Adding a Claim, and Avoiding Arbitration: The Supreme Court Reviews California’s PAG Act

By Russ Bleemer

The U.S. Supreme Court Wednesday examined California’s law allowing individuals to stand in for the state and file suits on behalf of coworkers against their employers even when they have arbitration obligations in the employment contracts.

California’s Private Attorneys General Act unquestionably has affected individualized arbitration processes under the Federal Arbitration Act, as a result of the California Supreme Case of Iskanian v. CLS Transp. Los Angeles LLC, 327 P.3d 129 (Cal. 2014) (available at https://stanford.io/3ILcTY5), which authorizes California employees to avoid mandatory arbitration employment contracts requirements by filing representative suits under the PAGA law. The Court had held that PAGA was not preempted by the FAA.

Employers have said that tens of thousands of suits have been filed under PAGA by employees with arbitration contracts.

That’s not a good look for a Supreme Court which has struck other laws interfering with the FAA, and was a problem this morning for the Court. The history of the cases that authorized mandatory individualized arbitration with waivers of class actions–AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (available at http://bit.ly/2VcI4mi), and the case that extended the authorization to employment cases that followed, Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018) (available at http://bit.ly/2Y66dwK)–loomed over the arguments.

California employers want to halt the law being used as an end-run around their workplace dispute programs, which has been used to force them into class processes they seek to avoid with mandatory arbitration dispute resolution procedures. Employment attorneys and consumer advocates have countered that PAGA is a crucial state law that allows people to vindicate their employment rights.

The Court wasn’t called upon to remove the PAGA law today. But there also likely won’t be a compelling reason to keep PAGA claims out of arbitration, or at least, allow the possibility, even though the agreement at issue barred them entirely. Ultimately, the decision will focus on the Court’s Concepcion and Epic Systems arbitration-supportive history.

As a result, in Viking River Cruises v. Moriana, No. 20-1573, the advocates and the Court wrestled with the nature of the PAGA claim—as a procedural move that allows for a different legal claim or claims, or a substantive right under state law.

The Concepcion and Epic Systems cases divided the Court 5-4. It’s a different Court today, with wider ideological lines, but the Court’s three liberal justices are still inclined to back class processes. The justices who were in opposition in Concepcion and Epic Systems—Justices Stephen G. Breyer, Sonia Sotomayor, and Elena Kagan—were most animated today. They provided the toughest questions to Viking River’s Paul D. Clement, a former U.S. Solicitor General and a partner in the Washington office of Kirkland & Ellis, asking him to justify how the Court can police the laws California provides to its residents for use in vindicating their rights.

The Court’s conservatives mostly took a backseat this morning.

Clement, arguing in the nation’s top Court for the second time in nine days in an arbitration case (details on the previous case on CPR Speaks here), conceded that the state had properly installed the PAGA law, but also insisted that Concepcion had been violated. He said the law violations that were the basis of original plaintiff Angie Moriana’s claims would have been easily addressed by an arbitrator, even with an award going to the state under PAGA. But forcing the PAGA claim into courts opens up a flood of claims on behalf of many potential workplace plaintiffs without the guidance of Federal Rule of Civil Procedure 23’s protections for defendants.

Moriana’s lawyer, Scott Nelson, an attorney at Washington, D.C.’s Public Citizen Litigation Group, faced challenges on the FAA end-run by PAGA users by telling the Court that his client’s objection was to Viking River arbitration provisions that explicitly required waiving PAGA claims altogether. Nothing in the FAA, he said, requires the enforcement of such an agreement.

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Paul Clement in his petitioner’s argument faced an immediate challenge from Chief Justice John G. Roberts Jr., who said that respondent Moriana wasn’t acting for herself, but as a delegee of the California Attorney General, securing a recovery for the state and her fellow employees. Clement responded that the setting the chief justice described wasn’t “the critical feature of PAGA.” He objected to Moriana bringing the PAGA claim on the part of the Viking River sales force as a whole, later explaining that the law’s use contravened the customary nature of arbitration as an individualized process.

Justice Elena Kagan interrupted, and confronted Clement with an objection echoed by her fellow liberal justices. The state, said Kagan, has determined that it needed law for policing that it did not have the capacity to do on its own. “So this is a state decision to enforce its own labor laws in a particular kind of way that the state has decided is the only way to adequately do it,” she said.

Clement agreed: “At the end of the day, that’s right,” he said. But he insisted that Concepcion set the path for parties to agree to arbitrate such disputes, and the state must conform to the Court’s decision.

Kagan asked whether he thought there would have been views when the FAA was passed in 1925 that the then-new law would preclude the state from structuring its own law enforcement for its labor laws. Clement conceded it was an interesting question what sort of class actions could have been foreseen, but he said, “[C]ertainly, if we take Concepcion and Epic [Systems and Lamps Plus Inc. v. Varela, 139 S. Ct. 1407 (2019) (available at http://bit.ly/2GxwFbC)] as a given, and nobody has asked [the Court] to overrule those cases here. . . This Court said that state policy had to yield. I don’t think the state policy here is any more sacrosanct.”

Clement also noted for the first of repeated mentions that the California law is an outlier. While other states have considered the California law, he said its form is unique, and Clement emphasized that no other states joined in support of California as an amicus. (For details on the 22 amicus filers, as well as case background, see yesterday’s CPR Speaks preview of the argument, here.)

Clement lamented PAGA’s similarity to class actions on two points in particular, the potential dollar amounts that the claims put before the defendants, and the burdensome class discovery. Given the high stakes and the discovery, he said, “if I’m a defendant and you’re telling me I can’t escape this kind of aggregate litigation, . . . then I’m going to pick litigation every time, because I get lots of additional judicial review” and remedies, and the result means that “arbitration is going to whither on the vine.”

Justice Sonia Sotomayor disputed Clement’s characterization of arbitration claim handling, noting that arbitration historically has handled complex cases, and the Court has backed its use in cases involving racketeering, antitrust and disparate impact claims. She said it’s parties that choose whether to have arbitration class actions, not the Court.

Clement countered that the key question, as raised by Justice Kagan, wasn’t complexity but it was the operation of the PAGA statute as the mechanism providing a cause of action and specifying penalties under it. He said that the FAA doesn’t preempt the statute itself, but the arbitration right under the contract has been cut off.

Sotomayor pointedly stated that the goal was destroying the state’s mechanism for enforcing labor law violations, and Clement pushed back and said that the plaintiff’s claims could be brought in arbitration. He later noted that the critical part wasn’t calling PAGA a state claim, nor the classification of the claim as a substantive or procedural right, but the fact that the state claim let in many claims that are not customary in bilateral arbitration.

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Public Citizen’s Scott Nelson said in response to the chief justice that the multiple claims of his client, respondent Angie Moriana, could be arbitrated as to her individual claims, and she could pursue others on her own but under PAGA on behalf of the state and other workers.

He told Justice Amy Coney Barrett in response to a question that the most important part of his client’s claim wasn’t just that the PAGA claim belongs to California, but also that the FAA can’t override the right to pursue the claim that California has provided.

Nelson maintained that the PAGA action is not the kind of aggregated multiparty action on which the Court focused in Concepcion and Epic Systems, but rather the state’s right to civil penalties through its individual representatives. PAGA, he explained, can be brought by the state’s representative as an equally bilateral arbitration or litigation between the representative and the defendant.

The agreement waives Moriana’s right to pursue a statutory remedy, emphasized Nelson. But Justice Samuel A. Alito Jr. was skeptical, and said that under the arbitration agreement, “she doesn’t have a right to pursue a substantive claim in court, but she does have a right to pursue the substantive claim just in arbitration. I thought that was sort of at the core of our precedents. . . . Arbitration gets at the remedy. ”

Nelson responded that “the substantive claim . . . is the claim to recover civil penalties for these violations which are available only via PAGA, and the arbitration agreement explicitly prohibits the assertion” of a PAGA claim and a representative claim. He said that the California Labor Code claim could be pursued in arbitration, but not the PAGA claim for damages.

Justice Breyer pressed Nelson on whether the California rule had special implications for arbitration, and whether the PAGA case could be brought in court if the Supreme Court held PAGA targeted arbitration. Nelson responded that if the law “is inconsistent with the nature of arbitration, then that’s what creates a problem. . . . [W]hat the state has said is for contracts, whether they are part of an arbitration agreement or not, you can’t waive the right to bring a PAGA claim in an employment agreement before the claim arises. So [it] applies to every kind of agreement.”

Justice Brett Kavanaugh concluded Scott Nelson’s argument by asking him to react to Viking River attorney Paul Clement’s point that California is alone on having the PAGA law. “It’s certainly true that California is the only state that has this mechanism,” said Nelson, adding “It’s somewhat ironic that one of the arguments made in favor of this Court’s review was that if you let California do it, everyone will do it. Now California is the only state that wants to do it.”

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In his rebuttal, Kirkland & Ellis’s Clement said that the big problem with the law was that the representative could submit a claim on behalf of all of the employees “for all these disparate violations,” and in considering the scope of such an action, “then there is nothing left of Concepcion. ….. It’s too naked a circumvention.”

He re-emphasized his point about California’s outlier status in producing laws that are anti-arbitration. He noted that the substantive-procedural distinction can’t be used to avoid Concepcion/Epic Systems arbitration requirements.

Clement’s last point was on what he termed “practicalities.” He said that if respondent Moriana’s only claim was on timing of her final paycheck, “an arbitrator could dispatch that case in about an hour,” cutting her a check, and cutting a check for the state as well. But to do that in arbitration with many claims would require a claims administrator.

Before Concepcion, he said, little attention was paid to the 2004 PAGA statute. Now, since Concepcion, Clement concluded, 17 PAGA complaints are being filed daily.

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The official question presented to the Court today is

Whether the Federal Arbitration Act requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.

A decision is expected before the current Court term concludes at the end of June. For more background on Viking River, see Mark Kantor, “US Supreme Court to Review Whether Private Attorney General Action Can Be Waived by an Arbitration Agreement,” CPR Speaks (Dec. 16) (available here).

Today’s case concludes a run of four U.S. Supreme Court arbitration cases in nine days. Previews and analysis of the cases can be found on this CPR Speaks blog using the search function in the upper right, and searching for “Supreme Court” and/or “arbitration.” An overview and an analysis of the 2021-2022 Supreme Court arbitration docket, including the cases argued over the past two weeks, can be found at Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022), and Imre Szalai, “Not Like Other Cases: SCOTUS’s Unique Arbitration Year,” 40 Alternatives 28 (February 2022), both available for free at https://bit.ly/3GDEJEK. Argument coverage is available on CPR Speaks, here.

The audio stream archive and the transcript of the March 30 Viking River Cruises argument can be found on the Supreme Court’s website here.

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The author edits Alternatives to the High Cost of Litigation at altnewsletter.com for CPR.

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