Last week, a California Court of Appeal issued a decision that provides important guidance on drafting of employment arbitration agreements.  In Universal Protection Service, LP v Superior Court (Franco), the employer had its employees sign an arbitration agreement.  The agreement was silent on the issue of class action/representative action claims, but generally required an employee to arbitrate any employment-related disputes.  The plaintiff in the case an action in arbitration against the employer, alleging various wage and hour claims on a class and representative basis.  The employer responded by filing a declaratory relief action in state court, seeking to have the court declare that (1) under the parties’ arbitration agreement, it was for the court, and not an arbitrator, to decide whether class or representative claims could be arbitrated; and (2) the arbitration agreement did not allow for class or representative claims.  The plaintiff then asked the court to order the matter to arbitration, arguing that it was for the arbitrator, not the court, to decide whether class and/or representative claims could be arbitrated.  The trial court agreed with the plaintiff and ordered the matter to arbitration. The employer appealed.

The Court of Appeal agreed with the plaintiff that under the terms of the parties’ specific arbitration agreement, the arbitrator, not the court, was charged with deciding gateway issues of arbitrability of claims (i.e. which claims did the parties agree to arbitrate), including class and representative claims.  The court explained that the general rule is that a court decides gateway issues of arbitrability, unless there is clear evidence that the parties intended for the arbitrator to decide these issues.  In this case, however, the court held that the parties’ agreement provided clear evidence that the parties intended for an arbitrator to decide gateway issues of arbitrability.  The arbitration agreement did not expressly say this, but it did expressly say that any and all disputes would be resolved by arbitration “in accordance with the National Rules for the Resolution of Employment Disputes set forth by the [American Arbitration Association].”  Although not set forth in any greater detail in the arbitration agreement, those AAA rules (and some “supplementary” AAA class action rules) provide that the arbitrator shall be responsible for construing and interpreting the scope of an arbitration agreement and the arbitrability of claims, including determining whether any claim could proceed on a class basis in arbitration.  Based on the agreement’s general incorporation of the AAA employment rules, the Court of Appeal held that this incorporation was sufficiently clear evidence that the parties intended for an arbitrator to decide whether plaintiff could pursue class and representative claims in arbitration.

The full decision is available here. This decision serves as a good reminder to employers to make sure that they are familiar with any rules they are incorporating by reference in their arbitration agreements and to expressly override any rules they do not wish to adopt.  Employers are wise to include specific provision in their arbitration agreements stating who (court or arbitrator) will decide gateway issues relating to the enforceability of the agreement and the arbitrability of claims.  California employers should also note that there are two cases currently pending before the California Supreme Court on the issue of whether a court or an arbitrator gets to decide whether the parties agreed to arbitrate class/representative claims -- Sandquist v. Lebo Automotive, Inc. (2014) 228 Cal.App.4th 65, review granted November 12, 2014, No. S220812, and Network Capital Funding Corporation v. Papke (2014) 230 Cal.App.4th 503, review granted January 14, 2015, No. S222638.   As review was only recently granted in these two cases, decisions are not expected for some time. 

For any readers out there who are wondering why this issue is significant, it is because there are very limited grounds for review and reversal of an arbitrator's rulings and, as a result, if an arbitrator wrongly construes an arbitration agreement to permit class claims in arbitration, an employer is more likely to be stuck with that decision than if a court wrongly reached the same conclusion (because a court's ruling would be subject to broader judicial review).  A class claim in arbitration could be a very costly exercise for an employer (who has to pay the arbitrator's hourly fees for the life of the dispute).  A notable case illustrating this very scenario is Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013).