A divided California Supreme Court has held that an arbitrator, rather than a court, should determine whether an arbitration clause in an employment agreement allows employees to bring their claims in arbitration on a class-wide basis where the agreement is silent on the issue of class arbitration.

In Sandquist v. Lebo Automotive, Inc., a former sales manager working for an auto dealership filed a class action racial discrimination suit, claiming that he and other African American employees suffered harassment and were passed over for promotions based on race. The trial court ordered the case to be arbitrated, ruling that Sandquist could move forward only with his individual claims. The California Court of Appeals for the Second District reversed, and the California Supreme Court affirmed the appeals court in a 4-3 decision.

Writing for the majority, Justice Kathryn Mickle Werdegar found that “no universal rule allocates [the determination of the availability of class-wide arbitration] to either arbitrators or courts.” Because California law does not address the issue and “no contrary presumption requires a different result” under federal law, the court held that there is no universal rule and the decision maker is identified on a case-by-case basis according to the parties’ underlying agreement.

The majority found that the arbitration agreement in the case at issue was ambiguous regarding who could decide whether claims could be arbitrated class-wide. When the agreement of the parties is ambiguous, the court explained, “ordinary contract principles require that the provision be construed against the drafter’s interpretation and in favor of the non-drafter’s interpretation.” The court found that the employer “could have prepared an arbitration provision that explicitly addressed any unstated desire to have the availability of class arbitration resolved by a court, notwithstanding the otherwise broad and all encompassing language of the clause identifying matters for the arbitrator;” however, “[i]t did not.” Therefore, the court construed the arbitration agreement against the employer and held that an arbitrator could decide whether to hear the class-wide claims.

The dissent, written by Justice Leondra Kruger, explained that the U.S. Supreme Court has strongly suggested that courts should decide this issue. Moreover, the dissent emphasized, to date, “every federal court of appeals to consider the issue on the merits has held that the availability of class arbitration is a question of arbitrability for a court, rather than an arbitrator, ‘unless the parties clearly and unmistakably provide otherwise.’” That is because “class arbitration dramatically increases the risks to defendants” and because the switch from bilateral to class arbitration implicates the rights of absent parties. This is not a mere procedural matter for an arbitrator to decide, but rather a critical gateway matter of arbitrability that a court should decide, Justice Kruger opined. After surveying relevant federal case law, the dissent concluded, “[i]t may well be that further developments in the United States Supreme Court will shed new light on the issue before us. But unless and until the court revisits the issue, I would follow where the court has led. Because the majority today charts a different path, I must respectfully dissent.”

Sandquist supports the strategy of plaintiffs who are clearly bound to arbitrate their claims but want to resist individual proceedings. However, most companies view class arbitration as the worst of all possible worlds, since class-wide liability can often be draconian and there are only narrow grounds for appealing an arbitrator’s award. Therefore, employers should make sure that their arbitration clauses expressly preclude class-wide arbitration and specifically state that a court will decide whether or not the arbitration clause applies to a particular class of plaintiffs. Sandquist demonstrates that arbitration clauses that are silent or ambiguous on this issue can unwittingly subject a company to the perils of class-wide arbitration.

Ballard Spahr's Labor and Employment Group routinely handles discrimination matters and assists employers in drafting, reviewing, and defending the enforceability of employment and arbitration agreements. The firm's Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements.

Copyright © 2016 by Ballard Spahr LLP.
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