Arbitration Agreement Not Clear Enough For Arbitrator to Decide Scope, Validity

The mere incorporation of the procedural rules of the American Arbitration Association (AAA) in an arbitration agreement isn’t explicit enough to have issues of the scope and validity of the arbitration agreement decided by the arbitrator, a California appellate court has ruled.

Carlos Villalobos was employed by Simplified Labor Staffing Solutions (Simplified), a temporary staffing services company. Simplified placed Villalobos with Maersk Warehouse and Distribution Services (Maersk), where he worked first as a materials handler and later as a forklift operator.

In June 2022, Villalobos filed a class action against Maersk alleging multiple wage-and-hour claims under the California Labor Code and an unfair competition claim. The suit was later consolidated with a second complaint filed by Villalobos for civil penalties against Maersk under the Private Attorneys General Act (PAGA).

Villalobos signed two separate documents that constituted the arbitration agreement at issue. In the first, an Employee Agreement to Arbitrate, Villalobos acknowledged receiving and reviewing a copy of the second document, titled “Notice to Employees About Our Mutual Arbitration Policy.”

In the employee agreement, Villalobos agreed to binding arbitration of any employment claims, including on a class or collective basis, and that the arbitration would be conducted “under the Federal Arbitration Act [FAA] and the applicable procedural rules of the [AAA].” The agreement did not state which set of AAA procedural rules were applicable or where the rules could be found.

The second document, the arbitration policy, explained the procedures and stated that, while the policy was governed by the FAA, if it was deemed inapplicable, the policy would be governed by state arbitration statutes.

Nothing in either document stated that the arbitrator had the power to rule on the existence, scope or validity of the arbitration agreement.

Relying on the arbitration agreement, the defendants filed a motion to compel arbitration. Villalobos objected, arguing that he was exempt from the FAA because his work involved loading, unloading and organizing cargo traveling in interstate commerce.

The defendants responded that the validity of enforceability of the arbitration agreement and the scope of the obligation were issues clearly and unmistakably delegated to the arbitrator because the parties agreed to be governed by the AAA rules.

The trial court disagreed that those issues had been clearly and unmistakably delegated to the arbitrator. Without such delegation, the court, not the arbitrator, must decide arbitrability, and the trial court concluded that the claims were not subject to arbitration because the FAA did not apply to the employee and under California law, the employee’s PAGA claims and most of his wage-and-hour claims were not arbitrable. 

The Court of Appeal affirmed.

Beginning with the delegation issue, the Court of Appeal emphasized that it could not assume the parties agreed to arbitrability unless clear and unmistakable evidence existed that they did so.

“We are persuaded, in the circumstances of this case, that the incorporation of AAA rules did not constitute clear and unmistakable evidence of the parties’ intent to delegate arbitrability issues to the arbitrator,” the court said.

Only at the end of a three-step process could Villalobos discover what the employer knew from the outset—that he was agreeing that the arbitrator would decide his or her own jurisdiction.

The three-step process began with the employee agreement to arbitrate, which contained no clause expressly delegating arbitrability issues to the arbitrator. The next step was the arbitration policy, which also contained no express delegation clause, instead only referencing the AAA rules.

“So, to find out that the arbitrator will decide arbitrability, the employee must take step 3, which will result in his access (as of the time this dispute arose) to a 26-page document with 48 rules, one of which will tell him that the arbitrator has the power to rule on his or her own jurisdiction,” the court explained. “In these circumstances, it is obvious that only one of the parties unmistakably intended or knew it was supplanting the judge who ordinarily decides arbitrability issues with the arbitrator.”

The defendants countered that Villalobos’ signature on the agreement constituted “objective manifestation of his intent to assent,” but the court was not persuaded.

“We cannot see how a delegation to the arbitrator can be clear and unmistakable when there is no delegation clause in the arbitration agreement, no delegation clause in the mutual arbitration policy, and no indication that among the incorporated AAA procedural rules (of which there are many) is a delegation clause,” the court wrote.

“We hold as a matter of law that, in the circumstances of this case, the three-step process necessary for one of the contract parties to discover that he or she has delegated the power to decide arbitrability issues to the arbitrator, contrary to the usual rule that a court is to decide those issues, does not constitute a clear and unmistakable delegation of that power to the arbitrator.”

Turning to the PAGA claim, the court held that, because the FAA did not apply, and California law did, the preemption principles announced in did not apply.

Therefore, —which precludes division of PAGA actions into individual and non-individual claims through an arbitration agreement—applied, and Villalobos’ pre-dispute agreement to arbitrate PAGA claims was not enforceable without the state’s consent.

The court accordingly affirmed that no part of Villalobos’ PAGA claim was arbitrable and upheld the trial court’s other rulings regarding arbitrable claims.

To read the opinion in Villalobos v. Maersk, Inc., click .

Why it matters: California employers should review their arbitration agreements to make sure they do not run afoul of the rule set forth in this case. Employers often cross-reference an arbitration-provider’s rules in their arbitration agreements, and some courts have found that this is sufficient to incorporate those rules (including rules regarding delegation of arbitrability decisions to the arbitrator) into the agreement. This decision makes clear that in California, just cross-referencing the provider’s rules may not suffice to constitute a “clear and unmistakable” delegation of powers to the arbitrator.