Sandquist v. Lebo Automotive, Inc.: California’s Cautionary Tale About the Importance of Drafting Arbitration Agreements with Precision

Ambiguities in employee arbitration agreements may force employers to litigate putative class action claims in arbitration. The California Supreme Court delivered this cautionary message by its recent holding in Sandquist v. Lebo Automotive, Inc. In Sandquist, the plaintiff, an African-American male, filed a discrimination class action on behalf of “current and former employees of color” following his separation from the company. The company filed a motion to compel individual arbitration, relying on an arbitration clause the plaintiff signed in three separate documents upon commencing his employment. The trial court granted the company’s motion, concluding that the existing case precedent required the court – rather than the arbitrator – to determine whether class arbitration was available. Ultimately, the trial court interpreted the arbitration agreements’ as impliedly prohibiting class arbitration and, on that basis, struck the class allegations.

Upon review, the Court of Appeal reversed the trial court, holding that the arbitrator, not the trial court, must determine whether an arbitration agreement permits class arbitration. The California Supreme Court granted review and, on July 28, 2016, a narrowly divided Court affirmed the Court of Appeal, holding that the question of whether a court or an arbitrator decides if an arbitration agreement permits class claims should be determined on a case-by-case basis, specifically focusing on the agreement's terms and resolving any ambiguities in favor of the non-drafting party. By its decision, the Court placed itself at odds with numerous federal appellate courts that have held that such questions are for a court, not an arbitrator, to decide.

In examining the language of the instant arbitration agreement, the majority found that class arbitration was available to the plaintiff because the agreement broadly allowed for any employment-related disputes to be resolved by an arbitrator, and the agreement did not include an express waiver of class claims. Moreover, the agreement did not make clear whether the court or an arbitrator must resolve questions of arbitrability. As such, the Court held that this ambiguity be resolved in favor of arbitration and against the employer’s interpretation as the drafting party.

The takeaway? In the vast majority of scenarios, the employer is the drafting party of the arbitration agreement, meaning that any ambiguities in the agreement will likely be resolved in employees’ favor. As such, employers contemplating the use of an arbitration agreement that precludes class action litigation should include narrowly-tailored waiver language that places the interpretation of the arbitration agreement in the hands of the court, not the arbitrator.

Employers, especially those in California, who foresee utilizing an arbitration agreement with a class action waiver should consider the following:

  • Review your current arbitration agreements. If you currently employ an arbitration agreement, it is worthwhile to have the language reviewed by qualified employment counsel to ensure that the relevant provisions are clear and unambiguous.
  • Revise your current agreement to include additional language expressly prohibiting cases brought on a class basis, and making clear that the court, not an arbitrator, should resolve any disputes regarding the agreement. In Sandquist, the Court found that while the employer “could have prepared an arbitration provision that explicitly addressed any unstated desire to have the availability of class arbitration resolved by a court,” it chose not to do so. If you revise your arbitration agreement, we recommend consulting with qualified employment counsel to discuss how the new agreement should be “rolled out” to employees.
  • Understand the risks associated with litigating before an arbitrator. Although many benefits are generally associated with arbitration as a dispute resolution mechanism, such as expediency and confidentiality, it can also be costly for an employer. This is especially so in California, where employers are responsible for paying for all of the arbitration costs, including the arbitrator fees. Moreover, given the limited judicial review available for arbitration awards, employers often face higher risks in arbitration should the arbitrator decide that employment claims can be arbitrated on a class basis.
It is also worth noting that the National Labor Relations Board has concluded that class-action waivers are prohibited under the National Labor Relations Act; however, the vast majority of the federal courts have expressly disagreed. Therefore, in most jurisdictions, class waivers remain enforceable and, for many employers, advisable.

In sum, the Court’s endorsement of evaluating the enforceability of class waivers in arbitration agreements on a case-by-case basis means that the totality of the agreement, and the context in which it was presented to employees, will be scrutinized. Such an individualized inquiry reinforces the import of including precise language in arbitration agreements and remaining cognizant of the circumstances under which those agreements are presented to employees. Kelley Drye's Labor and Employment Group routinely assists employers in the review, drafting, and “rolling out” of arbitration agreements. Please feel free to contact our team if you need assistance in preparing, reviewing, or defending the enforceability of employment and arbitration agreements.