Seyfarth Synopsis: The California Supreme Court, in Sandquist v. Lebo Automotive, deviated from rulings of most federal circuit courts to hold that the question of “who decides” whether class arbitration is available—courts or arbitrators—should be answered by interpreting the arbitration agreement under state contract law.

This ruling raises the prospect that, under some arbitration agreements, the question of class arbitration will be decided by someone (the arbitrator) who has a financial incentive to find class-wide arbitrability, and that the ensuing class arbitration will lack the safeguards of judicial review. To avert that prospect, employers should determine whether they need to revise their arbitration agreements to expressly require that the court is to address all questions of class arbitrability.

The Facts

In 2012, Timothy Sandquist sued Lebo Automotive for race discrimination, harassment, and retaliation. He sued on behalf of a class of current and former employees of color.

Sandquist and the other class members had signed arbitration agreements with Lebo Automotive providing that the parties would submit to binding arbitration any claim, dispute, or controversy that arose out of employment. Excluded from arbitration were NLRA claims, workers’ compensation claims, and unemployment claims.

When Lebo Automotive moved to compel arbitration, the California Superior Court granted the motion to compel arbitration of Sandquist’s individual claims and, after finding the arbitration agreements did not permit class arbitration, dismissed the class claims. On Sandquist’s appeal, the Court of Appeal agreed that individual claims were subject to arbitration, but disagreed with the trial court’s decision that class arbitration was unavailable and held that the availability of class arbitration is a question of contract to be decided by the arbitrator, not the court.

The Supreme Court Decision

The California Supreme Court affirmed the Court of Appeal’s decision, but on different grounds. In a 4-3 decision, the Supreme Court held that there is no universal rule as to whether courts or arbitrators should decide the availability of class arbitration. “Rather, who decides is in the first instance a matter of agreement, with the parties’ agreement subject to interpretation under state contract law.”

The Court began its analysis with the arbitration agreements, which contained several indications that the parties intended for an arbitrator to decide the class arbitration issue. First, the agreement to submit any claim, dispute, or controversy to an arbitrator suggested a choice to have an arbitrator decide the class arbitration issue. Second, since the agreements give an arbitrator authority to decide any claim connected to employment, the class arbitration question that directly arises from underlying employment claims should be answered by an arbitrator. Third, since Lebo Automotive specifically excluded certain claims from the arbitration agreements, like those arising under the NLRA, it “might well have specified other matters not for the arbitrator, such as the availability of class arbitration at issue here, but did not.”

The Supreme Court then cited two state-law rules of contractual interpretation that further suggested that the arbitrator should decide class-wide arbitrability: (1) any ambiguities in the arbitration agreements should be construed against their drafter (here, Lebo Automotive), and (2) “when the allocation of a matter to arbitration or the courts is uncertain, we resolve all doubts in favor of arbitration.”

Once it determined that the arbitration agreements, interpreted under state law, designated the class-arbitration question to an arbitrator, the Supreme Court considered “whether the Federal Arbitration Act imposes an interpretive presumption that, as a matter of federal law, preempts state law rules of contract interpretation and alters the conclusion state law would otherwise reach here.” The U.S. Supreme Court has interpreted the FAA as imposing presumptions that the parties to an arbitration agreement intend (1) courts, not arbitrators, to decide questions of arbitrability, and (2) arbitrators, not courts, to decide disputes over arbitration procedure.

The California Supreme Court concluded that class-wide arbitrability is a procedural matter, to be decided by the arbitrator after resolution of the much narrower gateway question of arbitrability presumed to be reserved for the court. The Supreme Court reasoned that no “logical relation places the availability of classwide arbitration in the category of questions that must be resolved before any arbitrator will be able to entertain a dispute.” The Supreme Court also concluded that “a presumption that arbitrators decide the availability of class arbitration is more consistent with the desire for expeditious results that motivates many arbitration agreements.

The Supreme Court rejected the reasoning of several federal courts, and the dissenting opinion, that the FAA makes class arbitrability a gateway question for the court to decide. The Supreme Court was unpersuaded by the rationale underlying these decisions—that class arbitration entails many more risks and consequences than bilateral arbitration and therefore such a significant decision should be left to an arbitrator only when the parties have expressly agreed to do so. The Supreme Court found nothing in the FAA that reserves “significant” decisions to courts rather arbitrators.

Finally, the Supreme Court acknowledged the U.S. Supreme Court’s decision in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp. that class arbitration, because it differs qualitatively from bilateral arbitration, is available only where the parties expressly consent to it. But the California Supreme Court reconciled this decision with its own result by saying that there is no reason why an arbitrator could not apply the Stolt-Nielsen presumption just as a court would in deciding whether class arbitration is available.

What Sandquist Means for Employers

Many employers have arbitration agreements similar to those drafted by Lebo Automotive—agreements that lack language on the issue of who decides the class arbitrability question. Sandquist raises the prospect that plaintiffs will argue that the typical arbitration agreement—with language assigning all claims, disputes or controversy to arbitration—will require courts to defer to arbitrators both the question of class arbitrability and the issue of whether a class-action waiver is enforceable. Employers should thus determine if they need to revise their agreements to expressly assign the class-wide arbitrability question to the court and not to the arbitrator.