon confirmation of the award.

adolph is a disappointing decision and threatens to undo many of the benefits employers have gained from Cruises on the Viking River. A positive aspect of adolph opinion is the Court’s observation that the lower court may stay non-individual PAGA claims when individual PAGA claims are bound for arbitration, and a favorable decision in arbitration will be issued preclusively on the plaintiff’s status as an injured employee in court. Employers who continue to enforce individual arbitration agreements in PAGA actions must argue that such a stay is mandatory under the Civ Code. Proc. § 1281.4, which uses the word “shall.” There is also an untested argument that from adolph California’s own interpretation of statutory rules conflicts with the FAA.

Employers should review their arbitration agreements and carefully consider, in consultation with their employment lawyer, whether and under what circumstances they should have and/or enforce agreements providing for the arbitration of individual PAGA claims in light of the new decision.