On June 25, 2014, in Sandquist v. Lebo Automotive, Inc., Case No. B244412 (Cal. App. Ct. June 25, 2014), the California Court Of Appeal for the Second Appellate District reversed a trial court’s order dismissing class claims with prejudice, holding that whether the parties agreed to class arbitration was an issue that should be decided by the arbitrator, not the trial court.

This decision is a reminder for employers to include an express prohibition on arbitration of class action claims in their arbitration agreements. Otherwise, employers may find themselves arguing the arbitrability of class claims in front of an arbitrator, not a court.

Factual Background

Plaintiff Timothy Sandquist filed suit on behalf of a putative class of people of non-European descent, or “employees of color,” in 2012 against Lebo Automotive, Inc. (“Lebo”) alleging violations of California’s Fair Employment and Housing Act and Unfair Competition Law. Id. at 3-4. Sandquist sought damages as well as injunctive and declaratory relief. Id. at 4.

After the suit was filed, Lebo filed a motion to compel arbitration pursuant to multiple arbitration agreements Sandquist entered into with Lebo at the start of his employment. Id. at 5. Notably, the arbitration agreements at issue were silent on the permissibility of class arbitration. Id. 

On August 14, 2012, the trial court granted Lebo’s motion (“August 14th Order”). The trial court also dismissed Sandquist’s class allegations without prejudice, finding that since Sandquist was subject to individual arbitration, there is no longer a class representative. Id. at 5. The trial court gave plaintiff 60 days to amend the complaint to bring forth a class representative, noting if plaintiff failed to do so, defendant could request dismissal of the case with prejudice. Id. 

Plaintiff was unable to find any Lebo employee that had not entered into the same arbitration agreements as Sandquist, and thus on October 5, 2012, the trial court dismissed the class claims with prejudice (“October 5th Order”). Id. at 6.

Sandquist appealed the August 14th Order, but did not include a notice of appeal of the October 5th Order.

The Appellate Court’s Ruling

The Appellate Court first held that under the “death knell” doctrine—a doctrine which allows a plaintiff to appeal any order that is “tantamount to a dismissal of the action as to all members of the class other than the plaintiff”—the October 5th Order was appealable. Id. at 9. The Appellate Court noted that although the August 14th Order compelling arbitration was not appealable because it did not finally terminate the class claims, it was clear that Sandquist intended to appeal the underlying judgment, i.e., the October 5th Order. Id. 

The Appellate Court next held that the arbitrator, not the trial court, should determine whether the arbitration agreement entered into between Sandquist and Lebo provides for class arbitration. Id. at 15. The Appellate Court, citing Howsam v. Dean Witter ReynoldsInc., 537 U.S. 79 (2002), distinguished between situations where contracting parties would likely have expected a trial court to decide the gateway matter, such as the issue of whether the parties are bound by a given arbitration clause, and situations where the parties would not likely expect that an arbitrator would decide the gateway matter, such as procedural questions which grow out of the dispute and bear on its final disposition. Id. at 11. The Appellate Court stated that only in the former can a trial court decide the gateway matter. Id. 

The Appellate Court then noted that the U.S. Supreme Court has yet to determine whether the issue of class arbitration, when an arbitration agreement is silent on the issue, is a gateway question for the court or for the arbitrator. The Appellate Court elected to follow the reasoning of a plurality of four justices in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003). Id. at 11-12. Citing Bazzle, the Appellate Court concluded that when an arbitration agreement is silent on class arbitration, but where the parties agreed to submit “all disputes, claims or controversies arising from or relating to this contract” to the arbitrator, the arbitrator decides whether the agreement precludes class arbitration. Id. The Appellate Court noted that this ruling is consistent the idea that a class action is a procedural device, which underHowsam is presumptively “not for the judge but for the arbitrator to decide.”  Id.at 13.

Implications For Employers

The Lebo decision is an important one for employers as it shows that an arbitrator, with limited judicial review, may decide the issue of whether class claims can be arbitrated if the employer’s arbitration agreement is silent on the issue.  Accordingly, employers should ensure that their arbitration agreements are clear and leave no procedural issues, especially class arbitration, up for interpretation.