Arbitration agreements should be read as drafted

When an appellate court turned down Tesla's attempt to compel arbitration for employee claims of discrimination, it handed the company a mixed verdict. The plaintiffs in Vaughn v Tesla had worked at Tesla's Fremont facility through an outside staffing agency but later transitioned to employee status. During the entire time, they alleged, they were subjected to racial slurs and other incidents of race discrimination.

In its Jan. 4 decision, a panel of the First Appellate District said that even though they had signed an arbitration agreement when they became Tesla employees, the workers could not be required to arbitrate claims related to events that occurred while they were "temps" through an agency, prior to their employment with the company. The court relied on the express language of the Tesla arbitration agreement to hold that arbitration could only be compelled in connection with discriminatory acts that occurred on or after the workers' employment commencement date for Tesla. As a result, the "before" claims could go to trial, while the "after" claims could be compelled to arbitration.

The language in question reads as follows: "[T]o ensure the rapid and economical resolution of disputes that may arise in connection with your employment with Tesla, you and Tesla agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to your employment, or the termination of your employment, will be resolved, to the fullest extent permitted by law by final, binding and confidential arbitration ..."

Although the Federal Arbitration Act (FAA) requires that any ambiguity be read in favor of arbitration, the court found little ambiguity in this case. In response to Tesla's argument that other courts had read arbitration agreements to encompass post-employment disputes, the judges looked at the broader language used in those agreements and held that Tesla's "relating to" and "arising from" language established temporal boundaries for disputes subject to arbitration.

It distinguished Tesla from other cases, such as Salgado v. Carrows Restaurants, Inc. (33 Cal.App.5th 356), in which the plaintiff agreed to arbitrate "any claim," and Franco v. Greystone Ridge Condo. (39 Cal.App.5th 221), in which the arbitration extended to " '[a]ny and all claims ... relating to any aspect of ... employment with Employer (pre-hire through post-termination).' "

Citing Ahern v. Asset Mgmt. Consultants, Inc. (74 Cal.App.5th 675 (2022)), the court noted that the FAA policy favoring arbitration " 'does not override ordinary principles of contract interpretation' ... '[T]he terms of the specific arbitration clause under consideration must reasonably cover the dispute as to which arbitration is requested.' " Applying the plain language of the arbitration agreement, as well as Tesla's offer letters stating "your first day of employment will be August 2, 2017," the court concluded that plaintiffs could only be compelled to arbitrate disputes that arose after that date.

As the drafter of the arbitration provision, Tesla had the opportunity to draft it broadly enough to cover disputes predating the workers' employment. That it neglected to do so should not allow reinterpretation of terms in the agreement Tesla drafted. A fundamental principle of contract law is that contracts are read in favor of the party that did not draft the agreement. Given Tesla's resources and interests, it is disingenuous for it to ask after the fact for a different reading of the agreement.

Of perhaps equal significance is the appellate court's decision regarding public injunctive relief against Tesla under the state Fair Employment and Housing Act (FEHA). The plaintiffs had asked for a "public injunction, enjoining Defendant[] from committing further violations of the FEHA with respect to race discrimination and harassment against Black and/or African-American workers, and failure to prevent such." As part of the relief requested, they asked for " implementation of effective policies to prevent and correct race harassment, implementation of mandatory training regarding harassment for all of Defendant['s] managerial and nonmanagerial employees, and a public declaration that [Defendant's] widely known racist practices contravene California law and will not continue and will not be tolerated."

The lower court denied Tesla's motion to compel the request for a public injunction, and the appeals court upheld that denial. Relying heavily on McGill v. Citibank, N.A. (2 Cal.5th 945 (2017)), it held that "an arbitration agreement waiving a statutory right to seek a public injunction 'in any forum' is invalid as 'contrary to California public policy' because it 'would seriously compromise the public purposes the statute [was] intended to serve.'"

Tesla had cited the Supreme Court's recent decision in Viking River Cruises to argue that the FAA preempted California's rule against contractual waivers of the right to seek a public injunction. The appeals court took pains to distinguish Viking River, explaining why California law trumped the FAA in this case.

The court said that the FAA did not preempt California law or require enforcement of the waiver provision because the arbitration agreement prohibited the arbitrator from granting non-individual relief. It therefore did not waive the plaintiffs' right to seek a public injunction. The panel made clear that just because a member of the public would not be entitled to assert the FEHA claim did not mean that the plaintiffs could not pursue relief whose primary purpose and effect was to bar unlawful acts that could harm the general public.

The court questioned why injunctive relief benefiting the public was available under other laws - false advertising, UCL, CLRA - but not under FEHA. It referenced the California Supreme Court's decision in Aguilar v. Avis Rent A Car Sys., Inc. (21 Cal.4th 121 (1999)) that injunctive relief was available under FEHA. The determinative issue, said the court, is whether the injunctive relief sought "has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public," not whether the statutory authorization of injunctive relief is express or implied. Injunctive relief under FEHA, said the court, benefits the public just as much as injunctive relief under other laws.