California continued its ongoing debate on arbitrations and class actions this week when its Supreme Court held that in some cases an arbitrator, not the court, must decide whether an arbitration agreement permits class-wide arbitration. This case is important because it rejects a universal rule on who should be the decision-maker in favor of a case-by-case analysis.
In Sandquist v. Lebo Automotive, Inc., No. S220812 (Cal. July 28, 2016), the California Supreme Court did not address the now familiar issue of whether an arbitration agreement permitted class arbitration. Instead, it examined a matter antecedent to that issue: who should decide whether an arbitration agreement permits or prohibits class-wide arbitration. The Court concluded that no universal rule allocates the decision to either arbitrators or courts. Instead, the decision must be made on a case-by-case basis after an examination of the arbitration agreement at issue.
The court placed heavy emphasis on the parties’ intent. It explained that “just as whether class arbitration is available depends on whether the parties agreed to allow or forbid it, so the question who has the power to decide the availability of class arbitration turns upon what the parties agreed about the allocation of that power.” Accordingly, the court first examined the parties’ agreements to determine what they said regarding the “who decides” question.
The court determined the agreements at hand were ambiguous. It thus turned to general principles of contractual and arbitration clause interpretation. But before it could make this inquiry, it was required to answer the classic question—which principles apply, state or federal?
The court concluded that California contract and arbitration law should apply. The court also considered and rejected a potential preemptive effect of the Federal Arbitration Act (FAA) that could have mandated that the court consider the availability of class-wide arbitration. The court found that the FAA contained no such presumption.
In support, the court relied on the United States Supreme Court’s decision in Green Tree Financial Inc. v. Bazzle. In Green Tree, a plurality determined the parties’ agreement allocated the class availability question to the arbitrator, explaining that nothing in the FAA subjects the “who decides” question to any contrary pro-court assumption. Accordingly, the plurality concluded, “this matter of contract interpretation should be for the arbitrator, not the courts, to decide.”
The California Supreme Court followed the Green Tree plurality’s reasoning and held that the question of class arbitration availability does not fall within the narrow class of questions subject to a pro-court presumption. It thus concluded that the decision must be made on a case-by-case basis based on the language of the agreement.
The implication of this case is simple: arbitration agreements must not be silent. First, they should clearly and conspicuously waive the power to bring class action arbitrations. This will make the decision for whichever decision-maker addresses the issue an easy one. Second, the arbitration agreement should clearly allocate the power to decide the issues of class arbitration to either a court or an arbitrator. Given the procedural protections and power of juridical review, the power to decide the availability of class wide arbitration should often be allocated to the court. This approach is also consistent with the weight of federal authority. Stay tuned to this space for further developments that may lead to further refinements to arbitration agreements.