California continued its ongoing debate on arbitrations and class actions in July when its Supreme Court held that in some cases an arbitrator, not the court, must decide whether an arbitration agreement permits class arbitration. This case is important because it rejects a universal rule on who should be the decision-maker in favor of a case-by-case analysis.
In Sandquist v. Lebo Automotive, Inc., No. S220812 (Cal. July 28, 2016), the California Supreme Court did not address the now familiar issue of whether an arbitration agreement permits class arbitration. Instead, it examined a matter antecedent to that issue: who should decide whether an arbitration agreement permits or prohibits class arbitration. The Court concluded that no universal rule allocates the decision to either arbitrators or courts. Instead, the decision must be made on a case-by-case basis after an examination of the arbitration agreement at issue.
The court placed heavy emphasis on the parties’ intent. It explained that “just as whether class arbitration is available depends on whether the parties agreed to allow or forbid it, so the question who has the power to decide the availability of class arbitration turns upon what the parties agreed about the allocation of that power.” Accordingly, the court first examined the parties’ agreements to determine what they said regarding the “who decides” question.
The court first determined that California contract law, rather than federal law, should apply insofar as the question presented an issue of contract interpretation. Analyzing the arbitration clauses, which were silent on whether the availability of class arbitration was reserved for the arbitrators, the court determined that certain features of the clauses suggested that the issue was arbitrable, but ambiguity remained. Ultimately, the court found two principles dispositive. First, under state and federal law, all doubts concerning allocation of a matter to arbitration or the courts are resolved in favor of arbitration. Second, ambiguities in contracts are construed against their drafters, and here the contract was one of adhesion drafted by the employer, who wanted the issue resolved by the courts. Thus, the employer should not benefit from the ambiguity in the contract by having the issue decided by the courts. As a matter of state contract law, the court thus found that the parties’ arbitration agreement allocated the decision on the availability of class arbitration to the arbitrator.
The court also considered and rejected arguments that California law and federal law contained presumptions requiring the class arbitration availability question to be allocated to the courts. After concluding that state law contained no such presumption, the Court considered whether the Federal Arbitration Act (“FAA”), which would preempt state law, imposed a presumption mandating that the court decide the availability of class arbitration. The court held that the FAA does not impose such an “anti-arbitral presumption.”
In support, the court relied on the United States Supreme Court’s decision in Green Tree Financial Inc. v. Bazzle. In Bazzle, a plurality determined the parties’ agreement allocated the class availability question to the arbitrator, explaining that nothing in the FAA subjects the “who decides” question to any contrary pro-court assumption. Accordingly, the plurality concluded, “this matter of contract interpretation should be for the arbitrator, not the courts, to decide.”
Citing Bazzle, the California Supreme Court held that the question of class arbitration availability does not fall within the narrow scope of gateway questions of arbitrability subject to a pro-court presumption. Rather, it is a procedural question affecting the manner in which an arbitration is to be conducted, and thus presumptively for an arbitrator to decide. The court thus concluded that neither state nor federal law contains a presumption that would disturb the court’s decision that the “who decides” class arbitration availability question must be made on a case-by-case basis based on the language of the parties’ agreement.
The implication of this case for parties seeking to avoid class arbitration is simple: arbitration agreements must not be silent. First, they should expressly waive the power to bring class actions and class action arbitrations. Second, the arbitration agreement should clearly allocate the power to decide the availability of class arbitration to either a court or an arbitrator.