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Sandquist v. Lebo Automotive, Inc.

Supreme Court of California

July 28, 2016

TIMOTHY SANDQUIST, Plaintiff and Appellant,
v.
LEBO AUTOMOTIVE, INC., et al., Defendants and Respondents.

         Los Angeles County Super. Ct. No. BC476523, Ct.App. 2/7 B244412 Elihu Berle Judge.

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         COUNSEL

         Sanford Heisler Kimpel, Janette Wipper, Felicia Medina; Public Justice and F. Paul Bland, Jr., for Plaintiff and Appellant.

         Arbogast Law, David M. Arbogast; The Bronson Firm and Steven M. Bronson for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

         Capstone Law, Glenn A. Danas; Public Citizen Litigation Group and Scott T. Nelson for Public Citizen, Inc., as Amicus Curiae on behalf of Plaintiff and Appellant.

         Fisher & Phillips, James J. McDonald, Jr., Grace Y. Horoupian, Jimmie E. Johnson and Wendy McGuire Coats for Defendants and Respondents.

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         Holland & Knight, James W. Michalski and Jerrold J. Ganzfried for Dri-the Voice of the Defense Bar and the Association of Southern California Defense Counsel as Amici Curiae on behalf of Defendants and Respondents.

         OPINION

         WERDEGAR, J.

         Plaintiff Timothy Sandquist and the various defendants here are parties to an arbitration agreement. A salient question is whether that agreement permits or prohibits arbitration on a classwide basis. Here we must answer a question one step removed—who decides whether the agreement permits or prohibits classwide arbitration, a court or the arbitrator? The question has divided the many state and federal courts to consider it.

         We conclude no universal rule allocates this decision in all cases to either arbitrators or courts. Rather, who decides is in the first instance a matter of agreement, with the parties’ agreement subject to interpretation under state contract law. Under state law, these parties’ arbitration agreement allocates the decision to the arbitrator. Under federal arbitration law, no contrary presumption requires a different result, so the issue remains one for the arbitrator. Because the Court of Appeal arrived at a similar answer, we affirm.

         Factual and Procedural Background

         The material facts are not in dispute. In 2000, plaintiff Timothy Sandquist was hired by defendants (collectively, Lebo or Lebo Automotive) to work as a salesperson at an automotive dealership.[1] On Sandquist's first day, his manager gave him approximately 100 pages of preprinted forms with instructions to fill out and sign each document as quickly as possible so that Sandquist could begin work. The documents were not discussed with Sandquist, but he was required to sign them as a condition of employment. Included among the documents were three different form arbitration agreements. Under time pressure, Sandquist finished the paperwork as quickly as possible, without reviewing each document, and did not realize he was signing multiple arbitration agreements.

         In 2012, Sandquist, who is African-American, sued Lebo Automotive. The operative complaint alleges Sandquist and other non-Caucasian employees were subjected to racial discrimination, harassment, and retaliation. The complaint seeks to bring claims on behalf of "a class of current and former

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employees of color." It includes an individual claim for constructive discharge and class claims for discrimination and creation of a hostile work environment under the California Fair Employment and Housing Act (Gov. Code, § 12940 et seq.) and unfair competition law (Bus. & Prof. Code, § 17200 et seq.). The complaint seeks injunctive and declaratory relief and damages.

         Lebo Automotive moved to compel individual arbitration based on the arbitration agreements signed by Sandquist on his first day of work. (See Code Civ. Proc., § 1281.2.) Finding the agreements enforceable and not unconscionable and the instant dispute within their scope, the trial court granted the motion. The court also interpreted Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp. (2010) 559 U.S. 662 [176 L.Ed.2d 605, 130 S.Ct. 1758] and Kinecta Alternative Financial Solutions, Inc. v. Superior Court (2012) 205 Cal.App.4th 506 [140 Cal.Rptr.3d 347] as requiring the court to decide whether class arbitration was available. Because in the trial court’s view the agreements did not permit class arbitration, it struck the class allegations under Code of Civil Procedure section 436. Although the trial court granted Sandquist leave to amend and time to find a substitute class representative, when he advised the court every employee at the dealership was subject to the same arbitration agreements, it dismissed the class claims with prejudice.

         On appeal, the Court of Appeal reversed in part. It declined to address Sandquist’s claim that the arbitration agreements were unconscionable because that ruling was not appealable (State Farm Fire & Casualty v. Hardin (1989) 211 Cal.App.3d 501, 505-506 [259 Cal.Rptr. 433]), but it considered his challenge to the dismissal of class allegations under the death knell doctrine (see In re Baycol Cases I & II (2011) 51 Cal.4th 751, 762 [122 Cal.Rptr.3d 153, 248 P.3d 681]). Disagreeing with the trial court’s conclusion that existing precedent compelled the court to determine whether class arbitration was available, the Court of Appeal found the issue an open and unsettled one. It examined cases on each side of the existing divide and concluded the availability of class proceedings under an arbitration agreement is a question of contract interpretation for the arbitrator to decide in the first instance.

         Lebo Automotive petitioned for review, contending the Court of Appeal’s decision contributed to an existing state and federal split over who should decide whether an arbitration agreement permits class arbitration. We granted review.

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         Discussion

         I. State Law and the Parties’ Arbitration Clauses

         A. What the Arbitrator May Decide Is Initially a Matter of Agreement Under State Law

         The issue before us is not whether class arbitration is permissible here, but a matter antecedent to that issue: who should decide whether it is permissible, a court or an arbitrator. No universal one-size-fits-all rule allocates that question to one decision maker or the other in every case. Rather, “who decides” is a matter of party agreement. As the United States Supreme Court has explained in a closely related context, “[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute [citations], so the question ‘who has the primary power to decide arbitrability’ turns upon what the parties agreed about that matter.” (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 943 [131 L.Ed.2d 985, 115 S.Ct. 1920].) And just as whether class arbitration is available depends on whether the parties agreed to allow or forbid it (Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., supra, 559 U.S. at pp. 684-687), so the question who has the power to decide the availability of class arbitration turns upon what the parties agreed about the allocation of that power.

         The United States Supreme Court’s treatment of the issue confirms the parties’ agreement as the mandatory starting point. In Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 [156 L.Ed.2d 414, 123 S.Ct. 2402](Green Tree), the plurality and the principal dissent, although disagreeing about the ultimate “who decides” question, both agreed about where the analysis should begin. (See id. at p. 451 (plur. opn. of Breyer, J.) [concluding the question should be for the arbitrator because “[u]nder the terms of the parties’ contracts, the question-whether the agreement forbids class arbitration-is for the arbitrator to decide”]; id. at p. 456 (dis. opn. of Rehnquist, C. J.) [agreeing that “the decision of what to submit to the arbitrator is a matter of contractual agreement by the parties”].) Similarly, in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., supra, 559 U.S. at page 680 and Oxford Health Plans LLC v. Sutter (2013) 569 U.S. ___, ___, fn. 2 [186 L.Ed.2d 113, 119, fn. 2, 133 S.Ct. 2064, 2068, fn. 2], the Supreme Court accepted-because the parties had so agreed-that an arbitrator should decide in the first instance whether class arbitration was available.

         Consequently, we must examine the parties’ agreements to determine what they say concerning the “who decides” question. But under what body of law? Sandquist argues federal law governs exclusively, while Lebo

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Automotive urges state law does. We agree with Lebo: this examination must be conducted, at least initially, through the prism of state law. “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally... should apply ordinary state-law principles that govern the formation of contracts.” (First Options of Chicago, Inc. v. Kaplan, supra, 514 U.S. at p. 944; see DIRECTV v. Imburgia (2015) 577 U.S. ___, ___ [193 L.Ed.2d 365, 372, 136 S.Ct. 463, 468]; Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 474 [103 L.Ed.2d 488, 109 S.Ct. 1248].) This default choice-of-law rule applies to the question whether the availability of class arbitration is for an arbitrator or a court; insofar as the question who decides “presents a disputed issue of contract interpretation, ” “state law, not federal law, normally governs such matters.” (Green Tree, supra, 539 U.S. at p. 450 (plur. opn. of Breyer, J.); accord, id. at p. 454 (cone. opn. of Stevens, J.) [applying state law]; id. at pp. 457-458 (dis. opn of Rehnquist, C. J.) [agreeing that “ ‘[s]tates may regulate contracts, including arbitration clauses, under general contract law principles’ ” and “ ‘[t]he interpretation of private contracts is ordinarily a question of state law’ ”].)

         The parties do not disagree as to which state’s law applies: California. The arbitration clauses were entered into in California, govern an employment relationship between a California resident and a company with its sole place of business in California, and invoke various provisions of California law throughout.

         B. The Application of State Contract Law to These Agreements

         Lebo Automotive had Sandquist sign three different form agreements. Each contains an arbitration clause. The language in each clause defining the scope of arbitrable matters varies slightly, but is materially the same.

         The clause in the “Applicant’s Statement & Agreement” provides in part: “I and the Company both agree that any claim, dispute, and/or controversy (including, but not limited to, any claims of discrimination and harassment, whether they be based on the California Fair Employment and Housing Act, as well as all other applicable state or federal laws or regulations) which would otherwise require or allow resort to any court or other governmental dispute resolution forum between myself and the Company (or its owners, directors, officers, managers, employees, agents, and parties affiliated with its employee benefit and health plans) arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Company, whether based on tort, contract, statutory, or equitable law, or otherwise, (with the sole exception of claims arising under the National Labor Relations Act which are

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brought before the National Labor Relations Board, claims for medical and disability benefits under the California Workers’ Compensation Act, and Employment Development Department claims) shall be submitted to and determined exclusively by binding arbitration.”

         The clause in the “Mandatory Arbitration Agreement” provides: “I agree that any claim, dispute, and/or controversy (including, but not limited to any claims of discrimination and harassment) which would otherwise require or allow resort to any court or other governmental dispute resolution forum, between me and the Company (or its owners, directors, officers, managers, employees[, ] agents, and parties affiliated with its employee benefits and health plans) arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with, the Company, whether based on tort, contract, statutory, or equitable law, or otherwise, shall be submitted to and determined exclusively by binding arbitration....”

         Finally, the clause in the “Employee Acknowledgement and Agreement” provides: “I agree that any claim, or dispute, or controversy (including, but not limited to, any and all claims of discrimination and harassment) which would otherwise require or allow resort to any court or other governmental dispute resolution forum between myself and the Company (or its owners, directors, officers, managers, employees, agents, and parties affiliated with its employee benefit and health plans) arising from, related to, or having any relationship or connection whatsoever with my seeking employment with, employment by, or other association with the Company, whether based on tort, contract, statutory, or equitable law, or otherwise, (with the sole exception of claims arising under the National Labor Relations Act which are brought before the National Labor Relations Board, claims for medical and disability benefits under the California Workers Compensation Act, and Employment Development Department claims), shall be submitted to and determine[d] exclusively by binding arbitration....”

         All three arbitration provisions share the same basic structure and much of the same language. All three contain two inclusive clauses that define the range of disputes that must be “submitted to and determined exclusively by binding arbitration.” Two of the three add an exclusive clause that sets out a specific, limited set of disputes, otherwise covered by the clause’s inclusive language, that are nevertheless withdrawn from the arbitrator’s purview.

         First, the provisions extend to “any claim, dispute, and/or controversy (including, but not limited to any [and all] claims of discrimination and harassment) which would otherwise require or allow resort to any court or other ...


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