Arbitrator, Not Court, Gets to Decide Whether Arbitration Agreement Is Enforceable
Last week, a California Court of Appeal overturned a trial court decision denying an employer's petition to compel arbitration where the trial court found that the arbitration agreement was unconscionable. In overturning the trial court's ruling, the Court of Appeal held that the trial court erred in even reaching the issue of whether the agreement was unconscionable because the arbitration agreement included a provision expressly delegating to the arbitrator authority to determine issues of enforceability of the agreement. The provision stated:
"The arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including but not limited to, any claim that all or any part of the Agreement is void or voidable."
Relying on United States Supreme Court precedent in Rent-A-Center, West v. Jackson, 561 U.S. 63 (2010), the court held that delegation clauses, like this one, are enforceable as long as the delegation language is "clear and unmistakeable" and the provision is not revocable under state law principles such as fraud, duress or unconscionability (limited to the fairness of the delgation provision itself and not the fairness of the arbitration agreement as a whole). The court held the language of the delegation provision before it was clear and unmistakeable and that the provision itself was not unconscionable because there is nothing inherently unfair about authorizing an arbitrator, rather than a court, to decide issues relating to the enforceability of the arbitration agreement. As such, the court held that the delegation provision was enforceable and an arbitrator, not the court, should have decided whether the parties' arbitration agreement as a whole was enforceable and applicable to the parties' dispute. For these reason, the Court of Appeal overturned the trial court's denial of the employer's petition to compel arbitration because the trial court lacked authority to rule on the petition.
In its decision, the Court of Appeal noted that some California courts have in the past refused to enforce delegation provisions such as the one at issue in this case. However, the Court dismissed those cases as pre-dating more recent United States Supreme Court precedent, such as Rent-A-Center and AT&T Mobility v. Concepcion, which strongly favor enforceability of arbitration agreements according to their terms.
The case is Tiri v. Lucky Chances, Inc. and is available here. Employers may wish to consider including provisions in their arbitration agreements that specifically delegate authority to the arbitrator to decide whether the agreement is enforceable. This is one tool for keeping unconscionability decisions out of the hands of trial courts that are sometimes inconsistent in ruling on these issues. However, delegating authority to the arbitrator is not entiretly without risk, as one recent case before the United States Supreme Court demonstrated. In Oxford Health Plans v. Sutter, the parties' arbitration agreement contained a delegation clause and, pursuant to that clause, an arbitrator interpreted the agreement as allowing class claims in arbitration (a ruling that almost certainly would not have been made in court). Because of the very limited grounds for judicial review of an arbitrator's rulings, the arbitrator's interpretation of the agreement in that case was upheld. Bottom line--employers should think carefully about the provisions in their arbitration agreements, including deciding what issues to delegate to the arbitrator, and ensure that these provisions are very clearly drafted to best ensure that the agreement is enforced as intended. Employers must also periodically review their agreements to ensure that they are as beneficial as permissible in light of continually evolving case law.