Why it matters

An arbitrator—and not the court—should decide if an arbitration agreement between an employer and a former employee prohibits class claims, a California appellate panel recently ruled. Erik Papke initiated arbitration proceedings against his former employer, alleging violations of state and federal wage laws. Network Capital responded with a declaratory judgment action, asking the court to declare that pursuant to the arbitration agreement signed by Papke in 2011, he could not pursue a class effort and must individually arbitrate his claims. A trial court judge agreed, but the appellate panel reversed, analogizing to the California Supreme Court’s decision in Sandquist v. Lebo Automotive. “Based on the striking similarities between the arbitration agreement Papke signed with Network Capital and the arbitration agreements in Sandquist, the California Supreme Court’s analysis in Sandquist applies with equal force here and compels us to conclude the arbitrator must decide the class arbitration question in this case,” the court wrote.

Detailed discussion

Erik Papke began working for Network Capital Funding Corp. in October 2011, when he signed the “Employment Acknowledgment and Agreement.” The agreement contained a binding arbitration agreement, wherein Papke agreed to “resolve all disputes that may arise out of or be related to my employment in any way.”

In June 2013, Papke initiated arbitration proceedings against Network Capital by serving a demand for class arbitration. He alleged wage and hour claims under the Labor Code and Unfair Competition Law, later amending his demand to add a representative claim under the Private Attorneys General Act.

Network Capital informed Papke that the arbitration agreement did not authorize class arbitration and told him that the trial court needed to resolve any disagreement over the availability of class arbitration—not the arbitrator. Papke disagreed.

The employer then sought a judicial declaration that it was the court’s responsibility to decide whether the arbitration agreement authorized class arbitration and, further, that the agreement prohibited class arbitration. Siding with Network Capital, the trial court said the issue of whether the agreement permits class arbitration was for the court and then held that the agreement required Papke to proceed as an individual.

Initially, the appellate panel affirmed and Papke appealed to the California Supreme Court. However, the state’s highest court held the case pending its decision in Sandquist v. Lebo Automotive, then under consideration.

In that case, the California Supreme Court concluded that no universal rule exists allocating the decision of whether the parties’ arbitration agreement authorizes class arbitration to the court or to the arbitrator. Instead, the allocation of that decision is a matter of agreement between the parties, and each case turns on whom the parties assigned that decision to under the terms of their contract.

The state’s highest court then remanded the instant dispute to the appellate panel, which changed course and reversed the trial court, finding that the language of the agreement signed by Papke closely tracked the agreement in Sandquist.

“[W]e conclude the arbitration agreement between Papke and Network is strikingly similar to the arbitration agreements at issue in Sandquist, and therefore the Supreme Court’s reasoning compels the conclusion the arbitration agreement here allocated to the arbitrator the decision whether Papke and Network Capital agreed to class arbitration,” the court said.

For example, the arbitration agreements in Sandquist required arbitration of “any claim, dispute, and/or controversy,” while the agreement Papke signed applied to “any claim, dispute, and/or controversy that either [Papke] may have against [Network Capital]” or vice versa.

In addition, the Sandquist agreements applied to all claims “arising from, related to, or having any relationship or connection whatsoever with [the employee] seeking employment with, employment by, or other association with the [employer],” and Papke’s agreement governed “all disputes that may arise out of or be related to [Papke’s] employment in any way.”

Both of the employees signed form contracts that were drafted by the employer and imposed on the employee as a condition of his employment, and the agreements made similar exceptions for claims arising under the National Labor Relations Act brought before the National Labor Relations Board as well as claims for medical and disability benefits under the California Workers’ Compensation Act.

“Given these similarities, we see no basis for distinguishing Sandquist and concluding the Arbitration Agreement allocates the Class Arbitration Question to the court, not the arbitrator,” the panel wrote.

Network Capital attempted without success to distinguish Papke’s agreement from those in Sandquist, pointing out that the agreement used the singular possessive “my” to limit claims arising out of Papke’s employment only. The agreement in Sandquist also used the term “my,” the court said. “Moreover, class claims that Papke alleges as a class representative necessarily arise out of or relate to his employment because he cannot allege or pursue the claims unless he, as an individual, has claims that are typical of the class.”

As a result of the conclusion that the arbitrator should decide whether the parties agreed to class arbitration, the panel did not reach the issue of whether Papke and Network Capital actually agreed to class arbitration, remanding with directions for the trial court to grant Papke’s motion to compel arbitration.

To read the opinion in Network Capital Funding Corporation v. Papke, click here.