Arbitration agreements that are well-drafted and “state-of-the-art” under current California law are key to ensuring that employment disputes will be resolved by final and binding arbitration. But a recent California Court of Appeal case – Fleming Distribution Co. v. Younan (Cal. Ct. App., May 15, 2020, No. A157038) 2020 WL 2511680 – is a cautionary tale. Employers must move swiftly and decisively to enforce their arbitration agreement when an employee files a claim outside of the designated arbitration forum. And, employers must act consistently with the intent to arbitrate, at all times. Delaying moving to compel arbitration – or taking a “wait and see approach” while actively participating in a Labor Commissioner administrative proceeding – can result in a waiver of the right to compel an employee’s claims to arbitration.
In Fleming, a former employee, Alfonus Younan (“Younan”), had worked as a sales representative for Fleming from 2009 to 2016. In 2017, Younan filed a complaint with the California Labor Commissioner seeking $22,000 in unpaid commissions, plus penalties and interest. In response, Fleming’s attorneys sent a letter to the Labor Commissioner stating that the complaint should be dismissed because the parties had signed an arbitration agreement requiring that all employment-related claims would be resolved by final and binding arbitration. The letter enclosed a copy of the arbitration agreement signed by Younan, and Fleming said it was prepared to file a petition to compel arbitration in Superior Court if the Labor Commissioner did not dismiss the complaint.
The Labor Commissioner did not dismiss the complaint. Instead, the Labor Commissioner scheduled a hearing on Younan’s wage claim for August 2018. Fleming filed a motion to vacate the hearing and to dismiss the complaint, again based on the arbitration agreement. Once more, Fleming stated it was prepared to file a motion to compel arbitration in Superior Court if its motion to vacate and dismiss was denied. The Labor Commissioner denied the motion and refused to dismiss the claim. Instead, the Labor Commissioner proceeded with the hearing.
Additional Inconsistent Acts
Rather than immediately petitioning to compel arbitration, Fleming participated fully in the Labor Commissioner hearing. Both sides presented testimony, evidence, and argument. Fleming cross-examined Younan, learning Younan’s credibility as a witness and his trial strategies. Four months after the hearing, the Labor Commissioner issued an award in favor of Younan for $27,412.60. Only then did Fleming appeal the award in Superior Court, and file a petition to compel arbitration, stay proceedings, vacate the Labor Commissioner’s award, and dismiss the matter. The trial court denied Fleming’s petition to compel arbitration, finding that Fleming had waived its right to arbitration by acting inconsistently with an intent to enforce the arbitration agreement. Fleming appealed.
Nail in the Coffin
The Court of Appeal affirmed. It found that Fleming had waived its right to compel arbitration by both delaying any effort to enforce its arbitration agreement and by acting inconsistently with intent to arbitrate. Fleming repeatedly chose not to move to compel arbitration, despite being fully aware that it could do so from the inception of Younan’s claim. The Court of Appeal agreed with the trial court that Fleming’s delay in seeking to enforce its arbitration agreement was “not reasonable” because Fleming waited a full 20 months after Younan filed his Labor Commissioner complaint before finally petitioning to compel arbitration in Superior Court. And, in the interim, Fleming participated fully in the Labor Commissioner hearing – which the Appellate Court found were acts inconsistent with the intent to arbitrate the dispute.
Fleming is a compelling reminder that merely having an arbitration agreement does not guarantee that disputes with current or former employees will be arbitrated. Employers who wish to arbitrate must act swiftly to assert the right to arbitrate, take affirmative steps to “activate” their arbitration agreement (even when an employee has asserted his or her claims in a forum other than the courts), and refrain from participating in non-arbitration proceedings to the greatest extent possible.
Fleming also cautions employers to make sure that their arbitration agreements are up-to-date and fully compliant with current law. Enforceability of employment arbitration agreements is one of the most rapidly evolving areas of California employment law. While the Appellate Court in Fleming did not decide whether the arbitration agreement in that case was unconscionable, the trial court had deemed it unenforceable due to ambiguity in a key provision. Even if Fleming had not waived its right to arbitrate, it likely would have had difficulty compelling arbitration with an ambiguous and potentially unenforceable arbitration agreement. Employers would be well served to have their arbitration agreements reviewed and updated by counsel regularly.
Read the full Fleming decision here.