Two California Appellate Decisions “Delegate” Authority From Courts to Arbitrators

Two divisions of the California Court of Appeal recently issued two significant decisions on arbitration agreements. Both courts held that a trial court lacks authority to determine the enforceability of an arbitration agreement if the agreement has a provision delegating that authority to an arbitrator.

Tiri v. Lucky Chances, No. A136675 (May 15, 2014): In the first case, the employee, Lourdes Tiri was hired as a cook by Lucky Chances, Inc., a card-club casino and restaurant. Three years later, she was asked and agreed to sign an arbitration agreement. The agreement included a provision, referred to as the “delegation clause.” The delegation clause stated that an arbitrator, not the courts, “shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”

Five years later, Tiri was discharged from her job. She sued her former employer for wrongful termination. Lucky Chances filed a petition to compel arbitration. Tiri argued that the arbitration agreement was unconscionable and unenforceable. Lucky Chances asked the trial court to rule on the threshold issue of the enforceability of the delegation clause and to delegate the decision regarding the enforceability of the agreement to the arbitrator. The trial court denied the petition to compel and found the agreement to be unconscionable. Lucky Chances appealed.

The Court of Appeal in the First Appellate District disagreed with the trial court and held that, in light of the delegation clause, the trial court did not have the authority to decide the enforceability of the agreement. The court noted that for a delegation clause to be effective it must meet two requirements: 1) the language of the delegation clause must be clear and unmistakable, and 2) the delegation must not be revocable under state-law grounds of fraud, duress, or unconscionability. The court held that the language of the clause was clear and that the clause was not substantively unconscionable. Therefore, the court concluded that the delegation clause was effective, and an arbitrator would need to decide whether the arbitration agreement was enforceable.

Malone v. Superior Court (California Bank & Trust), No. B253891 (June 17, 2014): Keeya Malone was hired by California Bank & Trust (CB&T) in 2007. At the time she was hired, she allegedly accepted the company handbook, which contained an arbitration agreement. The agreement contained a delegation clause stating, “[t] he arbitrator has exclusive authority to resolve any dispute relating to the interpretation, applicability, or enforceability of this binding arbitration agreement.”

Her employment with CB&T ended in 2010. In 2013, she filed a wage and hour lawsuit and sought to pursue a class action lawsuit against CB&T. CB&T asked the court to compel arbitration. Since the arbitration agreement did not allow for class arbitration, CB&T asked that Malone arbitrate her claim on an individual basis. Malone challenged the arbitration agreement on the basis that it was unconscionable and, therefore, unenforceable.

The trial court found that the delegation clause itself was not unconscionable and noted that the arbitrator can address whether the arbitration agreement as a whole is unconscionable. Malone appealed.

The Court of Appeal agreed with the trial court. The court clarified that some of the prior case law, that found delegation clauses unconscionable, relied on the notion that the arbitrator may have a self-interest in finding the agreement enforceable. The court noted that the Federal Arbitration Act (FAA) preempts such reasoning and stated, “This analysis is nothing more than an expression of a judicial hostility to arbitration, based on the assumption that a paid decision-maker cannot be unbiased, and it, therefore, is wholly barred by the FAA.”

According to Jack Sholkoff, a shareholder in the Los Angeles office of Ogletree Deakins: “The courts’ decisions in Tiri and Malone present a double-edged sword for employers. On the one hand, these appellate court decisions that enforce an agreement’s delegation clause and send the question of the agreement’s enforceability to the arbitrator will likely mean that more cases will go to arbitration. Indeed, inserting a delegation clause like that in Tiri or Malone would mean that virtually every case would go to arbitration at least with regard to enforceability. This will be a powerful tool for employers, since it may be that arbitrators are more likely than courts to enforce arbitration agreements.”

Sholkoff continued, “On the other hand, one of the most compelling reasons to use arbitration agreements at all is to take advantage of a class action waiver. The danger of using a delegation clause like the one in Tiri or Malone is that the arbitrator would, in addition to reviewing the enforceability of the arbitration agreement, also review the enforceability of any class action waiver contained in the arbitration agreement. The unintended result could be that an employer gets the worst result of all: class action arbitration. Employers should, in view of these cases, carefully examine their arbitration agreements to determine that the agreements meet their ultimate goals.”