The California Supreme Court Takes a Bite Out of the Finality of Arbitration Awards

May 7, 2010

A recent California Supreme Court decision has created an air of less certainty surrounding the finality of arbitration awards.Arbitration awards have been typically viewed as being final – not subject to court review unless there is evidence of fraud or corruption. But the California Supreme Court, in Pearson Dental Supplies v. Superior Court, carved out an exception for when a trial court would be permitted to vacate an arbitration award. The Court held that when an arbitrator’s ruling is based on a clear error of law which deprives an employee of a hearing on the merits of an unwaivable statutory employment claim, the arbitrator’s ruling may be vacated.

The arbitrator in Pearson had dismissed the plaintiff’s claim of discrimination, basing his decision on the employer’s argument that plaintiff had missed the deadline to submit to arbitration. Plaintiff then sought to vacate the arbitrator’s award in the superior court. The trial court vacated the arbitrator’s award because the arbitrator had made a clear error of law, specifically misinterpreting the tolling provisions of Code of Civil Procedure section 1281.12. The trial court further concluded that under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, it was required to conduct judicial review sufficient to protect plaintiff’s unwaivable statutory rights arising from his FEHA claims. Having done so, the trial court ruled that the arbitrator had acted in excess of his jurisdiction.

The defendant appealed the trial court’s ruling and the Court of Appeal reversed. Although the Court of Appeal agreed with the plaintiff that the arbitrator had committed a clear error of law in misapplying the tolling period provided by section 1281.12, it concluded that the arbitrator’s erroneous decision was “insulated from judicial review and [was] not a proper basis upon which to deny confirmation of the arbitration award or to vacate the award.”

In deciding this matter, the California Supreme Court held that the arbitrator had misinterpreted section 1281.12 and that plaintiff had not missed the deadline. However, this was only part of the analysis. The Court next had to determine whether the arbitrator’s clear error of law could serve as a proper basis for vacating the award. In affirmatively answering this question, the Court focused its attention on the third prong of its Armendariz analysis which, in matters dealing with arbitration of claims under FEHA, requires sufficient judicial review of arbitrators’ awards to ensure an arbitrator complies with the requirements of the statute. The Court further found that if the arbitrator’s procedural error were allowed to stand, the employee would be unable to receive a hearing on the merits of his FEHA claims in any forum. Based on this analysis, the Court held that when an employee subject to a mandatory employment-arbitration agreement is unable to obtain a hearing on the merits of his FEHA claims, or claims based on other unwaivable statutory rights, because of an arbitration award based on legal error, that award can be vacated.

The Court made a point to limit its ruling to the particular circumstances of this case, where the arbitrator’s legal error was to misconstrue the procedural framework of arbitration. This case, however, may open the door to more challenges on arbitration decisions where other unwaivable statutory rights have arguably been denied.

For more information about Pearson Dental Supplies v. Superior Court or other arbitration issues, contact Nancy Park at 800.464.3559