Sandquist v. Lebo Automotive

Why now is a good time to review your arbitration agreements

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In a 4-3 split decision, Sandquist v. Lebo Automotive, Inc., the California Supreme Court recently held that who decides if a valid arbitration agreement allows class arbitration—an arbitrator or judge—depends on the agreement. This decision is in stark contrast to all recent federal appellate decisions, which require a court to decide whether an agreement allows class arbitration, unless the parties unmistakably agreed otherwise. Sandquist appears to flip that on its head, meaning California arbitration agreements that do not expressly waive class arbitrations may be headed to an arbitrator near you to interpret whether class claims will be permitted in arbitration.

What is this case about?

In 2012, Sandquist sued his employer for racial discrimination, harassment and retaliation. Lebo Automotive moved to compel arbitration based on arbitration agreements signed by Sandquist on his first day of work. The trial court sided with the dealer, granted the motion, and also decided that class arbitration was not permitted under the agreement. The Court of Appeal reversed in part, holding that the court improperly decided the question of whether class arbitration was allowed, not because class arbitration should have been allowed, but because that decision should have been made by the arbitrator.

The Supreme Court agreed, holding that absent an express class arbitration waiver, who decides the issue of class arbitration is a matter of contract interpretation under California law. Contract interpretation evaluates the language of the agreement and the parties’ reasonable expectations. In Sandquist, the arbitration provision broadly assigned the arbitrator the right to decide “all claims arising from, related to, or having any relationship or connection whatsoever” with Sandquist’s employment. Thus, the Court interpreted the agreement to designate the issue of class arbitration to the arbitrator as well.

Under general rules of contract interpretation, the Court resolved all ambiguities in favor of arbitration and construed the exact language of the agreement against the drafter (the employer). Because the agreement specifically excluded certain claims from the arbitrator’s purview (such as EDD claims and claims under the NLRA), the Court found that the employer intended to have an arbitrator decide the availability of class arbitration, because the agreement failed to exclude that issue from the arbitrator’s purview.

The Court also determined that the Federal Arbitration Act (“FAA”) did not conflict with, and therefore did not preempt, the conclusion reached above under state law. Relying heavily on Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444, the Court found that “who decides the availability of class arbitration” was not a “gateway question of arbitrability,” which the FAA mandates must be decided by a court. Instead, it concluded that gateway inquiries, properly designated to the courts, evaluate whether an arbitration agreement is enforceable, and whether it applies to a particular dispute. The question of who decides the availability of class arbitration was instead deemed not to be a ‘gateway’ question; only a procedural matter about the kind of arbitration available, to be determined by the arbitrator.

What does this mean for dealers and employers?

Since employers typically prefer to arbitrate employees’ claims in private binding arbitration, given its procedural simplicity and efficiency, you may be wondering why letting the arbitrator decide one more thing (the availability of class arbitration) is a big deal.

The issue is two-fold: 1) the increased cost, and 2) the limited judicial review available for an arbitrator’s decision. Even assuming an arbitrator reaches the same conclusion as the trial court: that class arbitration is not permitted by the agreement; the employer loses time and money having to bring a separate motion before an arbitrator, instead of having the issue decided principally and efficiently in its Motion to Compel Arbitration filed with the court. The kicker is that California law requires the employer to pay for arbitration, and because an arbitrator’s fees can rack up quickly, obtaining this ruling can itself be a costly endeavor.

An alarming concern presented by this ruling is that allowing an arbitrator to decide the issue of class arbitration presents a conflict of interest – with the arbitrator’s fees being directly proportional to the size/complexity of the case and the class-arbitration procedure providing for a lengthy and complex arbitration. And if an arbitrator decides the issue and commits error, under Oxford Health the arbitrator will have exceeded his/her authority. But the dealer would have to wait until the end of the class arbitration to get it reversed, after spending tens of thousands of dollars in arbitrator fees and even more on attorney’s fees.

What should dealers do?

Auto dealers should review and consider revising the arbitration agreements they use with their employees to ensure that they clearly and unambiguously waive class actions and class arbitrations. Remember, the issue in Sandquist arose out of an agreement that only implied this waiver, so vagueness can expose you to costly arbitration of this issue.

The agreement should also explicitly specify who has the power to decide whether class arbitration is available (a court or an arbitrator). As always, you should pay attention to the terms of the agreement, to make sure they are valid and enforceable; and ensure that employees are provided a chance to review and freely execute the agreement.

Contact an experienced auto dealer employment lawyer to review, and if needed, revise, your arbitration agreement.