California Court of Appeal Upholds Provision Delegating Authority to Arbitrator to Resolve Disputes Concerning Enforceability of Arbitration Agreement

On May 15, 2014, the California Court of Appeal provided positive news to employers seeking to maintain and enforce arbitration agreements. In Tiri v. Lucky Chances, Inc., a unanimous First Appellate District panel reversed a trial court, and enforced a provision delegating authority to resolve disputes concerning enforceability of an arbitration agreement to an arbitrator, and not a court.

Lourdes Tiri was employed as a cook by Lucky Chances, a card-club casino in Colma. During her employment, Tiri signed a mutual agreement to arbitrate claims which contained a “delegation clause.” This clause provided that an arbitrator, and not a court, would decide any dispute as to whether the arbitration agreement was enforceable. The arbitration agreement included a delegation clause that read: “The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”

Five years after signing the agreement, Tiri alleged that she was terminated while on medical leave. Tiri filed a civil action for wrongful discharge and Lucky Chances brought a motion to enforce the arbitration agreement. The trial court judge did not separately decide whether the delegation clause was enforceable. Rather, the judge decided that the agreement as a whole was unconscionable. In support of its decision, the court found that the agreement was provided on a “take it or leave it” basis and did not attach the governing American Arbitration Association Rules.

The Court of Appeal reversed and determined that the trial court’s analysis of the entire agreement was improper. The court explained that, based on United States and California Supreme Court precedent, the delegation clause must be reviewed separately from the entire agreement. Moreover, such a clause was enforceable if it is “clear and unmistakable” and not revocable under state contract law. The court found that the language of the delegation clause was clear and unmistakable. The court also found that the delegation clause was not unconscionable, because it was not overly harsh, and because both parties were bound equally to the provision.

In reaching this conclusion, the court declined to follow two other California appellate cases, Ontiveras v. DHL Express and Murphy v. Check ‘N Go of California, Inc., that found arbitration agreements unconscionable despite similar delegation clauses. In the court’s view, these decisions have been undermined by the more recent U.S. Supreme Court decisions in Rent-A-Center, West, Inc. v. Jackson and AT&T Mobility LLC v. Concepcion. The court found the delegation clause was effective, and remanded the case to the arbitrator to determine whether or not the agreement as a whole was unconscionable.

The legal landscape surrounding arbitration agreements is expected to develop significantly in 2014, as no less than six cases are pending before the California Supreme Court regarding enforceability of employment arbitration agreements. As employers wait for more clarity in this area, and in light of the constant evolution of the standard for enforceability of arbitration agreements, one step employers wishing to arbitrate employment disputes can take now is to review their arbitration agreements and consider the advantages and disadvantages of including similar delegation language.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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