On July 17, 2023, the California Supreme Court decided an important state law issue raised by the United States Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022). Viking River Cruises held that the Federal Arbitration Act (FAA) requires enforcement of an agreement to arbitrate California Private Attorneys General Act (PAGA) claims arising from alleged California Labor Code violations against the named plaintiff, notwithstanding the prior California authority that PAGA claims cannot be “split” into “representative” and “individual” components. In a short paragraph at the end of its decision in Viking River Cruises, the U.S. Supreme Court held that a PAGA plaintiff lacks statutory standing to pursue PAGA claims arising out of alleged Labor Code violations committed against other employees when the claims arising from violations against the named plaintiff have been “pared away” to arbitration. However, because statutory standing is an issue of state law, state courts were not bound by the U.S. Supreme Court’s interpretation, a point that Justice Sotomayor flagged in a concurrence. In Adolph v. Uber Techs., Inc., No. S274671, 2023 WL 4553702 (2023), the California Supreme Court disagreed with the U.S. Supreme Court’s interpretation of PAGA’s standing requirement and held that a PAGA plaintiff retains standing to sue for alleged Labor Code violations committed against non-party employees when the claims arising from alleged violations against the plaintiff have been compelled to arbitration.

The California Private Attorneys General Act

PAGA is a California state statute that permits an “aggrieved employee” to file an action to recover civil penalties for violations of the California Labor Code “on behalf of himself or herself and other current or former employees.” The civil penalties that may be recovered under PAGA would only be enforceable 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 the affected employees, and plaintiffs’ attorneys may also seek to recover their attorney’s fees and costs. Prior to Viking River Cruises, California courts had held that agreements to arbitrate class claims on an individual basis are enforceable, but that agreements to arbitrate PAGA claims on an individual basis are not. In the class action context, arbitration agreements serve as a powerful tool for limiting the scope of claims that may be asserted against employers, and Viking River Cruises gave promise that they may serve the same function in PAGA cases.

The Adolph Decision

The California Supreme Court in Adolph began by acknowledging Viking River Cruises’ holding that the FAA preempts California’s rule that “PAGA actions cannot be divided into individual and non-individual claims.” The California Supreme Court adopted the U.S. Supreme Court’s terminology of referring to PAGA claims arising from alleged Labor Code violations 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 in order to have standing to pursue non-individual PAGA claims, a plaintiff must satisfy just two requirements: the plaintiff must be someone (1) “who was employed by the alleged violator,” and (2) “against whom one or more of the alleged violations was committed.” These two standing elements flow from the definition of “aggrieved employee” in PAGA, and the California Supreme Court’s prior holding in Kim v. Reins Int’l California, Inc., 9 Cal. 5th 73 (2020).

The California Supreme Court held that under the statutory definition of “aggrieved employee,” a PAGA plaintiff whose individual PAGA claims are compelled to arbitration under Viking River Cruises does not lose standing to assert non-individual PAGA claims in court. The Court analogized to its holding in Kim that a plaintiff who settles a non-PAGA individual claim for damages does not lose standing to assert PAGA claims. Although Kim only addressed the standing impact of the settlement of non-PAGA individual damages claims, the California Supreme Court determined that the situation in Kim was sufficiently similar to a plaintiff whose individual PAGA claims are compelled to arbitration to find that “[a]rbitrating a PAGA plaintiff’s individual claim does not nullify the fact of the violation or extinguish the plaintiff’s status as an aggrieved employee.”

The defendant Uber raised a number of arguments against this conclusion, which the California Supreme Court rejected. Uber argued that when an individual PAGA claim is compelled to arbitration, the claim is no longer present in the court action and therefore the plaintiff fails to satisfy PAGA’s standing requirement as he or she is no longer a person “against whom one or more of the alleged violations” in the court action “was committed.” The California Supreme Court was not persuaded by this argument and held that an order compelling individual claims to arbitration does not “sever” them from the action. The Court also rejected Uber’s arguments that the language in PAGA providing that PAGA claims may be brought “on behalf of himself or herself and other current or former employees” imposes an additional standing element beyond the statutory definition of “aggrieved employee,” and that the plaintiff must have a financial stake in a PAGA action.

Uber also argued that permitting non-individual PAGA claims to proceed in court while individual PAGA claims proceed in arbitration would result in the trial court reexamining the plaintiff’s status as an “aggrieved employee” after arbitration on the same issue, in violation of the FAA and Viking River Cruises. The California Supreme Court held that this concern was unfounded, because “the trial court may exercise its discretion to stay the non-individual claims pending the outcome of the arbitration pursuant to section 1281.4 of the Code of Civil Procedure,” and any arbitration award finding that the plaintiff is not an aggrieved employee would be binding on the court following confirmation of the award.

Adolph is a disappointing decision and threatens to undo much of the benefits employers gained from Viking River Cruises. One positive aspect of the Adolph opinion is the Court’s observation that the trial court may stay non-individual PAGA claims when individual PAGA claims are compelled to arbitration, and a favorable ruling in arbitration will be issue preclusive on the plaintiff’s status as an aggrieved employee in court. Employers that continue to enforce individual arbitration agreements in PAGA actions should argue that such a stay is mandatory under Code Civ. Proc. § 1281.4, which uses the word “shall.” There is also an untested argument that Adolph’s interpretation of California’s statutory standing rules itself conflicts with the FAA. 

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