Arbitration Agreement Enforceability and Consumer Protection Claims in California post-Viking River

Eva Schueller
In last summer’s Viking River decision, the U.S. Supreme Court held that the Federal Arbitration Act (“FAA”) partly preempts the California rule that had prohibited the compelled arbitration of claims under the state’s Private Attorney General Act (“PAGA”).
  • California courts applying the Supreme Court’s July 2022 Viking River[1]decision have rejected the Court’s interpretation of California law and imposed a stay (rather than dismissal) of the non-arbitrable, representative portion of the claim at issue while its individual counterpart proceeds in arbitration.
  • The California Supreme Court’s imminent decision in Adolph v. Uber Technologies, Case No. S274671—oral argument set for May 9, 2023—is expected to be the definitive word.
  • Viking River’s rationale may be extended to require a similar division of claims brought under California’s consumer protection statutes, but by remedy sought. Requests for relief that would benefit the plaintiffs could be compelled to arbitration while any “public injunctive relief” is reserved for a court. The California Supreme Court’s McGill decision already includes language sanctioning just such a piecemeal process, including the division of a single claim.
  • Because consumer protection statutes define standing in terms of injury, as opposed to the looser “aggrieved employee” status required under the California law at issue in Viking River, California’s consumer protection statutes might more readily result in a dismissal of the “public injunctive relief” part of a plaintiff’s claim rather than a stay pending arbitration.
  • Those looking to arbitrate their disputes should carefully review the severance, waiver, and delegation provisions in their arbitration agreements to ensure that they are enforceable to the extent intended.

Background:

In last summer’s Viking River decision, the U.S. Supreme Court held that the Federal Arbitration Act (“FAA”) partly preempts the California rule that had prohibited the compelled arbitration of claims under the state’s Private Attorney General Act (“PAGA”).[2] Instead, California courts must permit the division of such claims into arbitrable individual claims and non-arbitrable representative claims. Once an employee’s individual claim is forced into arbitration, the Court’s non-binding conclusion was that the representative claim should be dismissed for lack of standing.

California’s Courts of Appeal have thus far rejected Viking River’s reading of California law requiring dismissal of the non-arbitrable representative claim. [3] The California Supreme Court is set to decide the issue soon in Adolph v. Uber Technologies, Case No. S274671, following oral argument on May 9, 2023.[4]

California courts have also flagged a developing split of state authorities regarding whether an arbitrator’s findings in the individual arbitration would have preclusive effect in the later court proceeding. But generally arbitral decisions do have preclusive effect under California law. The specter of Viking River leading to a defendant having to deal with the “re-litigation” of issues is thus overstated, as at least one California court has noted.[5]      

Viking River and California’s McGill Rule:

California’s McGill Rule provides that to the extent a plaintiff seeks “public injunctive relief” pursuant to California’s consumer protection statutes, that remedy cannot be waived in all forums.[6] Before Viking River, challenges to the application of the McGill Rule focused on the extent to which the remedy sought was truly “public injunctive relief.”[7] In response to these arguments courts have consistently held that requests for restitution, disgorgement, or injunctive relief that primarily benefits the plaintiffs or those similarly situated to a plaintiff do not constitute public injunctive relief.

Although Viking River addresses PAGA claims, the Court’s determination that the FAA preempts a California rule prohibiting claim divisibility should be relevant to applications of the McGill Rule. For example, where an arbitration agreement carves out claims for “public injunctive relief” and requires that such claims be heard by a court, Viking River adds further support to the argument that the non-arbitrable remedy alone stays outside of the arbitration. To the extent the claim seeks any private relief – restitution, disgorgement, or injunctive relief that benefits the plaintiff – it should be compelled to arbitration. McGill itself sanctions exactly such a separation of an otherwise single claim, noting that the “piecemeal litigation of claims the parties have agreed to arbitrate and claims they have not agreed to arbitrate is consistent with the FAA” and that “this court extended this principle to piecemeal litigation of arbitrable and inarbitrable remedies derived from the same statutory claim.”[8]

Viking River’s discussion of statutory standing and dismissal of representative claims may, however, carry the more significant (and yet untested) challenge for plaintiffs seeking to avoid arbitration under the McGill Rule. As the court in Gregg explained, PAGA standing requires only that a plaintiff be an “aggrieved employee,” defined as “someone ‘who was employed by the alleged violator’ and ‘against whom one or more of the alleged violations was committed.’”[9] Under California Supreme Court precedent, this loose standing requirement is met at the time someone becomes an “aggrieved employee” and is not nullified by later developments such as individual settlement or recovery because “[t]he Legislature defined PAGA standing in terms of violations, not injury.”[10]

California’s consumer protection statutes, in contrast, do define standing in terms of injury. Accordingly, if a claim under California’s Unfair Competition Law is compelled to arbitration, to the extent it seeks private relief there may be an argument for dismissal of the remaining public injunctive relief remedy based on a lack of statutory standing. And under Viking River, this result appears to be permissible even if in practice it could result in a complete abrogation of the McGill Rule.

Takeaways Tips for Arbitration Clauses:

Viking River and McGill both highlight the importance of clearly drafted severability and waiver clauses in arbitration agreements. In Viking River, the agreement said that if the waiver provision is invalid in any part, any “portion” of the waiver that remains valid must still be “enforced in arbitration.”[11] The Court held that this clause entitled Viking River to compel arbitration of the plaintiff’s individual PAGA claim. And in McGill the Court highlighted an unexplained discrepancy between two versions of the arbitration agreement’s severance provisions and directed the appellate court on remand to address the issue.

Similarly, an arbitration agreement’s delegation clause could play a pivotal role in the consumer protection context. Under McGill, public injunctive relief claims may be heard in arbitration, they just cannot be waived in all forums. Delegation clauses should state whether the nature of the relief sought should be determined by the arbitrator in the first instance.

Any party that wishes to ensure that all arbitrable claims and parts of claims may be compelled to arbitration should review their agreement’s severance, delegation, and waiver provisions in light of these decisions.

[1] Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022).

[2] California’s PAGA law lets aggrieved employees bring lawsuits on behalf of other employees as well as on their own behalf for their employer’s alleged wage and hour Labor Code violations. PAGA is a procedural statute—it does not create substantive rights.

[3] Nickson v. Shemran, Inc., 306 Cal. Rptr. 3d 835 (2023); Seifu v. Lyft, Inc., 89 Cal. App. 5th 1129 (2023); Gregg v. Uber Techs., Inc., 306 Cal. Rptr. 3d 332 (2023); Piplack v. In-N-Out Burgers, 88 Cal. App. 5th 1281 (2023); Galarsa v. Dolgen California, LLC, 88 Cal. App. 5th 639 (2023), as modified on denial of reh’g (Feb. 24, 2023), review filed (Mar. 13, 2023).

[4] Oral argument will be available via live stream on the Court’s website: https://supreme.courts.ca.gov/.

[5] Gregg, 306 Cal. Rptr. 3d at 346.

[6] McGill v. Citibank, N.A., 2 Cal. 5th 945, 952 (2017).

[7] See Hodges v. Comcast Cable Commc’ns, LLC, 21 F.4th 535, 548 (9th Cir. 2021) (holding that “non-waivable ‘public injunctive relief’ within the meaning of the McGill rule refers to prospective injunctive relief that aims to restrain future violations of law for the benefit of the general public as a whole, rather than a discrete subset of similarly situated persons, and that does so without requiring consideration of the individual claims of non-parties”).

[8] McGill, 2 Cal. 5th at 966 (internal quotations and citations omitted) (emphasis added). A recent appellate decision holding that “a public injunction is a unitary remedy that cannot be divided into ‘individual’ and ‘representative’ components” is not entirely inconsistent in that it refers only to the public injunction portion. See Vaughn v. Tesla, Inc., 87 Cal. App. 5th 208, 237 (2023), reh’g denied (Jan. 20, 2023), review filed (Feb. 14, 2023). To the extent that the court in Tesla was suggesting that a consumer protection claim cannot be divided by the nature of relief sought, however, it is inconsistent with McGill and the California Supreme Court cases it cites, as well as with the U.S. Supreme Court’s prior pronouncements about the preemption of California rules against claim splitting.

[9] Gregg, 306 Cal. Rptr. 3d at 343.

[10] Kim v. Reins Int’l California, Inc., 9 Cal. 5th 73, 84 (2020).

[11] Contrast this with a recent California decision addressing a “poison pill” waiver that the court noted “ironically” defeated the application of Viking River sought by the defendant company. Westmoreland v. Kindercare Educ. LLC, No. A164090, 2023 WL 3052080, at *9 (Cal. Ct. App. Apr. 24, 2023).

May 8, 2023 | POSTED IN  Arbitration  |  All Articles