Network Capital Funding Corp. v. Papke, No. G049172 (October 9, 2014): A California Court of Appeal recently held that absent “clear and unmistakable” language in an arbitration agreement authorizing an arbitrator to decide threshold questions like arbitrability, the courts should decide such issues. The court also held that an arbitration agreement that was silent on class arbitration and representative actions cannot be interpreted to authorize class arbitration without other evidence of the parties’ intent.

Erik Papke was hired by Network Capital Funding Corporation in 2011. At the time of hiring, he signed an arbitration agreement that required the parties to use binding arbitration to resolve “all disputes that may arise out of or be related to employment in any way.” In 2013, Papke initiated arbitration proceedings against Network Capital and demanded class arbitration on behalf of himself and similarly situated employees for alleged wage and hour violations. Network Capital filed an action in district court to compel Papke to arbitrate his claims on an individual basis. In turn, Papke asked the trial judge to require that the parties go before an arbitrator, not the courts, to resolve the issue of whether the agreement authorized class arbitration.

The trial court found that the dispute over class arbitration should be decided by the courts, not the arbitrator. It also ruled that the parties did not agree to class arbitration since the agreement was silent on the issue of class arbitration and representative actions. Papke appealed.

The Court of Appeal first examined the question of whether the courts or the arbitrator should determine if the agreement authorized class arbitration. It held that unless there is a “clear and unmistakable” agreement assigning the power to an arbitrator, there is a presumption that the courts will resolve these types of threshold questions. The court then examined whether the agreement allowed class arbitration. The court held that without any other evidence showing the parties’ intent to agree to class arbitration, an agreement that is silent cannot be interpreted as authorizing class arbitration. 

According to Rafael G. Nendel-Flores, a shareholder in the Orange County office of Ogletree Deakins: “The issue of whether the court or the arbitrator gets to decide if an arbitration agreement authorizes class arbitration is of critical importance to employers. Understandably, many employers are concerned that arbitrators will be much less likely than courts to rule that an arbitration agreement does not authorize class arbitration. In turn, the California Court of Appeal in Papke had to decide whether the class arbitration question is an arbitrability/gateway issue which is presumptively for the court to decide or merely a procedural issue which is presumptively for the arbitrator to decide. The Papke court concluded that the class arbitration question is a gateway issue because it addresses what claims the parties did and did not agree to arbitrate. All in all, this is an excellent result for employers.”

Nendel-Flores noted, “However, the overall state of the law on this issue remains in flux. The Supreme Court of the United States has not issued a binding decision on this issue. Instead, in Green Tree Financial Corp. v. Bazzle (2003), a mere plurality of justices opined that the class arbitration question is merely a procedural issue that is for the arbitrator to decide. However, the U.S. Courts of Appeal for the Third and Sixth Circuits have ruled that the class arbitration question is for the court to decide. [See, Opalinski v. Robert Half Intern. Inc. (3rd Cir. 2014) 761 F.3d 326; Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett (6th Cir. 2013) 734 F.3d 594.] Further confusing issues, a different California Court of Appeal held earlier this year in Sandquist v. Lebo Automotive, Inc. (2014) that it was an issue for the arbitrator.” 

“The bottom line is that, while Papke is a good decision for employers, it is unlikely to be the last word from California’s appellate courts on this issue,” added Nendel-Flores. “For employers that wish to avoid class wide arbitration, a key take away is to consider implementing express class action waivers so as to avoid the arbitrability issue versus procedural issue dichotomy.”