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Role Reversal in Recent State Supreme Court Arbitration Decision

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In yesterday’s Sandquist v. Lebo Automotive decision, a split California Supreme Court issued a decision further construing the status of class actions in arbitration agreements. In short, the court ruled that it should be an arbitrator, and not a court, who interprets the arbitration agreement to see whether bringing claims on behalf of a class would be allowed in this alternative forum. Interestingly, stakes in the case caused roles to be flipped from a typical arbitration dispute, where plaintiffs attempt to keep the matter before a trial judge and defendants seek to empower the arbitrator.

The case was similar to prior decisions in that the crux of the case came down to the arbitration agreement itself. After all, arbitration agreements are simply clauses in contracts, and are thus subject to state law rules of contract interpretation, within the boundaries set by the Federal Arbitration Act. And the Supreme Court has already addressed how such an issue should be interpreted. The justices have explained that “[j]ust as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, so the question ‘who has the primary power to decide arbitrability’ turns upon whether the parties agreed to submit that question to arbitration.” And among other provisions, the contract noted that “claims . . . shall be submitted to and determined exclusively by binding arbitration.”

With the broad language in the contractual provisions, the decision seems simple. So why the controversy? For one, ever since the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion and Am. Exp. Co. v. Italian Colors Rest., the status of class actions in arbitration has been in jeopardy. This decision shows that when contract interpretation is in the hands of an arbitrator, they may sometimes rule for plaintiffs and allow class actions to survive. Defense argue that there is “too much at stake for the arbitrator to make the call on class proceedings.” But this is likely just a reflection of the fact that businesses are threatened; in a forum where plaintiff’s rights have repeatedly been foreclosed, some hope remains.

With the decision seemingly out of line with other circuits, defense counsel is weighing its options. Defense counsel commented on a cert petition pending in the U.S. Supreme Court on the issue, saying the justices “would like to answer this question, they just have not been properly asked it.” For now, however, the Sandquist holding is the law in California.

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