6 minute read | June.27.2022
For practitioners seeking to send California consumer claims to arbitration, the U.S. Supreme Court’s recent opinion in Viking River Cruises, Inc. v. Moriana (“Viking”), offers guidance for avoiding the pitfalls of California’s McGill rule, which has been a roadblock to arbitrating disputes where the claimant seeks public injunctive relief.
The background of Iskanian and McGill rules
To start, some background. In 2014 and 2017, the California Supreme Court developed a pair of rules—the Iskanian rule and the McGill rule—establishing that certain terms in arbitration agreements violate California public policy. In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that a pre-dispute agreement in which an employee agrees to arbitrate all claims individually and to forgo her right to pursue a representative Private Attorney General Act (“PAGA”) action is unenforceable as against public policy. 59 Cal. 4th 348, 384 (2014). The California Supreme Court concluded that the Federal Arbitration Act (“FAA”) does not preempt the new rule because “the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.” Id. at 313. PAGA permits a single employee to stand in the shoes of the state and assert claims predicated on the employer’s violations of the California Labor Code as to other employees.
Ninth Circuit agrees that neither Iskanian nor McGill rules are preempted
A divided panel of the Ninth Circuit agreed with the preemption determination, but for a different reason. The Ninth Circuit found that “[t]he Iskanian rule does not conflict with [the FAA’s] purposes” because, in its view, representative PAGA actions are not as incompatible with traditional arbitration as class actions. Sakkab v. Luxottica N. Am., Inc., 803 F.3d 425, 433-34 (9th Cir. 2015). The “critically important distinction,” according to the Ninth Circuit, is that PAGA claims are not governed by Rule 23, and, thus, “do not require the formal procedures of class arbitrations.” Id. at 436.
Following Iskanian, the California Supreme Court decided McGill v. Citibank, N.A., in which it held that any pre-dispute agreement that waives a consumer’s right to seek public injunctive relief—a remedy available under California’s Unfair Competition Law, False Advertising Law, and the Consumers Legal Remedies Act—in any forum is also unenforceable as against public policy. 2 Cal. 5th 945, 952 (2017). The McGill court also rejected the argument that the FAA preempts the rule it announced by making arguments substantially similar to those articulated in Sakkab. In particular, the McGill court asserted that public injunctive relief does not interfere with the fundamental attributes of arbitration. Id. at 961-66. Thus, while McGill did not cite Sakkab, the reasoning in the two decisions is nearly identical—as the Ninth Circuit itself subsequently made clear.
After significant litigation over the implication of McGill in the federal district courts, the Ninth Circuit held that the FAA does not preempt McGill, explaining that “our decision in Sakkab all but decides this case.” Blair v. Rent-A-Center, Inc., 928 F.3d 819, 825 (9th Cir. 2019). The Blair panel held that under Sakkab, the McGill rule, like the Iskanian rule, does not “deprive the parties of the benefits of arbitration.” Id. at 828.
SCOTUS decides Iskanian is preempted in part in Viking
Enter Viking. The central question presented in the case is whether the FAA preempts the Iskanian rule. The plaintiff was an employee who signed an arbitration agreement with a “Class Action Waiver” that, among other things, waived the right to bring a PAGA representative action. — S.Ct. — , 2022 WL 2135491, at *5 (June 15, 2022). The arbitration agreement permitted a court to sever the waiver to the extent it was invalid but, if any “portion” of the waiver remained valid, the agreement also required that portion to be “enforced in arbitration.” Id. Applying Iskanian, the California Court of Appeal affirmed the trial court’s denial of Viking’s motion to compel the plaintiff’s “individual” PAGA claim and motion to dismiss her other PAGA claims. Id. The U.S. Supreme Court granted certiorari and reversed, concluding that the FAA preempts the Iskanian rule to the extent it prohibits dividing PAGA actions into individual and non-individual claims. Id. at *12.
The Court explained that the Iskanian rule has primary and secondary rules. Id. at *5. The primary rule prohibits a party from waiving the right to act as a representative of the state to bring PAGA claims in arbitration or court. Id. The secondary rule prohibits a party from agreeing to arbitrate an individual PAGA claim separate from a representative PAGA claim. Id. at *10. The Court concluded that the FAA does not preempt the primary rule, but the secondary rule’s “take-it-or-leave-it” approach violates the core principle that arbitration is a matter of consent. Id. Parties must agree to the joinder rule imposed by Iskanian or decline arbitration. Id. “Either way, the parties are coerced into giving up a right they enjoy under the FAA.” Id.
Iskanian’s rule of joinder, the Court added, permits parties to arbitrate an employee’s PAGA claim predicated on personally sustained violations only if they agree to arbitrate the employee’s PAGA claim predicated on violations against other employees. Id. at 11. This “defeat[s] the ability of parties to control which claims are subject to arbitration.” Id. Given that parties are unlikely to desire to navigate a “higher stakes” PAGA representative claim in arbitration, with its procedural informality and lack of judicial appellate review, they are likely to forgo arbitration. Id. “This result is incompatible with the FAA.” Id.
After reaching its preemption determination, the Court concluded that Viking was entitled to compel arbitration of the plaintiff’s individual claim. Id. The Court then reiterated its position that the primary Iskanian rule prohibiting a party from waiving the right to act as a representative of the state to bring PAGA claims is still valid (i.e., not preempted), but held that California law does not permit a plaintiff to bring non-individual PAGA claims without bringing individual claims in the same action, requiring dismissal here.
Justice Sotomayor’s concurrence emphasized that California courts would have the final say as to whether California law permitted a representative PAGA claim to proceed in court after the plaintiff’s individual claim had been resolved in arbitration.
How Viking affects McGill
Back to McGill. The McGill rule prohibits parties from waiving the right to bring a claim for public injunctive relief in any forum. This is analogous to the primary rule in Iskanian that the U.S. Supreme Court found was not preempted. Thus, plaintiffs’ attorneys will likely argue that the preemption analysis has not changed for categorical waivers of an ability to seek public injunctive relief in any forum and that such waivers are still be invalid under McGill. Nonetheless, Viking reaffirms that courts are required to grant motions to compel arbitration where an arbitration clause contains a savings clause to sever public injunctive relief to be adjudicated in court. As such, it remains critical to ensure that arbitration clauses are carefully drafted to weather enforceability challenges under McGill.[1]
Viking also raises questions as to whether plaintiffs will have standing to pursue claims for public injunctive relief once their individual claims are resolved. In Viking, the U.S. Supreme Court determined that California law did not permit an employee who had their individual PAGA claims resolved in arbitration to bring representative claims in court. 2022 WL 2135491, at *11. Under this reading of PAGA, the Court only permitted representative claims to be brought by an aggrieved employee who brought their individual claims concurrently. Id. Defendants should be able to leverage that finding in making similar arguments (and Article III standing arguments if in federal court) for severed public injunctive relief claims.
[1] Additionally, this presumably should compel reconsideration of decisions like the Second District Court of Appeal of California’s decision in Dixon v. Fast Auto Loans, Inc., wherein the Court of Appeal affirmed the denial of a motion to compel arbitration even where it contained a severability clause for the claim for public injunctive relief to be adjudicated in court if the waiver was deemed unenforceable. 2022 WL 130874, at *1 (Cal. Ct. App. Jan. 1, 2022).