In California, the Battle Continues

While private parties doing business are free to agree to arbitrate any dispute between them outside of the courts, an employer who presents a “take-it-or-leave-it” arbitration requirement to a job applicant as a condition of hiring presents special problems. California’s appeals courts have been particularly dedicated – or perhaps in commerce’s view obsessively picky – in refining the detail required to render an employment arbitration agreement fair, balanced and thus enforceable in this state. The decision in Garden Fresh Restaurant Corp. v. Superior Court, 180 California Reporter , third series (Cal. Rptr. 3d) 89 (November 17, 2014), is the latest.

One of the more hotly contested refinements on arbitration agreements is the wording necessary to disqualify an employee from bringing a “class action” or “representative claim” into his or her arbitration on his individual claims. As we outlined in “Contractor Misclassification . . . Class Action?”, an employee’s class action allegations seek to include a large number of his or her co-workers claims in the lawsuit. A “representative” claim or action similarly seeks to include co-workers, but under special, streamlined criteria and procedures.

In Garden Fresh, the Court of Appeal decided that when the employment arbitration agreement does not specify whether the employee can include class action or representative claims in arbitration, it is up to a judge, not an arbitrator, to decide.

The trial judge in Garden Fresh originally declined to make the ruling on an employee’s ability to include a representative claim in her arbitration, instead referring the question for the arbitrator to decide. This was bad news to the employer Garden Fresh Restaurants since, in theory anyway, an arbitrator might well be more inclined to include class or representative actions in the arbitration out of the prospect of a more complicated and thus more profitable proceeding for that arbitrator. Handing the question to the arbitrator also raised the stakes because arbitration decisions and awards are commonly not reviewable by a court. Thus, an employer would almost certainly be stuck with an arbitrator’s ruling to allow a class or representative action, a development that could jack up considerably the leverage against the employer to settle.

However, Garden Fresh, and with it other California employers, fared better with the appellate court. Just as trial judges are required to examine agreements for their fairness on matters such as an employee’s decreased scope of claims or increased cost in arbitration, the Court of Appeal saw this as a “gateway” issue requiring judicial determination.

The irony of course is that arbitration agreements are dictated by employers. Here, Garden Fresh faced the prospect of incurring a severe blow to its operations and financial stability by virtue of incomplete contract terms on which it had required the employee to agree.

The wisdom of whether an arbitration agreement could or should actually seek to limit an individual’s ability to bring class or representative actions in his/her required arbitration is a separate question. However, if the Garden Fresh agreement had included direction on that point – or directed that the trial judge should decide it – it would have saved the fees and other resources necessary to hash out the ambiguity at two levels of the California courts. The simple “math” of an ounce of prevention equaling several thousand pounds (or dollars) of cure comes to mind.

If you need further information, please contact any of our attorneys – Tim Bowles, Cindy Bamforth, and Helena Kobrin.

Helena Kobrin, December 12, 2014