On July 28, 2016, the California Supreme Court answered the Question: When an arbitration agreement is silent on the issue, who decides whether classwide arbitration is permitted or prohibited; courts or arbitrators? In a 4-3 decision, the Court declined to issue a uniform standard, and held that in this instance, it was a matter for the arbitrator. Timothy Sandquist v. Lebo Automotive, Inc. (Cal. Sup. Ct. July 28, 2016, No. S220812)
Timothy Sandquist ("Sandquist") accepted a sales position with Lebo Automotive Group, d.b.a. Manhattan Beach Toyota, in September 2000. Upon hire, his manager gave him approximately 100 pages of paperwork to sign, telling him to complete it quickly so that Sandquist could get to the sales floor. According to Sandquist, time constraints prevented him from reviewing the documents, and Sanquist was unaware that he signed multiple arbitration agreements.
Among the documents Sandquist signed, was a document entitled "Applicant’s Statement & Agreement," which provided that any "claim, dispute or controversy" arising out of his employment which would otherwise allow resort to court or a government tribunal, will instead be "submitted to and determined exclusively by binding arbitration . . ." Additionally, Sandquist signed two other separate documents expressly acknowledging that employment disputes were to be resolved by binding arbitration, governed by the Federal Arbitration Act ("FAA") in conformity with the procedures set forth in the California Arbitration Act (Cal. Code Civ. Proc., § 1280 et seq.)
In 2012, Sandquist filed suit against Lebo Automotive. The complaint included an individual claim for constructive discharge, and discrimination, harassment and retaliation causes of action brought on behalf of an ostensible class of "current and former employees of color." The class claims were asserted pursuant to the Fair Employment and Housing Act (Gov. Code, § 12940 et seq.) and the unfair competition law (Bus. & Prof. Code § 17200 et seq.). The complaint also sought injunctive and declaratory relief and damages. Lebo Automotive responded to the complaint with a motion to compel individual arbitration, based on the agreements Sandquist signed on his first day of work.
The trial court found that the agreements were enforceable, and that the Sandquist’s claims were included within the scope of the agreements. Additionally, the trial court interpreted Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. (2010) 559 U.S. 662, and Kinecta Alternative Financial Solutions, Inc. v. Superior Court (2012) 205 Cal.App.4th 506, as requiring that the court, and not an arbitrator, should decide whether or not class arbitration was prohibited by the agreement. Finally, the trial court also concluded that classwide arbitration was not within the scope of the Sandquist/Lebo arbitration agreement. Accordingly, the trial court granted the motion and struck all class claims.
THE APPELLATE COURT’S DECISION
The Second District Court of Appeal reversed in part. The court disagreed with the trial court’s conclusion that existing precedent required courts to decide whether class arbitration was available as a threshold issue. Instead, the Second District found a split of opinion in state courts. After examining cases on each side of the divide, the court concluded that the availability of classwide arbitration under a particular arbitration agreement was a question of contract interpretation, for the arbitrator to decide. Lebo Automotive petitioned the California Supreme Court for review.
THE CALIFORNIA SUPREME COURT’S DECISION
Preliminarily, the Court noted that interpretation of arbitration agreements is ordinarily a matter of California law, and not federal law. The Court found the three arbitration agreements signed by Sandquist were materially the same in structure and content. All three agreements required disputes to be determined exclusively by binding arbitration and two of the three carved out exceptions for certain disputes that arise under the National Labor Relations Act ("NLRA"); concern benefits under the California Workers’ Compensation Act, or through the Employment Development Department.
It was very significant that the language was so comprehensive and inclusive. The agreements specified that any dispute "which would otherwise require or allow resort to any court" would be arbitrated. The Court noted Lebo was, in this instance, seeking resort to the court to determine the availability of classwide arbitration. So, the Court reasoned that the arbitration agreement expressly delegated the decision to an arbitrator.
Also significant was that the arbitration agreement carved out specific exceptions for certain types of disputes involving the NLRA, Workers’ Compensation, or unemployment benefits. The Court noted that the drafter could have just as easily excluded other matters from the arbitrator, such as the availability of class arbitration, but simply did not.
Furthermore, the Court decided that to the extent that the arbitration clause was ambiguous, California law favored allocating the availability of classwide arbitration to the arbitrator, based on the assumed expectations of the parties. The Court reasoned that typically, parties to arbitration agreements expect that their dispute will be resolved without necessity for any contact with the courts. The Court found support for this idea in the language of the Sandquist/Lebo agreement which declared a preference for arbitration because of its "reduced expense and increased efficiency." Allowing a court to decide the issue would contravene that expectation and impose additional cost and delay, while the parties stayed their arbitration and proceeded through the court system, possibly with appellate review, before resuming arbitration.
The Court also found two other long-established interpretive principles to be "ultimately dispositive." First, the rule that when the allocation of a matter to arbitration versus courts is uncertain, all doubts should be resolved in favor of arbitration; and second, the rule that ambiguities in written agreements are to be construed against their drafters. Lebo was faulted for failing to explicitly state its desire to allocate the availability of class arbitration to the court.
Even though the California Arbitration Act’s procedures do not specifically address this threshold question, the Court declined to decide, as a matter of first impression, whether state law embraces a particular pro-court or pro-arbitrator presumption.
As for the FAA, the Court described the "crux of this case" as "whether the FAA imposes an interpretive presumption that, as a matter of federal law, preempts state law rules of contract interpretation and alters the conclusion that state law would otherwise reach here." It noted that the U.S. Supreme Court discussed the "who decides" issue only once before, 13 years ago, in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444. In that case, the plurality concluded that class arbitration availability was a question for the arbitrator because the issue was (at that time) labeled a "procedural" question rather than a gateway question of arbitrability. The availability or unavailability of class arbitration has nothing to do with whether the parties agreed to arbitrate, or whether the subject matter of the dispute is encompassed by the arbitration agreement. Instead, that is a question about "the kind of arbitration" the parties have agreed to, which is a matter that the arbitrator is well-qualified to address.
Finally, the Court rejected Lebo’s contention that the higher fee potential inherent in a class arbitration case would create a conflict of interest in allowing the arbitrator to decide whether arbitration would be bilateral or classwide.
The dissent was grounded on the basic precept that arbitration is a matter of consent, not coercion, and opening the arbitration to people who did not ask for it creates more problems than it solves. Notwithstanding the policy of liberality in upholding arbitration agreements, the law makes exceptions for gateway matters such as whether the agreement is even lawful to begin with, or whether the arbitration clause applies to the specific claim. The dissent argued that post-Green Tree decisions from the Supreme Court and federal appellate courts point to a change in law. "n more recent years, the U.S. Supreme Court has not only disavowed any notion that Green Tree decided the issue, it has also, as another court put it, given every indication short of an outright holding that classwide arbitrability is a gateway question rather than a subsidiary one." (Reed Elsevier, Inc. v. Crockett (6th Cir. 2013) 734 F. 3d 594, 598, cert denied (2014) __ U.S. __ [189 L. Ed. 2d 173, 134 S. Ct. 2991].)
The dissent also argued that courts should not assume that parties agreed to arbitrate such gateway matters without clear and unmistakable evidence of intent. Interpreting silence or ambiguity in an arbitration agreement as consent to submit the matter to an arbitrator rather than the court could often force unwilling parties to arbitrate a matter they reasonably would have anticipated that a judge would decide.
The dissent also pointed out the U.S. Supreme Court’s decision in Stolt-Nielsen, which acknowledged that determining whether arbitration would be bilateral or classwide is not just a procedural question. Classwide arbitration changes the nature of arbitration so much that it cannot be presumed that the parties consented to it simply by executing a general arbitration agreement.
Class arbitration dramatically increases risks to the defendant and there is no denying that the commercial stakes of classwide arbitration are comparable to classwide litigation, even though the scope of review is far more limited. Class arbitration can put the defendant in a "bet the company" situation, without any procedural protections or reviews of the arbitrator’s decision. Conversely, class arbitration still provides claimants with all of the procedural notifications and protections that class action lawsuits require in terms of notices to class members, certification of classes, class "opt-out" provisions, retention of administrators, etc. These facts give reason to doubt that the parties impliedly expected or consented to class treatment of their case.
IMPORTANCE OF THE CASE
Curiously, the split of authority which led the California Supreme Court to grant review in this instance has not occurred in the federal appellate courts. As noted in the dissent: "[E]very federal court of appeals to consider the issue on the merits has held that the availability of class arbitration is a question of arbitrability for a court, rather than an arbitrator unless the parties clearly and unmistakably provide otherwise." It remains to be seen whether this case will continue to the U.S. Supreme Court.
WHAT EMPLOYERS SHOULD DO
Drafting arbitration agreements requires delicate balancing of the authority that the parties to the agreement attribute to the court or arbitrator. Therefore, employers should review their arbitration agreements in light of the Sandquist holding. Broadly worded arbitration agreements that are silent as to who decides classwide arbitration issues may be susceptible to the same interpretation as in Sandquist. Employers with questions regarding their arbitration agreements should feel free to contact the authors, or their usual employment law counsel.