Arbitration Award May Not Be Reviewed for Legal Errors

An arbitration decision that an employer had not violated California's wage and hour laws was not subject to judicial review for legal errors, a California appellate court ruled. "Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be" set aside because of such error, the court said.

The plaintiff, a former machine operator for a manufacturing company, sued the company for wage and hour violations, including failure to pay overtime wages and to provide adequate meal and rest breaks, as required by California law.

The company filed a motion to compel arbitration of the claims, which the court granted. The arbitrator issued a written award in favor of the company, finding that it did not fail to pay the plaintiff for any wages he had earned, and it did not schedule meal and rest breaks in an unlawful manner. The trial court affirmed the award, and the plaintiff appealed.

Judicial Review of Arbitration Awards

The arbitration agreement the plaintiff signed provided that all employment-related disputes would be submitted to arbitration, the arbitrator would issue a written award that would be binding on both parties, and judicial review of the arbitration award would be limited to "deciding whether the arbitrator complied with statutory law."

On appeal, the plaintiff claimed that the trial court erred when it refused to review the merits of the arbitrator's decision because the arbitration agreement expressly permitted limited judicial review of any award to determine whether the arbitrator "complied with statutory law." The plaintiff argued that this included substantive wage and hour laws. The appeals court rejected this argument, ruling that the trial court correctly declined to review the arbitrator's legal conclusions.

[SHRM members-only HR Q&A: What are the California rules regarding mandatory arbitration agreements?]

The court first noted that both California and federal law have strong public policies in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution. Consistent with the public policy favoring finality of arbitration awards, the court said, a party generally is not entitled to judicial review of an arbitrator's decision for errors of fact or law. Rather, review of an award is limited to the grounds specified in the California Arbitration Act (CAA) or the Federal Arbitration Act (FAA), whichever applies to the parties' arbitration agreement.

The CAA and FAA provide nearly identical grounds for review of an arbitrator's decision, the court explained. Under both statutes, courts are authorized to vacate an award under the following circumstances:

• It was procured by corruption, fraud or undue means.
• It was issued by corrupt arbitrators.
• It was affected by the arbitrators' prejudicial misconduct.
• It is in excess of the arbitrators' powers.

Under the CAA, the parties may agree to expand the scope of judicial scrutiny to encompass review of the arbitrator's decision for errors of fact or law.

In this case, the appellate court said, the trial court found the FAA's procedural provisions applied, and, as a result, the parties could not consent to expanded judicial review of the award beyond the grounds listed in the FAA. Further, the court said, even if the CAA applied, under that statute the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts.

The agreement at issue in this case included no such provision, the court said.

While the agreement did state that any award was subject to limited review to determine whether the arbitrator "complied with statutory law," several previously decided California cases found that this language did not prohibit the arbitrator from committing legal error, the court said.

The court also rejected the plaintiff's claim that the award was subject to expanded review because it implicated the plaintiff's nonwaivable statutory right to proper meal and rest breaks under California's wage and hour laws.

The court noted that the rule stating an arbitrator's decision generally is not subject to judicial review for errors of law or fact applies even when the errors "appear on the face of the award or cause substantial injustice to the parties." While there are some narrow exceptions to the general rule prohibiting expanded judicial review of an arbitrator's decision, those exceptions only "protect against error that is so egregious as to constitute misconduct or so profound as to render the process unfair," the court said.

One example of this would be if the plaintiff did not receive any type of hearing on his or her complaints, the court said. The plaintiff in this case obtained a thorough hearing on the merits of his wage and hour claims, the court noted.

Because the plaintiff did not challenge the award on any of the grounds authorized by the FAA or CAA, the trial court did not err when it confirmed the award, the appeals court concluded.

Rodriguez v. Lawrence Equipment Inc., Calif. Ct. App., No. B291180 (Feb. 26, 2020).

Professional Pointer: The exact wording of an arbitration agreement, especially one subject to the CAA rather than the FAA, is crucial in determining the proper scope of a judicial review of an arbitration award. All agreements should be carefully drafted and, if possible, reviewed by counsel.  

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.