A recent state appeals court decision found that the Federal Arbitration Act (FAA) default rule applied in a case where the parties disagreed if an arbitration contract was binding or nonbinding.
The Second Appellate District’s unanimous decision in Western Bagel Co. Inc. v. Superior Court of Los Angeles County and Jose Calderon was published July 16.
The ruling reaffirms the longstanding practice of courts interpreting the Federal Arbitration Act to favor the arbitration of disputes, Jay Mootz, professor of law at the University of the Pacific McGeorge School of Law, told the Northern California Record by email.
“The message is clear: if there is way to read the agreement as providing for arbitration of disputes, the courts will read the contract that way,” Mootz said.
While the trial court had found that Western Bagel bore responsibility for an ambiguity in translation of the contract, the appellate panel ruled that under the FAA it did not.
“Upon reaching the merits of Western Bagel’s writ petition, we conclude the FAA preempted the trial court’s use of contra proferentem,” Associate Justice Helen I. Bendix wrote for the court. “Next, assuming arguendo there is an ambiguity regarding whether the parties consented to binding or nonbinding arbitration, we employ the FAA’s default rule that any ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration as envisioned by the FAA, a fundamental attribute of which is a binding arbitral proceeding.”
A default rule is a term of a contract that is provided by a matter of law to fill a gap in the agreement, Mootz said.
“Because the contract could be read as requiring arbitration or not, the court used an interpretive default rule under general contract law to read the document against the interest of the drafter (contra proferentem). This is an important rule, because it puts the onus on the party preparing the document to make the provisions clear or it will suffer an adverse interpretation,” Mootz said. “However, because the courts have interpreted the FAA to favor arbitration, there is another default rule to enforce a plausible interpretation of the contract that finds an agreement to arbitrate. Federal law is superior to state law, so the FAA default rule is applied. This has perverse consequences. A large, nationwide corporation prepared sloppy contract documents and then presented them to a low-level, Spanish-speaking employee who had worked for the firm for more than 30 years. Despite its sloppy contract, it was able to enforce the reading of the agreement favoring arbitration because of the FAA interest in promoting arbitration.”
Calderon began working for Western Bagel as a retail store employee in 1985 and signed the arbitration agreement in 2018, according to the ruling.
“This is just another case that makes it extremely easy for employers to use arbitration to prevent workers from being able to protect their rights in concert with other employees,” Mootz said. “Rather than employees bringing a class action lawsuit in court against the employer for violating workplace laws regarding meals and breaks, each employee must separately arbitrate their claim. This makes it financially difficult for lawyers to protect worker rights.”
Nor was the appellate ruling unexpected, Mootz said.
“This just reaffirms the state of arbitration law, and so it is not really that surprising of a ruling.”
Mootz noted the employee argued that the FAA requires the courts to treat arbitration agreements like any other contract, and that the interpretive principle of contra proferentem is a general default rule of contract law.
“This argument was plausible decades ago, but the courts have made clear that they will go beyond even-handed treatment and find in favor of arbitration, if possible, given the federal policy promoting the use of arbitration,” Mootz said.
The ruling noted the arbitration agreement was subject to the FAA because the company had shown it was engaged in interstate commerce.
“The law of arbitration is a very effective tool to minimize workers' ability to assert their rights. Be very careful before you sign an agreement because it will be enforceable unless it contains truly unconscionable terms,” Mootz said. “In many respects, the courts are pro-arbitration, which makes them pro-employer.”
“But sometimes the worm turns,” Mootz added. “A few years ago nearly 13,000 Uber drivers filed for arbitration of their individual claims, triggering Uber's obligation to pay $2,650 in arbitration filing fees for each arbitration. Facing an arbitration bill of more than $30 million, Uber found itself trying to escape the terms of its mandated arbitration agreement. With arbitration, it sometimes is a case of being careful what you wish for.”