The California Supreme Court in a 4-3 decision vacated an arbitration award and provided further clarification regarding mandatory, pre-dispute employment arbitration agreements and the scope of judicial review of arbitration awards. Pearson Dental Supplies, Inc. v. Sup. Ct (Turcios), No. S167169 (April 26, 2010). The key aspects of the ruling are:

  • The court recognized an exception to the general rule that an arbitration award cannot be vacated based on an error of law and held that an award may be vacated if an arbitrator's clear error of law deprives an employee of unwaivable statutory rights (in this case, the arbitrator's procedural error deprived the employee of his right to a hearing on the merits of his FEHA claim in any forum);
  • Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83 (2000) requires a written arbitration decision that contains, at a minimum, a brief explanation of the reasoning sufficient to allow for judicial review; and
  • While an arbitration agreement cannot preclude an employee from filing claims with prosecutorial agencies (such as the EEOC or DFEH), it may preclude the filing of claims with adjudicative agencies (such as the Labor Commissioner).

Background

Luis Turcios signed an arbitration agreement requiring him to submit any disputes to arbitration within a one-year statute of limitations. Turcios was terminated on January 31, 2006, and on October 2, 2006 he filed a lawsuit alleging age discrimination in violation of FEHA. Pearson Dental filed a motion to compel arbitration in March 2007, which was granted. The arbitrator issued a written decision granting Pearson Dental's motion for summary judgment holding that the claim was time barred. Turcios had argued that the one-year contractual time limit was unconscionable and rendered the entire arbitration agreement unenforceable, but even if it were enforceable, his claim was timely because the time was tolled under Civ. Code § 1281.12 while his claim was pending in court. The trial court vacated the arbitration award on the ground the arbitrator exceeded his authority by misapplying the tolling statute. The Court of Appeal reversed, holding that an error of law is not a basis for vacating an award.

Legal Analysis

The California Supreme Court affirmed the order vacating the arbitration award. The two issues presented on appeal were: (1) what standard of judicial review should a trial court employ to ensure that an employee's antidiscrimination claim brought under the FEHA is adequately protected when arbitrated pursuant to a mandatory arbitration agreement and (2) is a mandatory employment arbitration agreement restricting an employee from seeking administrative remedies for violations of FEHA unlawful?

As to the first issue, the California Arbitration Act (CAA) permits a court to vacate arbitration awards only in limited circumstances, including if arbitrators exceed their power. The court reemphasized the limited nature of judicial review of arbitration awards and the general rule that an arbitrator does not exceed his authority merely because the decision contains an error of law. However, the court carved out an exception, holding that the scope of review is greater in the case of a mandatory employment arbitration agreement that encompasses unwaivable statutory rights; an award may be vacated where, as here, the arbitrator made a clear error of law that deprives an employee of a hearing on the merits of his FEHA statutory claim. The Court relied on Armendariz, which sets forth the minimum requirements for agreements to arbitrate FEHA claims, including a written decision and judicial review sufficient to ensure that the arbitrator complied with the FEHA (the court also noted that the decision did not comply with Armendariz because it failed to explain why the tolling statute did not apply). Significantly, the carve-out is one sided, allowing for judicial review in favor of the employee, but not the employer. The majority also rejected the possibility, raised by the dissent, that the Federal Arbitration Act (FAA), which generally preempts state laws disfavoring arbitration, would preempt judicial review under the CAA of an arbitration award on these facts. Pearson Dental, or a future employer, could seek review in the US Supreme Court on this ground.

With respect to the second question, the court held that while an arbitration agreement cannot lawfully prevent an employee from submitting claims to prosecutorial agencies, such as the EEOC or DFEH, it may lawfully preclude an employee from submitting claims to agencies that perform adjudicative functions, such as the California Labor Commissioner.

Finally, the court did not reach the issue of whether the one-year contractual statute of limitations rendered the entire agreement unconscionable and therefore unenforceable. Significantly, the Court of Appeal had rejected that argument, leaving this issue open.

Practical Implications

The court reaffirmed the enforceability of agreements to arbitrate FEHA claims that comply with the Armendariz requirements and held that arbitration agreements may prohibit employees from submitting claims to adjudicative agencies. However, the expansion of judicial review reduces some of the benefits of arbitration because it may prolong the process and increase the costs. The dissent characterized the ruling as an "unprecedented move to judicialize the arbitration process" which will "significantly undermine the strong public policy favoring arbitration as a fair, quick and inexpensive means of resolving disputes."

The impact may be narrow in that the case appears to be limited to clear errors of law that deprive an employee of a hearing on the merits of an unwaivable statutory claim. It is unclear whether arbitration decisions that contain errors of law impacting unwaivable statutory rights but do not deprive the employee of a hearing on those rights will be subject to judicial review. On April 27, 2010, the U.S. Supreme Court vacated an arbitration award in a non-employment case under the FAA on the ground the arbitrator exceeded his authority in relying on his own notions of public policy rather than the applicable statutes and law. Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. U.S., No. 08-1198 (April 27, 2010) (see Gibson Dunn Alert, May 3, 2010). While that holding is also narrow, it is another example of increased judicial review of arbitration decisions.