This week, it became clearer still that a current majority on the California Supreme Court is very sensitive to procedural irregularities in arbitrations involving alleged violations of statutory employment rights. Employers should take note.


The court ruled in Pearson Dental Supplies, Inc. v. Superior Court of Los Angeles County on April 26, 2010, that an arbitrator's dismissal of a claim as untimely, based on his clear legal error in interpreting state law tolling provisions, exceeded his powers under the California Arbitration Act and warranted overturning his award, which favored the employer. The dissenting opinion asserted that legal error by an arbitrator does not make the arbitrator's decision subject to judicial review, noting that "arbitral finality is a core component of the parties' agreement to submit to arbitration."


The arbitrator in Pearson Dental had decided in favor of the employer on the grounds that the employee's discrimination claim was time-barred under the provision in the arbitration agreement allowing one year to demand arbitration. Although the employee had sued within the one-year period, and California Code of Civil Procedure Section 1281.12 provided for tolling from the date the civil action was commenced, the arbitrator failed to recognize that such tolling "stopped the clock" between the time the civil action was filed and the time the employee demanded arbitration. Based on his erroneous reading of Section 1281.12, the arbitrator therefore determined that the employee's demand was untimely.


Rejecting the traditional case authority that an arbitrator’s legal error is not sufficient grounds on which to overturn an award, the Supreme Court made an exception for employment claims based on nonwaivable statutory rights: "[W]hen, as here, an employee subject to a mandatory employment-arbitration agreement is unable to obtain a hearing on the merits of his FEHA claims, or claims based on other unwaivable statutory rights, because of an arbitration award based on legal error, the trial court does not err in vacating the award."


So, what does this mean for employers whose employees enter into binding arbitration agreements including arbitration of statutory discrimination claims?


First, the majority clearly was particularly disturbed that based on an erroneous ruling, the employee did not even get a hearing on the merits of his claim. The court held that it was inconsistent with the protection of a party's statutory rights if "as a result of allowing the procedural error to stand, and through no fault of the employee or his attorney, the employee will be unable to receive a hearing on the merits of his FEHA claims in any forum." (Emphasis added.) Second, the court explicitly stated that its decision was narrow on the facts of the case and that it was not deciding—at least for now—whether all legal errors are reviewable in arbitration of alleged violations of statutory rights.


It is clear, as demonstrated by the Supreme Court decisions in Pearson Dental, as well as in Armendariz v. Foundation Health Psychcare Services, Inc., (2000) 24 Cal. 4th 83, that California employers would be prudent to review periodically any binding arbitration agreements for potential procedural irregularities that could jeopardize enforcement of such agreements or enforcement of favorable decisions for the employer.


If you have questions about Pearson Dental or other employment issues, feel free to contact any member of the Labor and Employment Group.

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