The Wolf Guarding the Henhouse: Should Arbitrators Decide Whether To Enforce Arbitration Agreements?

When an employee files a lawsuit in court, and the employer tries to compel the employee to proceed in arbitration based on an arbitration agreement, who gets to decide whether the arbitration agreement is enforceable?  Is it the judge who is presiding over the employee’s case?  Or is it an arbitrator?  For more than five years, the rule in California-which we think is fair-has been that the judge decides.  However, the recent decision of Tiri v. Lucky Chances, Inc. (May 15, 2014) 2014 DJDAR 6103 introduces confusion into this previously settled question.

Prior to Tiri, two well-reasoned decisions by the California Court of Appeal had found that it is for the judge, and not the arbitrator, to decide whether to force a plaintiff into arbitration.  See Murphy v. Check ‘N Go (2007) 156 Cal.App.4th 138; Ontiveros v. DHL Express (2008) 164 Cal.App.4th 494, 503.  In those cases, the courts found that the provisions delegating arbitrability to the arbitrator were substantively unconscionable.  In other words, permitting arbitrators to determine whether or not to compel arbitration was unfair because the arbitrators had a “unique self-interest in deciding that a dispute is arbitrable.”  Ontiveros, supra, 164 Cal.App.4th at 505.

Without casting any aspersions on arbitrators, this real-world analysis makes sense.  Arbitrators are paid (and often paid a significant amount of money) to handle employment cases.  Arbitrators are also, not surprisingly, in favor of more arbitrations.  Therefore, an arbitrator is more likely to send a case to arbitration than a judge.

In Tiri, however, the Court of Appeal for the First Appellate District (which includes much of the Bay Area) held that the arbitrator gets to make the call.  In Tiri, the plaintiff had signed an arbitration agreement three years after she was hired.  Two years later, she was fired.  She then sued for wrongful discharge.  After she sued, the defendant petitioned the trial court to compel arbitration.  The trial court denied that petition, holding that Ms. Tiri’s case could remain in court.  The Court of Appeal reversed.

As in Murphy and Ontiveros, the arbitration agreement in Tiri had a specific clause providing that the arbitrator had the exclusive authority to decide any issue related to the enforceability of the arbitration agreement.  The Court of Appeal noted the holdings in Murphy and Ontiveros, but concluded that recent United States Supreme Court decisions effectively overrode those holdings.  Specifically, the Court of Appeal found that Rent-A-Center v. Jackson (2010) 561 U.S. 63 compelled the conclusion that:

[C]lear delegation clauses in employment arbitration agreements are substantively unconscionable only if they impose unfair or one-sided burdens that are different from the clauses’ inherent features and consequences.

Incredibly, the Court of Appeal appears to be saying that if unfairness is always part of delegation clauses, then the clauses are not substantively unconscionable, and are therefore enforceable.  In other words, if a delegation clause is inherently unfair, then it is enforceable because otherwise delegation clauses would be categorically unenforceable.

This reasoning seems circular.  If arbitration agreements are inherently unfair, then they should not be enforceable. This is particularly true given that such agreements are usually contracts of adhesion, meaning that employees are required to sign them as-is if they want to have a job.

As explained above, the holding in Tiri conflcts with the holdings in Murphy and Ontiveros.  It would not be surprising if the California Supreme Court granted review.  Please check back here for future updates.

The law regarding arbitration agreements is very complicated.  If you are subject to an arbitration agreement and have questions about it, please feel free to call the attorneys at Hunter Pyle Law for a free consultation at 510.444.4400.  You can also email us at inquire@hunterpylelaw.com