An employer did not waive its right to enforce an arbitration agreement by waiting to request arbitration until after the U.S. Supreme Court has issued a decision addressing the enforceability of class action waivers in arbitration agreements, the California Court of Appeal has ruled.  Reyes v. Liberman Broadcasting, Inc., No. B235211 (Cal. Ct. App. Aug. 31, 2012).  Significantly, the Court found the employer did not waive its right to arbitration because it had reasonably concluded it could not have enforce the agreement under the then-current state of California law and could have been subjected to class arbitration.

Background

Jesus Reyes worked as a security officer for Liberman Broadcasting, Inc.  He signed an agreement to arbitrate all claims arising out of his employment.  The agreement did not contain a class arbitration waiver or expressly authorize class arbitration.  In May 2010, Reyes, on behalf of himself and a class of other employees, sued LBI for alleged wage and hour violations.  In June 2011, one month after the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), requiring enforcement of (consumer) arbitration agreements under the Federal Arbitration Act despite the presence of class action waivers in violation of California contract law, LBI asked the trial court to compel arbitration; the trial court denied the request, finding that LBI had waived its right to arbitration by failing to timely assert it.  LBI appealed.

Applicable Law

Section 2 of the Federal Arbitration Act makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  The U.S. Supreme Court in Concepcion said that arbitration agreements are enforced according to their terms, in the same manner as other contracts. However, the Court explained, the FAA’s “savings 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 found California’s rule conditioning the enforceability of certain consumer arbitration agreements on the availability of class-wide arbitration procedures set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148, 153 (2005), preempted by the FAA.  The Supreme Court 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.”  On this basis, the Supreme Court overruled Discover Bank as preempted because the rule 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 Gentry v. Superior Court, 42 Cal. 4th 443 (2007), the California Supreme Court applied the principles in Discover Bank to address whether a class action waiver in an employment arbitration agreement was enforceable.  The California Supreme Court held that, under certain circumstances, a trial court must invalidate a class action waiver if it determines that class arbitration is “likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”  California law remains unsettled regarding whether Concepcion overruled Gentry.

Did Not Waive Right to Compel Arbitration

In Reyes, the Court found that LBI did not waive its right to compel arbitration.  It first noted that the agreement did not expressly provide for class arbitration, and an agreement could not be implied from its terms.  To the contrary, the agreement provided only for the arbitration of the employee’s claims related to his employment. Further, he did not present any evidence of any intent by the parties to provide for class arbitration.  Therefore, the Court held that, because the agreement’s plain language provided only for the individual arbitration, it did not authorize class arbitration.  Thus, LBI’s failure to seek arbitration was not inconsistent with the agreement’s language.

Further, based on the state of California law at the time Reyes filed his complaint, LBI reasonably concluded that it would have been futile to try to compel arbitration individually.  Indeed, LBI faced the significant risk that it could have been forced, under Gentry, to arbitrate the employee’s claims in class arbitration.  That risk diminished substantially after Concepcion.  Accordingly, the Court concluded that LBI did not act inconsistently with a right to arbitrate by delaying its motion to compel until after Concepcion

The Court also noted that the “machinery of litigation” had not been substantially invoked so as to render LBI’s motion untimely.  The parties had engaged in limited discovery. The employee also did not show that he was prejudiced as a result of the delay; indeed, the parties spent much of their first year in litigation attempting to resolve the case.  Thus, the Court reversed the trial court’s order denying LBI’s motion to compel arbitration.

Implications

Reyes confirms that issues surrounding the enforceability of employment arbitration agreements in California continue to evolve.  Employers should consult with their legal counsel when reviewing the enforceability of arbitration agreements.