California Supreme Court Review: March 2023

This month's installment examines the potential impact of the California Supreme Court's forthcoming decision on review of Zhang v. Superior Court, 85 Cal.App.5th 167 (2022), which will decide the enforceability of contractual forum selection and delegation clauses when they ostensibly conflict with Labor Code section 925, which prohibits an employer from requiring an employee who primarily resides and works in California as a condition of employment to agree to adjudicate a California claim outside of the state.

Petitioner Zhang, an equity partner at a multinational law firm who resided and primarily worked in California, was terminated for cause. Relying on the arbitration clause in his employment agreement (the "Agreement"), the firm commenced arbitration proceedings in New York. Zhang filed a wrongful termination complaint in Los Angeles Superior Court and an application for temporary restraining order to enjoin the arbitration, arguing that Labor Code section 925 prohibited the firm from arbitrating claims arising from his California employment outside of the state. The firm successfully moved in a New York court to compel arbitration and stay Zhang's lawsuit, on grounds that the New York court was one of "competent jurisdiction" under California Code of Civil Procedure section 1281.4, and that the Agreement "clearly and unmistakably" delegated arbitrability issues to the arbitrator.

The California Supreme Court granted a petition for review to answer the question of whether a court in a non-California forum is one of "competent jurisdiction" to rule on a motion to compel arbitration if (a) an employer attempts to compel arbitration in a non-California forum pursuant to a forum-selection clause in an employment agreement, but (b) the California-resident employee invokes section 925, which prohibits said employer from requiring a California employee to agree to such a provision. Further complicating matters, the parties dispute whether Zhang is an "employee" such that section 925 even applies and allows him to void the arbitration clause, and whether Zhang's status is a question of arbitrability delegated to the arbitrator to decide. Accordingly, the Supreme Court must also address the question of whether a contractual agreement to delegate questions of arbitrability prevents a California court from enforcing section 925 in opposition to the employer's motion to stay proceedings in California.

Zhang presents a logical merry-go-round: Because the question of whether Zhang is an "employee" under section 925 is a question of arbitrability, such a question is delegated to the arbitrator in New York. But if the arbitrator in New York decides that Zhang is an employee, then he may raise section 925 as a defense to void the arbitration clause. If the Court decides that such delegation is enforceable, it would represent something of an abdication of authority for California courts and shift additional weight to bodies of alternative dispute resolution. Multi-state organizations and their employees would be wise to revisit their employment agreements to specify, or perhaps carve out, such threshold questions from arbitration proceedings.

Furthermore, the implications of the Court's decision have important strategic ramifications for litigants. If the Supreme Court decides that a court in a non-California forum is one of competent jurisdiction to rule on a motion to compel arbitration, then California courts would be forced to stay any in-forum proceedings pursuant to section 1281.4 anytime such a motion is filed. The result would be a new procedural arrow in the quivers of litigants in employment disputes.

Regardless of the outcome, the Court's upcoming decision will clarify the applicability of section 925 in the context of out-of-state arbitrations of California labor disputes, and will likely impact employers' considerations in constructing arbitration clauses to include in employment agreements moving forward.