California Supreme Court Provides Cautionary Message to Employers Regarding Arbitration Agreements – Act Now to Narrowly Tailor Your Class Waiver Language!


By: Dennis Strazulo and Kacie Manisco
It is now well-established that class-action waivers contained in employment arbitration agreements are valid and enforceable in California. But who decides whether class-action claims can be arbitrated when an agreement is silent on the issue? On July 28, 2016, the California Supreme Court in Sandquist v. Lebo Automotive, Inc. deviated from several federal appellate courts and held this question should be answered on a case-by-case basis by interpreting the arbitration agreement under state contract law. On the facts of the case before it, the Court interpreted the parties’ agreement to require an arbitrator, rather than the court, decide whether the plaintiff could pursue his class claims in arbitration.
In Sandquist, plaintiff filed a lawsuit alleging discrimination claims on a class-wide basis against his employer. The employer filed a motion to compel individual arbitration pursuant to an arbitration clause plaintiff signed as a condition of employment. The trial court granted the employer’s motion, holding the arbitration agreement was enforceable and that it impliedly prohibited arbitration of class claims. Upon review, the Court of Appeal affirmed the lower court’s ruling that the arbitration agreement was enforceable, but held the issue of whether the arbitration agreement permits class arbitration should be decided by the arbitrator – not the court.
The California Supreme Court affirmed the Court of Appeal in a 4-3 decision. The Court found class arbitration was available to Plaintiff because the agreement at issue broadly allowed for any employment-related disputes to be resolved by binding arbitration. Moreover, the agreement did not include an express waiver of the class claims and was silent on the issue of whether the court or an arbitrator should resolve class arbitration questions
The Court interpreted the agreement as giving the arbitrator the power to decide whether the agreement allowed class claims in arbitration. In arriving at this conclusion, the Court applied case law holding ambiguities in arbitration agreements must be resolved in favor of arbitration and also applied the general principle of contract law that ambiguities are to be resolved against the drafter of the contract. Because the employee’s interpretation of the contract favored the arbitrator deciding the issue, and the employer’s interpretation favored a court deciding the issue, the Court resolved the ambiguity in favor of the employee.
This ruling raises the possibility that, under some arbitration agreements, the question of class arbitration will be decided by the arbitrator – a person who has financial incentive to find class-wide arbitration proper. (It’s hard to imagine many employment contracts that have been drafted by the employee, to be sure!) If class-wide arbitrability is found, an employer will face higher risks in arbitrating class claims without the safeguard of judicial review. Accordingly, as the legal community awaits a likely cert. petition in Sandquist, California employers should review and revise their arbitration agreements as necessary to include narrowly-tailored class waiver language that precisely places the interpretation of the class-wide arbitrability question in the hands of the court, not the arbitrator. They should do so now!