California Supreme Court: Plaintiffs compelled to arbitrate individual PAGA claims retain standing to litigate non-individual PAGA claims in court

Last week, the California Supreme Court issued a unanimous decision concluding that plaintiffs who are compelled to arbitrate their individual claims for civil penalties under the California Private Attorneys General Act (PAGA) retain standing to prosecute non-individual PAGA claims on behalf of other aggrieved employees and the State of California.

In doing so, the California Supreme Court disagreed with the US Supreme Court’s interpretation of California state law in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022), which held that a plaintiff’s non-individual PAGA claims must be dismissed for lack of standing when his/her individual PAGA claims are compelled to arbitration.

While the decision is a blow to California employers, the California Supreme Court confirmed that when compelling individual PAGA claims to arbitration, trial courts may stay litigation of non-individual PAGA claims pending resolution of the plaintiff’s arbitration.

Procedural background

In June 2022, the US Supreme Court issued its decision in Viking River. In the majority decision, authored by Justice Samuel Alito, the Court concluded that the Federal Arbitration Act (FAA) preempts Iskanian v CLS Transp. Los Angeles, LLC, 58 Cal.4th 380 (2014) to the extent it prevents parties from arbitrating PAGA claims on an individual basis. Accordingly, the US Supreme Court held that, if an employee’s binding arbitration agreement is covered by the FAA, the employee is required to arbitrate his/her “individual” PAGA claims, ie, claims for civil penalties based on Labor Code violations suffered by the employee asserting the claim.

However, the US Supreme Court ruled that the FAA does not preempt the Iskanian rule prohibiting waivers of statutory standing to bring non-individual PAGA claims in a judicial or arbitral forum. Nevertheless, the Court did not find any basis under California state law that would allow a PAGA plaintiff to maintain standing to prosecute non-individual PAGA claims, ie, claims for civil penalties based on Labor Code violations suffered by other employees, in the absence of an individual PAGA claim in the same proceeding. Accordingly, the US Supreme Court held that a plaintiff’s non-individual PAGA claims should be dismissed for lack of statutory standing when his/her individual PAGA claims are compelled to arbitration. In her concurring opinion, however, Justice Sonia Sotomayor invited California courts to weigh in on the correctness of the majority’s interpretation of California law in this regard. Viking River, 142 S.Ct. at 1925 (Sotomayor, J., concurring [“Of course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.”]).

Accepting the US Supreme Court’s invitation, the California Supreme Court granted review “to provide guidance on statutory standing under PAGA.”

California Supreme Court upholds PAGA standing requirements established under Kim v. Reins

In its unanimous decision written by Justice Goodwin Liu, the California Supreme Court disagreed with the US Supreme Court’s conclusion that, under California state law, non-individual PAGA claims must be dismissed for lack of standing when the plaintiff’s individual PAGA claims are compelled to arbitration. The California Supreme Court instead concluded: “Where a plaintiff has brought a PAGA action comprising individual and non-individual PAGA claims, an order compelling arbitration of the individual claims does not strip the plaintiff of standing as an aggrieved employee to litigate claims on behalf of other employees under PAGA.”

In reaching last week’s decision, the California Supreme Court reaffirmed its statement in Kim v. Reins International California, Inc., 9 Cal.5th 73 (2020) that PAGA’s statutory framework contains only two requirements for PAGA standing. The plaintiff must be an “aggrieved employee,” meaning (1) someone “who was employed by the alleged violator” and (2) someone “against whom one or more of the alleged Labor Code violations was committed.”

In Kim, the California Supreme Court addressed whether an employee who settles his/her individual claims under the California Labor Code with his/her employer loses standing to pursue non-individual PAGA claims alleging the same violations on behalf of other allegedly aggrieved employees. While the employer in Kim argued that the plaintiff was stripped of his status as an “aggrieved employee” when he accepted compensation for his alleged injury, the Court found nothing in the definition of “aggrieved employee” to suggest that “the Legislature intended to limit PAGA standing to employees with unresolved compensatory claims.” The California Supreme Court ultimately concluded that a rule stripping PAGA plaintiffs of standing when they settle their individual claims would frustrate the remedial purpose of PAGA by impairing the state’s ability to collect and distribute civil penalties for alleged violations of the Labor Code.

Looking again to the only two requirements above that exist for PAGA standing in deciding whether plaintiffs are stripped of PAGA standing when their individual PAGA claims are compelled to arbitration, the California Supreme Court found that nothing in the definition of “aggrieved employee” purported to require a plaintiff to “maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action.” The California Supreme Court further held that, even when a PAGA plaintiff is required to arbitrate his/her individual PAGA claims in arbitration, that plaintiff is still prosecuting the PAGA action on his/her own behalf as well as on behalf of other allegedly aggrieved employees. The action remains a single action even though the named plaintiff is litigating his/her individual PAGA claims in a separate forum (ie, in arbitration) than the non-individual PAGA claims (ie, in court). Accordingly, the Court concluded that PAGA plaintiffs retain standing to prosecute non-individual PAGA claims when their individual PAGA claims are compelled to arbitration, and trial courts should not dismiss non-individual PAGA claims when compelling the plaintiff to arbitrate his/her individual PAGA claims.

California Supreme Court provides roadmap for litigating non-individual PAGA claims after a plaintiff’s individual PAGA claims are compelled to arbitration

Although the California Supreme Court concluded that a plaintiff’s non-individual PAGA claims may not be dismissed simply because his/her individual claims are compelled to arbitration, it also rejected the notion that its conclusion would permit PAGA plaintiffs to re-litigate whether they are “aggrieved employees” in court, notwithstanding their agreement to resolve that issue in arbitration.

Consistent with the Court of Appeal’s decision in Rocha v. U-Haul Co. of California, 88 Cal.App.5th 65 (2023), the California Supreme Court confirmed that, under the FAA, a trial court may not re-litigate the PAGA plaintiff’s individual claims. Because an arbitrator’s ruling that the plaintiff is not an “aggrieved employee would divest the plaintiff of standing to litigate the non-individual PAGA claims,” trial courts “may exercise [their] discretion to stay the non-individual claims pending the outcome of the arbitration pursuant to section 1281.4 of the Code of Civil Procedure.”

Following the arbitration, the arbitrator’s determination of whether a PAGA plaintiff is an “aggrieved employee” (if confirmed and reduced to a final judgment) would be binding upon trial courts when deciding whether the PAGA plaintiff has standing to continue prosecuting his/her civil action on behalf of other allegedly aggrieved employees. Accordingly, although the California Supreme Court did not expressly reach this conclusion, if the arbitrator determines that a PAGA plaintiff is not an “aggrieved employee,” the plaintiff’s non-individual PAGA claims would then be ripe for dismissal for lack of standing.

Key takeaways

While last week’s decision by the California Supreme Court precludes California employers from automatically obtaining dismissal of non-individual PAGA claims when a plaintiff’s individual PAGA claims are compelled to arbitration, the decision contains helpful guidance for trial courts deciding the question of what to do with a plaintiff’s non-individual PAGA claims while the individual PAGA claims are being arbitrated.

The California Supreme Court’s conclusions that trial courts may stay plaintiffs’ non-individual PAGA claims pending the outcome of individual arbitration, and that trial courts must give effect to arbitrators’ decisions, provides some degree of reprieve to California employers fearing that its decision would further upend Viking River and leave open the possibility of re-litigating whether an employee is “aggrieved” in multiple forums.

With this key unsettled question from Viking River now resolved, employers are encouraged to review and revise any existing arbitration agreements and the scope of their class and representative action waivers. Notwithstanding the California Supreme Court’s decision that PAGA plaintiffs retain standing to prosecute non-individual PAGA claims even when they are compelled to arbitrate their individual PAGA claims, the prospect of dismissing a plaintiff’s non-individual PAGA claims following a defense win in arbitration underscores the importance of arbitration agreements as a powerful tool in avoiding costly litigation. The California Supreme Court’s decision will also provide employers significantly more time to investigate plaintiffs’ PAGA claims before engaging in costly statewide discovery.

We will continue to monitor legislative and judicial developments in the wake of the California Supreme Court’s decision. Please reach out to your DLA Piper contact or the authors if you have questions about the decision and how it may impact your business or ongoing litigation.