California Supreme Court Holds “No Universal Rule” Exists When Deciding Who Should Determine Availability of Classwide Arbitration

On July 28, 2016, the California Supreme Court added to the ever-changing body of case law regarding classwide arbitration when it held that “no universal rule” exists regarding who (the court or the arbitrator) should decide whether classwide arbitration is permissible under an arbitration agreement, and that this issue must be decided on a case-by-case basis. 

In Sandquist v. Lebo Automotive, Inc. (Opinion No. S220812), the Court reasoned that, because the language of the specific arbitration agreement at issue established that an agreement to arbitrate did exist, but was ambiguous as to whether the agreement allowed for classwide arbitration, it was the arbitrator – not the court – who should determine whether class-wide arbitration was permissible under the agreement.  This decision departs from the recent line of federal court of appeals decisions all holding that the availability of classwide arbitration is a threshold issue to be determined by the court—not the arbitrator.  Interestingly, the parties in Sandquist took atypical positions (i.e., the defendant employer argued to limit the scope and purview of the arbitrator’s power. This decision highlights the split of opinion that exists regarding this issue, which many expect the U.S. Supreme Court may soon resolve.   

The facts leading to the Sandquist decision are as follows:  Timothy Sandquist, a former employee of Lebo Automotive, Inc., signed various arbitration agreements as a condition of his employment.  In 2012, Sandquist filed a putative class action lawsuit alleging race discrimination against Lebo.  Lebo filed a motion to compel arbitration on an individual, as opposed to classwide, basis.  In granting Lebo’s motion to compel arbitration, the trial court found that the arbitration agreements were enforceable and not unconscionable, covered the instant dispute, and did not permit classwide arbitration.  The trial court struck Plaintiff’s class claims from the Complaint.  On appeal, the Court of Appeal reversed in part—disagreeing that the trial court was compelled to determine whether class arbitration was available, and instead determining that the availability of class arbitration is a matter of contract interpretation for the arbitrator to decide.  Lebo petitioned for review, which the California Supreme Court granted.   

In reaching its 4-3 decision that this determination must be made on a case-by-case basis, the Court relied on Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (“Green Tree”), in which a plurality held that the question of whether classwide arbitration was available is not a threshold question necessarily for the court’s determination.  The majority noted that Green Tree does not establish what presumption, if any, the FAA requires when faced with this issue.  The majority relied on various well-established principles of contract law in its decision, especially the notion that any ambiguities should be construed against the drafter, reasoning that Lebo could have drafted the scope of the matters within the arbitrator’s jurisdiction less comprehensively. 

Although the majority held that the availability of classwide arbitration was appropriately a matter for the arbitrator to decide in this case, the dissenting opinion noted that every federal court of appeals to consider the issue since Green Tree has found that availability of class arbitration is presumptively a question for the court, not the arbitrator.  The dissent noted fundamental differences between classwide and bilateral arbitration that suggest this is a threshold issue more appropriate for court determination, including increased risk and cost for the defendant.  Additionally, the dissent reasoned that the issue of whether arbitration may proceed on a classwide basis “necessarily calls into question which parties, precisely, are involved,” and risks binding individuals to a process to which they have not consented.   

The main takeaway for employers looking to prevent unintended classwide arbitration is to ensure their arbitration agreements expressly preclude classwide arbitration and provide that any and all disputes as to (1) the parties to an arbitration, and (2) the availability of classwide arbitration, should be determined solely by the Court.