United States: California Appellate Court Clarifies The Arbitrability Of Claims

On February 14, 2012, the California Court of Appeal for the Second District issued a decision in a case involving a motion to compel arbitration and the arbitrability of the claims at issue. In the decision, Gallo v. Youbet.com, Inc., B230274, the appellate panel reversed and remanded a trial court's ruling that denied the employer's motion to compel arbitration of statutory claims brought by a former employee under the Fair Employment and Housing Act (FEHA). The appellate court held that when the scope and arbitrability of claims in an arbitration agreement are at issue, a trial court must conduct two examinations of these threshold issues: (1) whether an arbitration provision manifests the parties' clear and unmistakable intent to have the arbitrator determine issues of arbitrability, and (2) whether the arbitrability of a particular claim is "wholly groundless."

Factual Background

In March 2003, Victor Gallo joined Youbet as its General Counsel. At the time, Gallo signed an employment agreement that included an arbitration clause that covered "any dispute whatsoever arising out of or referable to this Agreement," including "any dispute as to the rights and entitlements and performance of the parties under this Agreement, or concerning the termination of [Gallo's] employment." The arbitration agreement also delegated to the arbitrator "the ability to arbitrate any such dispute."

Gallo's employment with Youbet ended in April 2009. In early July 2009, he filed a demand for arbitration with the American Arbitration Association, asserting three claims: (1) failure to pay wages in violation of the California Labor Code; (2) breach of contract; and (3) breach of the covenant of good faith and fair dealing.

In May 2010, Gallo filed a complaint in Superior Court alleging new statutory claims for religious discrimination, retaliation and wrongful termination in violation of the FEHA. With respect to his FEHA claims, Gallo alleged that his employment was terminated because he was not Jewish, and that Youbet had engaged in a practice of retaining and replacing gentile employees, including Gallo, with persons of the Jewish faith. Gallo further alleged that Youbet retaliated against him when he complained about what he saw as the pattern and practice of religious discrimination favoring Jewish employees.

Youbet responded by filing a motion to compel arbitration, arguing that the arbitration provision in the employment agreement governed each cause of action, including the FEHA claims. The lower court denied Youbet's motion with respect to the FEHA claims, issuing no rationale for its ruling. Youbet appealed.

Legal Analysis

Youbet contended that the trial court did not have the power or jurisdiction to decide the issue of the arbitrability of Gallo's FEHA claims. Youbet argued that pursuant to the arbitration provision, the arbitrator, not the trial court, must decide the threshold issue of arbitrability of these claims. The appellate court agreed.

The court emphasized that parties to an arbitration contract must "clearly and unmistakably" agree to delegate to an arbitrator the power to decide his or her own jurisdiction; otherwise the question of whether an arbitrator has jurisdiction is for the court to resolve. The appellate court concluded that Gallo's arbitration provision manifests a clear and unmistakable intent to have the arbitrator determine issues of arbitrability, leaving "no doubt" that such was the parties' agreement.

Reaching that conclusion, the appellate court next determined whether Youbet's argument that the FEHA claims are subject to arbitration is "wholly groundless." Thus, the trial court must make a second, initial determination of whether the particular dispute could possibly fall within the reasonably arguable scope or boundaries of the arbitration agreement. If not, then the court, and not an arbitrator, makes the determination of arbitrability.

The court conducted an initial and limited examination of the arbitration clause and the nature of the FEHA claims, and concluded that the claims "could possibly fall within the reasonably arguable scope or boundaries of the arbitration agreement, and therefore, appellant's claim of arbitrability is not wholly groundless."

Practical Impact

This decision provides much needed clarity on the trial court's limited power to decide the threshold issues involved in a motion to compel arbitration. This decision also underscores the unique requirements of California arbitration provisions which, in addition to the Armendariz requirements, should include comprehensive language on the scope of the arbitration agreement, as well as its delegation to the arbitrator of the power to decide the threshold issue of arbitrability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.