California Supreme Court Rules Certain Arbitration Awards Subject to Judicial Review

In a striking departure from established precedent regarding the enforcement of arbitration awards, the California Supreme Court has held that courts may review arbitration awards for errors of law that prevent an employee from obtaining a hearing on the merits of a unwaivable statutory employment claim. Pearson Dental Supplies, Inc. v. Superior Court, No. 167169 (Cal. Apr. 26, 2010). The Court also ruled that the agreement’s provision limiting an employee’s right to pursue claims in an administrative forum did not render the arbitration agreement unconscionable.

The Facts

In 1999, Pearson Dental Supplies, Inc. hired Luis Turcios as a janitor. Two years later, in 2001, Turcios signed a dispute resolution agreement with Pearson providing that “to avoid the inconvenience, cost, and risk that accompany formal administrative or judicial proceedings,” the parties agreed to arbitrate disputes arising out of the employment relationship. The agreement also included a one-year statute of limitations and provided that disputes not submitted to arbitration within one year would be waived.

In January 2006, Pearson terminated Turcios and, in April 2006, he filed an age discrimination complaint with the Department of Fair Employment and Housing against Pearson. The DFEH subsequently issued a right-to-sue letter. In October 2006, Turcios filed a lawsuit alleging, among other things, age discrimination under the California Fair Employment and Housing Act (“FEHA”).

In March 2007, the employer, pointing to the dispute resolution agreement, moved to compel arbitration. The court granted the motion.

The case proceeded to arbitration, and Pearson argued that Turcios’ claim was untimely. The arbitrator agreed and issued an award in favor of Pearson. The trial court vacated the award, ruling that the arbitrator erred in finding the claim time-barred.

Pearson appealed, and the Court of Appeal, reversing the lower court, ruled that although the arbitrator had erred in finding the claim time-barred, such error was not a valid basis for vacating an arbitration award.

Turcios petitioned the California Supreme Court for review of the following issues:

  • the standard of judicial review of an arbitrator’s decision of an FEHA claim, and
  • whether the agreement’s provision restricting an employee from seeking administrative remedies is lawful.

Supreme Court Decision

To address the first issue, the Court inquired whether the arbitrator made an error of law. It examined Section 1281.12 of the California Code of Civil Procedure, which provides, in relevant part:

If an arbitration agreement requires that arbitration of a controversy be demanded or initiated by a party to the arbitration agreement within a period of time, the commencement of a civil action by that party based upon that controversy, within that period of time, shall toll the applicable time limitations contained in the arbitration agreement . . . .

The parties did not dispute that Section 1281.12 applied to this case. The arbitration agreement required the commencement of a proceeding within one year. Turcios filed his lawsuit within the one year period; therefore, the filing of the lawsuit suspended the running of the time period. By ruling that Turcios’ claim was time-barred, the arbitrator committed an error of law, according to the Court.

The Court next addressed whether the trial court properly vacated the award. Referring to precedent, the Court acknowledged, “[G]enerally speaking, a court is not permitted to vacate an arbitration award when the award is based on errors of law.” Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 25, 28 (Cal. 1992). Nevertheless, relying on Armendariz v. Foundation Health Psychcare Svcs., Inc., 24 Cal. 4th 83 (Cal. 2000), the Court noted that to enforce FEHA claims in arbitration, there must be a written arbitration decision and judicial review “sufficient to ensure the arbitrators comply with the requirements of the statute.” The Court rejected the suggestion that all Armendariz required was a written award. Rather, the award must reveal “the essential findings and conclusions on which the award is based.” The arbitrator’s award did not meet that standard, and Turcios was left without a remedy or a forum through no fault of his own. Thus, the Court held, “[When] 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.”

The Court then addressed whether agreement containing the restriction regarding administrative remedies was lawful. Turcios argued the restriction was contrary to public policy and, when combined with the shortened limitations period, rendered the agreement unconscionable and unenforceable. The Court rejected that argument, finding that the language at issue was merely a statement of purpose and did not preclude Turcios from pursuing an administrative remedy. The Court further found that the provision could lawfully preclude “the parties . . . from submitting their claims for adjudication to an administrative entity.” Accordingly, the provision did not render the arbitration agreement unconscionable or unenforceable.

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This significant ruling evidences the California Supreme Court’s refusal to countenance arbitration agreements which, if followed literally, could deprive employees of non-waivable statutory remedies. Arbitrators may become more reluctant to rule claims are time-barred following this decision, for fear of depriving claimants the opportunity for a hearing and a corresponding record and decision. Employers should consult with counsel regarding how the decision affects their alternate dispute resolution agreements and programs.