A blow to PAGA. Bilateral arbitration agreements governed by the FAA may require arbitration of California Private Attorneys General Act (PAGA) claims on an individual basis only, the U.S. Supreme Court held on June 15, 2022. The Justices overruled the California Supreme Court’s 2014 decision in Iskanian v. CLS Transp. Los Angeles, LLC, to the extent Iskanian effectively required PAGA claims to be adjudicated in court on a representative basis.

In Iskanian, the California Supreme Court invalidated provisions in arbitration agreements that waive the right to assert representative claims, including representative claims under PAGA. The U.S. Supreme Court stated that the FAA does not establish a categorical rule mandating enforcement of representative action waivers. However, the Court stated that PAGA’s built-in mechanism of claim joinder conflicts with the FAA. The Court explained that Iskanian’s prohibition on the contractual division of PAGA actions unduly circumscribes the freedom of parties to determine the issues subject to arbitration. Further, it violates the fundamental principle that arbitration is a matter of consent. To the extent California’s rule precludes the division of PAGA actions into individual arbitrable claims and non-individual, non-arbitrable claims, the rule is preempted.

A more detailed discussion of the Supreme Court’s decision can be found here.

Airline cargo loaders not covered by FAA. Individuals employed as ramp workers who frequently handle cargo for an airline are “transportation workers” exempt from the FAA, the Supreme Court held on June 6, 2022. Therefore, the employees are not required to arbitrate their wagehour claims under the FAA. The Supreme Court made clear that, when determining whether workers qualify for the FAA’s transportation worker exception, the analysis turns on the specific duties those workers perform and whether those duties directly involve interstate commerce, and the nature of the company or industry in which the workers are engaged has no bearing on the analysis. Thus, a ramp supervisor that loads and unloads cargo qualifies for the exception; however, airline employees whose duties are more removed from the interstate flow of transit (such as shift schedulers and website designers) likely would not qualify for the exception. A more detailed analysis of the Supreme Court’s decision can be found here.

In recent years, the transportation worker exemption has emerged as a major issue in class action litigation, particularly as wage and hour lawsuits have proliferated among employees and independent contractors who claim they cannot be compelled to arbitrate because they fall within the exemption.

No look-through for review of arbitral award. On March 31, 2022, the Supreme Court held that under Sections 9 and 10 of the FAA, a federal district court may not examine the underlying dispute when determining whether it has jurisdiction over a motion to vacate or confirm an arbitral award. Rather, it can only look to the application submitted to the court in the request to vacate or confirm the award. In an 8-1 opinion, the justices noted that Congress did not replicate the look-through instruction found in FAA, Section 4 in Sections 9 and 10. Nor did Congress draft a global look-through provision, applying that approach throughout the FAA.

In the case at hand, the parties’ applications raised no federal issue beyond Section 9 or 10 itself. The court could not look to the underlying suit, where a federal-law claim satisfying Section 1331 existed, to find that it had jurisdiction of the parties’ applications under Sections 9 and 10 to vacate or confirm an arbitral award.

No prejudice showing required to assert waiver. On May 23, 2022, the Supreme Court held that a litigant is not required to show prejudice to establish that an opposing party has waived its right to arbitrate by litigating in court. The issue of prejudice typically does not enter into a contractual waiver analysis. Although numerous federal courts of appeals have cited the FAA and longstanding federal policy that favors arbitration of disputes to adopt “a rule of waiver specific to the arbitration context” that requires a showing of prejudice, the justices unanimously held that that the FAA does not authorize this “bespoke rule of waiver for arbitration.”

As a practical matter, the Court’s holding that a showing of prejudice is unnecessary when evaluating waiver in the context of an arbitration agreement means that employers will need to promptly assert their right to arbitrate under the terms of an agreement in the event of court litigation, or otherwise take steps to avoid a known relinquishment of that right. 

Scott Jang, Samia Kirmani, Linda O'Brien, and Marjorie Johnson also contributed to this article.