A clause delegating to an arbitrator the authority to decide questions of an arbitration agreement’s enforceability was not unconscionable under California law, the California Court of Appeal has ruled. Malone v. Superior Court, No. B253891 (Cal. Ct. App. June 17, 2014). 

The Court affirmed an order enforcing the delegation clause and compelling arbitration. Significantly, the Court rejected, as preempted by the Federal Arbitration Act (“FAA”), California case law reasoning that such delegation clauses are unconscionable because arbitrators have a financial self-interest in finding an agreement arbitrable — so that they can be compensated for arbitrating the dispute on the merits and be considered for further arbitration assignments. 

Background 

Keeya Malone worked for California Bank & Trust (“CB&T”) from July 2007 to November 2010. CB&T’s employee handbook included a provision requiring binding arbitration of any “controversy or claim arising out of” Malone’s employment. The arbitration provision also stated, “The arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.”

Following her termination from employment, Malone sued CB&T for alleged violations of the California Labor Code. CB&T asked the trial court to compel arbitration. Malone argued against this, saying the arbitration provision was unconscionable. CB&T contended that questions of enforceability were delegated to the arbitrator. Malone countered that the delegation clause was unenforceable and relied exclusively on prior California case law. The trial court ruled Malone’s reliance was misplace as those cases were no longer good law following the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Malone appealed.

Applicable Law

Arbitration agreements are enforced according to their terms, in the same manner as other contracts. The FAA’s “saving clause” permits revocation of an arbitration agreement if “generally applicable contract defenses, such as fraud, duress, or unconscionability” apply. In Concepcion, the U.S. Supreme Court addressed whether the FAA prohibited California’s rule conditioning the enforceability of certain consumer arbitration agreements on the availability of class-wide arbitration procedures. It found that, although the savings clause preserved generally applicable contract defenses, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” Therefore, the Supreme Court overruled California’s rule, finding it interfered with the FAA’s overarching purpose: “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”

In California, parties to a contract may agree to delegate to an arbitrator questions on the enforceability of the agreement as long as the language of the clause is clear and unmistakable. The delegation clause also must not be revocable under state contract law, e.g., for fraud, duress or unconscionability. Where an arbitration agreement contains a delegation clause, courts may consider challenges to the clause itself; however, the arbitrator retains the authority to consider challenges to the agreement as a whole. To challenge a delegation clause as unconscionable, the party must show the clause was both procedurally and substantively unconscionable, with the “former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.” 

Delegation Effective

Malone argued that prior California case law dictates that the delegation clause was unconscionable because it was outside the reasonable expectation of the parties, was not bilateral, and the arbitrator had an interest in finding the agreement arbitrable so that he would be compensated for arbitrating the dispute on the merits and be considered for further arbitration assignments. The appellate court rejected Malone’s arguments.

The Court found the delegation clause properly was bilateral (i.e., applied to both parties) as it authorized the arbitrator to address all issues relating to the “interpretation, applicability, or enforceability” of the arbitration provision. It could not be argued that this applied only to Malone, the Court said.

On whether an arbitrator’s alleged self-interest renders a delegation clause unconscionable, the Court declared that such reasoning ran afoul of the FAA. It stated, “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.” The Court disagreed with the view that arbitrators necessarily would rule in favor of employers on delegation because employers were “repeat players.” It said, “The analysis discriminates against arbitration, putting agreements to arbitrate on a lesser footing than agreements to select any judicial forum for dispute resolution, and it is therefore preempted [by the FAA].”

Finally, the Court said that although the delegation clause was presented on a take-it-or-leave-it basis, it nevertheless found that the clause was not substantively unconscionable and delegation was not inherently unfair or unilateral. It was clear and not hidden “in fine print in a prolix form” and did not “shock the conscience.” Consequently, the Court concluded the delegation clause was not unconscionable and affirmed the order compelling arbitration.

***

Together with the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, this case provides employers with persuasive support to enforce employment arbitration agreements, including those with properly drafted delegation clauses. (For more on Iskanian, see our article, California High Court: Class Action Waivers in Arbitration Valid, But Waivers of Representative Actions under State Law Are Not.)