United States: California Supreme Court Holds That Arbitrator, Not Court, Decides Whether Arbitration Agreements Permit Class-Wide Arbitration

Companies and other business entities often use arbitration agreements to protect themselves from class action liability. While these agreements may contain explicit class action waivers that state the parties agree not to pursue class claims in arbitration, an arbitration agreement may also contain an implicit or "silent" class action waiver. When presented with an agreement that contains such a provision, case law supports granting a motion to compel individual arbitration and dismissal of the class claims. See Kinecta Alternative Fin. Solutions, Inc. v. Super. Ct., 205 Cal.App.4th 506, 517 (2012) (dismissing class action allegations from complaint in light of bilateral arbitration agreement, which identified only two parties to the agreement and referred specifically to those parties).

However, an additional wrinkle to this analysis is the question of whether the court or the arbitrator decides whether the matter is subject to class arbitration when an arbitration agreement does not contain an express waiver of class claims. Prior case law has fluctuated on this issue. In Sandquist v. Lebo Automotive, Inc. (2014) 228 Cal.App.4th 65 (Sandquist I), the Court of Appeal held that whether the parties to an arbitration agreed to class arbitration is a question for the arbitrator, not the trial court. The court relied on the U.S. Supreme Court's plurality opinion in Green Tree Fin. Corp. v. Bazzle (2003) 539 U.S. 444, and reasoned that whether parties could pursue class claims in arbitration was a controversy arising from or relating to the subject arbitration agreement, which is within the arbitrator's purview to decide. On November 10, 2014, the California Supreme Court granted the petition for review filed in Sandquist I, which meant that the Court of Appeal's decision was de-published and no longer citable.

This left a contrasting Court of Appeal decision as the sole citable authority on this issue. In Garden Fresh Restaurant Corp. v. Superior Court (2014) 231 Cal.App.4th 678, the Court of Appeal reasoned that the determination of which forum decides if class arbitration may be had when the subject agreement does not contain an express waiver of class claims is a gateway question for a court to decide. The court further explained that if this issue was left for an arbitrator to decide, unwilling parties might too often be forced to arbitrate a matter they had not agreed to arbitrate.

However, on July 28, 2016, in a 4-3 decision the California Supreme Court affirmed the Sandquist I Court of Appeal's decision and held that, in this particular instance whether class-wide arbitration is permitted was a question for the arbitrator. Sandquist v. Lebo Automotive, Inc., et al. (July 28, 2016) No. S220812, 2016 Cal. LEXIS 6246, at *1.

The California Supreme Court's Decision

The Court began its analysis by assessing the terms of the arbitration agreements at issue, which the Court reasoned indicated that the parties intended for an arbitrator to decide the class arbitration issue because:

  1. The agreement to submit any claim, dispute, or controversy to an arbitrator suggested a choice to have an arbitrator decide the class arbitration issue;
  2. The potential class arbitration involved claims that were specifically included in the definition of arbitrable disputes; and
  3. Other types of disputes were specifically excluded from the arbitration agreement.

The Court then cited two state-law rules of contractual interpretation that further suggested that the arbitrator should decide class-wide arbitrability: (1) any ambiguities in the arbitration agreements should be construed against the drafter; and (2) uncertainties regarding the allocation of a matter to arbitration or the court, should be resolved in favor of arbitration.

Once it determined that the arbitration agreements, interpreted under state law, designated the class-arbitration question to an arbitrator, the Court considered whether the Federal Arbitration Act ("FAA") altered the conclusion state law would otherwise reach here. The Court reasoned that the FAA supported a presumption that the arbitrator has the power to decide procedural questions arising from the dispute. The Court determined that the question at issue is one such procedural matter to be decided by the arbitrator after resolution of the much narrower gateway question of arbitrability, which is reserved for the court.

Consequently, although the Court determined that there was no universally applicable rule of who should decide the issue of whether or not class arbitration is available, the Court's rationale for its decision makes it difficult to imagine a scenario where a court would be given the authority to decide this issue absent express contractual language. This presents a significant risk to employer-defendants, as there is a strong chance that, if a defendant successfully compels a class action matter to arbitration, it will proceed therein on a class-wide basis rather than an individual basis.

First, there are fewer checks and balances on arbitrators, which mean that an arbitrator's decision regarding individual versus class-wide arbitration may not be entirely consistent with the law on silent class action waivers, and the defendant likely would not be able to appeal that decision until after the conclusion of a class-wide arbitration. Second, judicial review of arbitration awards are extremely limited. The California Arbitration Act ("CAA") provides only limited grounds for judicial review of an arbitration award, such as fraud, corruption, misconduct, or that the award exceeded the arbitrators' powers. Cal. Civ. Proc. § 1286.2. Third, class-wide arbitration does not include the same procedural protections afforded to defendants in class action litigation.

Next Steps

Employers should review and consider revising their arbitration agreements to specify that the court decides whether class arbitration is permissible, particularly if they do not include an express class action waiver.

We will keep you apprised of any future developments effecting the potential for class-wide arbitration, and are available to assist with updating arbitration agreements and counseling on the benefits and disadvantages of proceeding in arbitration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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