Finding that a district court echoed the legal errors in an arbitrator’s analysis of a grievance, a divided Ninth Circuit reversed the confirmation of an arbitration award in favor of an employer in a dispute over vacation time owed to employees of a third-party vendor. The appeals court found that the arbitrator’s essential error was his failure to discern a critical distinction between the arbitrability of a grievance and its merits. He compounded the error by neglecting the distinction between procedural arbitrability and substantive arbitrability. The arbitrator’s confusion led him to decide an arbitrability question that he was not empowered to adjudicate on the mistaken belief that it was procedural, and to base his conclusion of non-arbitrability on an analysis anchored in his view of the merits. Judge Owens filed a separate concurrence. Judge Friedland filed a dissenting opinion (Local Joint Executive Board of Las Vegas v. Mirage Casino-Hotel, Inc., December 13, 2018, Bucklo, E.).
Unpaid vacation pay. In late 2009, the employer subcontracted to operate a food and beverage venue called BB King’s Blues Club and Grill at the Mirage Hotel. Their agreement provided that BB King’s would “directly employ” the union’s food and beverage employees and would be responsible for paying their wages and employee benefits. However, the Mirage would “at all times hold and exercise full control over the terms and conditions of employment of all of the employees.” BB King’s was a short-lived venture and declared bankruptcy. It shuttered permanently in November 2012.
Arbitrator says not arbitrable. At the time of BB King’s closing, many of its employees had accrued vacation time for which the union believed they had a right to payment under the terms of the CBA. After it became clear that Mirage would not step in to ensure that the employees received the vacation benefit, the union filed a grievance in December 2012, which culminated in arbitration. The arbitrator concluded that the dispute over vacation pay not paid to the BB King employees was “not arbitrable.”
The union petitioned the district court to vacate the arbitration award, and the employer filed a cross petition to confirm the award. On cross-motions for summary judgment, the district court confirmed the award, and the union appealed.
Subcontracting arrangement. The parties had negotiated contractual obligations in the event Mirage subcontracted or subleased third-party operations on its property. The CBA provided that any work performed under a subcontracting or subleasing arrangement must be performed by union members, and Mirage would “at all times hold and exercise full control over the terms and conditions of employment of all of the employees.” A side letter agreement modified Mirage’s obligations to allow additional “hiring flexibility” when opening new venues. Moreover, the parties negotiated venue-specific memoranda of agreement. The MOA clarified that although BB King’s would operate as an independent business that would directly employ the venue’s food and beverage employees, and pay wages and benefits, the Mirage still held full control over terms and conditions of employment.
In its grievance, the union’s central theory was that by failing to ensure that BB King’s employees were paid for unused vacation time, Mirage violated the CBA, the side letter and the MOA requiring it to maintain “full control” over the terms and conditions of employment of BB King’s employees.
Arbitration. The first round of briefing during the arbitration proceedings revealed that the parties had very different understandings of the issue or issues. Mirage argued that the grievance was not subject to arbitration because BB King’s—not Mirage—was the employees’ employer. However, the union confined the substantive argument in its brief to the issue of timeliness, believing it would have the opportunity to address the merits once arbitrability was determined. Observing that the parties had taken steps to resolve the dispute, the arbitrator concluded that the grievance was timely. But he determined that Mirage was not “the guarantor for payment of wages or benefits” for BB King’s employees, and the parties’ agreement that Mirage would “at all times hold and exercise full control over the terms and conditions of employment of all of the employees” meant only that Mirage was required to “assure compliance with the CBA by BB King’s and nothing else.”
The district court held that the union’s submission to the arbitrator of the merits of its grievance necessarily encompassed the question of arbitrability, thus empowering the arbitrator to determine arbitrability. It went on to hold that the arbitrator did not exceed the scope of issues presented by considering merits-based arguments in proceedings limited to the “timeliness-arbitrability question.”
Obligation under CBA, side agreement and MOA. In this case, the parties’ substantive dispute concerned Mirage’s obligation under the CBA, side agreement, and the MOA to ensure that BB King’s employees received payment for unused vacation time and other accrued benefits due them under the CBA. That dispute is arbitrable, said the Ninth Circuit, if it falls within the arbitration agreement; its arbitrability is determined by the arbitrator if the parties “clearly and unmistakably agreed” to submit the question to him; and it is meritorious if the union’s “control” theory is supported by the text of the CBA, side letter, the MOA, and other evidence presented at hearing.
Arbitrability does not mean filed against the wrong party. But the arbitrator conflated these three distinct inquiries, holding that the grievance was “not arbitrable” without considering his authority to decide that issue, and compounding the error. The arbitrator’s conclusion that the grievance was not arbitrable simply misunderstood the arbitrability inquiry. By “not arbitrable,” the arbitrator meant that the grievance “was filed against the wrong party. But the union’s grievance asserted obligations that it believed the CBA and other agreements imposed on Mirage (not just BB King’s). The arbitrator’s conclusion that the union’s exclusive remedy to recover claimed benefits against BB King’s plainly had nothing to do with substantive arbitrability.
Extreme deference. The district court’s extreme deference to the arbitrator was premised on two erroneous beliefs: first, that the substance of the union’s grievance “encompassed” the question of arbitrability, and second, that by agreeing to arbitrate “substantive issues,” the union implicitly authorized the arbitrator to determine whether the grievance itself was arbitrable. Here, the Ninth Circuit concluded that neither view can be squared with the Supreme Court’s ruling in First Options of Chicago v. Kaplan, “which explained that a disagreement over who should decide the merits of a dispute is distinct from a disagreement over who should decide who decides the merits.”
The upshot is that although the arbitrator did not have authority to decide the question of substantive arbitrability, he concluded that the union’s grievance was “not arbitrable.” As a result, the aggrieved employees were denied benefits to which the union might have proven their entitlement had it presented its merits argument to the arbitrator. Accordingly, the district court’s judgment was reversed.
Dissent. In dissent, Judge Friedland argued that the “clear and unmistakable” test for determining whether a party resisting arbitration has nevertheless consented to having the arbitrator decide substantive arbitrability was not intended to extend to the context of determining whether a party that initiates arbitration so consented. He asserted the even if the arbitrator erred by deciding the merits of the dispute when purporting to decide whether the dispute was substantively arbitrable, he grounded his decision in the CBA. Thus, his decision was not merely “his own brand of industrial justice.”
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