The California Supreme Court issued a decision yesterday in Pearson Dental Supplies, Inc. v. Superior Court (pdf) that begins:
We have emphasized in our case law the limited nature of judicial review of contractual arbitration awards, concluding that, generally speaking, a court is not permitted to vacate an arbitration award when the award is based on errors of law.
The rest of the decision proceeds to disregard those very principles.
In Pearson Dental Supplies, the parties were litigating an age discrimination case in court when the employer purportedly located an agreement to arbitrate such disputes and successfully compelled arbitration. Once it got before the arbitrator, the employer moved to dismiss the action on the basis that the employee failed to bring the case to arbitration within one year as required by the arbitration agreement. The arbitrator granted the motion and dismissed the case.
In doing so, the arbitrator either misunderstood, misapplied, or simply disregarded Code of Civil Procedure section 1281.12, which states that the time to bring a case to arbitration is tolled while the case is proceeding in court. So it seems fairly clear that the arbitrator made an error of law. But as the majority noted in the opening sentence, errors of law are not grounds for vacating arbitration awards.
By statute (Code of Civil Procedure section 1286.2), arbitration awards can only be vacated based on specifically identified statutory grounds: (1) the award was procured by corruption, fraud, or other undue means; (2) an arbitrator was corrupt; (3) arbitrator misconduct substantially prejudiced a party’s rights; (4) an arbitrator exceeded his or her powers and the award can’t be corrected without affecting the merits of the decision; or (5) a party was substantially prejudiced by an arbitrator’s refusal to postpone the hearing.
Prior decisions had made clear that the fourth exception (arbitrators exceeded their powers) does not make errors of law subject to judicial review. The California Supreme Court’s 1992 decision in Moncharsh v. Heily & Blase explained:
It is well settled that arbitrators do not exceed their powers merely because they assign an erroneous reason for their decision. A contrary holding would permit the exception to swallow the rule of limited judicial reviewer; a litigant could always contend the arbitrator erred and thus exceeded his powers.
So how does an error of law justify vacating the award here? The majority turned to the court’s 2000 decision in Armendariz v. Foundation Health Psychcare, Inc. The issue there was when an arbitration agreement could be enforced, not when an arbitration award could be vacated. But in a discussion of the requirement that arbitration agreements provide for written decisions explaining the basis for the award, the court seized upon language that written awards were necessary to enable appropriate judicial review. From that discussion, in a case that had nothing to do with the standard for vacating arbitration awards, the court reached this conclusion:
[W]hen, as here, 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, the trial court does not err in vacating the award. Stated in other terms . . . an arbitrator whose legal error has barred an employee subject to a mandatory arbitration agreement from obtaining a hearing on the merits of a claim based on such right has exceeded his or her powers within the meaning of Code of Civil Procedure section 1286.2, subdivision (a)(4), and the arbitrator’s award may properly be vacated.
So the new rule seems to be, arbitration awards can be vacated for legal errors if those errors deprive the employee of a hearing on the merits. Note the absence of any parallel right for employers.
I don’t know what I find more frustrating. Is it the underlying presumption that the judicial system consistently reaches the right result and arbitrators do not? Is it the disregard of established precedents and the faulty reasoning used to justify doing so? Or is it the blatant double standard inherent in a rule that protects employees, but not employers, from arbitrator errors? Most likely it’s a combination of all of these.