In Viking River Cruises, Inc. v. Moriana, Case No. 20-1573, the U.S. Supreme Court granted certiorari to decide whether representative claims under the Private Attorneys General Act (PAGA) may be compelled to individual arbitration. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), the California Supreme Court announced a rule against individual arbitration of PAGA claims, but the U.S. Supreme Court is widely expected to hold that the Federal Arbitration Act (FAA) preempts the Iskanian rule. (To read a recap of the Viking River Cruises oral argument, click here.)
In Part 1 of this two-part series, we examine the battle lines that will likely be drawn in current litigation if the U.S. Supreme Court overrules Iskanian. Current PAGA lawsuits on behalf of claimants subject to arbitration agreements will not automatically wind up in arbitration, nor should defendants expect that plaintiffs will submit to individual arbitration voluntarily. Instead, a flood of motions to compel arbitration will likely ensue, filed by defendants eager to enforce their arbitration agreements and opposed by plaintiffs who in many cases will have devoted substantial time and resources to pursuing a representative claim in court. Three arguments may feature prominently.
Waiver. In many cases, defendants may file motions to compel arbitrations many months or even years after lawsuits were filed. In such cases, plaintiffs will almost certainly argue that the defendants waived their rights to compel arbitration by not seeking to enforce their agreements sooner.
Because the vast majority of PAGA cases are litigated in state courts, California law regarding waiver will apply in most cases. Under this standard, courts consider the following factors:
- Whether the party's actions are inconsistent with the right to arbitrate.
- Whether the litigation machinery has been substantially invoked before the party notified the opposing party of an intent to arbitrate.
- Whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay.
- Whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings.
- Whether important intervening steps had taken place.
- Whether the delay affected, misled, or prejudiced the opposing party.
Saint Agnes Med. Ctr. v. PacifiCare of Cal., 31 Cal. 4th 1187, 1196 (2003). This inquiry may vary depending on the facts of specific cases, but defendants will argue that in light of Iskanian, any attempt to enforce the arbitration would have been futile. Ironically, Iskanian itself lends support to that claim. Iskanian, 59 Cal. 4th at 376 ("[F]utility as grounds for delaying arbitration is implicit in the general waiver principles we have endorsed.").
However, if a consistent body of case law develops based on waiver principles that is hostile to attempts to compel arbitration, it may be difficult to reverse. Because waiver is a matter of state law in most cases, the U.S. Supreme Court may have little opportunity to intervene.
Contract interpretation arguments. To avoid running afoul of limits on contractual arbitration, agreements are commonly drafted with carve-outs exempting claims that cannot be arbitrated as a matter of law. Plaintiffs may argue that such provisions demonstrate an intent to exempt PAGA claims from the agreement, regardless of whether Iskanian is overturned.
For example, in McKillop v. OneHalloweenNight, Inc., Sacramento Super. Ct. Case No. 34-2017-00206815-CU-OE-GDS, the plaintiff's arbitration agreement defined "Claims not covered by this Agreement" to include "claims by law which are not subject to mandatory binding predispute arbitration pursuant to the Federal Arbitration Act[.]" The plaintiff noted that at the time he signed the agreement, Iskanian was good law, and so PAGA claims were "not subject to mandatory binding predispute arbitration." Therefore, he argued, the parties never formed an agreement to arbitrate PAGA claims.
One obvious criticism of this approach is that the clear intent of a provision like the one in McKillop is to make the scope of the agreement as broad as the law will allow. This view would argue that such carve-outs are evergreen, rather than limited to the then-existing case law at the time the agreement was signed.
As with waiver, however, courts adjudicating contract interpretation arguments will be applying generally-applicable principles of state law. Therefore, if these arguments against arbitration resonate with state courts, they also may evade review in the U.S. Supreme Court.
AB 51 arguments. In 2019, California enacted AB 51, which makes it an unlawful practice to require an employee to "waive any right, forum or procedure" for an alleged violation of the Labor Code or Fair Employment and Housing Act as a condition of employment. Cal. Lab. Code § 432.6(a). Because the effect of the statute would be to prohibit mandatory arbitration, it raises obvious preemption concerns. 9 U.S.C. § 2 (arbitration agreements "shall be valid irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract").
However, in Chamber of Commerce of United States v. Bonta, 13 F.4th 766 (9th Cir. 2021), a three-judge panel of the 9th Circuit found that the statute was not preempted, because it is aimed at conduct that occurs prior to an employer and employee entering into an arbitration agreement. Section 432.6(f) provides, "[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA]." The court interpreted this provision to mean that "§ 432.6 cannot be used to invalidate, revoke, or fail to enforce an arbitration agreement," and therefore "§ 2 of the FAA simply does not apply." Id. at 775.
Enforcement of AB 51 is currently enjoined while the 9th Circuit considers a petition for rehearing en banc (which itself has been deferred pending a decision in Viking River Cruises). However, if the statute is permitted to go into effect, plaintiffs may argue that agreements signed after its effective date of January 1, 2020, are unenforceable under generally applicable contract law principles of illegality or unconscionability. That being said, it may be difficult (or impossible) to square this position with the 9th Circuit's conclusion that "§ 432.6 cannot be used to invalidate, revoke, or fail to enforce an arbitration agreement . . . even if such agreement is consummated in violation of the statute." Bonta, 13 F.3d at 775-76.
Plaintiffs may also pursue mass arbitrations. Where an employer successfully compels a PAGA case to arbitration, the plaintiff may seek to initiate as many individual arbitrations as possible in an effort to force the employer to entertain a representative settlement (which may also include class claims). If a plaintiff is able to recruit sufficient numbers of claimants, the attorney's and arbitrator's fees necessary to litigate the individual cases can have a coercive effect, considering the filing fees alone can total thousands of dollars per case. This strategy requires substantial resources on the plaintiff's part and may not be a credible threat in many cases, but the risk of mass arbitrations is somewhat higher in cases where the plaintiff has already invested substantial time and expense, especially if the plaintiff has already obtained discovery of other employees' names and contact information.
In sum, while a decision abrogating Iskanian ought to result in massive numbers of current cases being compelled to individual arbitration, current litigants should expect plaintiffs to put up strong resistance.
In Part 2 of this series, we will examine how future litigation may be affected by legislative responses to Viking River Cruises.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.