Supreme Court Bars Injury Claim by Independent Contractor on Construction Site

By Ronald W. Novotny

Can an independent contractor sue a general contractor for injuries he sustains on a construction site as a result of a “peculiar risk” inherent in the nature of the work?  No, said the California Supreme Court in the case of Tverberg v. Fillner Construction, Inc., issued June 28, 2010, because the independent contractor assumes responsibility for workplace safety by entering into a contract requiring the performance of inherently dangerous work.

The case was brought by a licensed subcontractor, Jeffrey Tverberg, for injuries he sustained when he fell into a bollard hole while constructing a metal canopy over some fuel-pumping units.  The holes had been dug by another subcontractor who had been hired to erect concrete posts for the expansion of a commercial fuel facility operated by an oil company.  Tverberg sued Fillner Construction Company, the general contractor on the project, for physical and mental injuries under theories of negligence and premises liability. 

The Court held that because Tverberg’s contract granted him the authority to determine the manner in which the work was to be performed, he assumed legal responsibility for taking whatever precautions were necessary to perform the work in a safe manner.  Previously, in Privette v. Superior Court, the Court had held that the hirer of an independent contractor is not vicariously liable to the contractor’s employee who sustains on-the-job injuries resulting from a special or peculiar risk inherent in the work, because those injuries are covered by workers’ compensation insurance.   By essentially expanding its decision in Privette to independent contractors, the Court further insulated general contractors from potential injury claims by sole proprietors such as Tverberg even though he was not subject to mandatory coverage for workplace injuries under the workers’ compensation system.

New Court of Appeal Decision Potentially Helpful To Employers Opposing Class Certification Of Wage And Hour Claims

By Christopher S. Andre and Scott K. Dauscher

Today, in Faulkinbury v. Boyd & Associates, Inc., the California Court of Appeal issued a decision that might prove helpful to employers opposing motions for class certification of wage and hour claims.  The court reiterated that it is the plaintiff(s)' burden to show his or her claims are susceptible to common proof (i.e. proof of alleged liability common to all of the purported class members) and that a defendant employer "'may defeat class certification by showing that an affirmative defense would raise issues specific to each potential class member and that the issues presented by that defense predominate over common issues.'" 

In general, non-exempt employees must be provided at least one unpaid, duty-free meal period of at least 30 minutes each workday.  An additional unpaid, duty-free meal period may be required if an employee works more than 10 hours in a workday.  The Industrial Welfare Commission wage orders permit an employer to instead provide a paid on-duty meal period "when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job meal period is agreed to."

The plaintiffs in the case were employed as security guards who worked at numerous different locations.  They alleged, among other things, that the employer improperly required them to agree to paid on-duty meal periods, contending that the nature of their work did not prevent them from being relieved of all duty (i.e., that they should have been provided unpaid, duty-free meal periods instead of paid, on-duty meal periods).  The plaintiffs alleged also that they were not authorized and permitted to take all required rest periods and that the employer improperly calculated their overtime rates of pay. 

The trial court denied class certification, finding that common issues of law and fact did not predominate over individualized issues. 

The Court of Appeal affirmed the trial court's decision as to plaintiffs' meal period claims and as to plaintiffs' rest period claims, holding that the trial court correctly applied the law as to those claims and holding that the trial court's rulings as to those claims were supported by substantial evidence. 

The Court of Appeal was persuaded that the evidence in the record sufficiently showed that common issues of law and fact would not predominate over individual issues because there was no common proof showing whether or not the requirements for a valid on-duty meal period were or were not satisfied as to any particular security guard employee.  As to the plaintiffs' rest period claim, the Court of Appeal was persuaded that the declarations the employer submitted by employees stating they were authorized and permitted to take all required rest periods was substantial evidence supporting the trial court's conclusion that common issues of law and fact did not predominate over individualized issues because those declarations showed a lack of common proof as to whether the security guard employees were or were not authorized and and permitted to take all required meal periods. 

However, the Court of Appeal reversed the trial court's denial of class certification of plaintiff's claim that the employer incorrectly calculated the applicable overtime rates of pay because its calculations did not include annual bonus payments and other forms of alleged compensation provided to the security guard employees.  The Court of Appeal held that claim was susceptible to common proof because the claim could be determined based on the employer's payroll records.  In other words, the employer either correctly calculated the rate of overtime pay or it did not.  This part of the decision is still potentially helpful to employers because the Court of Appeal emphasized that the claim should have been certified because it was susceptible to common proof, and we believe many common wage and hour claims are in fact not susceptible to common proof.  

Department of Labor Clarifies Who May Take Leave to Care for Child Under FMLA

By Jonathan Judge

On June 22, 2010, the Department of Labor (DOL) issued an Administrative Interpretation clarifying the definition of “son or daughter” as it applies to an employee standing in loco parentis to allow individuals who provide day-to-day care of a child to take leave under the Family Medical Leave Act (FMLA). 

The FMLA entitles an employee to 12 workweeks of leave for the birth or placement of a son or daughter, to bond with a newborn or newly placed son or daughter, or to care for a son or daughter with a serious health condition.

The definition of “son or daughter” under the FMLA includes not only a biological or adopted child, but also a “foster child, a stepchild, a legal ward, or a child of a person standing in loco parentis.”

In its Administrative Interpretation, the DOL focuses on the term in loco parentis citing court decisions finding that the key determination in such relationships is the intention of the person allegedly in loco parentis.  Current FMLA regulations define in loco parentis as including those with day-to-day responsibilities to care for and financially support a child.

Tying these two themes together, the DOL concludes that “the regulations do not require an employee who intends to assume the responsibilities of a parent establish that he or she provides both day-to-day care and financial support in order to be found to stand in loco parentis to a child.”

Following this statement, the DOL provides numerous examples of how an individual may qualify as a parent entitled to leave under the interpretation:

Where an employee provides day-to-day care for his or her unmarried partner’s child (with whom there is no legal or biological relationship) but does not financially support the child;

An employee who will share equally in the raising of a child with the child’s biological parent; and

An employee who will share equally in the raising of an adopted child with a same sex partner, but who does not have legally recognized obligations to care for the child.

The DOL notes also that neither the FMLA nor the FMLA regulations restrict the number of parents a child may have under the FMLA.  Thus, for example, where a child’s biological parents divorce, and each parent remarries, the child will be the “son or daughter” of both the biological parents and the stepparents and all four adults would have equal rights to take FMLA leave to care for the child.

The DOL provides the additional guidance that where an employer has questions about whether an employee’s relationship to a child is covered under FMLA, the employer may require the employee to provide reasonable documentation or statement of the family relationship. However, a simple statement asserting that the requisite family relationship exists is all that is needed in situations such as in loco parentis where there is no biological relationship or other legal relationship.

It is important to note that while the Administrative Interpretation may not be controlling in court, it will most likely be followed by the DOL, which is responsible for enforcing the FMLA.  We note, also, that that this Interpretation Letter does not address an employee’s entitlement to take military FMLA leave for a son or daughter, which is determined by separate definitions.

Supreme Court Permits Arbitrator To Decide Whether Arbitration Agreement Is Enforceable

By:  Ronald W. Novotny

One issue that often arises in litigation over arbitration agreements is “Who gets to decide if the agreement to arbitrate is valid?”  This is usually a “gateway issue” for the courts to decide under both the federal and California arbitration statutes.  However, sometimes the parties specifically agree that the arbitrator can decide issues of contract validity and enforceability, in order to ensure that their entire dispute is resolved in arbitration.

 

In Rent-A-Center West, Inc. v. Jackson issued June 21, 2010, the U.S. Supreme Court decided that a party wishing to challenge such a provision delegating “gateway issues” to the arbitrator must do so by attacking the legality of the “delegation provision” itself and not the parties’ entire agreement.  The delegation clause in that case stated that “The Arbitrator, and not any federal, state, or local agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.”  An employee, Antonio Jackson, challenged the agreement “as a whole” because it required him to split the costs of arbitration and provided for only limited discovery.  But since he did not challenge the legality or enforceability of the “delegation clause,” the issue of the contract’s enforcement was referred to the arbitrator instead.

This is another decision in a recent line of cases favoring the enforcement of arbitration agreements under the Federal Arbitration Act (FAA).  Parties who wish to maximize the chances that their arbitration agreements will be enforced are wise to consider reference to the FAA’s governing law and procedures, and a “delegation clause” such as the one in Jackson, in their agreements.  Although such clauses can still be challenged on the grounds that they were fraudulently obtained or are otherwise somehow “unconscionable” in and of themselves, the Jackson case provides support for employers who are comfortable resolving such enforcement issues in the arbitral forum.

Pending Legislation That Will Affect Employers If Enacted

By Jonathan Judge

The California legislative season is in full swing.  Among the proposed bills this year are several involving changes to meal and rest period regulations, some new leave entitlements, and legislation that may affect the hiring and firing process.  We will be monitoring these and other bills throughout the summer as the August 31, 2010 deadline for bill passage approaches. 

AB 482 (Mendoza) Consumer Credit Reports - This bill would prohibit an employer, with the exception of certain financial institutions, from obtaining a consumer credit report for employment purposes unless the information is (1) substantially job-related, meaning that the position of the person for whom the report is sought has access to money, other assets, or confidential information, and (2) the position of the person for whom the report is sought is a position in the state Department of Justice, a managerial position, that of a sworn peace officer or other law enforcement position, or a position for which the information contained in the report is required to be disclosed by law or to be obtained by the employer.

AB 569 (Emmerson) Meal & Rest Periods - This bill would exempt from meal and rest period provisions, employees in construction, commercial drivers, and security officers if such employees are covered by a valid Collective Bargaining Agreement (CBA) containing specified terms, including meal period provisions.

AB 1853 (Huffman) Bid Preferences - This bill would require state agencies awarding public works contracts to provide a 2% bid preference to a bidder or subcontractor meeting specified criteria related to providing employee health care coverage. This bill would become operative on January 1, 2012, and would not apply to contracts advertised for bid on or after January 1, 2017.

AB 2340 (Monning) Bereavement Leave - This bill would allow for three days unpaid leave for bereavement purposes upon the death of a spouse, child, parent, sibling, grandparent, grandchild, domestic partner, or domestic partner’s child, within 13 months of the death of the bereaved individual.  The provisions of the bill would not apply to an employee who is covered by a valid CBA that provides for bereavement leave and other specified working conditions.

AB 2424 (Niello) Final Wages Payment - This bill would allow employers to pay wages to discharged employee within a reasonable time, not exceeding 24 hours after discharge, excluding weekends and holidays, and would also allow payment of final wages to be made by mail to the most current address of the employee in the employer's payroll records, to a specified address provided by the employee at the time of discharge, or by making payment available to the discharged employee at a location specified by the employer.

AB 2468 (DeLeon) Lactation Breaks - This bill would authorize an employer to use the designation "Mother-Friendly Worksite" it promotional materials, if it submits its workplace breast-feeding policy to the Labor Commissioner and the Labor Commissioner determines that the employer's policy provides for specified criteria.

AB 2727 (Bradford) Criminal Records - This bill would prohibit employers from denying an application for employment based on conviction of a criminal offense unless the employer determines that there is a direct relationship between the prior conviction and the employment sought, or granting employment would involve an unreasonable risk to property or persons.

SB 908 (Wyland) Meal and Rest Periods -  This bill would allow exception from Wage Order Meal and Rest Period Provisions for employees working in armored cars.

SB 1304 (DeSaulnier) Marrow Donation Leave -   This bill would require employers to permit employees to take paid leaves of absence for organ and bone marrow donation, and to restore an employee returning from such leave to the same or equivalent position.  The bill would also prohibit an employer from interfering with, or retaliating against, an employee taking such leave, or opposing an unlawful employment practice related to such leave.  The bill would also create a private right of action for aggrieved employees to seek enforcement of these provisions.

Please check back regularly for updates on these and other bills.

U.S. Supreme Court Uholds Employer Search Of Pager Text Message Records Where Search Was Work-Related And Limited In Scope

By Irma Rodriguez Moisa, Nate Kowalski, Amber Solano, Jay Trinnaman, and Matthew D'Abusco

On June 17, 2010, the United States Supreme Court ruled that a city audit of an employee’s text messages on a city-owned device did not violate the Fourth Amendment.  In City of Ontario v. Quon, the Supreme Court determined that the City of Ontario’s search was reasonable under the narrow factual circumstances of this case. Significantly, however, the Supreme Court declined to address the broader issue of to what extent does an employee have a reasonable expectation of privacy in his electronic communications on employer provided devices.

Click here to download and read the full alert.

Click here to download and read the Supreme Court's opinion. 

Department of Labor Directive Expands Impact of New Labor Rights Posting Requirements For Federal Contractors

By Robert Fried

As we previously reported here, by Executive Order 13496, the Obama administration revoked Executive Order 13201 issued by the Bush administration requiring that providers of goods or services to the executive branch to post a Beck notice informing employees of their rights to not join a union and their right to not pay agency fees associated with the political and other non-representation activities of a union (the so-called "Beck" rule based on a US Supreme Court decision of the same name).  


As required by Executive Order 13496, on May 20, 2010, the Department of Labor (DOL) issued a final rule effective June 21, 2010, requiring federal contractors with prime contracts over $100,000 and federal subcontractors with subcontracts over $10,000 to instead post notices informing employees of certain rights under the National Labor Relations Act (NLRA). Specifically, affected employers are now required to post a notice informing employees of their rights under the NLRA to form a union, to join a union, to support a union; provides examples of conduct by employers and conduct by unions that interferes with those rights; and states how employees can contact the National Labor Relations Board (NLRB) to ask questions or to file complaints.

While new posting notice requirements might not in themselves reflect a fundamental change in the balance of rights and risks in the workplace, additional new rules issued as a directive without formal rule making by the Office of Federal Contract Compliance (OFCCP) do suggest a shift in enforcement practice at the federal level that requires close attention to the extent it marks the beginning of a far more active inter-agency coordinated enforcement driven approach on labor issues.

The new June 15, 2010 OFCCP directive provides that federal compliance officers on federal contracts, Davis-Bacon, and other American Recovery and Reinvestment Act of 2009 stimulus projects will inspect work sites for compliance with the new posting requirements as well as inspecting contractual language for compliance language.  Because compliance enforcement is intended to be shared, at first with the Office of Labor Management Standards (OLMS), the directive marks a  new and untested era of inter-agency enforcement and information sharing. While no specific enforcement sharing with the NLRB has yet been formally announced, such a functional extension of coordination is possible and with it the use of the unfair labor practice provisions of the Act.  This means notice posting will play a role in future organizing campaigns

Supreme Court Wakes The Dead By Rejecting Hundreds of Recent NLRB Rulings

By Thomas A. Lenz and Jonathan Judge

On June 17, 2010, in  New Process Steel, L.P. v. National Labor Relations Board, the United States Supreme Court dealt a severe blow to the National Labor Relations Board (NLRB) and hundreds of NLRB decisions.  From the period of late 2008 to early 2010, the NLRB operated with a two member quorum.  Three empty seats at the Board remained during this period as appointment packages did not receive Senate confirmation at the end of the Bush Presidency and beginning of the Obama Presidency.   The two NLRB members remaining decided to render decisions on cases where they could agree.  Relying upon legal advice that they could render decisions on behalf of the Board with a two member quorum, the two members issued decisions on hundreds of cases involving unfair labor practice and union election issues. 

In the Supreme Court's 5-4 ruling, signaling a deeply divided decision, the majority expressed that the Board lacked authority to decide cases with only two members, and instead, confirmed that three sitting Board members are required for a quorum.  In sending the hundreds of decided cases back to the NLRB for reconsideration by a quorum of at least three members, the Court characterized the Board's effort to operate via two member quorum as “a tail that would not only wag the dog, but would continue to wag after the dog died.”  Not surprisingly, the majority ruling is accompanied by a bitter dissenting opinion. 

The impact of the ruling remains to be seen.  The NLRB immediately issued a press release in which it confirmed the current four-member Board will do its best to rectify the situation in accordance with the Supreme Court's ruling.   The current four-member Board should be expected to revisit the rulings sent back by the Supreme Court decision.  The level of review and process to achieve it remains to be seen.  This will certainly swamp the Board with work involving old rulings on old cases at a time when newer cases and arguments for change in NLRB rules are also at play.  When coupled with the fact that the Board stands to lose three of the four members in coming months unless there is Senate confirmation, the situation now facing the NLRB is indeed dire. 

The situation is not one that advocates of labor law reform expected with the current Administration.  The ruling may well discourage unions, employees, and employers from going to the NLRB for assistance with labor issues as well as complicate those issues and cases already pending with the Board. 

Employers with recent NLRB issues should stay tuned to see how this situation develops.

U.S. Customs and Immigration Services Will Launch Redesigned E-Verify Website on June 13, 2010

By Jonathan Judge and Christopher S. Andre

As we previously reported here,  the Los Angeles Times has reported  here that the Immigration and Customs Enforcement ("ICE") agency, the largest investigative agency in the Department of Homeland Security ("DHS") is conducting a crackdown on employers that knowingly hire or retain undocumented workers. Alleged violators are being prosecuted in Federal court by the United States Attorney.

Employers seeking to reduce the likelihood of unknowingly hiring undocumented workers can also enroll in the DHS' E-Verify program, "an Internet-based system that allows an employer, using information reported on an employee's Form I-9, Employment Eligibility Verification, to determine the eligibility of that employee to work in the United States." The DHS notes that the E-Verify is for most employers "voluntary and limited to determining the employment eligibility of new hires only. There is no charge to employers to use E-Verify."

The U.S. Citizenship and Immigration Services ("USCIS") will launch a redesigned E-Verify website, June 13, 2010, which the USCIS states will enhance E-Verify's "usability, security, accuracy and efficiency."  E-Verify is an internet-based system that compares information contained on an applicant's or employee's Form I-9, Employment Eligibility Verification form to data kept by the DHS and Social Security Administration records to confirm eligibility for employment.

The newly redesigned E-Verify website will feature "a clean and modern design, easy and intuitive navigation, and clear and simple language."  The USCIS states also that the redesigned site will include a new home page, a new case alerts feature, improved case management, a streamlined tutorial, and other improvements.  

According to the USCIS, current users of E-Verify can use their existing user IDs and passwords, and existing user data will remain available.  However, existing users will be required to complete an approximately 20-minute  tutorial to learn about the changes to the site.  

To prepare for the new site, the USCIS recommends E-Verify participants:

• Watch two "How to" videos, which demonstrate how to create a case, and how to respond to a tentative nonconfirmation.
• Download the new user manuals and quick reference guides to become familiar with how to use E-Verify.  USCIS states updated publications will be available in early June, but, at the time of this post, updated publications were not yet available.
• Attend the USCIS's preview webinars.

 For more information, click here.

NLRB Ruling May Encourage Employee Dishonesty

By Thomas A. Lenz  

Awards of backpay in unfair labor practice cases are intended to make whole an employee who suffers a loss of earnings because of an unfair labor practice.  Because awards of backpay are typically limited to an employee's actual loss, an award of backpay is usually offset by any post termination earnings.

In Atlantic Veal & Lamb, Inc., 355 NLRB No. 38 (May 28, 2010), the National Labor Relations Board ruled in favor of a terminated employee claiming he was terminated as a result of engaging in protected activity.  At issue was the question of whether the administrative law judge who initially considered the matter properly determined that the employee's claim for backpay was barred because the employee falsified his post termination employment history on a mortgage application. 

The administrative law judge hearing the matter initially agreed with the employer that the employee's falsification of his post termination employment history should bar the employee from being awarded backpay for the time period at issue.  The administrative law judge expressed concern that the employee's fasification of his post-termination employment history would hinder an accurate determination of the employee's actual post-termination earnings for purposes of applying those post-termination earnings as an offset against an award of backpay.

On review, a three-member panel of the recently reconstituted NLRB reversed the administrative law judge's decision and remanded the matter back to the administrative law judge for further proceedings.  The NLRB panel ruled that the administrative law judge gave too much significance to the discrepancies between the information the employee provided on his mortgage application and the information the employee submitted as part of his claim for an award of backpay and ruled that the employee should not be barred from receiving an award of backpay for the time period in question.  The NLRB panel also criticized the administrative law's judge's credibility determinations and the impact of those credibility determinations on what may be a broader scope of backpay liability than the NLRB panel would consider appropriate.  

The NLRB panel's instructions to the administrative law judge will very likely increase the employee's recovery in the case as the discrepancies and credibility issues will weigh less heavily on backpay calculations.

More broadly, the ruling stands to reward employee dishonesty and reward incomplete or inconsistent employee accounts of their post termination employment and earnings.  This may encourage employees and unions to increase their resort to the NLRB to challenge employment related decisions and to enhance leverage and employer exposure during organizing campaigns. 

NLRB Helps Resolve Union Turf Wars On Construction Projects

By Thomas A. Lenz

AALRR clients have recently had two published rulings by the National Labor Relations Board in which competing unions have disputed work assignments by construction contractors.  Where either or both unions to a dispute picket or threaten to picket because of such a dispute, the NLRB can get involved.  If the unions involved have not agreed to a different mechanism to resolve such disputes, the NLRB has the legal authority to make a final and binding award of the disputed work.

In a matter involving the Teamsters, the Laborers, and Ames Construction, the contractor assigned truck driving work on a construction in Imperial County, California to the Laborers despite the Teamsters' insistence that the work should be assigned to its members.  After an investigation and a hearing in Los Angeles, the NLRB in Washington, DC agreed with the contractor's work assignment and awarded the disputed work to the Laborers.  See Laborers (Ames Construction), 354 NLRB No. 113 (November 30, 2009).

In a matter involving the International Brotherhood of Electrical Workers, the Laborers, and High Light Electric, the contractor assigned certain traffic light installation work to the Laborers.  The IBEW demanded the work assignment.  After an investigation and a hearing in Los Angeles, the NLRB in Washington,DC agreed with the contractor's work assignment and awarded the disputed work to the Laborers.  See Laborers (High Light Electric), 355 NLRB No. 29 (April 29, 2010). 

The NLRB's dispute resolution process is very important in today's highly competitive climate.  Work is scarce, and unions are more competitive than ever as they seek to preserve their market share.  An NLRB award of disputed work is final and binding on the unions involved.  It is critical for any contractor performing work in the current economy to understand the playing field in case such issues arise.  This is especially true for contractors signed to multiple labor agreements, working under project labor agreements, or otherwise performing work that multiple unions claim.

Plaintiffs File Petition For Rehearing Of California Supreme Court Decision Clarifying Who Can Be Liable As An "Employer"

By Scott K. Dauscher and Christopher S. Andre

As we previously reported here, on May 20, 2010, by a unanimous decision in Martinez v. Corky N. Combs, the California Supreme Court clarified the standard courts must use to determine who is liable as an "employer" for violations of wage and hour laws embodied in Industrial Welfare Commission ("IWC") Wage Orders, including claims for unpaid or underpaid wages.  In that case, the plaintiffs sought to hold customers of the employer liable for their claims for allegedly unpaid wages.  The trial court, the Court of Appeal, and the California Supreme Court all rejected the plaintiffs' arguments.  

Today, the plaintiffs filed in the California Supreme Court a petition for a rehearing of the case.  Because the Supreme Court's decision was a unanimous decision and because petitions for rehearing are seldom granted, we think the Court will very likely deny the petition and allow its May 20, 2010 decision to stand.  In any event, we will report here any further significant developments.

Eagerly Awaited California Supreme Court Decision Regarding Meal Periods Is Not Likely Until February 2011, At The Earliest

By Scott K. Dauscher and Christopher S. Andre

The issue of whether an employer's obligation to "provide" to non-exempt employees unpaid, duty free meal periods of at least 30 minutes means the employer must ensure that non-exempt employees actually take such meal periods or means the employer must merely make the meal periods available has been pending before the California Supreme Court since August 2008 when the court granted review of the Court of Appeal's decision in Brinker Restaurant Corp. v. Superior Court holding that an employer satisfies its duty to "provide" required meal periods by making required meal periods available to non-exempt employees.  On December 4, 2008, the Court also granted review of the Court of Appeal's decision in Brinkley v. Public Storage, which decided the issue the same way as the Brinker court.  

The California Supreme Court will not conduct any additional oral arguments this summer.  Therefore, September is the earliest that Brinker could be placed on the Court's oral argument calendar.   Assuming oral argument would then take place in November 2010, at the earliest, a decision by the Court is not likely to be issued until February 2011, at the earliest.

Court Refuses to Compel Arbitration by Third Parties Not Signed to Arbitration Agreement

By Ronald W. Novotny

On June 1, 2010, the California Court of Appeal refused to enforce an arbitration agreement to require the arbitration of claims asserted against third parties who did not agree to arbitration.  In Valencia v. Smyth, purchasers of real property sued their agent, the property owners and the owners’ broker and listing agent, and three additional parties (two title companies and the trustee of the deed of trust) for fraud, breach of fiduciary duty, negligence, and other claims arising out of the alleged misappropriation of the purchasers’ escrow funds.  The owners attempted to enforce an arbitration agreement entered into with the buyers in which they agreed to arbitrate “any dispute or claim in Law or Equity arising between them out of this Agreement or any resulting transaction,” which neither the title companies nor the trustee were parties to.  The trial court had refused to enforce the agreement, and required that all parties be joined in a consolidated judicial proceeding, because the claims against the third parties arose out of the same transaction or series of related transactions and there was a “possibility of conflicting rulings on a common issue of law or fact.”

The Court of Appeal affirmed this ruling based on the provisions of the California Arbitration Act, Code of Civil Proc. Section 1281.2, which permit a court to deny arbitration in a case involving third parties who have not agreed to arbitrate.  Although arbitration of the entire dispute could have been ordered if the parties had adopted the procedural provisions of the Federal Arbitration Act, the court found that they had not done so -- even though the Arbitration Agreement stated that “Interpretation  of this agreement to arbitrate shall be governed by” the FAA. 

The case demonstrates the importance of the wording of arbitration agreements to determining how they will be enforced.  It is particularly important for employers who seek to enforce their agreements to arbitrate claims brought by former employees to properly reference the Federal Arbitration Act int heir agreements, if they want to compel arbitration of their disputes against third parties who have not signed the arbitration agreement.