California Supreme Court: Arbitrator Decides Whether Class Claims Are Permissible
There has been much litigation over the issue of whether an employment arbitration agreement validly may include a provision requiring the employee to waive class claims. It is well-established now that these waivers are, in fact, valid. However, not all agreements contain language explicitly stating that the employee is permitted to bring claims on a class basis. Where the agreement is silent on the issue, it becomes an issue of contract interpretation but this scenario generally supports a finding that class arbitration is impermissible because the parties did not clearly agree to it. Nonetheless, this does not stop plaintiffs’ lawyers from bringing class claims, typically in court. The question then becomes “who decides the gateway issues of whether the arbitration agreement is enforceable and, if so, whether class claims are permitted?” In Sandquist v. Lebo Automotive, the plaintiff filed a lawsuit alleging discrimination claims on a class basis against his employer. The employer moved to compel individual arbitration and to strike the class claims pursuant to a pre-dispute arbitration agreement the plaintiff had signed as a condition of employment. The trial court granted the motion, finding that the arbitration agreement was enforceable and that it did not permit class claims. The plaintiff appealed, and the court of appeal affirmed the lower court’s ruling that the arbitration agreement was enforceable. However, the court of appeal reversed the dismissal of the class claims, holding that the trial court should not have decided this issue because it was for the arbitrator, not the court, to decide whether the parties’ agreement allowed class claims. The employer successfully sought review by the California Supreme Court.
Today, the California Supreme Court issued its decision (4-3), agreeing with the court of appeal and holding that on the facts of the case before it, the parties’ agreement should be interpreted to require an arbitrator (rather than a court) to decide whether the plaintiff could pursue class claims in arbitration. The Court viewed this principally as a matter of contract interpretation. The parties’ arbitration agreement contained broad language stating that the employee agreed that any and all claims, disputes, or controversies arising out of the employment relationship would be resolved by binding arbitration. The agreement did not specify whether a court or arbitrator would decide gateway issues of enforceability or of the availability of class proceedings. Nonetheless, the Court interpreted the agreement as giving the arbitrator the power to decide whether the agreement allowed class claims in arbitration. The Court’s interpretation was based on the broad language of the arbitration agreement as applying to all disputes or controversies that would otherwise be decided in court. The Court reasoned that a dispute over the propriety of class claims was a dispute between the parties that otherwise would be decided in court and, thus, was within the scope of what the parties agreed to arbitrate. The Court acknowledged that the agreement was ambiguous on this point but applied two principles of contract interpretation to support its conclusion. First, the Court applied arbitration caselaw holding that where an arbitration agreement is involved, ambiguities must be resolved in favor of arbitration. Second, the Court applied the general principle of contract law that ambiguities are resolved against the drafter of the contract (in this case, the employer). Because the employee’s interpretation of the contract favored allowing the arbitrator to decide the issue, and the employer’s interpretation favored a court deciding the issue, the ambiguity would be resolved in favor of the employee’s interpretation.
The Court rejected the employer’s argument that there is a presumption in favor of courts deciding all gateway issues where the arbitration agreement is silent or ambiguous. The Court held that this reasoning applied only to the gateway issue of whether the parties agreed to arbitrate at all (and whether the agreement is enforceable). However, in the Court’s view, this presumption does not apply to the procedural issue of whether class claims are permissible in arbitration. The Court held that this issue was of the type traditionally reserved for the arbitrator.
Today’s ruling of California’s high court means that in California, it is possible that gateway issues of arbitration will be decided partly by courts and partly by arbitrators, with the initial issue of the agreement’s enforceability being decided by a court and the issue of whether class claims are permissible being decided by an arbitrator. The latter is dangerous for employers. For this reason, employers may wish to revise their arbitration agreements as necessary to include express language making clear that gateway issues of enforceability (including enforceability of any class waiver provision and/or of the availability of class procedures) are to be decided by a court of law and not the arbitrator). If the language is clear and unambiguous, it will be enforced under well-established principles of contract interpretation.