Arbitration is supposed to be a quicker, less formal and less costly alternative to litigation. But what happens when the parties to the dispute – whether for strategic reasons or simple oversight – fail to take the steps necessary to initiate the arbitration process?
That was the question presented in a recent case decided by the California Court of Appeal (Arzate v ACE American Insurance).
In June of 2021, Michelle Arzate and several other employees in the Southern California offices of ACE American Insurance Company filed a class action lawsuit in the Los Angeles Superior Court alleging that the company had wrongly classified them as exempt (generally salaried) employees, thus denying them benefits such as overtime pay and meal breaks required for nonexempt (typically hourly) workers.
The company asked the court to compel the employees to arbitrate the dispute, citing agreements that all the plaintiffs had signed as a condition of their employment. The documents, titled “Arbitration Agreement,” stated, “I agree that, in the event I have any employment-related legal claims, I will submit them to final and binding neutral third-party arbitration.” It also said, “I understand that this agreement means that I cannot bring any employment-related claim in court and that I waive my right to a jury trial for such claims.”
The agreements included two other documents, one of which explained the scope of arbitration in more detail, and a second which said any arbitration proceedings would follow the rules of the American Arbitration Association, or AAA.
One of those rules stated that “A party who wants to start the arbitration procedure should submit a demand within the time periods required by applicable law.”
If it was ACE that demanded arbitration, the document said, the company would pay all costs. An employee demanding arbitration would have to pay $200 to the AAA; all additional fees would be paid by the company.
In the case of a court-ordered arbitration, the document specified that “the demand for arbitration must be filed in accordance with these rules and procedures within thirty (30) calendar days” from the issuance of the court order, unless the court set another time limit.
The superior court ruled that the employees’ claims fell within the scope of the arbitration agreement. On March 14, 2023, it issued an order compelling the parties to arbitrate the dispute and to confirm by September 8, 2023, that an arbitrator had been selected and a hearing date set.
The court’s order did not specify who was to commence the arbitration.
After additional hearings on other issues in the case, the employees filed a petition on August 25, 2023, arguing that ACE was the party responsible for initiating the arbitration process, and that by failing to do so within the 30-day time paid the company had waived its right to arbitration.
On February 2, 2024, the trial court agreed with the employees, finding that ACE’s inaction “was inconsistent with its right to arbitrate.”
The court reasoned that, although it was the employees who had filed the wage-and-hour complaint, “they have heavily contested any requirement to arbitrate these claims. They never ‘wanted’ or ‘demanded’ to initiate arbitration, within the meaning of the agreement and governing rules; in fact, they opposed [ACE]’s demand.” Therefore, the court said, it was incumbent on ACE to commence arbitration, and by failing to do so the company forfeited its right to arbitrate the dispute.
ACE appealed.
Although there were a number of issues raised by both parties, the appellate justices said, “at heart, the outcome of this appeal depends on the answer to a single question: under the arbitration agreements, which party was required to initiate arbitration?”
The employees argued that ACE is the only party that “wanted” arbitration. ACE filed a motion to compel arbitration, while the plaintiffs strongly preferred to remain in court and resisted arbitration. Thus, they argued, it was ACE that was required to initiate the arbitration.
The justices disagreed. They said the employees were focusing too narrowly on a few isolated phrases in the employment agreement, while under law the agreement must be interpreted as a whole. The language regarding “the party that ‘wants’ or ‘demands’ arbitration,” they noted, occurs in a discussion of the obligations of a party with employment-related claims.
“In this context, the phrase ‘wanting to start the arbitration procedure’ cannot refer to a preference for arbitration over litigation,” the justices said, because by signing the documents requiring arbitration of any employment-related conflicts “the parties already ruled out litigation as an option” in any such dispute.
“Where the only option for addressing a dispute is in arbitration, ‘wanting to start the arbitration procedure’ means a desire to seek redress for an employment-related legal claim,” they said. “In other words, it must refer to an action by a plaintiff,” which in this case was the employees.
The justices reversed the order of the trial court and awarded ACE its costs on appeal.
Like many other cases interpreting arbitration agreements, this case illustrates that, far from being less expensive and quicker than resolving a dispute in the trial court, arbitration can be time-consuming and more costly, given the vagaries of the statutory and case law governing the interpretation of these agreements.
By Laurie Murphy