4-3 Cal. Sup. Ct. rules contract interpretation governs who decides whether class arbitration available
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Tuesday, August 2, 2016

4-3 Cal. Sup. Ct. rules contract interpretation governs who decides whether class arbitration available

By Ronald Miller, J.D. There is no universal rule governing whether the court or an arbitrator decides if an arbitration agreement permits or prohibits classwide arbitration in every case, ruled a divided California Supreme Court, in a 4-3 decision. Rather, the question of who has the power to decide the availability of class arbitration turns upon what the parties agreed to about the allocation of that power. Accordingly, the court found nothing in the Federal Arbitration Act (FAA) to support that this question should be submitted to the court rather than an arbitrator unless the parties have unmistakably provided otherwise. Justice Kruger filed a separate dissenting opinion joined by Justices Chin and Corrigan (Sandquist v. Lebo Automotive, Inc., July 28, 2016, Werdegar, K.). The employee, an African-American male, was hired by an automobile dealership as a salesperson. On his first day of employment, he was given a large packet of documents with instructions to sign them as soon as possible. Under time pressure, the employee finished the paperwork as quickly as possible, without reviewing each document, and did not realize he was signing multiple arbitration agreements. The documents were not discussed. In 2012, the employee filed suit alleging that he and other non-Caucasian employees were subject to race discrimination, harassment, and retaliation. The complaint asserted the claims as a class action. The employer moved to compel arbitration based on the arbitration agreements. Class arbitration. Finding the agreements enforceable and not unconscionable and the instant dispute within their scope, the trial court granted the motion. In the trial court’s view, the agreements did not permit class arbitration. On appeal, the court of appeal reversed in part. It declined to address the employee’s claim that the arbitration agreements were unconscionable, but considered his challenge to the dismissal of class allegations under the death knell doctrine. Disagreeing with the trial court’s conclusion that precedent compelled the court to determine whether class arbitration was available, the appeals court found the issue an open and unsettled one, and concluded the availability of class proceedings under an arbitration agreement is a question of contract interpretation for the arbitrator to decide in the first instance. The California Supreme Court granted review of the appellate court’s decision. Who decides whether class arbitration permitted? The question facing the California high court was who decides whether an arbitration agreement permits or prohibits classwide arbitration, a court or the arbitrator. As an initial matter, the court found there is no universal rule that allocates that question to one decision maker or the other in every case. Rather, it concluded that "who decides" is a matter of contract interpretation depending on the parties’ agreement. In other words, the question of who has the power to decide the availability of class arbitration turns upon what the parties agreed to about the allocation of that power. The California court found that the U.S. Supreme Court’s treatment of the issue in Green Tree Financial Corp. v. Bazzle, confirmed the parties’ agreement as the mandatory starting point. Consequently, the state court concluded that it must examine the parties’ agreements to determine what they say concerning the "who decides" the question of classwide arbitration. Further, the court agreed with the employer that this examination must be conducted, at least initially, through the prism of state law. Choice of law. With respect to the choice of law, the state high court concluded that California law applied. It observed that the arbitration clauses were entered into in California, governed an employment relationship between a California resident and a company with its sole place of business in California, and invoked various provisions of California law throughout. Although not conclusive, the state court found that the features of the arbitration clauses suggested the "who decides" question was an arbitrable one. Consequently, in the presence of ambiguity, it turned to other principles applicable to the interpretation of arbitration clauses and contracts generally. Ultimately dispositive here were two, long-established interpretive principles. First, under state law as under federal law, when the allocation of a matter to arbitration or the courts is uncertain, all doubts are resolved in favor of arbitration. Second, ambiguities in written agreements are to be construed against their drafters. Here, the state court observed 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. But it did not. Consequently, the court decided that, 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. State law presumption. Moreover, the court rejected the employer’s argument that as a matter of state law the arbitration provisions should presumptively be read to allocate the class arbitration availability question to a court, absent any explicit commitment of the dispute to an arbitrator. The court agreed that the arbitration provisions did not explicitly allocate the class arbitration question to an arbitrator; however, it disagreed that City of Los Angeles v. Superior Court,established any state law presumption that would in these circumstances require submission of the question to a court. Further, the state high court declined to decide as a matter of first impression, whether state law embraces a particular pro-court or pro-arbitrator presumption. Rather, it noted that all three of the arbitration clauses invoked the FAA. Consequently, this was not a case where the parties by agreement had expressly opted for the application of state law in lieu of any otherwise applicable federal rule. Thus, any state law presumption would have to yield to whatever presumption the FAA establishes. FAA presumptions. The crux of this case is whether the FAA imposes an interpretive presumption that, as a matter of federal law, preempts state law rules of contract interpretation and alters the conclusion state law would otherwise reach here. The Supreme Court has interpreted the FAA as imposing two distinct presumptions. On the one hand, courts presume that the parties intend courts, not arbitrators, to decide whether there is an enforceable arbitration agreement or whether it applies to the dispute at hand. "On the other hand, courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration." Two other established FAA principles also weighed in favor of allocating the question to the arbitrator. First, a presumption that arbitrators decide the availability of class arbitration is more consistent with the desire for "expeditious results" that motivates many an arbitration agreement. Second, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Applying this interpretive rule here, where the uncertainty was over whether to place a question in the "presumptively for the court" or "presumptively for the arbitrator" category; if that question is close, the court resolves doubt in favor of placing the question in the "presumptively for the arbitrator" category. Dissent. Justice Kruger focused her dissent on a question of federal law: Whether, under the FAA, the availability of class arbitration under the parties’ agreement is a "gateway question of arbitrability" that is presumptively for a court to decide, or whether it is instead a matter presumptively reserved for the arbitrator. She noted that every federal court of appeals to consider the issue on the merits has concluded—in contrast to the majority‘s holding—that whether an arbitration agreement permits class arbitration is presumptively a question for the court, rather than the arbitrator. Because Kruger read the U.S. Supreme Court’s cases as indicating that classwide arbitrability is a gateway question for purposes of the FAA, she would affirm the trial court‘s decision in this case,

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