Why it matters: In the latest decision out of California addressing the issue of non-bilateral arbitration in the employment context, an appellate panel held that a judge should make the decision of whether classwide or representative arbitration is appropriate when the agreement itself is silent. An employer moved to compel individual arbitration when an employee filed a putative class action suit and a Private Attorney General Act (PAGA) claim alleging labor code violations. A trial court granted the motion to compel but ruled that the arbitrator should determine whether or not to hear the class and PAGA representative claims because the agreement itself was silent. The panel reversed. Characterizing the question as a “gateway issue,” the court said class and representative actions present more than just procedural differences from bilateral arbitration and therefore need to be decided by a judge.

Detailed Discussion

As an employee of Garden Fresh Restaurant Corporation from 2006 to 2013, Alicia Moreno signed two arbitration agreements. After she stopped working at the company, she filed a putative class action alleging various labor code violations, including the failure to pay overtime wages and the failure to provide accurate itemized wage statements. Her complaint included a representative claim pursuant to PAGA.

Garden Fresh moved to compel arbitration on an individual basis. A trial court split the difference, granting the motion to compel but referring the entire matter to the arbitrator. The appellate panel reached a contrary conclusion.

Emphasizing that arbitrators derive their powers from the parties’ voluntary submission of disputes for resolution in a nonjudicial forum, the court explained that arbitrators only have the power to decide an issue if the parties have authorized the arbitrator to do so.

Instead, “questions of arbitrability,” or “gateway issues,” must be decided by courts.

Although a plurality of the U.S. Supreme Court found that the availability of class arbitration is not a question of arbitrability in Green Tree Financial Corp. v. Bazzle, subsequent high court precedent has cast doubt on that position, the California appellate panel noted. Just last term, the Justices wrote in Oxford Health Plans LLC v. Sutter that they have “not yet decided whether the availability of class arbitration” is a question for a court or an arbitrator to resolve.

“Our reading of recent United States Supreme Court precedent persuades us that the availability of class and/or representative arbitrability is a question of arbitrability, and is therefore a gateway issue for a court to decide, in the absence of a clear indication that the parties intended otherwise, rather than a subsidiary one for an arbitrator to decide,” the panel concluded.

The shift from individual to class or representative arbitration “fundamentally changes the nature of the arbitration proceeding and significantly expands its scope,” the court wrote, and “the differences between bilateral and classwide arbitration are so significant that they may be classified as ‘fundamental.’ ”

For example, if the question of whether the parties agreed to class and/or representative arbitration were sent to an arbitrator, that decision would be unreviewable; if the matter proceeded to arbitration on a class or representative basis, the result of the “potentially high-stakes proceeding” would also be unreviewable, the court said. And a class or representative claim would make for a slower, costlier process, forfeiting the quick and cheap nature of arbitration.

Class and representative arbitration also raise “significant due process concerns,” the panel noted, with an arbitrator’s decision binding not just the parties to the arbitration agreement but potentially thousands of employees and, in the case of a PAGA representative action, the state as well.

Although the seminal California Supreme Court decision in Iskanian v. CLS Transportation carved out an exception for employees to bring PAGA claims in court, the panel said the holding did not provide direct guidance on the issue before it. The opinion raised a number of possible issues – including the possibility that a court could never compel arbitration of a PAGA claim unless the state entered into an arbitration agreement with the defendant – but the panel left it to the trial court to consider whether Moreno’s PAGA claim was arbitrable under the authority of Iskanian.

“Although a class and/or representative action has often been thought of as merely a procedural device, we interpret the United States Supreme Court’s analysis regarding the incompatibility of this procedural device with the attributes of arbitration as suggesting that the Supreme Court views the question whether anything other than simple, bilateral arbitration is available where the arbitration agreement between the parties is silent on the matter as being much more than a mere ‘procedural’ question,” the court wrote. “We therefore conclude that the question whether an arbitration agreement permits class and/or representative arbitration is a gateway issue, and is thus reserved ‘for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’ ”

The panel remanded the case to the trial court for a determination of whether the parties consented to class and/or representative arbitration, as well as the effect of Iskanian on Moreno’s PAGA claim.

To read the opinion in Garden Fresh Restaurant v. Superior Court of San Diego, click here.