Arbitration Agreements

Congrats to Hogan Lovells’ appellate team for securing one of the most important employer-friendly SCOTUS decisions in decades regarding the enforceability of class action waivers in arbitration agreements.  Please read about it at http://www.hoganlovells.com/en/news/hogan-lovells-scores-major-win-for-employers-in-us-supreme-court-case-epic-systems-corp-v-lewis.

Employers in California received an important reminder this past month as to why it is necessary to be specific when identifying the claims that are subject to arbitration in an employee arbitration agreement. The case Cortez v. Doty Bros[1] examined the strict manner in which employment-related arbitration agreements are interpreted under California law.  The plaintiff in Cortez sued his former employer on behalf of himself and a putative class of other employees, alleging that the employer failed to comply with the California Labor Code provisions governing overtime pay, meal periods, rest breaks and the timely payments of wages due on termination of employment.  The plaintiff also asserted claims under Industrial Welfare Commission Wage Order (“Wage Order 16”) and the Labor Code for the employer’s failure to comply with certain recordkeeping requirements.  A Collective Bargaining Agreement (CBA) that governed the employment relationship provided for arbitration of any dispute or grievance which “arose under” Wage Order 16, but unfortunately, the arbitration provision in the CBA did not specifically incorporate claims under the California Labor Code itself.  Because the plaintiff in Cortez asserted both claims under Wage Order 16 and under the Labor Code for the failure to timely pay wages upon separation and unfair competition (which claims are not based on Wage Order 16), the employer could not force the employees to arbitrate the timely pay and unfair competition claims, even though the remaining claims (overtime pay, meal periods, rest breaks) were subject to mandatory arbitration.

Cortez stands as a reminder of courts’ insistence that arbitration is a matter of contract and while contractual matters under a CBA are presumed arbitrable, this presumption does not apply to statutory violations, i.e. the Labor Code.  Therefore, for statutory claims to be arbitrable, they must be explicitly incorporated into the parties’ arbitration agreement.  The decision notes “the United States Supreme Court has made clear that waiver of the right to prosecute a statutory violation in a judicial forum is only effective if it is explicit, ‘clear and unmistakable.’”[2]  And according to the Cortez court, the failure to cite the statute at issue in the arbitration provision itself is fatal to any claim that the waiver of the right to enforce the statute in court is clear and explicit.

Employers with California-based employees should examine their arbitration agreements to ensure that the arbitration clause clearly and unmistakably include the most-commonly asserted statutory violations within the scope of arbitration, as well as a “catch all” for all “statutory claims” that may be asserted by an employee. The arbitration clause should also give the arbitrator, and not a court, the power to determine which claims are subject to arbitration, except (as noted below) with respect to the question of class claims.  If not, employers risk the rejection of their arbitration agreements, and like the employer in Cortez, may have to litigate statutory disputes in a public judicial forum.

The Cortez court separately addressed the issue of whether an arbitration agreement that is silent about the arbitration of class claims can be interpreted to permit class wide arbitration.  The court restated the rule established in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662, 684-685 (2010), that absent express language in the arbitration provision or extrinsic evidence establishing the parties’ intent to arbitrate class claims, only individual claims may be arbitrated, and silence on the issue may not be construed as agreement to class arbitration.  A well-drafted arbitration agreement should reserve for the court, and not the arbitrator, the power to determine the arbitrability of group, collective or class claims.

In this portion of the decision, the Cortez court noted the current split amongst federal circuit courts over whether explicit class action waivers violate the National Labor Relations Act.  The Cortez court declined to address this split, instead holding that it was bound by the California Supreme Court’s rejection of the same NLRA violation argument in Iskanian.[3]  In any event, the circuit split likely will be resolved soon when the U.S. Supreme Court decides Lewis v. Epic Systems Corp. When that important decision is handed down, employers once again will need to review, and if necessary, modify their arbitration agreements to achieve their desired goals.

 

[1] Cortez v. Doty Bros. Equip. Co., 15 Cal. App. 5th 1 (2017).

[2] Id. at 14. (emphasis added)

[3] See Iskanian v. CLS Transportation, LLC Los Angeles, 59 Cal.4th 348, 375-376 (2014) (“the NLRA’s general protection of concerted activity, which makes no reference to class actions,” does not bar parties to a CBA from excluding class claims from the agreement to arbitrate).