Why it matters

Yet again, the California Supreme Court considered arbitration in the context of an employment agreement, this time reflecting on whether a judge or an arbitrator should decide whether class arbitration is available where the agreement is silent on the matter. Refusing to adopt a bright line test for who answers the question, the majority said courts must consider the contract at issue using state law principles of interpretation. Applying the standard to the case at bar—involving Timothy Sandquist, a worker at an auto dealership who filed a putative class action alleging racial discrimination—the 4-3 majority said the arbitrator should make the decision, as it involved a non-"gateway" question. A dissenting opinion countered that the majority misinterpreted U.S. Supreme Court precedent that class arbitration is not merely a matter of procedure but a fundamental gateway issue for the court to decide.

Detailed discussion

In 2000, Lebo Automotive hired Timothy Sandquist to work as a salesperson at a car dealership. On his first day of work, he received about 100 pages of preprinted forms with instructions to fill them out as quickly as possible so he could get to work. Among the documents were three different arbitration agreements. None of the agreements—which contained substantively similar language—included an express class action waiver.

Twelve years later, Sandquist sued his employer, alleging that he and other non-Caucasian employees were subjected to racial discrimination, harassment, and retaliation. The putative class action sought injunctive and declaratory relief as well as damages. Lebo responded with a motion to compel individual arbitration based on the agreements signed by Sandquist.

A trial court judge granted the motion, ruling that state law required the court to decide whether class arbitration was available and determining it was not. An appellate court disagreed that existing precedent compelled the trial court to decide the question of whether class arbitration was available and, after examining the issue, held that the arbitrator should decide.

Adding to its long history of considering arbitration in the context of employment agreements, the California Supreme Court granted review and found that no "universal one-size-fits-all rule allocates that question to one decision maker or the other in every case. Rather, 'who decides' is a matter of party agreement. … And 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."

The court began with an examination of the parties' agreements to determine what they said about the "who decides" question, siding with the employer that the review must be conducted through the prism of state law. The agreements at issue presented several features suggesting the "who decides" question was an arbitrable one, such as the "comprehensive" language covering a broad swatch of disputes or controversies and the fact the drafter of the agreements included a list of matters not for the arbitrator and failed to include a decisionmaker for class arbitration.

Given the lack of an express statement, however, the court moved on to other principles, including the parties' likely expectations about allocations of responsibility. Parties that enter into an arbitration agreement typically expect that their dispute will be resolved without necessity for any contact with the courts, the majority noted, relying on two other interpretive principles for support.

"First, under state law as under federal law, when the allocation of a matter to arbitration or the courts is uncertain, we resolve all doubts in favor of arbitration," the court said. "All else being equal, this presumption tips the scales in favor of allocating the class arbitration availability question to the arbitrator. Second, ambiguities in written agreements are to be construed against their drafters," in this case the employer.

No established contrary state law presumption allocating the class arbitration availability to a court existed and state law does not embrace a particular pro-court or pro-arbitrator presumption, the majority said. Turning to the Federal Arbitration Act (FAA), the court found nothing in the statute's text or its legislative history altering the conclusion made under state law.

Looking for guidance from the U.S. Supreme Court, the majority said it has only directly addressed the "who decides" issue once, in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), with the plurality in that case finding that nothing in the FAA subjects the question to any pro-court presumption. "The issue thus remains unresolved," the court said.

The justices have interpreted the FAA to impose two distinct presumptions, depending on the subject matter. Courts presume that the parties intend courts, not arbitrators, to decide disputes about whether an enforceable arbitration agreement exists or whether it applies to the dispute at hand, the Supreme Court has written, while arbitrators, and not courts, decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration.

Whether class arbitration is available falls into the latter category, the California Supreme Court said. "[T]he availability or unavailability of class arbitration has nothing to do with whether the parties agreed to arbitrate, either in general or with respect to a specific dispute," the court wrote. "Instead, the question is of the 'what kind of proceeding' sort that arises subsequent to the gateway issue of whether to have an arbitral proceeding at all."

Two other principles of FAA interpretation also weighed in favor of allocating the question to the arbitrator: the desire for expeditious results that motivates many an arbitration agreement and that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.

The court declined to follow decisions cited by the employer that determined the availability of classwide arbitration is a "gateway question" for the court, including opinions from the Third and Sixth Circuits, emphasizing that the distinction between gateway and non-gateway questions does not focus on the question's significance.

"We conclude no universal rule allocates this decision in all cases to either arbitrators or courts," the majority wrote. "Rather, who decides is in the first instance a matter of agreement, with the parties' agreement subject to interpretation under state contract law. Under state law, these parties' arbitration agreement allocates the decision to the arbitrator. Under federal arbitration law, no contrary presumption requires a different result, so the issue remains one for the arbitrator."

The three-justice dissent argued that the "who decides" question more properly belongs in the courts as a "gateway" question rather than a subsidiary one, drawing on U.S. Supreme Court decisions after Green Tree that have undermined the plurality's premise.

In one opinion, the justices wrote that "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator," the dissent noted, while another decision pointed out the differences between bilateral and class arbitration, such as a dramatic increase in the risk to defendants and the formality of the proceedings, making the process slower and more costly.

"If, because of the fundamental differences between bilateral and class arbitration, the court is unwilling to treat classwide arbitrability as a mere procedural matter—and thus unwilling to presume that parties' 'silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings'—it seems rather unlikely that the court would be willing to presume that the parties have consented to allow an arbitrator to make an essentially unreviewable determination to the same effect," the dissent argued. "That is particularly true because, as the court has emphasized, the decision is one that does not affect the named plaintiffs and defendant alone, but implicates whether other, absent plaintiffs will also be required to submit their claims to arbitration."

To read the opinion in Sandquist v. Lebo Automotive, click here.