Why it matters: When an arbitration agreement is silent, should an arbitrator or the court determine whether class arbitration is appropriate? A new decision from the California Court of Appeal found that the court should decide. A former employee alleged wage and hour violations, demanding class arbitration pursuant to his employment agreement. The employer responded with a declaratory judgment action, arguing that the agreement itself was silent as to whether class arbitration was allowed and asking for a court’s interpretation. The appellate panel agreed with the employer, writing that “[d]eciding whether the parties’ arbitration agreement authorizes class arbitration does not simply determine what arbitration procedures the parties agreed to use, but rather whose claims the parties agreed to arbitrate.” When drafting arbitration agreements, employers should keep in mind that the panel determined that absent a “clear and unmistakable” intent in the agreement to have the arbitrator answer the question of whether class arbitration is allowed, the trial court should make the decision.

Detailed Discussion

When he was hired by Network Capital Funding in October 2011, Erik Papke signed an employment agreement that included an arbitration provision requiring the parties to “utilize binding arbitration to resolve all disputes that may arise out of or be related to [his] employment in any way.”

The agreement also stated: “Both the Company and I agree that any claim, dispute, and/or controversy that either I may have against the Company . . . or the Company may have against me, shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act . . . Included within the scope of this Agreement are all disputes, whether based on tort, contract, statute . . . , equitable law, or otherwise. The only exception to the requirement of binding arbitration shall be for claims arising under the National Labor Relations Act which are brought before the National Labor Relations Board, claims for medical and disability benefits under the California Workers’ Compensation Act, Employment Development Department Claims, or as may otherwise be required by state or federal law.”

In June 2013, Papke served a demand on Network Capital for class arbitration based on allegations of wage and hour violations under the state’s labor code. The employer informed Papke that the agreement did not authorize class arbitration and that any disagreement about the issue must be resolved by a trial court, not an arbitrator.

When Papke disagreed, Network Capital filed a declaratory judgment action. A trial court ruled not only that a court should determine the question of whether class arbitration was permitted but also went on to hold that the agreement at issue did not permit classwide claims for arbitration.

Emphasizing that arbitration is “a matter of consent, not coercion,” the appellate panel said that in the absence of “clear and unmistakable” agreement to the contrary, “it is presumed the parties to an arbitration agreement intended the court, rather than the arbitrator, to decide whether they agreed to submit a particular dispute to arbitration.”

Alternatively, questions of a procedural nature – those that grow out of the parties’ dispute and bear on its final disposition, such as whether the claimant satisfied all prerequisites to arbitration established by the parties’ agreement, a contention that the statute of limitations has expired, or allegations of waiver or delay – are presumptively not for a judge but an arbitrator to decide.

“Here, the Arbitration Agreement’s express terms do not mention class arbitration nor do they submit arbitrability questions to the arbitrator for resolution,” the panel wrote. “Instead, the Arbitration Agreement simply requires Papke and Network Capital to arbitrate ‘any claim, dispute, and/or controversy’ they have with one another, except for a few specialized claims not applicable here. This ambiguous language is not a clear and unmistakable statement Papke and Network Capital intended the arbitrator to decide whether they agreed to class arbitration.”

The Federal Arbitration Act’s strong policy in favor of enforcing arbitration agreements “only applies to whether a particular dispute is covered by an arbitration agreement, that is, to arbitrability questions,” the court explained. “That presumption does not apply to the threshold question of who decides whether a particular dispute is covered by an arbitration agreement.”

Reviewing case law on the issue, the panel declined to follow the plurality opinion of the U.S. Supreme Court in Green Tree Financial Corp. v. Bazzle, instead electing to track decisions from the Third and Sixth U.S. Circuit Courts.

Fundamental differences exist between class and individual arbitration, the court said. A class arbitration award adjudicates not only the rights of the parties to the arbitration agreement but the rights of absent parties, class arbitration proceedings are much more formal and do not provide the time and cost savings that prompt parties to agree to arbitration, and class arbitration requires the arbitrator to resolve not a single dispute between the parties to a single agreement but rather disputes involving hundreds or thousands of parties.

“We find these fundamental differences to be highly relevant because they show the class arbitration question does not grow out of the parties’ dispute relief and does not bear on the dispute’s final resolution,” the panel said. The class arbitration question “involves the scope of the parties’ arbitration agreement because it requires the decisionmaker to determine whose claims the parties agreed to arbitrate—only the named plaintiff’s claims against the defendant, or the claims of numerous other absent, but similarly-situated claimants against the defendant.”

The issue of the decisionmaker is also “a question of arbitrability because contracting parties would likely and reasonably expect a court to decide the question,” the panel added. “Indeed, when the class arbitration question is properly viewed as asking whose claims the parties agreed to arbitrate, allowing the arbitrator to decide the question without clear and unmistakable evidence the parties intended the arbitrator to decide it ‘might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.’ Allowing an arbitrator to decide this issue threatens the consensual nature of arbitration and the rule that parties may be compelled to arbitrate only those issues they agreed to arbitrate.”

Having concluded that the issue should rightfully be determined by the court, the panel turned to the agreement at issue and found it did not authorize class arbitration.

“Here, the Arbitration Agreement is silent as to class arbitration because the agreement neither expressly authorizes nor prohibits class arbitration, and therefore Papke must point to some other contractual basis for concluding the parties agreed to class arbitration,” the court said.

Although Papke pointed to the broad language of the agreement requiring the parties to submit “any claim, dispute, and/or controversy” to arbitration, the court said that was insufficient. “Without some extrinsic evidence of the parties’ intent, Papke’s argument is nothing more than an argument the parties implicitly agreed to class arbitration,” the panel wrote.

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