New California Supreme Court Case Expands Judicial Review of Employment Arbitration Decisions

May 10, 2010
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Introduction

 

In 1992, in Moncharsch v. Heily & Blase, the California Supreme Court decided that arbitration decisions involving employment disputes generally may not be reviewed by California courts for errors of fact or law.  The Court reasoned that although there is a risk that the arbitrator will make a mistake, the parties have agreed to bear the risk in return for a quicker and less expensive resolution to their dispute.  However, in recent years, California courts have begun to chip away at the Moncharsch decision by introducing several exceptions to this general rule.  On April 26, 2010, the California Supreme Court made yet another exception when it issued its decision in Pearson Dental Supplies, Inc. v. Superior Court.

 

The Facts

 

Luis Turcios was hired by Pearson Dental Supplies (“Pearson”) as a janitor in 1999.  He was terminated in 2006 at the age of 67.  After his termination, Turcios filed a complaint with the Department of Fair Employment and Housing (“DFEH”) claiming age discrimination.  The DFEH sent Turcios a right-to-sue letter, and Turcios filed an age discrimination lawsuit against Pearson in California Superior Court on October 2, 2006.  At a scheduling conference on February 20, 2007, Pearson’s attorney mentioned to Turcios, for the first time, that there was an arbitration agreement in Turcios’ file. 

 

On March 13, 2007, Pearson filed a motion in Superior Court to compel arbitration based on the existence of the arbitration agreement.  The arbitration agreement stated that the parties agreed to arbitrate disputes arising out of their employment relationship in order to “avoid the inconvenience, cost, and risk that accompany formal administrative or judicial proceedings.”  The Superior Court granted Pearson’s motion, dismissing Turcios’ case.

 

Soon after, Turcios and Pearson began the arbitration process.  On July 24, 2007, Pearson filed a motion for summary judgment with the arbitrator.  In the motion, Pearson claimed that Turcois had failed to initiate the arbitration process within the one year period provided by the terms of the arbitration agreement.  In reply, Turcios argued that, according to Code of Civil Procedure section 1281.12, the one year statute of limitations period had been tolled when he filed an action in Superior Court.  The arbitrator ruled for Pearson, finding, without much discussion, that Turcios’ claim had been filed outside the one year statute of limitations period provided in the arbitration agreement. 

 

After receiving a favorable ruling from the arbitrator, Pearson petitioned the Superior Court to affirm the arbitrator’s award.  Instead, the trial court vacated the award, finding that the arbitrator had committed a clear error of law by misinterpreting the tolling provision of the Code of Civil Procedure.  Pearson appealed, and the Court of Appeal reversed, finding that although the arbitrator had committed an error, it was improper for the Superior Court to vacate the award on that basis.  Turcios appealed the Court of Appeal’s decision to the California Supreme Court. 

 

The Supreme Court’s Decision

 

The Supreme Court found that the arbitrator had committed a clear error by failing to find that the statute of limitations was tolled on the date Turcios filed his lawsuit.  The Court then confronted the more complicated issue of whether the error was sufficient to vacate the arbitration award.  The Court noted that generally, arbitration awards may be vacated only for a few specific reasons, including corruption, fraud, and arbitrator misconduct.  The Court also noted that the Moncharsch decision provides a limited exception to the general rule, allowing arbitration awards to be reviewed in court when “granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights.” 

 

Turning to Turcios’ situation, the Court found:

 

It is difficult to imagine a more paradigmatic example of when “granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights” than in the present case, in which, as a result of allowing the procedural error to stand, and through no fault of the employee or his attorney, the employee will be unable to receive a hearing on the merits of his FEHA claims in any forum.

 

Thus, the Court found that when an employee subject to a mandatory arbitration agreement is unable to obtain a hearing on the merits of his FEHA claims because of an arbitration decision based on legal error, a court may vacate the arbitration decision. 

 

The Supreme Court also addressed the issue of whether the arbitration agreement was enforceable.  The agreement contained language stating that the parties wished to “avoid the inconvenience, cost, and risk that accompany formal administrative or judicial proceedings.”  However, it is well-established that arbitration agreements involving the employment relationship cannot bar employees from going to administrative agencies such as the DFEH and Equal Employment Opportunity Commission (“EEOC”), nor can they bar those agencies from prosecuting employment discrimination on their own.  Turcois argued that the arbitration agreement was contrary to public policy and was therefore unenforceable.  The Supreme Court disagreed.  It found that arbitration agreements may lawfully prohibit employees from resorting to some administrative agencies, including the Labor Commissioner.  The Court then found that because the arbitration provision could be construed in a manner that is lawful, it would interpret it that way.  Therefore, the Court found that the arbitration agreement was enforceable.   

 

Conclusion

 

The Pearson decision makes it clear that the California Supreme Court is willing to make exceptions to the general rule that errors of law by arbitrators are not reviewable when the arbitrator’s decision would result in prejudice to the employee’s right to have his or her claims heard.  In light of this case, employers should review their arbitration agreements to determine whether they contain procedural language that could be construed by the courts as a limitation on employees’ procedural rights.  In addition, employers should be aware that this decision may encourage employees to challenge mandatory arbitration agreements, thus increasing the overall cost of the arbitration process. 

 

 The California Supreme Court Will Review Harris v. City of Santa Monica

 

The California Supreme Court recently announced that it will be reviewing the decision in Harris v. City of Santa Monica, a case involving the “mixed motive defense,” which was discussed in Liebert Cassidy Whitmore’s December 10, 2009 and March 10, 2010 issues of the Client Update.  Liebert Cassidy Whitmore will continue to monitor this case and will analyze the Supreme Court’s pending decision in a future issue of the Personnel File. 

 

 

 

This article was written by Brianne Marriott, an attorney with the labor and employment law firm of Liebert Cassidy Whitmore.  Ms. Marriott is an Associate in the Fresno office and can be reached at (559) 256-7800 or at bmarriott@lcwlegal.com.  For more information regarding the information above or our firm please visit our website at www.lcwlegal.com, or contact one of our offices below.

 

Liebert Cassidy Whitmore publishes this article as a service to our clients and other friends for informational purposes only. It is not intended to be used as a substitute for specific legal advice or opinions and the transmission of this information is not intended to create an attorney-client relationship between sender and receiver. You should not act upon this information without seeking professional counsel. 

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