Written by Partner Jeffery M. Cross for the Summer 2022 Edition of Powerhouse Points, A Quarterly Litigation Update.
Read the full issue here.
- The Supreme Court held that nothing in its precedent or in the FAA established a rule mandating enforcement of a waiver in an arbitration provision waiving claims on behalf of an absent principal.
- Class-action waivers in arbitration provisions cannot be declared void by state laws or state court interpretations.
- The Supreme Court drew a line between class arbitrations and representative arbitrations between a single agent representing a single principal against a single defendant covering claims made by the single agent.
Over the years, the Supreme Court has been quite active in the area of arbitration. This past Term the Court issued five decisions involving arbitration.
Of these five decisions, the one decision that seems to reflect most clearly the Court’s approach to arbitration is Viking River Cruises, Inc. v. Moriana, slip op. No. 20-1573, 2022 U.S. LEXIS 2940, 142 S. Ct. 1906 (June 15, 2022). Viking involved the California Labor Code Private Attorneys General Act known as “PAGA.” In reaching its decision, the Court fleshed out its prior holdings regarding arbitration and “representative actions,” such as class actions. These prior holdings include the blockbuster decision AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that held that a party cannot be forced by state statute to arbitrate a dispute as a class action unless the party clearly agreed to do so. The Court’s reasoning in Viking clarifies its thinking as to class arbitrations.
The California Labor and Workforce Development Agency had authority to bring enforcement actions against employers for a variety of violations of the labor code. However, the California legislature concluded that the Agency did not have the resources to meet the legislature’s goal of full compliance. Consequently, the legislature authorized aggrieved employees to bring private enforcement actions. The California courts, however, held that the cause of action belonged to the State and the aggrieved employee was acting only as the “agent” or “proxy” of the State. The State remained the real party in interest. If there was a recovery, the State received 75 percent of any fine, and the remaining 25 percent was distributed among the injured employees.
The California courts also interpreted PAGA as permitting claim joinder. Under this interpretation, an aggrieved employee with standing to sue an employer could add all of the claims for other employees that the State could bring.
The Respondent employee joined Viking River Cruises as a sales representative. Her employment agreement contained an arbitration provision that provided that any arbitration could not be brought as a class action, a collective action, or a representative action under PAGA. The lower courts held that the waiver of the PAGA representative action was void as against state policy. Viking argued in the Supreme Court that the state court’s holding deviated from the traditional bilateral arbitration between two individual entities and therefore was in violation of § 2 of the FAA under the Court’s precedents such as Concepcion.
The Supreme Court disagreed. The Court held that nothing in its precedent or in the FAA established a rule mandating enforcement of a waiver in an arbitration provision waiving claims on behalf of an absent principal. The Court noted that there are myriad examples of non-class representative actions in which a single agent litigates on behalf of a single principal. These include shareholder derivative suits, wrongful death actions, trustee actions, and suits on behalf of infants or incompetent persons. Instead, the Court emphasized that it had held that class-action waivers in arbitration provisions could not be declared void by state laws or state court interpretations. The Court noted that the change from bilateral arbitration between individual entities to class arbitration was such a fundamental departure from the arbitration norm that it would not be forced on a party to an arbitration provision by state law or state court action. Only if the parties clearly agreed to class arbitration would it be permitted.
To understand the Court’s holding in Viking, it is valuable to examine the Court’s Concepcion decision. Class arbitration, of course, involves absent parties. The inclusion of such absent parties requires the addition of various procedures and formalities to protect such absent parties. Indeed, without such procedures and formalities, absent parties may not be bound. Such procedures include a determination whether the named parties are representative of the absent class and whether the claims of the named parties are typical of the class. In addition, the arbitration must provide absent class members with notice and an opportunity to opt-out.
Perhaps most importantly, the Court noted that class arbitration increases the risks on the defendant without many of the protections afforded the parties in class litigation. For example, in class litigation, the parties are entitled to discovery which in many cases can be extensive because of the amount at stake. In addition, the decision of the trial court in class litigation can be appealed. Indeed, the decision to certify the class is subject to interlocutory appeal.
In traditional bilateral arbitration, the parties give up some of the procedural rigor as well as appellate review to realize the benefits of arbitration. These include lower costs and greater efficiency. Often in arbitration discovery is truncated or streamlined. Furthermore, appeal under § 10 of the FAA is limited. Vacatur of an arbitration award is limited to very narrow grounds such as bias of the arbitrator or that the arbitrator refused to consider material evidence.
The Court noted that defendants in an arbitration are generally willing to accept the cost of errors in an arbitration because the impact is limited and the benefits of speed and efficiency outweigh such a limited cost. However, with class arbitration, this balance is dramatically upended. For the foregoing reasons, the Court in Concepcion made it clear that the parties must clearly agree to class arbitration. A state statute or state court decision declaring a waiver of class arbitration void would violate the FAA.
The Court, however, rejected Viking’s definition of bilateral arbitration as too narrow. The Court held that nothing in its precedent suggested that, in enacting the FAA, Congress intended to require states to abrogate their agency law to mandate that representative actions involving a single agent and a single principal could not be arbitrated. The Supreme Court thus upheld California’s ruling that a categorical waiver in an arbitration provision of a PAGA representative action was void.
Notwithstanding the foregoing, the Court did find aspects of a PAGA action as interpreted by the California courts to be in conflict with the FAA. This was the claim joinder aspect. The Court held that a corollary to its rule that arbitration is a matter of consent is that a party can be compelled to arbitrate only those issues that it has agreed to arbitrate. A state law that would mandate a party to arbitrate claims of multiple employees would expand the scope of arbitration beyond what a party had agreed to.
This Supreme Court has clearly been an activist court when it comes to arbitration. This Term has been no exception. The Viking decision provides important insights into the Court’s thinking as to representative arbitration, drawing a line between class arbitrations and representative arbitrations between a single agent representing a single principal against a single defendant covering claims made by the single agent.