CALIFORNIA SUPREME COURT HOLDS REPRESENTATIVE PAGA CLAIMS MAY REMAIN IN COURT WHILE INDIVIDUAL CLAIMS, INCLUDING INDIVIDUAL PAGA CLAIMS, ARE ARBITRATED
No one who pays attention to the federal and state court systems would be surprised to learn that the U.S. Supreme Court and the California Supreme Court view the world differently. As the familiar narrative goes, the U.S. Supreme Court is controlled by conservative justices while the California Supreme Court is packed with liberal judges who are widely regarded as judicial policy-makers who repeatedly exhibit an anti-business and anti-employer bias. One need only review the employment law decisions published by each court in recent years to see the obvious trends and leanings.
The contrast between the two courts was on display on July 17, 2023, when the California Supreme Court issued its long-awaited decision in Adolph v. Uber Technologies, Inc., _ Cal. 5th _ (2023), a case involving the collision between the rights created under a California law, the Private Attorneys General Act of 2004 (“PAGA”), and the rights of parties to arbitration agreements who have expressly agreed to refer all matters arising from employment disputes to arbitration on an individual-only basis. Such agreements often include provisions that specifically waive the ability to bring or participate in class, collective, or representative actions.
1. The Conflict Between The Adolph And Viking River Decisions
In June of 2022, the U.S. Supreme Court examined the enforceability of such arbitration agreements in its decision in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022). There, the U.S. Supreme Court determined that a 2014 California Supreme Court decision (Iskanian) was preempted by the Federal Arbitration Act (‘FAA”) where it concluded that a plaintiff could not split off an individual PAGA claim that could then be ordered to arbitration on an individual basis. It also construed California law to provide that an individual ordered to arbitrate an individual PAGA claim lacked standing to pursue a non-individual (representative) claim under PAGA in court. As a result, the Supreme Court observed that plaintiff-Moriana’s non-individual claim should be dismissed so it could not remain in court.
In Adolph, the California Supreme Court had no choice but to defer to the U.S. Supreme Court’s decision regarding preemption of Iskanian’s anti-splitting rule under federal law, the FAA. However, it disagreed with Viking River’s conclusion that a plaintiff loses standing to pursue non-individual (representative) PAGA claims in court once the plaintiff’s individual claims are ordered to arbitration. Concluding that it had “the final word” on the meaning of California law, it found that a plaintiff’s non-individual claim can be stayed and remain in court while the individual claims are resolved in arbitration.
2. The Issue Raised In Adolph
The holding in Adolph that an employee’s PAGA claim can be stayed in court rather than dismissed will have a widespread impact on other PAGA cases. It will also influence the manner in which arbitration agreements and their severability provisions are written. While the decision includes a detailed review of PAGA’s purpose and legislative history, the Supreme Court limited the holding to a review of the question of PAGA standing where an employee is subject to an arbitration agreement that provides for individual-only adjudication.
The question before the California Supreme Court was whether an “aggrieved employee” who has been compelled to arbitrate claims under PAGA that are premised on Labor Code violations actually sustained by the employee maintains statutory standing to pursue PAGA claims arising out of events involving other employees in court. The Supreme Court held that the answer is yes.
To have PAGA standing a plaintiff must be an “aggrieved employee.” There are only two requirements. The plaintiff must (1) have been employed by the alleged violator, and (2) have suffered at least one of the alleged Labor Code violations. Where a plaintiff has brought a PAGA action that includes individual and non-individual claims, an order compelling arbitration of the individual claims does not strip the plaintiff of standing as an aggrieved employee to litigate PAGA claims in court on behalf of other employees.
3. Background Facts
Erik Adolph worked as a driver for Uber Technologies, Inc., delivering food to customers through the company’s Uber Eats platform. As a condition of his employment, Adolf was required to accept the technology services agreement. Because he did not timely opt out, he became bound by the arbitration provision in that agreement. The arbitration provision required Adolph to arbitrate, on an individual basis only, almost all work-related claims he might have against Uber.
a. The Arbitration Agreement
With regard to PAGA actions, the agreement stated: “To the extent permitted by law, you and Company agree not to bring a representative action on behalf of others under the [PAGA] in any court or in arbitration.” This was referred to as the “PAGA Waiver.”
The agreement also included a severability clause that stated if the PAGA Waiver was found unenforceable or unlawful for any reason, (1) the unenforceable provision would be severed from the arbitration provision; (2) severance of the unenforceable provision would have no impact whatsoever on the arbitration provision or the parties’ attempts to arbitrate any remaining claims on an individual basis pursuant to the arbitration provision; and (3) any representative actions brought under PAGA must be litigated in a civil court of competent jurisdiction.
b. The Litigation
In October 2019, Adolf sued Uber in superior court, alleging individual and class claims under Labor Code Section 2802 and California’s Unfair Competition Law. Adolph claimed that Uber misclassified him and other delivery drivers as independent contractors rather than as employees and, as a result, wrongfully failed to reimburse them for necessary business expenses. In February 2020, Adolph amended his complaint to add a claim under PAGA.
In July 2020, the trial court granted a motion by Uber to compel arbitration of Adolph’s individual Labor Code claims and dismissed Adolph’s class action claims. Adolph later amended his complaint to eliminate his individual Labor Code and class claims and retain only his PAGA claim for civil penalties.
4. The California Supreme Court’s Analysis
The Supreme Court devoted a significant part of its analysis to a review of the history of PAGA, its one year statute of limitations, the effect of a PAGA settlement, and the inability to waive the right to bring a PAGA action.
a. PAGA Waivers
It stated that its decision in Iskanian v. CLS Transportation Los Angeles, 59 Cal. 4th 348 (2014), held that a pre-dispute categorical waiver of the right to bring a PAGA action is unenforceable. Iskanian also held unenforceable an agreement that, while providing for arbitration of alleged Labor Code violations sustained by the plaintiff employee (what Viking River called “individual claims”), compels waiver of claims on behalf of other employees (i.e., “non-individual claims”). Whether or not an individual claim is permissible under PAGA, a prohibition of representative (non-individual) claims frustrates PAGA’s objectives.
b. The Viking River Decision
Adolph disagreed with Viking River’s determination that Moriana’s non-individual PAGA claims should be dismissed. The California Supreme Court cited California decisions finding that Viking River did not disturb Iskanian’s rule that an arbitration agreement purporting to waive an employee’s non-individual claims is unenforceable as a matter of state law. It deferred to Viking River’s holding that the FAA preempted the rule of Iskanian insofar as it foreclosed the division of PAGA actions into individual and non-individual claims pursuant to an agreement to arbitrate. Viking River explained that such an anti-splitting rule is impermissible. Thus, it conceded that “Viking River requires enforcement of agreements to arbitrate a PAGA plaintiff’s individual claims if the agreement is covered by the FAA.” However, as noted below, it did not defer to Viking River’s finding that the non-individual PAGA claims should be dismissed rather than stayed.
c. The Court Focused On The Plaintiff’s Statutory Standing
After reviewing judicial precedents and the legislative history of PAGA, the Supreme Court addressed the narrow issue before it: whether an aggrieved employee who has been compelled to arbitrate individual claims premised on Labor Code violations actually sustained by the plaintiff maintains statutory standing to pursue non-individual PAGA claims arising out of events involving other employees in court. Viking River concluded that a PAGA plaintiff loses standing in this situation. Thus, it found that plaintiff-Moriana lacked standing to continue to maintain her non-individual claims in court and the correct course was to dismiss her remaining claims.
d. California Courts Have The “Final Word”
After framing the key issue in the case, the California Supreme Court chose to deviate from Viking River’s conclusion. It stated that the highest court of each state remains the final arbiter of what is state law. In other words, California courts will have the last word. Having given itself permission to resolve the issue it framed, the California Supreme Court declared that it was its obligation to ascertain the intent of the California Legislature so it could then effectuate the purpose of the enactment. It interpreted that intent in a manner that conflicted with the U.S. Supreme Court’s views in Viking River regarding PAGA standing.
The Supreme Court unanimously held that a plaintiff who files a PAGA action with individual and non-individual claims does not lose standing to litigate the non-individual claims in court simply because the individual claims have been ordered to arbitration. The Supreme Court reversed the judgment of the court of appeal and returned the case for further proceedings consistent with its opinion. It expressly limited its review to the question of PAGA standing and expressed no view on the parties’ other arguments regarding the proper interpretation of the arbitration agreement.
a. Class Claims, But Not PAGA Claims, Can Be Dismissed
Notably, the decision did not disagree with Viking River’s holding that employees can be compelled to arbitrate their individual claims, including their individual PAGA claims, when their arbitration agreement is subject to the FAA and provides for adjudication of claims on an individual-only basis. Nor did it disagree that the plaintiff’s class claims should be dismissed based on such an agreement. However, the Adolph decision preserves the ability of a PAGA plaintiff to pursue non-individual (representative) PAGA claims on behalf of other aggrieved employees in court. In short, the class claims can be dismissed while the PAGA claims can be pursued if the plaintiff is found to be an aggrieved employee.
b. The Significance Of The Arbitrator’s Decision
As a practical matter, this underscores the significance of the arbitrator’s determination of whether the plaintiff is or is not an aggrieved employee on the representative claims that are stayed in court. After the arbitrator issues a decision, any party may petition the court to confirm or vacate the arbitration award under Section 1285 of the Code of Civil Procedure.
Employers may therefore find it prudent to assess the potential outcome before deciding to compel arbitration. If the arbitrator finds the plaintiff is an aggrieved employee, i.e., the employee was employed by the employer and suffered at least one of the alleged Labor Code violations, that finding (if confirmed and reduced to a final judgment) would be binding on the court. Thus, the plaintiff would continue to have standing to litigate the non-individual (representative) claims in court. Conversely, if the arbitrator finds the plaintiff is not an aggrieved employee and the court confirms that determination and reduces it to a final judgment, the court would give effect to that finding. In that case, the plaintiff could no longer prosecute the non-individual claims due to lack of standing.
c. Moving Onwards
Employers are advised to consult with knowledgeable employment counsel regarding the combined impact of the Adolph and Viking River decisions. The decisions will have a widespread impact on pending and new PAGA cases and how they will be adjudicated in arbitration and in court. They will also influence the way arbitration agreements are drafted and enforced. Particular attention will be focused on provisions that contain class, collective and representative action waivers and severability clauses. One thing appears certain. It can be expected that arbitrators will be extremely busy. (For a detailed understanding of PAGA, readers are encouraged to review the publication, California’s Private Attorneys General Act (PAGA) Litigation And Compliance Manual by Attorneys Richard J. Simmons, Ryan Krueger, and Tyler Johnson of Sheppard Mullin. The book is available from Castle Publications, LLC.)To read more articles like this one, subscribe to the ALERT Newsletter today!
About The Author
Richard J. Simmons is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. He represents employers in various employment law matters involving litigation throughout the country and general advice regarding state and federal wage and hour laws, employment discrimination, wrongful discharge, employee discipline and termination, employee benefits, affirmative action, union representation proceedings, and arbitrations. Mr. Simmons received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Berkeley Law at the University of California at Berkeley where he was the Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.
Mr. Simmons argued the only case before the California Supreme Court that produced a victory for employers and business in 2018. He was recently recognized as the Labor and Employment Attorney of the Year by the Los Angeles Business Journal and was inducted into the Employment Lawyers Hall of Fame. He has lectured nationally on wage and hour, employment discrimination, wrongful termination, and other employment and labor relations matters. He is a member of the National Advisory Board to the Berkeley Journal of Employment and Labor Law, published by Berkeley Law at the University of California at Berkeley. He was also appointed by the California Industrial Welfare Commission as a member of three Minimum Wage Boards for the State of California.