Who Decides the Issue of Class Arbitration?

Two districts of the California Court of Appeal recently issued significant decisions on arbitration agreements. In a published case, the Fourth Appellate District of the California Court of Appeal held that if the arbitration agreement is silent on whether the agreement allows for class or representative arbitration, then courts should decide the gateway issue of whether class arbitration is allowed. In the second unpublished decision, the Second Appellate District of the California Court of Appeal held that the issue of class arbitration was for the arbitrator to decide.

Garden Fresh v. Superior Court (Moreno), No. D066028 (November 17, 2014): In the most recent case, the employee, Alicia Moreno, worked for Garden Fresh from 2006 to 2013. She signed two arbitration agreements during her employment. Moreno sued Garden Fresh on behalf of herself and other employees for unfair competition and failure to pay overtime (among other claims). Garden Fresh filed a petition to compel arbitration of Moreno’s claims on an individual basis only.

The trial court granted the petition to compel but it did not dismiss the class claims. The court said the issue of whether the arbitration agreement contemplated class arbitration was for the arbitrator to decide. Garden Fresh appealed. The Fourth Appellate District of the California Court of Appeal disagreed and directed the trial court, not an arbitrator, to decide whether class or representative arbitration would be allowed.

Bergiadis v. Fred Loya Insurance Agency, Inc., No. B249276 (October 29, 2014): Alex Bergiadis worked as an appraiser for Fred Loya Insurance Company from January 2010 to June 2010. In 2012, he and four other employees filed a class action complaint against Fred Loya for allegedly failing to pay minimum wage and overtime and to provide meal and rest periods in addition to claims under the California Private Attorneys General Act (PAGA). Fred Loya asked the court to sever Bergiadis’ claim from the class action and compel him to arbitrate his claims on an individual basis since he had signed an arbitration agreement that did not provide for class or representative actions.

Bergiadis argued that the arbitration agreement was not valid as a stand-alone agreement since it was contained in a 64-page employment manual, which was given to Bergiadis to review and sign during his lunch break. Bergiadis also argued that the agreement was unconscionable since it provided for attorneys’ fees and costs to be awarded to the prevailing party on statutory claims, and equitable remedies were excluded from arbitration. The trial court refused to enforce the arbitration agreement for these reasons. Fred Loya appealed. The Court of Appeal held that there was a valid arbitration agreement but declined to decide whether the agreement authorized class arbitration—an issue that was not addressed by the trial court. Instead, the Court of Appeal returned the case to the trial court to decide whether all claims could be litigated in a single forum or whether it was appropriate to bifurcate the PAGA claims from arbitration (i.e., send the individual claims to arbitration and the PAGA claims to litigation).

Practical Impact

This case highlights two gray areas in the arbitration jurisprudence. First, there is a clear split on who should decide the issue of class arbitration—an arbitrator or the court. In holding that the issue of class arbitration was for the arbitrator to decide, the Bergiadis court followed Sandquist v. Lebo Automotive, Inc. Sandquist’s holding was completely undermined in Network Capital Funding Corp. v. Papke, which held that courts should decide the issue of class arbitration. In holding that courts should decide the issue of class arbitration, the Garden Fresh decision came out the same way as Papke. Moreover, the California Supreme Court granted review in Sandquist on November 12, 2014; thus, Sandquist is no longer citable authority. Until the California Supreme Court resolves Sandquist/Bergiadis v. Papke/Garden Fresh, there will be continued confusion and litigation over this issue.

Second, courts are still struggling with how to handle arbitrations involving PAGA claims. Quoting Iskanian v. CLS Transportation Los Angeles, LLC, the Bergiadis court openly questioned what should happen if the parties could not agree to arbitrate the PAGA claims. Specifically, the court questioned whether it would be appropriate to bifurcate individual claims from the PAGA claims, and stay the arbitration while the PAGA claims were litigated. The Court of Appeal remanded these issues to the trial court for further consideration.

Although Iskanian and Bergiadis did not answer this second question, the Supreme Court of the United States provided some guidance on how it should be answered when the Federal Arbitration Act (FAA) is implicated. In KPMG LLP v. Cocchi, the Supreme Court held that where certain claims are arbitrable under the FAA—even if others are not—the arbitrable claims must be sent immediately to arbitration. The Court explained that the FAA “leaves no place for the exercise of discretion . . . but instead mandates that courts shall direct the parties to proceed to arbitration on issues as to which arbitration has been assigned.” Because the Supreme Court suggested it is not appropriate to stay claims that are arbitrable under the FAA, the most appropriate option appears to be staying the PAGA claim while arbitration proceeds on the individual claims. Whether California courts will ultimately follow Cocchi or its reasoning remains to be seen.