This year, California small businesses and the legal community will be keeping a close eye on how the State Supreme Court rules on major disputes over arbitration agreements. An arbitration agreement is a written agreement between two parties, designating an arbitrator — instead of a court of law — to resolve any disputes that may arise out of their business relationship. Companies often require employees to sign arbitration agreements as a means of limiting the costs associated with any disputes that may arise out of the employment relationship.
Legality and History of Arbitration Agreements
As far as the legality of arbitration agreements, the Federal Arbitration Act of 1925 (FAA) provides that arbitration agreements are “valid, irrevocable and enforceable, and entitled to the same respect as other contracts.” Despite this, several years ago, the California Supreme Court struck down an arbitration clause in a consumer agreement because the arbitration agreement did not permit the consumer to bring a class action arbitration. In a 5-4 decision, the United States Supreme Court reversed that ruling, holding that state law cannot interfere with an arbitration agreement’s elimination of the class action mechanism to resolve disputes. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court held that, “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration…. We find it hard to believe that defendants would bet the company with no effective means of review, and even harder to believe Congress would have intended to allow courts to force such a decision.” Accordingly, the Court found that the FAA preempts California state law and ruled that states may not enact special rules that disfavor arbitration, even in the interest of public policy. The decision effectively made it much more difficult for employees to file employment-related class actions, and led to California courts issuing very conflicting and often confusing decisions in employment cases involving arbitration agreements.