California’s Second and Fourth Appellate Districts Split Over Who Should Decide Whether Agreement Authorizes Class Arbitration – Court or Arbitrator

In Network Capital Funding Corporation v. Papke, G049172, 2014 WL 5035099 (Cal. Ct. App. Oct. 9, 2014), the California Court of Appeal for the Fourth Appellate District declined to follow the reasoning of the Second Appellate District in Sandquist v. Lebo Automotive, Inc., B244412, 2014 WL 3590152 (Cal. Ct. App. June 25, 2014) when it held that the question of whether an agreement authorizes class arbitration should be decided by the court, not the arbitrator. 


When Erik Papke ('Papke") was hired by Network Capital Funding Corporation (“Network Capital”) in 2011, he signed Network Capital’s “Employment Acknowledgment and Agreement” (“Arbitration Agreement”), which required the parties to “utilize binding arbitration to resolve all disputes that may arise out of or be related to [Papke’s] employment in any way.” 

In 2013, Papke initiated arbitration proceedings against Network Capital, alleging wage and hour claims under both the California Labor Code and the Unfair Competition Law, and later under the Private Attorneys General Act of 2004 ("PAGA").  Papke’s claims were brought on a class basis, not individually.  Network Capital promptly filed a declaratory relief action alleging its agreement with Papke required him to arbitrate his claims on an individual, rather than class-wide basis.  Papke moved the trial court for an order compelling Network Capital to submit the action for declaratory relief to arbitration.  He argued that the broad language of the parties’ Arbitration Agreement required the arbitrator, not the court, to decide whether class arbitration was authorized.  The trial court disagreed.  It went on to analyze the Arbitration Agreement, and it concluded that class arbitration was not authorized.


As recently alerted, in Sandquist v. Lebo Automotive, Inc., B244412, 2014 WL 3590152 (Cal. Ct. App. June 25, 2014), the California Court of Appeal for the Second Appellate District relied on the United States Supreme Court’s plurality opinion in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) to conclude that the question of whether an agreement authorizes class arbitration is a procedural question presumptively to be decided by an arbitrator, not a court.  (See our July 27, 2014 Legal Alert on the Sandquist case).

In Network Capital, the Fourth District Court of Appeal declined to follow the Courts’ reasoning in Sandquist and Bazzle, finding fundamental differences between class and individual arbitration proceedings. The Fourth District Court of Appeal noted that class arbitration would affect absent parties and allow for a narrower scope of judicial review than class action litigation. These fundamental differences convinced the court that the availability of class arbitration was not merely a procedural question that should automatically fall to the arbitrator.  Rather, the question should fall to the courts.

What This Means to You

In light of this new decision, it remains unclear in California whether the court or an arbitrator should decide the issue of whether an agreement allows or precludes class arbitration.


If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Shane R. Larsen or Corrie L. Erickson | 916.321.4500