In Viking River Cruises v. Moriana, B297327 (Cal. App. Sep. 18, 2020), the issue before the court was whether a pre-dispute arbitration agreement under the Federal Arbitration Act ("FAA") purporting to require arbitration of any such claim is valid. The decision effectively invalidates longstanding California law precluding arbitration of any Private Attorneys General Act (PAGA) claim, and will have massive positive repercussions in favor of employers.
Arbitration has been a part of the construction industry for many years. Developers and general contractors have long incorporated arbitration clauses into their construction and design contracts, subcontracts, purchase and sale agreements, deeds and sometimes the declaration of covenants, conditions, and restrictions ("CC&Rs") governing homeowner or condo associations. Some developers and general contractors have also incorporated class action and/or collective action waivers in their agreements with purchasers. These waivers have been challenged on public policy grounds when the claim is brought by a homeowner or condo association that has statutory representative standing, such as that found pursuant to PAGA in California. Although arising from an employment action, the United States Supreme Court's Viking River decision has likely made such waivers enforceable in the arbitration context when the Federal Arbitration Act applies.
What is PAGA?
PAGA is a statute that allows a single employee to act as a deputized proxy for the State of California, to pursue recovery of civil penalties on behalf of allegedly "aggrieved employees" for purported violations of the California Labor Code. Although a PAGA case is filed, prosecuted, and concluded by a private party (the employee) and their private attorney without State involvement, the State recoups 75% of the recovered penalties, with the remaining 25% issuing to the alleged aggrieved employee group. In theory, the State is the real party in interest. However, the State has little, if any, involvement, in the overwhelmingly vast majority of cases. In PAGA cases, although scores of employees are implicated, class certification is not required. Nor are such cases meaningfully screened by the State pre-filing. The PAGA process allows a single employee to bring claims on behalf of others while avoiding the class action procedure.
In recent years PAGA litigation has exploded, and plaintiff's attorneys are taking full advantage. For instance, in 2005, 700 PAGA cases were filed. Yet, by 2020, it was up to 6,000 cases per year statewide. This has caused deep concern for employers and other defendants, who fear the provisions of PAGA are not being validly used for their intended purpose, but as an avenue to overreach and extract undue sums from legally compliant employers.
Background Facts: Viking River Cruises, Inc. v. Moriana
Viking River arose from an employment law action in California where an employee, who had signed an employment agreement containing an arbitration clause and a class action waiver, sought to bring an action against her employer under PAGA to enforce the state’s labor code. Under PAGA, any “aggrieved employee” could bring an action against a former employer “on behalf of himself or herself and other current or former employees” to obtain civil penalties that previously could have been recovered only by the state in an enforcement action.
In the underlying action, Viking River moved to compel arbitration on an individual basis and to dismiss her collective action claims. The trial court, however, denied the motion and held that categorical waivers of PAGA standing are contrary to state policy and that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable “representative” claims under controlling California law. The Court noted that California law uses the term “representative” in two different ways when discussing PAGA claims. First, the claimant is a representative of the state. Second, the claimant is a representative of other employees.
The Supreme Court's Analysis
As an initial matter, the Court explained that the FAA does not preclude enforcement of waiver of representative capacity as a rule. Instead, requiring parties to arbitrate claims in a single-agent, single principal format is consistent with the norm of bilateral arbitration. The Court held that California’s rule prohibiting the division of PAGA claims into individual and representative claims violates the FAA. It stated that because arbitration is a matter of consent and a party cannot be forced to arbitrate a claim absent an affirmative contractual basis, a state cannot condition enforcement of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate. Notably, a state rule that would impose an expansive joinder of parties rule would be contrary to the FAA absent the consent of the parties.
Under prior California law, however, the only way an employer can agree to arbitrate an individual employee’s PAGA claim is to agree to arbitrate all other PAGA claims. Alternatively, the employer must litigate the entire claim to avail itself of the procedural protection of a class-based action. The Court held that this was an impermissible choice and the rule effectively coerces parties into withholding PAGA claims arbitration.
Based on the foregoing, the Court in Viking River held that the FAA preempts a rule that precludes bifurcating individual claims that are subject to arbitration and collective claims that might not be subject to arbitration. The Court concluded that the trial court should have ordered arbitration of the employee’s individual claim, and noted that the collective claim could proceed in Court but that a feature of California law deprived the employee of standing after her individual claim has been removed to arbitration. Therefore, the Court also ordered dismissal of the collective claim.
Why this Case is Important
In various states and under the Uniform Common-Interest Ownership Act, homeowner associations have been granted standing to bring representative actions on behalf of their members. Given the express authorization of representative standing, a collective action or class action waiver is subject to potential invalidation as against public policy if used in an attempt to defeat an association’s representative standing. As a result, some general contractors and developers may have sought to compel arbitration against the association but elected to forego the enforcement of the collective action waiver to increase the odds that a court would compel arbitration.
However, while collective action or class action waivers are still subject to potential invalidation as against public policy if asserted to defeat an association’s representative standing in litigation, general contractors and developers are now in a better position to prevent an association from aggregating its members’ claims when its members have agreed to individualized arbitration. As some courts have recognized, while an association may be given representative standing to assert the rights of its members, the members remain the real party in interest and the association is either acting as an agent of the individual members or “is assigned the right to bring the action for its members, and it receives that right with an obligation to comply with the arbitration agreements signed by each of its members” Pulte Home Corp. v. Vermillion Homeowners Ass'n, Inc., 109 So. 3d 233, 235 (Fla. Dist. Ct. App. 2013).
As such, to the extent that an association is asserting both its own rights and the rights of its members, courts should compel arbitration of those claims subject to the member’s arbitration clause, even if it means that the association’s own claims would remain in litigation (unless an arbitration agreement between the parties otherwise exist). Moreover, where the members have entered into arbitration agreements requiring individualized arbitration, Viking River obligates courts to enforce such agreements. This follows because states cannot adopt mechanisms that require a party to submit to collective action/class-based arbitration absent the consent of the parties, and requiring a general contractor or developer to arbitrate claims with an association in a collective manner is inconsistent with the norm of bilateral arbitration. It is important to remember that enforcement of bilateral arbitration agreements does not alter the substantive rights of the parties and the fact that it may be expensive for an individual owner to prosecute a claim on their own, is not a basis for invalidating an arbitration agreement.
- While Viking River reinforces the rule that parties cannot be forced to submit to collective action arbitration absent consent, it is important that developers and general contractors regularly review their arbitration agreements to ensure that the agreement clearly limits the issues subject to arbitration, the rules of the arbitration and with whom a party will arbitrate its disputes.
- For example, a developer or general contractor may wish to consider, among other things:
- Whether subcontractors, material suppliers or design professionals can be brought into the arbitration (and ensure that those parties have corresponding arbitration provisions in their agreements with the developer or general contractor);
- the scope of the arbitration agreement;
- whether collective action will be permitted;
- whether AAA rules or some other rules will govern the arbitration;
- whether arbitrability and threshold issues are delegated to the arbitrator;
- whether a particular arbitration service is to be used and the mechanism for selecting an arbitrator; and
- whether the parties have a right to appeal and the basis for appeal.
- It is important to ensure that the arbitration clause binds the foreseeable parties to the claim that is to be arbitrated.
- It may be advisable to include an arbitration agreement in the association’s formation documents, in the deed transferring title to bind subsequent purchasers, and a choice of law clause for the FAA to apply to the arbitration clause.
- Remember that in preparing an arbitration agreement, the FAA permits the parties to select the forum for resolving their disputes. The FAA, however, is not a means to effectuate an abrogation of one of the parties’ substantive rights. Abrogation of substantive rights, especially statutory rights, except as otherwise permitted by law, could result in invalidation of the arbitration agreement.
The attorneys of Wood, Smith, Henning and Berman are prepared to assist you in navigating the implications of this new decision on your business. Should you have any questions or concerns in this regard please do not hesitate to reach out to a member of our employment practice team.