California Supreme Court Set to Resolve Conflict and Confusion Surrounding Arbitration Agreements in Employment Contracts

February 12, 2014

This year, California small businesses and the legal community will be keeping a close eye on how the State Supreme Court rules on major disputes over arbitration agreements. An arbitration agreement is a written agreement between two parties, designating an arbitrator — instead of a court of law — to resolve any disputes that may arise out of their business relationship. Companies often require employees to sign arbitration agreements as a means of limiting the costs associated with any disputes that may arise out of the employment relationship.

As far as the legality of arbitration agreements, the Federal Arbitration Act of 1925 (FAA) provides that arbitration agreements are "valid, irrevocable and enforceable, and entitled to the same respect as other contracts." Despite this, several years ago, the California Supreme Court struck down an arbitration clause in a consumer agreement because the arbitration agreement did not permit the consumer to bring a class action arbitration. In a 5-4 decision, the United States Supreme Court reversed that ruling, holding that state law cannot interfere with an arbitration agreement's elimination of the class action mechanism to resolve disputes. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court held that, "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration…. We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe Congress would have intended to allow courts to force such a decision." Accordingly, the Court found that the FAA preempts California state law and ruled that states may not enact special rules that disfavor arbitration, even in the interest of public policy. The decision effectively made it much more difficult for employees to file employment-related class actions, and led to California courts issuing very conflicting and often confusing decisions in employment cases involving arbitration agreements.

In September 2012, the California Supreme Court granted review in Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949 (2012), review granted 147 Cal.Rptr.3d 324 (Sept. 19, 2012), to address whether the United States Supreme Court's decision in Concepcion allows class action waivers in state employment disputes. The California Court also will consider whether Concepcion allows employees to waive their rights to bring representative suits under the state's Private Attorneys' General Act. In Iskanian, California's high court granted plaintiff/former CLS Transportation Los Angeles, LLC limo driver Arshavir Iskanian's petition for review of the lower court's ruling, sending his proposed wage-and-hour class action to individual arbitration because he had signed an arbitration agreement that included a class action waiver. There is speculation that the California high court will find class action waivers in employment agreements enforceable, but that it will impose specific guidelines for arbitration agreements in the employment context. Such a ruling would be welcomed by employers, particularly small businesses, seeking to avoid class actions that result in substantial pay-outs, often even amounting to seven or eight figures. We will further examine Iskanian and its effects on employers/small businesses when the Court issues its opinion.

In the meantime, do you have questions or concerns about how to draft an arbitration agreement or whether your existing arbitration agreement is valid and enforceable? For assistance with any number of California business law issues, from how to draft an arbitration agreement to complying with the ever-changing laws affecting small businesses, an experienced business law attorney can help you. Contact us today.