On April 26, the California Supreme Court issued a decision providing useful clarification to employers intending to revise or enforce existing mandatory arbitration agreements. In summary, the court ruled that: (1) clear error of law will serve as a basis for vacating an arbitrator’s award where the error deprives an employee of a hearing on the merits of their Fair Employment and Housing Act (FEHA) claims or other unwaivable statutory claims; (2) arbitration agreements may lawfully preclude employees from pursuing administrative adjudication of their state law claims; and (3) in FEHA cases, the Supreme Court’s prior holding in Armendariz v. Foundation Health Psychcare Services, Inc. requires that arbitrators state reasons for their written decisions in sufficient detail to provide a meaningful basis for judicial review – mere written conclusions are not enough.

Another issue in this case concerned the conscionability of a one-year statute of limitations imposed by the arbitration agreement. The Supreme Court side-stepped this issue because the plaintiff had not properly preserved the argument on appeal. However, the Court of Appeal had ruled that the agreement’s statute of limitations was not unconscionable, leaving this issue open in California.  Pearson Dental Supplies, Inc. v. The Superior Court of Los Angeles County, No. S167169, Supreme Court of California (April 26, 2010).

Factual Background

Luis Turcios was employed by Pearson Dental Supplies as a janitor from February 1999 until he was terminated on January 31, 2006. On April 5, 2006, Turcios filed an age discrimination complaint with the California Department of Fair Employment and Housing and received a notice of right to sue nine days later. Turcios then filed a civil lawsuit against Pearson in Los Angeles Superior Court on October 2, 2006.

On March 13, 2007, Pearson filed a motion to compel arbitration, which was ultimately granted. The arbitration agreement stated that the parties agreed to arbitrate all disputes arising out of the employment relationship “to avoid the inconvenience, cost, and risk that accompany formal administrative or judicial proceedings.” The agreement also provided that any dispute:

must be submitted to binding arbitration within one year from the date the dispute arose or the employee or Pearson first became aware of the facts giving rise to the dispute. If any employment related dispute which may arise is not submitted to binding arbitration within one year from the date the dispute arose or the Employee or Pearson first became aware of facts giving rise to the dispute, Pearson and the Employee agree that the claim shall be void and considered waived to the fullest extent allowed by law.

By June 13, 2007, the parties had agreed to an arbitrator. On July 24, 2007, Pearson filed a motion for summary judgment, claiming that Turcios’ claims were time-barred because they had been submitted to arbitration more than one year after his termination. Turcios argued that: (1) the statute of limitations provision was unconscionable; and (2) under California Civil Code Section 1281.12 his claim had been submitted to arbitration well within the one-year statute of limitations.  The arbitrator agreed with Pearson and dismissed the claims.

Turcios then petitioned the Superior Court for vacation of the award on the grounds that the one-year statute of limitations was unconscionable, and that the arbitrator had misapplied the tolling provision of Civil Code Section 1281.12. The trial court vacated the award due to the arbitrator’s misapplication of the tolling provision, and the court’s perceived duty to “protect the plaintiff’s unwaivable statutory rights arising from his FEHA claims.”

Pearson filed a timely appeal. The Court of Appeal reversed the decision of the trial court. The appellate court concluded that: (1) the one-year statute of limitations contained in the arbitration agreement was not unconscionable; and (2) while the arbitrator’s application of Section 1281.12 was erroneous, the error was “not a proper basis upon which either to deny confirmation of the arbitration award or to vacate the award.”

On appeal to the California Supreme Court, two issues were presented: (1) What standard of judicial review applies to an arbitrator’s decision on an employee’s anti-discrimination claim under FEHA that is arbitrated pursuant to a mandatory employment arbitration agreement?; and (2) Can such a mandatory arbitration agreement restrict an employee from seeking administrative remedies for violations of the Act?

Legal Analysis

Concerning the first issue, the Supreme Court held that an arbitrator’s award may be vacated by a court when an employee is prevented from obtaining a hearing on the merits of FEHA claims, or claims based on other unwaivable statutory rights, because of legal error committed by an arbitrator. In so holding, the court determined that the arbitrator’s dismissal of Turcios’ claims on statute of limitations grounds was erroneous and that the error, if upheld, would have resulted in a complete extinguishment of Turcios’ rights. The court, therefore, vacated the arbitration award on the grounds that the arbitrator exceeded his authority.

Notably, the Supreme Court also indicated that the arbitrator had erred by failing to comply with the court’s prior mandate set forth in Armendariz. Armendariz requires, among other things that, arbitration decisions in FEHA cases be written in a sufficient manner to permit judicial review. The court found that the arbitrator’s decision concluded that Turcios had not complied with the statute of limitations requirement of the agreement, without providing the reasoning for arriving at that conclusion.

With respect to the second issue, the court held that, while it may be unconscionable to prevent an employee from submitting claims to prosecutorial agencies, such as the U.S. Equal Employment Opportunity Commission, an arbitration agreement may lawfully restrict “the parties [. . .] from submitting their claims for adjudication to an administrative entity such as the [California] Labor Commissioner.”  (Emphasis added). In so holding, the court noted, “[e]ven assuming an arbitration clause purporting to override the statutory jurisdiction of an administrative adjudicator would violate California law, state law would be preempted when applied to an arbitration agreement covered by the Federal Arbitration Act.” Applying that reasoning to the Pearson arbitration agreement, the court stated:

[W]e construe the language of the arbitration agreement, stating that the parties to the agreement intend “to avoid the inconvenience, cost, and risk that accompany formal administrative or judicial proceedings,” as stating an intention to lawfully preclude or restrict the parties to the arbitration agreement from submitting their claims for adjudication to an administrative entity such as the Labor Commissioner, at least to the extent set forth by the United States Supreme Court in Preston. We therefore conclude that the inclusion of a provision limiting resort to an administrative forum does not render the arbitration agreement unconscionable or unenforceable.

Practical Impact

According to a shareholder in Ogletree Deakins’ San Francisco office: “While the plaintiff employee ultimately prevailed in this case, the decision is by no means a repudiation of arbitration agreements. To the contrary, the California Supreme Court continues to give deference to agreements where the basic unwaivable statutory rights of employees are protected. In addition, the court has provided specific guidance on the type of administrative agency proceedings that can be specifically precluded by arbitration agreements. Employers would be wise to identify those agencies that perform adjudicatory functions and consult with counsel about whether to revise arbitration agreements to explicitly include language waiving an employee’s right to pursue such adjudicatory actions.”.

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