Why it matters: An arbitrator should decide whether the parties agreed to allow class arbitration – not a judge, a California appellate court has ruled. In the case, which involved an employee at California Bank & Trust, the handbook at issue mandated binding arbitration of any “controversy or claim arising out” of employment. Pursuant to the handbook, the “arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding agreement.” Reviewing the state of case law addressing arbitration in California, the panel concluded that portions of prior opinions finding delegation clauses unconscionable were no longer viable and that the remaining good law in the cases was insufficient to find the agreement at issue unconscionable. Notably, the court said the former employee’s contention that the delegation clause was unconscionable because arbitrators have a financial interest in finding an agreement arbitrable “discriminates against arbitration, putting agreements to arbitrate on a lesser footing than agreements to select any judicial forum for dispute resolution, and is therefore preempted” by the Federal Arbitration Act (FAA). Employers seeking to uphold arbitration agreements will find much to like in the unanimous decision.

Detailed Discussion

A “wires specialist” at California Bank & Trust, Keeya Malone began working for the financial institution in 2007. At the time, she accepted an employee handbook that contained an arbitration agreement providing for mandatory binding arbitration of “[a]ny legal controversy or claim arising out of” employment.

Governed by the FAA, the agreement also contained a delegation clause providing that “The arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.”

After Malone was terminated, she brought a class action wage and hour action against the bank. Relying on the agreement, the bank moved to compel individual arbitration.

Malone argued that the delegation clause itself (as well as the agreement as a whole) was unconscionable. She relied upon three cases from the California appellate courts: Murphy v. Check ‘N Go of California, Bruni v. Didion, and Ontiveros v. DHL Express.  

Concluding that portions of the decisions – from 2007 and 2008 – were no longer good law in light of the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, the unanimous panel disagreed. Further, even the law that remained valid from those decisions was insufficient to find the delegation clause unconscionable.

The court reviewed the three California decisions that rejected delegation clauses for three reasons: they were not bilateral, the clause was outside the reasonable expectations of the parties, and the potential for an arbitrator’s self-interest.

The argument regarding an arbitrator’s financial self-interest was preempted by the FAA, the court said, while the bilateral argument was inapplicable to Malone’s agreement. The remaining argument, that the delegation clause was outside the reasonable expectation of the parties, “standing alone, is not sufficient to render the clause unconscionable,” the court said.

Addressing FAA preemption, the court noted that Concepcion emphasized the judicial commitment to treating arbitration agreements as no less than any other contracts. Therefore, the argument that an arbitrator would be more likely to rule in favor of enforceability so that the arbitrator would then be paid to resolve the dispute on the merits is “based on a belief that an arbitrator would be more likely to rule on enforceability issues in favor of a ‘repeat player’ who would have further business for an arbitrator,” the court said.

“This analysis is nothing more than an expression of a judicial hostility to arbitration, based on the assumption that a paid decisionmaker cannot be unbiased, and it, therefore, is wholly barred by the FAA,” the panel wrote. “Indeed, taken to its logical conclusion, this analysis of bias questions the objectivity of arbitrators as a whole, as the very same argument can be made that an arbitrator will tend to rule on the merits in favor of an employer who is a ‘repeat player,’ as opposed to an employee who is not.”

The FAA prevents courts from accepting that view, the court said. With the delegation clause at issue not one-sided, the only remaining argument against arbitration was the fact that it was a contract of adhesion and not within the reasonable expectation of the parties.

“Even if this is true, it is not sufficient to establish unconscionability in the instant case,” the panel said. The clause was clear and unmistakable, not overly harsh or so one-sided as to shock the conscience, and not inherently unfair. The court affirmed the order to compel arbitration, permitting the arbitrator to resolve Malone’s challenges to the validity and enforceability of the arbitration agreement as a whole.

To read the decision in Malone v. Superior Court, click here.