Pearson Dental Supplies, Inc. v. Superior Court of Los Angeles County

BAXTER, J., Dissenting.

I dissent from part II.A. (part A) of the majority’s decision (maj. opn., ante, at pp. 672-680), which holds this: Even if the parties to a mandatory employment arbitration agreement did not agree to arbitral conformity with rules of law or to expanded judicial review, the arbitral resolution of the employee’s statutory age discrimination claim is subject to court review if the claim was found time-barred. If the court determines that the arbitral award in the employer’s favor reflects an error of law, then the award must be vacated pursuant to Code of Civil Procedure 1 section 1286.2, subdivision (a)(4) (section 1286.2(a)(4)), which requires vacatur when a court finds “[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.”

I cannot join in this unsupported and unprecedented move to judicialize the arbitration process. The majority misapplies section 1286.2(a)(4) and the principles articulated in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 [ 10 Cal.Rptr.2d 183 , 832 P.2d 899 ] (Moncharsh) and Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 [ 99 Cal.Rptr.2d 745 , 6 P.3d 669 ] (Armendariz), so as to significantly undermine the strong public policy favoring arbitration as a fair, quick, and inexpensive means of resolving disputes. Because I believe that review of the arbitral decision here is unauthorized, my dissent to part A expresses no opinion as to whether the arbitrator’s application of the contractual time bar was legally erroneous, but assumes for purposes of argument that it was. 2

At the same time, I concur in part Ü.B. of the majority’s decision, which concludes plaintiff has forfeited the claim challenging the arbitration agreement as unconscionable and unenforceable. (Maj. opn., ante, at p. 681.)

*684 I.

Moncharsh, supra, 3 Cal.4th 1 , is our seminal decision governing judicial review of arbitration awards. Moncharsh was decided in the context of an employment dispute that did not involve a claim for violation of the California Fair Employment and Housing Act (FEHA; Gov. Code, § 12900 et seq.). In assessing the extent to which a trial court may review an arbitral decision for errors of law, Moncharsh emphasized that minimizing judicial intervention in the arbitration process vindicates the intentions and expectations of the parties to an arbitration agreement in two significant ways.

First, “[bjecause the decision to arbitrate grievances evinces the parties’ intent to bypass the judicial system and thus avoid potential delays at the trial and appellate levels, arbitral finality is a core component of the parties’ agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so. By ensuring that an arbitrator’s decision is final and binding, courts simply assure that the parties receive the benefit of their bargain.” (Moncharsh, supra, 3 Cal.4th at p. 10 , first italics added, fn. omitted; see also Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1355 [ 82 Cal.Rptr.3d 229 , 190 P.3d 586 ] (Cable Connection), quoting Moncharsh', Berglund v. Arthroscopic & Laser Surgery Center of San Diego, L.P. (2008) 44 Cal.4th 528, 534 [ 79 Cal.Rptr.3d 370 , 187 P.3d 86 ] (Berglund).)

Second, “ ‘[arbitrators, unless specifically required to act in conformity with rules of law, may base their decision upon broad principles of justice and equity, and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action.’ [Citations.]” ( Moncharsh, supra, 3 Cal.4th at pp. 10-11; see also Cable Connection, supra, 44 Cal.4th at p. 1355, quoting Moncharsh', Berglund, supra, 44 Cal.4th at p. 534.) Hence, parties to an arbitration agreement “ ‘ “may expect not only to reap the advantages that flow from the use of that nontechnical, summary procedure, but also to find themselves bound by an award reached by paths neither marked nor traceable and not subject to judicial review.” [Citation.]’ ” (Moncharsh, at p. 11.) Indeed, by voluntarily submitting to arbitration, the contracting parties have “agreed to bear [the risk of arbitral error] in return for a quick, inexpensive, and conclusive resolution to their dispute.” (Ibid., italics added; see also Berglund, at p. 534.)

The Legislature, having enacted a comprehensive statutory scheme regulating private arbitration (the California Arbitration Act; § 1280 et seq.), “expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.’ ” (Moncharsh, supra, 3 *685 Cal.4th at p. 9 .) Therefore, “[a]bsent a clear expression of illegality or public policy undermining this strong presumption in favor of private arbitration, an arbitral award should ordinarily stand immune from judicial scrutiny.” (Id. at p. 32.)

Upon carefully weighing these considerations, Moncharsh concluded that, where, as here, there is no limiting clause in the parties’ arbitration agreement, 3 an arbitral award “is not subject to judicial review except on the grounds set forth in sections 1286.2 (to vacate) and 1286.6 (for correction). Further, the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.” (Moncharsh, supra, 3 Cal.4th at p. 33 ; see also Moshonov v. Walsh (2000) 22 Cal.4th 771, 775 [ 94 Cal.Rptr.2d 597 , 996 P.2d 699 ].) Applying these principles in the instant case leads to only one conclusion: the arbitral decision finding plaintiff’s FEHA claim time-barred is not subject to judicial review and vacatur, even though the decision is based on a legal error that forecloses plaintiff from proceeding on the merits of that claim.

In holding to the contrary, the majority concludes judicial review and vacatur are proper under section 1286.2(a)(4), which authorizes vacatur of an arbitration award if the arbitrators exceeded their powers. (Maj. opn., ante, at p. 680.) That is plain wrong. “It is well settled that ‘arbitrators do not exceed their powers merely because they assign an erroneous reason for their decision.’ [Citations.] A contrary holding would permit the exception to swallow the rule of limited judicial review; a litigant could always contend the arbitrator erred and thus exceeded his powers.” (Moncharsh, supra, 3 Cal.4th at p. 28 [addressing the predecessor to § 1286.2(a)(4)]; see also Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1184 [ 77 Cal.Rptr.3d 613 , 184 P.3d 739 ]; Moshonov v. Walsh, supra, 22 Cal.4th at p. 779.)

The majority also reasons that, because “there was no opportunity for bargaining over the arbitration agreement in this case,” it cannot be said that “plaintiff merely received the justice he bargained for.” (Maj. opn., ante, at p. 680.) That reasoning is faulty. Although a court will scrutinize an arbitration provision in an adhesion contract to determine whether the provision is unduly oppressive or unconscionable, and therefore subject to revocation (see § 1281.2, subd. (b); Armendariz, supra, 24 Cal.4th at pp. 113-114), the adhesive nature of a contract appears irrelevant once the arbitration provision is found enforceable and the question remaining for *686 determination is whether section 1286.2 authorizes judicial review and vacatur. Contrary to the majority’s suggestion, if an employee signed an employment contract containing an enforceable arbitration agreement as a condition of employment ( Moncharsh, supra, 3 Cal.4th at pp. 6-7), then the risk of arbitral mistake is acceptable because the parties “voluntarily” submitted to the arbitration and “agreed to bear that risk in return for a quick, inexpensive, and conclusive resolution to their dispute.” (Id. at p. II.) 4

II.

Unlike Moncharsh, Armendariz, supra, 24 Cal.4th 83 , did not concern judicial review of an arbitration award. Rather, Armendariz arose in the context of a petition to compel arbitration and addressed only the enforceability of a mandatory employment arbitration agreement. (Id. at pp. 91-92.) Rejecting the contention that employees may never be compelled to arbitrate discrimination claims brought under the FEHA, Armendariz concluded “such claims are in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights.” ( 24 Cal.4th at p. 90 .)

As Armendariz explained, an employment agreement for mandatory arbitration of a FEHA claim is valid and enforceable if the agreement (1) does not limit the remedies normally available under the FEHA; (2) allows discovery sufficient to adequately arbitrate the FEHA claim; (3) provides for a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based; and (4) does not require the employee to bear any type of expenses greater than the usual costs incurred during litigation (that is, the employer must pay costs that are unique to arbitration). (Armendariz, 24 Cal.4th at pp. 103-113; but see Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1085-1089 [ 130 Cal.Rptr.2d 892 , 63 P.3d 979 ] (cone. & dis. opn. of Baxter, J.) [disagreeing with Armendariz’s views on cost allocation in light of Green Tree Financial Corp.-Ala. v. Randolph (2000) 531 U.S. 79 [ 148 L.Ed.2d 373 , 121 S.Ct. 513 ]].) If the arbitration agreement does not make these requirements explicit, then the requirements are to be implied, so long as they are not inconsistent with the agreement. (See Armendariz , at pp. 104, 106, 107, 113.) When a *687 mandatory arbitration agreement satisfies the Armendariz requirements, then a petition to compel arbitration of a FEHA claim is properly granted.

There appears no question here that the parties’ mandatory arbitration agreement may be interpreted consistently with the four Armendariz requirements. That being the case, the superior court found the agreement enforceable and sent the matter to arbitration. In contrast to the situation in Armendariz , the parties here actually appeared before an arbitrator, who made an award in defendant’s favor after hearing evidence and arguments on an affirmative defense. But because the instant matter concerns the cross-petitions to confirm or vacate that award, and not the earlier petition to compel arbitration, the parties deserve to receive the benefit of their bargain. That bargained-for benefit is the enforcement of the arbitration award pursuant to the California Arbitration Act and the principles articulated in Moncharsh, supra, 3 Cal.4th 1 , which prohibit judicial review and vacatur of the award for legal error, even if such error bars a hearing on the merits of plaintiff’s FEHA claim.

In hunting down support for expanding judicial involvement in the arbitration process, the majority states: “The Moncharsh court recognized ‘that there may be some limited and exceptional circumstances justifying judicial review of an arbitrator’s decision’ such as when ‘granting finality to an arbitrator’s decision would be inconsistent with the protection of a party’s statutory rights.’ (Moncharsh, supra, 3 Cal.4th at p. 32 .) Because the issue did not arise in that case, the Moncharsh court had no occasion to develop this exception.” (Maj. opn., ante, at p. 676.)

The majority does not say so, but Moncharsh supported its suggestion that protection of a statutory right may warrant an exception to the general rule of nonreviewability with an “accord” citation to Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, 225-227 [ 96 L.Ed.2d 185 , 107 S.Ct. 2332 ] (McMahon), and a parenthetical notation describing McMahon as holding that “federal statutory claims are arbitrable under the Federal Arbitration Act unless party opposing arbitration demonstrates ‘that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.’ ” (Moncharsh, supra, 3 Cal.4th at p. 32 .) Thus, with a nod to McMahon, Moncharsh left open the possibility that judicial review and vacatur may be appropriate if confirmation of an arbitration award were to contravene a party’s statutory right to trial.

In support of its more invasive form of judicial review, the majority does in fact quote a portion of Armendariz that in turn quotes a different part of McMahon . (Maj. opn., ante, at p. 677.) But nothing in McMahon suggests that judicial review for legal error is appropriate when plaintiffs assert claims *688 based on unwaivable substantive rights protected by statute. If anything, McMahon and later Supreme Court decisions espouse views to the contrary.

In McMahon, supra, 482 U.S. 220 , a brokerage firm and its registered representative were sued by their customers for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ( 18 U.S.C. § 1961 et seq.) and the Securities Exchange Act of 1934 (Exchange Act; 15 U.S.C. § 78a et seq.). Despite the statutory nature of the plaintiffs’ claims, the Supreme Court emphasized that the “duty to enforce arbitration agreements is not diminished when a party bound by an agreement raises a claim founded on statutory rights.” (McMahon, at p. 226.) As the high court explained, “ ‘[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.’ ” (Id. at pp. 229-230.)

It bears emphasis that the Supreme Court found no basis for limiting arbitration of the plaintiffs’ Exchange Act claims, even though the substantive protections of the Exchange Act, like those of the FEHA, cannot be waived by agreement. ( McMahon, supra, 482 U.S. at pp. 227-230.) In the part of McMahon that Armendariz quotes, the high court remarked that “although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute” at issue. (McMahon, at p. 232; see Armendariz, supra, 24 Cal.4th at p. 106 .) Given the text of McMahon’s statement, its use as a springboard for expanding permissible review beyond the statutory grounds is puzzling. Indeed, the Supreme Court repeatedly cites this very same statement when rejecting claims that the FAA’s provisions for judicial review, which do not authorize review for error, are too limited to protect rights under a statutory antidiscrimination law. (14 Penn Plaza LLC v. Pyett (2009) 556 U.S._,_, fn. 10 [ 173 L.Ed.2d 398 , 129 S.Ct. 1456, 1471, fn. 10 ] [addressing claim under Age Discrimination in Employment Act of 1967]; Gilmer, supra, 500 U.S. at p. 32, fn. 4 [same]; cf. Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) 552 U.S. 576, 584-589 [ 170 L.Ed.2d 254 , 128 S.Ct. 1396 ] [grounds provided in FAA for vacatur are exclusive and do not permit judicial review for arbitral errors, even when parties contract to limit arbitral finality in this way].)

Consistent with the Supreme Court’s decision in McMahon , our recognition that a statutory right may warrant an exception to the general rule of nonreviewability was previously restricted to situations in which arbitration impaired a statutory right to a judicial forum. (Aguilar v. Lerner (2004) 32 Cal.4th 974, 981-983 [ 12 Cal.Rptr.3d 287 , 88 P.3d 24 ] [judicial review of arbitrator’s decision appropriate because enforcement of the attorney-client arbitration agreement at issue contravened the client’s right under a specific statutory scheme to reject an arbitrator’s decision and proceed to trial]; Board *689 of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269, 276-277 [ 52 Cal.Rptr.2d 115 , 914 P.2d 193 ] [judicial review of arbitrator’s decision permissible where party claimed “an ‘explicit legislative expression of public policy’ that issues involving the reelection of probationary teachers not be subject to arbitration”]; see also Berglund, supra, 44 Cal.4th at pp. 538-539 [allowing full judicial review of arbitral discovery orders against nonparties to arbitration agreement in order to preserve the nonparties’ legal rights].) But employees have no statutory right to a trial or judicial review of FEHA claims, and this narrow exception has no application here.

In short, there is nothing in Armendariz , or in McMahon , or in any other authority cited by the majority, that supports judicial review and vacatur when an arbitrator rules in favor of an affirmative defense that forecloses a hearing on the merits of an unwaivable statutory claim. Given the vast number of statutory schemes that can be claimed to protect unwaivable rights, as well as the myriad ways in which legal error can be claimed to preclude or impair a hearing on the merits, the majority’s holding makes for an exception that will surely “swallow the rule of limited judicial review.” (Moncharsh, supra, 3 Cal.4th at p. 28 .) 5

III.

Part A of today’s decision and the logic supporting it are confounding. The decision runs counter to the settled principle that arbitrators generally may rely on broad principles of justice and equity to reject a claim. It also contradicts our seminal case holding that an error of law causing substantial injustice does not provide grounds for judicial review. Perhaps most troubling, the decision is irreconcilable with the fundamental premise that the risk of arbitral error is what contracting parties bargain for in exchange for a quick, inexpensive, and conclusive resolution to their dispute.

*690 I am aware that applying Moncharsh has a harsh effect on the employee in this instance. But it is not for us to second-guess the legal or equitable basis of the arbitral award. The employer’s assertion of the time bar was a valid affirmative defense, and there is nothing to suggest the parties were unable to fairly present their arguments to the arbitrator on that question. Where, as here, there is no limiting clause and no statutory right to a trial or judicial forum, the effect of allowing review and vacatin' of the arbitral award is to frustrate the parties’ contractual expectations and to defeat the strong public policy favoring arbitration.

Chin, J., and Corrigan, J., concurred

Unless otherwise indicated, all further statutory references are to this code.

As part A of the majority opinion indicates, there is no precedent governing the interpretation and application of Code of Civil Procedure section 1281.12 and its tolling provision. Accordingly, while I assume for purposes of argument that the arbitral decision reflects legal error, I do not accept the majority’s suggestion that it amounts to a “ ‘manifest disregard of the law.’ ” (Maj. opn., ante, at pp. 677-678, fn. 3.)

Parties to an arbitration agreement may limit the arbitral process by expressly agreeing that “legal errors are an excess of arbitral authority that is reviewable by the courts.” (Cable Connection, supra, 44 Cal.4th at p. 1361.) The majority acknowledges that no limiting clause exists in this case. (Maj. opn., ante, at p. 676, fn. 2.)

Moncharsh’s conclusion that an enforceable arbitration agreement is subject to the limited judicial review provided in the California Arbitration Act is in accord with the views of the United States Supreme Court. For instance, in Gilmer v. Interstate/Johnson Lane Corp. (1991) 500 U.S. 20 [ 114 L.Ed.2d 26 , 111 S.Ct. 1647 ] (Gilmer), the high court rejected the contention that inequality in bargaining power is a sufficient reason to categorically preclude enforcement of compulsory arbitration agreements in the employment context; at the same time, the court found that claims for violations of the Age Discrimination in Employment Act of 1967 ( 29 U.S.C. § 621 et seq.) are arbitrable, and that the limited judicial review provided in the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) is adequate to vindicate such claims. (Gilmer, at p. 32, fn. 4.)

Apart from the above, I also question the majority’s decision to allow judicial review and vacatur of an arbitral award only where the arbitrator erroneously rules in favor of the employer, but not when the ruling wrongly favors the employee. Although we generally find a lack of mutuality in an arbitration agreement troublesome when it favors the employer as the party with superior bargaining power (see Armendariz, supra, 24 Cal.4th at pp. 114—121), I see no basis or rationale for imposing a one-sided rule of judicial review where, as here, neither party can be faulted for the situation. In contrast to the majority’s rule, each of the express statutory grounds for vacating or correcting an award is neutral in its application to the parties. (§§ 1286.2, 1286.6.)

Moreover, because the FAA preempts all state laws and rules disfavoring arbitration (see Allied-Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 271-272 [ 130 L.Ed.2d 753 , 115 S.Ct. 834 ]), I have the additional concern that the FAA precludes this court from burdening the arbitral process as the majority does here, in the absence of an express legislative intent allowing such burdens. (See generally Little v. Auto Stiegler, Inc., supra, 29 Cal.4th at pp. 1089-1095 (cone. & dis. opn. of Brown, J.) [disagreeing with majority’s application of the Armendariz requirements to an action alleging wrongful termination in violation of public policy (Tameny claims)].)