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December 30, 2016

Court Cannot Decide Arbitrability of Class Claim—Arbitrator Must

<a href="mailto:[email protected]">Candice A. Garcia-Rodrigo</a> - December 30, 2016

The question of arbitrability of class claims is a contract interpretation matter for the arbitrator based upon the agreement itself and state law contract principles. Sandquist v. Lebo Automotive, Inc. In reaching the decision, the California Supreme Court also relied on case law interpreting the Federal Arbitration Act and the U.S. Supreme Court's ruling in Green Tree Financial Corp. v. Bazzle. The California decision highlights the need for lawyers to carefully draft arbitration clauses that clearly explain who decides procedural issues and whether the claims are subject to arbitration, observes certain leaders of the ABA Section of Litigation.  

Agreement Should Answer Procedural Question
The plaintiff-employee sued his employer for racial discrimination, harassment, and retaliation claims for a class of current and former employees of color. The trial court granted the employer's motion to compel individual arbitration based on the three arbitration agreements employee signed on his first day of employment.

The trial court found that the court must determine availability of class arbitration. The trial court interpreted the agreements to prohibit class arbitration and dismissed the class claims with prejudice.

In reversing the trial court's ruling, the court of appeals concluded the arbitrator must determine the possibility of class arbitration. The California Supreme Court reviewed the limited question of who decides whether the arbitration agreement allows class arbitration.

The court determined no "one-size-fits-all rule" exists to answer whether class arbitration is available. Instead, the party's arbitration agreement resolves the issue. After Green Tree, the question of who decides whether a class claim is subject to arbitration is a procedural question that depends on whether the parties agreed to the issue beforehand.

Question Is One of Contract Interpretation
In Green Tree, the U.S. Supreme Court ruled the courts must view the parties' agreement first to resolve who decides whether class arbitration is available. The court must then apply state law principles in interpreting the parties' contract.

The parties' arbitration agreement gave the decision of the availability of class arbitration to the arbitrator, the court concluded by applying state contract interpretation principles. The court construed against the drafter-employer the ambiguous clause that did not explicitly state who decides the issue.

State law presumed the court resolves class arbitration issues, the employer argued. The court disagreed, finding there is no state law presumption that the court should decide the matter. Furthermore, federal law does not preempt the state law rules of contract interpretation.

Green Tree made it clear: Whether class arbitration is available, and what kind of arbitration proceeding the parties agreed to, is a matter of contract interpretation.

Strategic Drafting of Agreement Is the Answer
ABA Section of Litigation leaders agree the question of arbitrability is a matter of contract interpretation based on state law principles. "The U.S. Supreme Court previously pronounced that this is a state-law question, and, therefore, a contract question. The California Supreme Court took what the U.S. Supreme Court said at face value that the decision is to be made by the arbitrator and not the court," explains Robert J. Will, St. Louis, MO, cochair of the Section's Pretrial Practice & Discovery Committee.

This is a gray area of law, asserts Will. "Other courts have interpreted the Supreme Court's pronouncement on whether this is a gateway question less definitively. When combined with later dicta in other cases, among other reasons, other courts have concluded that the Supreme Court would rule differently now; thus making this a gray area of law," he continues.

Section leaders warn that considering this case lawyers must strategically draft arbitration agreements. "One solution, at least with respect to drafting such provisions in the future, is to clearly spell out in the arbitration agreement who makes the decision—the court or the arbitrator. If the contract is clear as to who makes the decision, then, based on the California Supreme Court's rationale, a court will honor that provision," advises Will.

"Drafting arbitration clauses can be challenging and strategic. The drafter must take into consideration the particular needs of the client in the transaction. That said, more complex clauses do not always serve the client's interest," says Harout Jack Samra, Miami, FL, cochair of the Section's Alternative Dispute Resolution Committee. Drafting clauses is a matter of balance, instructs Samra. "The more they include the more problems they may create at a later stage," he cautions. "If it is in the client's interest to include a waiver of class arbitration, counsel should also specify who determines whether the waiver is enforceable," Samra suggests.

The question of "who decides," as the court phrased it, arises "when the arbitration clause is broadly worded and does not contain a class action waiver," explains Neal M. Eiseman, New York, NY, chair of the Arbitration Subcommittee of the Section's Alternative Dispute Resolution Committee. "The controversy can be avoided if the parties drafting the arbitration agreement specifically state whether class arbitration is permissible," recommends Eiseman.

Employers and businesses may be hesitant to include such language. There may be risk the court will conclude waiver of class arbitration is an unenforceable adhesion contract or unconscionable, Eiseman concludes.


Candice A. Garcia-Rodrigo is an associate editor for Litigation News.


Keywords: arbitration, contract interpretation, class claim


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<a href="mailto:[email protected]">Candice A. Garcia-Rodrigo</a> - December 30, 2016