Employment Arbitration Dealt a Heavy Blow by the California Supreme Court

A closely-divided California Supreme Court has dealt employment arbitrations a potentially huge setback.  In a 4-3 decision, the court held that an arbitrator’s legal error warranted vacating an arbitration award where the error deprived an employee of his right to a hearing on the merits of his claim arising under California’s Fair Employment and Housing Act (“FEHA”).

 

The court attempted to limit its holding to the “particular circumstances of this case,” but the potential expansion of this ruling to future cases is clear.  Arbitration awards, even where the arbitrator gets it wrong, are supposed to be final and binding, as announced in the leading case of Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, nearly 20 years ago.  The new case that changes the landscape is Pearson Dental Supplies, Inc. v. Superior Court (Turcios) (2010 Cal. LEXIS 3685), available here.

The plaintiff, Luis Turcios, was terminated in January 2006, at the age of 67.  On October 2, 2006, within one year of being terminated, he filed a lawsuit in Superior Court claiming age discrimination and wrongful termination.

In March 2007, Pearson filed a motion to compel arbitration.  Pearson claimed the parties were bound to arbitrate any disputes by virtue of an employment arbitration agreement signed by Turcios while working at Pearson.  The agreement stated that any dispute must be submitted to binding arbitration within one year from the date the dispute arose and, if not submitted to arbitration within one year, the claim would be void and considered waived to the fullest extent allowed by law.

The court granted Pearson’s motion to compel arbitration.  The parties then selected an arbitrator to conduct binding arbitration.  Pearson filed a motion for summary judgment with the arbitrator, contending that Turcios’s claims were time-barred because they had not been submitted to arbitration within one year of plaintiff’s termination.  The arbitrator, in a brief letter ruling, held in favor of Pearson and dismissed the claims as time-barred.  Turcios, therefore, never got a full hearing on his claims – in arbitration or in court.

The California Supreme Court, however, granted him relief.  The court held for Turcios despite the usual rule that the arbitrator’s legal error is not a basis for vacating an arbitrator’s award.

By signing an arbitration agreement, the parties generally take the risk of arbitral error in return for a quick, inexpensive and conclusive resolution to their dispute.  Ever since Moncharsh, practitioners have understood that arbitrators are not necessarily bound to follow the law and may base their decisions upon broad principles of justice and equity.  The California Supreme Court has now backed off of its decision in Moncharsh, at least in cases involving claims arising under FEHA, and quite possibly, by extension, claims arising under the California Labor Code as well.

According to the court:

“We therefore hold that when, as here, an employee subject to a mandatory employment arbitration agreement is unable to obtain a hearing on the merits of his FEHA claims, or claims based on other unwaivable statutory rights, because of an arbitration award based on legal error, the trial court does not err in vacating the award.  Stated in other terms, construing the CAA [California Arbitration Act] in light of the Legislature’s intent that employees be able to enforce their right to be free of unlawful discrimination under FEHA, an arbitrator whose legal error has barred an employee subject to a mandatory arbitration agreement from obtaining a hearing on the merits of a claim based on such right has exceeded his or her powers within the meaning of Code of Civil Procedure section 1286.2, subdivision (a)(4), and the arbitrator’s award may properly be vacated.  (See Armendariz, supra, 24 Cal.4th at pages 106-107.)”

It is not difficult to imagine that many employees unsatisfied with arbitration results can point to a “legal error,” and that the Turcios argument will be made any time a FEHA-based claim, or a wage and hour claim, does not go to a full hearing on the merits but is dismissed on a pre-hearing motion or demurrer.

Arbitration remains a viable option for employers, but they must watch out for compliance with substantive and procedural nuances before and during the process that may serve to invalidate the arbitration award.

Jeffrey A. Snyder, Employment Group