The Ninth Circuit Court of Appeal’s decision in Sandler v. Modernizing Medicine, Inc. holds that, in employment arbitration agreements governed by the Federal Arbitration Act (“FAA”), a properly drafted delegation clause (appointing an arbitrator, not a judge, to decide challenges to the agreement’s validity) will be upheld. The decision states that it is legal error to rely on California appellate decisions that apply state law to treat boilerplate severability clauses as sufficient to strip a clear delegation provision of its power.
In Sandler, the employee brought California and federal discrimination and leave claims in court, and the employer moved to compel arbitration under an agreement requiring arbitration under the FAA, administered by JAMS, and incorporating the JAMS Employment Arbitration Rules. Those rules give the arbitrator authority to decide formation, validity, and scope of the arbitration agreement. The district court acknowledged that incorporation of JAMS Rules typically constitutes “clear and unmistakable” evidence of delegation, but held that the severability clause’s permitting a “court or other body of competent jurisdiction” to “excise an unconscionable provision,” rendered the delegation clause ambiguous and unenforceable. The district court therefore had the authority to determine the validity question and invalidated the arbitration agreement as unconscionable.
The Ninth Circuit reversed. Applying federal law under the FAA to the “who decides” question, the court held that incorporating JAMS rules is enough to clearly and unmistakably delegate arbitrability, and a generic severability clause does not negate that delegation. The appellate court harmonized the two provisions, reading the severability clause as addressing what happens if a court or arbitral body reaches the issue, not as retracting the parties’ separate agreement to have an arbitrator decide validity. The court further indicated that state rules treating severability language as defeating delegation are preempted under the FAA when they disfavor arbitration.
The opinion in Sandler offers several points of practical interest for California employers who wish to provide an arbitrator to make decisions regarding disputes over the formation, existence, validity, and interpretation or scope of the arbitration agreement. Agreements that expressly allocate these powers to the arbitrator (and that incorporate JAMS or comparable institutional rules reflecting the same allocation) may not need to be revised, based on the court's reasoning. As for severability clauses, Sandler suggests that language referencing both courts and arbitral tribunals as “bodies of competent jurisdiction” is less likely to create the kind of ambiguity that defeated delegation in the district court. Finally, the Sandler decision is a reminder that delegation does not make unconscionability irrelevant; it merely shifts the forum for that fight.
