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Agreement to Submit all Claims to Arbitration was Insufficient to Allow Employee to Compel Employer Into Class Arbitration

Class arbitration is so fundamentally different from individual arbitration that courts will not assume that an agreement to submit all employment related disputes for arbitration includes class-arbitration.

An employee hoping to retain the right to seek class arbitration will not be able to do so, unless the employee is party to an arbitration agreement that explicitly allows for class-arbitration. In the case of Network Capital Funding Corp. v. Papke, 230 Cal. App. 4th. 503 (2014), the California Court of Appeal court held that, where the arbitration agreement was silent, the court rather than the arbitrator had authority to decide whether a dispute was arbitrable. In addition, a court will not read an implicit agreement to class arbitration into an individual arbitration agreement.

Factual Basis of the Case

This case arose from a dispute between Defendant-Appellant Erik Papke and his former employer, Plaintiff-Respondent Network Capital Funding Corporation (“Network Capital”). At the beginning of his employment, Papke signed an arbitration agreement that required the parties to submit any employment related disputes to arbitration. In addition, the arbitration agreement states that the Federal Arbitration Act (“FAA”) would govern any subsequent arbitration. After his employment was terminated, Papke initiated arbitration against Network Capital. In his demand, Papke sought to bring class arbitration on behalf of all similarly situated current and former Network Capital employees. Papke alleged various wage and hour claims under the California Labor Code and unfair competition law. In response, Network Capital sought a judicial declaration that (1) it was the court rather than the arbitrator who had authority to decide whether the agreement allowed class arbitration; and (2) according to judicial review, the arbitration agreement did not allow class arbitration. In addition, Network Capital sought a preliminary injunction enjoining Papke from seeking any class or representative relief in the arbitration. Papke opposed the motion, and countered with a motion to compel Network Capital to submit the dispute to the arbitrator. The trial court heard all the motions at the same time. The trial court granted Network Capital’s preliminary injunction and denied Papke’s motion to compel arbitration. Papke appealed.

The Appeal

There were two main questions on appeal. First, was it the arbitrator or the court who had authority to decide whether the arbitration agreement allowed Papke to bring a demand for class arbitration? Second, if the court did have authority to decide the issue of class arbitration, did it err in deciding that the parties did not agree to allow class arbitration.

As to the first issue, the Court of Appeal agreed that the court, not the arbitrator, had authority to decide the question of class arbitration. As a starting point, the court reasoned that arbitration is a matter of consent; arbitrators only have authority because the parties agree to give them authority. As such, in the absence of a “clear and unmistakable agreement to the contrary, it is presumed the parties to an arbitration agreement intended the court, rather than the arbitrator, to decide whether they agreed to submit a particular dispute to arbitration.” Here, there was no clear and unmistakable statement as to who had authority to decide whether or not the individual arbitration agreement also allowed class arbitration. Indeed, Network Capital and Papke’s agreement neither mentioned class arbitration nor submitted arbitrability questions to the arbitrator. Where, as here, there was no clear and unmistakable statement, then the presumption is that the parties intended for the court to resolve the “who decides” question. Because Papke and Network Capital’s agreement was silent on class-arbitration, the court applied the presumption in favor of judicial review and found that allowing the arbitrator to decide would be contrary to the consensual nature of arbitration.

Having found that the court rather than the arbitrator had authority to decide whether the parties agreed to class arbitration, the court moved to the second question: was the trial court correct in finding that the parties did not agree to class arbitration. Papke had argued that, because the arbitration agreement required the parties to submit all claims,, save for a narrow category of exclusions, to arbitration, then that includes class arbitration. The Court of Appeal did not agree. Citing the Supreme Court case Stolt-Nielson S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), the court found that a court may not compel a party to submit to class arbitration under the FAA if there is no evidence that the parties arbitration agreement comprehends class arbitration. Because class-arbitration is substantially different than individual arbitration, a court will not assume that parties to an arbitration agreement have agreed to class arbitration without some contractual basis. Since the arbitration agreement between Network Capital and Papke provided only for individual arbitration, the court refused to read class arbitration into the contract. The court therefore affirmed the trial court’s order granting Network Capital’s preliminary injunction and granted Network Capital its costs for the appeal.

Papke’s Impact

This case is important for employees who might want to pursue class arbitration. It shows that courts consider class-arbitration fundamentally different from individual arbitration. An employee seeking to bring a class arbitration must therefore show some contractual basis to support his or her authority to bring such a claim. In addition, this case shows that that, unless an arbitration agreement says otherwise, the courts will assume that the parties intended for the court, rather than the arbitrator, to decide who has the power to construe the arbitration agreement. If you have any employment-related dispute, contact the employment attorneys at Nassiri Law Group, practicing in Orange County, Riverside, and Los Angeles. Call (949) 375-4734.

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