California Supreme Court Holds Employees Do Not Lose Standing To Pursue Representative, Non-Individual Private Attorneys General Act Claims Even After Individual PAGA Claims Are Compelled To Arbitration

On July 17, 2023, the California Supreme Court issued its highly anticipated decision in Adolph v. Uber Technologies Inc., No. S274671, --- P.3d ---, 2023 WL 4553702 (July 17, 2023). Not surprisingly, the court disagreed with the United States Supreme Court’s analysis of PAGA standing in Viking River Cruises Inc. v. Moriana¹ and held that “[w]here a plaintiff has brought a PAGA action comprising individual and non-individual 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.” Id. at slip op. 2-3.² This employee-friendly decision should cause employers to reevaluate their expectations for litigating PAGA claims. In a nutshell, the California Supreme Court made clear that an employee’s signature on an arbitration agreement, even with a class or representative action waiver, will not preclude an employee from pursuing a PAGA action in court seeking to recover penalties on behalf of others.

Viking River Cruises

In Viking River, the United States Supreme Court held that the Federal Arbitration Act (FAA) preempts California’s Iskanian rule “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” 142 S. Ct. at 1911. In so holding, the Court settled the issue of whether an employee can be compelled to submit his “individual” PAGA claims to arbitration pursuant to a pre-dispute arbitration agreement, answering that question in the affirmative.³

The U.S. Supreme Court went on to opine that, under its interpretation of California law, an employee whose individual PAGA claim is compelled to arbitration lacks standing to pursue the non-individual PAGA claims in court and, therefore, those non-individual claims should be dismissed. Id. at 1925 (“When an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”) (citing Kim v. Reins International California Inc., 9 Cal. 5th 73, 90 (2020)). Though, as Justice Sotomayor noted in her concurrence: “Of course, if this Court’s understanding of state law is wrong [on the issue of standing], California courts, in an appropriate case, will have the last word.” Id. at 1925 (Sotomayor, J., concurring).

The Adolph Decision

As Justice Sotomayor predicted, the California Supreme Court took up the Adolph case to have the last word, and, as noted above, it did decide that the United States Supreme Court’s understanding of state law was wrong.

Specifically, the California Supreme Court held that, under its prior holding in Kim, PAGA standing has only two requirements: the plaintiff must allege that he is (1) “someone who was employed by the alleged violator” and (2) someone “against whom one or more of the alleged violations was committed.” Adolph, slip op. at 11 (quoting Kim, 9 Cal. 5th at 83-84 (internal quotations omitted)). The court repeated that, once an employee becomes an “aggrieved employee” with standing under the statute, that standing “is not affected by enforcement of an agreement to adjudicate a plaintiff’s individual claim in another forum.” Id. at 13 (“Arbitrating 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 court refused to endorse additional standing requirements suggested by Uber, such as requiring a PAGA plaintiff to have a “financial stake” in the outcome of his non-individual claims. Id. at 21-22. According to the court, its decision was consistent with the California Legislature’s intent to allow plaintiff employees “to prosecute numerous Labor Code violations committed by an employer and to seek civil penalties corresponding to those violations.” Id. at 15 (citing Iskanian v. CLS Transp. Los Angeles LLC, 59 Cal. 4th 348, 384 (2014)).

In short, the California Supreme Court appears to have largely slammed the door on employers who, as recently as last June, had been hoping that Viking River would provide a silver bullet against the proliferation of PAGA actions throughout the Golden State.

A Potential Bright Spot for Employers?

The California Supreme Court did offer one potential bright spot for California employers. Before Adolph, California Courts of Appeal were split on whether a decision on the merits in arbitration could have preclusive effect on the determination of an employee’s status as an “aggrieved employee” for purposes of non-individual PAGA claims. Compare Gavriilogou v. Prime Healthcare Management Inc., 83 Cal. App. 5th 595, 600, 602-603 (2022) (holding that an arbitral award concluding “that the alleged Labor Code violations did not occur” against an employee did not preclude that employee from being an “aggrieved employee” based on the same alleged Labor Code violations), with Rocha v. U-Haul Co. of Cal., 88 Cal. App. 5th 65 (2023) (holding that an arbitrator’s decision in favor of an employer on a Labor Code claim precluded an employee from having PAGA standing premised on a violation of that same Labor Code section).

Adolph resolved this split, and held that an arbitrator’s decision regarding whether an employee was an aggrieved employee would have preclusive effect over the non-individual PAGA claims. Specifically, the court rejected Uber’s argument that allowing the non-individual PAGA claims to go forward in court would effectively allow an employee to relitigate his standing as an “aggrieved employee,” even if an arbitrator had already ruled against him: “[i]f the arbitrator determines that Adolph is not an aggrieved employee and the court confirms that determination and reduces it to final judgment, the court would give effect to that finding, and Adolph could no longer prosecute his non-individual claims due to lack of standing.” Slip op. at 17 (citing Rocha, 88 Cal. App. 5th at 76-82). Thus the court “[saw] no basis for Uber’s concern” regarding relitigation, and further noted that, “Viking River makes clear that in cases where the FAA applies, no such relitigation may occur.” Id. (citing Viking River, 596 U.S. at ---, 142 S. Ct. at 1923-1925).

This ruling has important implications for case management once a trial court compels individual PAGA claims to arbitration. That an arbitration award will (in most cases) determine whether an employee has standing as an “aggrieved employee” should weigh heavily in favor of having trial courts stay non-individual PAGA claims pending arbitration instead of letting the two actions proceed in parallel. See Code Civ. Proc. § 1281.4 (requiring that once a court compels arbitration, the action must be stayed “until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.”). This stay will conserve resources by allowing an arbitrator to determine whether a plaintiff is an “aggrieved employee” before proceeding with costly, time-intensive PAGA discovery and addressing complex manageability issues.

Please feel free to contact the attorneys listed in this advisory for further guidance or analysis.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.