California Supreme Court – Arbitrator Decides Whether Parties Agreed To Arbitrate Class Action

California Supreme Court Says Arbitrator Decides Whether Parties Agreed To Arbitrate Class Action Claims

In a highly anticipated decision, the California Supreme Court ruled that the question of whether parties to an arbitration agreement agreed to arbitrate class action claims is a question to be decided by the parties’ arbitrator and not by a court. Sandquist v. Lebo Automotive, Inc., ____ Cal.4th ____, 2016 Daily Journal Daily Appellate Report 7663 (California Supreme Court July 28, 2016) .

Specifically, the question decided by the California Supreme Court was: when the parties to a dispute disagree over whether class action claims are subject to arbitration, “who decides whether the [arbitration] agreement permits or prohibits classwide arbitration, a court or the arbitrator?” (2016 DJDAR at 7663.) The answer to that question is of supreme importance to parties who may find themselves in arbitration, because everyone, rightly or wrongly, suspects that judges and arbitrators are likely to reach opposite conclusions when construing identical arbitration agreements, with courts more likely to find that the parties have not agreed to classwide arbitration and arbitrators more likely to find that they did agree.

The plaintiff, Timothy Sandquist, worked for defendant Lebo Automotive, Inc. Mr. Sandquist, who is African-American, sued Lebo Automotive, alleging that he and other non-Caucasian employees were subjected to racial discrimination, harassment, and retaliation. Mr. Sandquist sought to sue not only on his own behalf but also “on behalf of a class of current and former employees of color.” (2016 DJDAR at 7663.) Lebo Automotive moved to compel arbitration based on three separate yet similar arbitration agreements that Mr. Sandquist signed on his first day of employment. The trial court granted the motion. The court also concluded that the arbitration agreements did not permit class arbitration. Therefore, the court struck the class allegations from the case.  Mr. Sandquist appealed.

The court of appeal reversed the trial court and concluded that the arbitrator rather than the trial court should decide “the availability of class proceedings under an arbitration agreement.” (2916 DJDAR 7664.) Not surprisingly, Lebo Automotive sought review by the California Supreme Court, which affirmed the decision of the court of appeal.

The California Supreme Court noted that all three arbitration agreements contained “comprehensive” language describing what claims were subject to arbitration. For example, one of the agreements encompassed “any claim, dispute or controversy . . . which would otherwise require or allow resort to any court or other governmental dispute resolution forum” “arising from, related to, or have any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Company . . . .” (2016 DJDAR at 7665.) Since the dispute over who decides whether class claims are arbitrable is related to claims arising from Mr. Sandquist’s employment, the California Supreme Court concluded that the language of the arbitration agreements “suggests” that the question is for the arbitrator, but is “by no means conclusive.” (2016 DJDAR at 7665.) The Court, therefore, looked to California law “applicable to the interpretation of arbitration clauses and contracts generally.” (2016 DJDAR at 7665.)

The Court noted that two principles of contract interpretation favor leaving the question to the arbitrator: (1) “when the allocation of a matter to arbitration or the courts is uncertain, we resolve all doubts in favor of arbitration”; and (2) “ambiguities in written agreements are to be construed against the drafters” (in this case, the employer, Lebo Automotive). (2016 DJDAR at 7666.) Thus, the Court concluded, “as a matter of state contract law, the parties’ arbitration provisions allocate the decision on the availability of class arbitration to the arbitrator, rather than reserving it for a court.” (2016 DJDAR at 7666.)

If Mr. Sandquist’s lawsuit were governed solely by California law, this would have been the end of the Court’s analysis. However, each of the three arbitration agreements between Mr. Sandquist and Lebo Automotive invokes the coverage of the Federal Arbitration Act. Therefore, the California Supreme Court also looked to recent decisions of the U.S Supreme Court relating to arbitration.

The Court noted that in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 (“Green Tree”) a plurality of the U.S. Supreme Court concluded that the question of whether the parties had agreed to arbitrate class claims should be decided by the arbitrator rather than the courts.

But here’s the rub: Green Tree was a plurality decision, not a majority decision. Therefore, Green Tree does not constitute controlling precedent. As the California Supreme Court noted, the U.S. Supreme Court “has twice reiterated” this fact. (2016 DJDAR at 7667.) In addition, notwithstanding the Green Tree decision, all of the federal appellate courts that have been confronted with this question, have ruled that the trial court rather than the arbitrator must decide whether the parties agreed to class arbitration.

Justice Kruger dissented in Sandquist v. Lebo Automotive, in an opinion joined in by Justices Chin and Corrigan. She conceded that the majority’s decision is supported by the plurality opinion in Green Tree. However, but she noted that the U.S. Supreme Court appears to be heading in a direction contrary to Green Tree, which has resulted in the federal appellate decisions holding that a court rather than the arbitrator should decide whether the parties agreed to conduct the classwide arbitration. Justice Kruger concluded by saying, “unless and until the [U.S. Supreme Court] revisits the issue, I would follow where the court has led. Because the majority today charts a different path, I must respectfully dissent.” (2016 DJDAR 7675.)

The California Supreme Court majority in Sandquist v. Lebo Automotive is on solid ground analytically. However, Justice Kruger and her fellow dissenters may well have correctly divined where the U.S. Supreme Court is headed on this issue. Thus, this case could well be headed to the U.S. Supreme Court.

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