Mandatory arbitration agreements in employment settings bring with them benefits and challenges. One attractive aspect – particularly in California – is that employers may require workers to arbitrate all disputes individually; i.e., not via a multi-plaintiff or class action. Both the United States and California Supreme Courts have upheld so-called “class action waivers” as lawful.

One of arbitration’s downsides, on the other hand, is that, at times, it leads to expensive, time consuming litigation over the validity or meaning of the arbitration agreement. Another contested issue is whether the arbitrator or a court should hear those threshold or gateway disputes about the scope or meaning of the agreement to arbitrate.

Now, the California Supreme Court has decided in Sandquist v. Lebo Automotive, Inc., that parties to an arbitration agreement may choose whether a court or arbitrator decides if a class waiver exists and is enforceable. The Court wrote, in its 4-3 majority opinion authored by Justice Kathryn M. Werdegar: “the question who has the power to decide the availability of class arbitration turns upon what the parties agreed about the allocation of that power.”

Background

Timothy Sandquist was a car salesman with Lebo Automotive, Inc. in Los Angeles County. Sandquist signed a series of arbitration agreements at the start of his employment. After his employment ended, Sandquist sued his employer in Los Angeles County Superior Court (No. BC 476523) for race discrimination and harassment. He asserted some of his claims not just on his own behalf, but also on behalf of a class of his former co-workers.

Lebo sought to enforce its arbitration agreement by filing a motion in Los Angeles County Superior Court. That court dismissed Sandquist’s class-based allegations and ordered him to arbitration. The Superior Court judge found that Sandquist’s arbitration agreement not only was enforceable, but also permitted only individual claims rather than class actions.

But a panel of the Second District Court of Appeal, Division 7, reversed the trial court’s order regarding the class claims. The court of appeal held that, the arbitrator – not the judge – should have decided if Sandquist could assert a class action in arbitration. The court of appeal reasoned that, in the absence of an agreement authorizing the court to decide, the trial court’s job was to determine only whether there is an enforceable agreement to arbitrate and, if so, leave to the arbitrator whether the agreement permitted class actions in arbitration.

The California Supreme Court’s Opinion

Lebo sought review in the California Supreme Court. Lebo asked the Court to decide that the trial court correctly dismissed the class action claims, and that the Court of Appeal was wrong. But the Supreme Court by a 4-3 vote sided with Sandquist’s position and affirmed the Court of Appeal’s judgment.

Justice Werdegar, writing for the majority, explained that state law controls the analysis whether the arbitration agreement authorized the arbitrator or the court to decide if the agreement allowed for classwide arbitration. The Court also found, contrary to the dissenting opinion, that the federal courts interpreting the Federal Arbitration Act had not required a contrary result.

The opinion’s focus is on the arbitration agreement’s inclusive language regarding the types of disputes that would be arbitrable. The Court inferred that if the parties intended “all” disputes to be arbitrated, that would include interpreting the scope of the agreement.

The Court also relied on the legal principle that any ambiguity in the arbitration agreement should be resolved in favor of arbitration. The majority also noted the fundamental principle that a contract’s ambiguities generally are resolved against the agreement’s drafter. Lebo drafted the arbitration agreement. Because the trial court had ruled against class arbitration, it was Lebo advocating at the Supreme Court that the court should decide if its arbitration agreement precluded class action arbitration.

The majority rejected Lebo’s argument that arbitrators would have an incentive to rule in favor of class arbitration. The Court noted that arbitrators must decide issues that are against their interests, such as whether the arbitration agreement was tainted by fraud.

All told, the Supreme Court wrote that in the absence of an express provision in an arbitration agreement, the arbitrator should decide whether an arbitration agreement allows for class claims. The Court therefore sent the case back to the lower courts to order the case to arbitration and let the arbitrator decide if the class claims survived.

Justice Leondra R. Kruger wrote the dissenting opinion, joined by Justices Corrigan and Chin. Justice Kruger wrote that the majority had misinterpreted the federal decisions interpreting the Federal Arbitration Act. The dissenters believed that the court should decide whether class actions are arbitrable in the absence of an express agreement permitting an arbitrator to do so.

What Does the Decision Mean?

Before pondering Sandquist’s ramifications for employers, it is worth noting that its future significance is uncertain. Hostility to arbitration agreements and class action waivers continues among federal and state law makers and some courts.

As stated above, U.S. and California Supreme Courts previously have upheld class action waivers as lawful under the Federal Arbitration Act. However, the National Labor Relations Board has ruled class action waivers are illegal under the National Labor Relations Act (at least for employers and employees covered by that law.) A second federal court of appeals has endorsed the NLRB’s view, setting up possible U.S. Supreme Court review. If class action waivers are illegal, Sandquist’s ruling that arbitrators should decide if they exist will be largely irrelevant. Additionally, the new U.S. president may be receptive to calls for changes to the FAA, particularly if Congress’ majority changes from Republican to Democrat after the November 2016 elections.

That said, assuming class action waivers and Sandquist remain viable, the opinion is important for employers who value arbitration in employment settings. Sandquist provides employers with flexibility to draft arbitration agreements in accordance with their wishes. The opinion also provides incentives for employers to draft arbitration agreements with precision. It appears that courts will send to arbitration the interpretation of the agreement to arbitrate class disputes, unless the employer specifically includes language allocating the responsibility to a court.

So, employers have the power to choose whether arbitrators or courts will decide the existence or scope of a class action waiver. Therefore, “job one” is to include express language allocating that responsibility in the arbitration agreement.

It is good to have choices, generally speaking. But to whom should employers assign this critical responsibility: an arbitrator or a judge? There are pros and cons that senior management, including in-house and outside counsel, should weigh. A non-exhaustive list might include:

  • Whether a court or arbitrator in the employer’s jurisdiction is more likely to follow the plain language of the arbitration agreement’s class waiver;
  • Courts’ hostility to the employer, arbitration in general, and class-wide arbitration;
  • Arbitrators’ incentives to allow class-wide arbitration;
  • The availability of appellate review if the court misinterprets the class action waiver;
  • Whether to modify the arbitration agreement to allow for appellate review of arbitrators’ decisions about class action waivers;
  • Whether the arbitration agreement expressly allocates other issues, including unconscionability analysis, to the arbitrator or court;
  • Whether there are non-arbitrable representative claims, such as under the state’s Private Attorneys General Act (aka PAGA), which a court will adjudicate on the merits regardless of an arbitration agreement.

Class waivers and “gateway” determinations of arbitrability aside, the Sandquist decision is a reminder to employers and their lawyers: The law governing arbitration agreements has become nuanced and complex. Drafting arbitration agreements is not a rote exercise. Employers and their lawyers should discuss their options following Sandquist and other cases, and how to capitalize on those options through careful drafting.

Sidebar

What employers should do?

  1. Assess whether arbitration is a desired alternative to court, including the benefits of class action waivers in arbitration agreements.
  2. Decide whether to include a class action waiver in arbitration agreements, and how to ensure it is enforceable.
  3. Evaluate whether the court or an arbitrator is the preferred neutral to interpret the arbitration agreement in case of a challenge to the class action waiver.
  4. Ensure arbitration agreements are revised as desired to address class action arbitration, appellate review, carve-outs of certain claims, applicable arbitration procedures, arbitrator selection and other issues affected by case law.
  5. Monitor legal developments regarding enforceability of class action waivers under the National Labor Relations Act.
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