Cisco Systems, Inc. hired John Doe in September 2015 to work as an engineer. Doe was required to sign an arbitration agreement as a condition of his employment. Under the agreement, Cisco and Doe must arbitrate “all disputes or claims arising from or relating to” Doe’s employment, including claims of discrimination, retaliation, and harassment.
Several years after signing the agreement, Doe filed a complaint with the Department of Fair Employment and Housing (DFEH), which investigates violations of the California Fair Employment and Housing Act (FEHA). When the DFEH receives complaints of employment discrimination, it has the authority to investigate and informally resolve the complaint if it finds it has merit. If the matter is not resolved informally, the DFEH can decline to pursue it further and issue a right-to-sue notice to the complainant, which allows the employee to file a civil lawsuit against the employer. The DFEH can also file suit against the employer, and the plaintiff has a right to participate but is not required to do so.
Doe’s complaint alleged that Cisco discriminated against him on the basis of his ancestry or race. He alleged that two supervisors denied him opportunities and disparaged him because under the traditional caste system in India, he is from the lowest caste and the supervisors are from the highest caste. He also alleged that Cisco retaliated against him when he complained about the unfavorable treatment.
The DFEH investigated the complaint and concluded it had merit. The informal resolution process was unsuccessful and the DFEH filed suit against Cisco and the two supervisors. Doe was not a party to that suit. Cisco moved to compel the DFEH to arbitration based on the arbitration agreement Doe signed. The trial court denied the motion and Cisco appealed.
The Court of Appeal held that the arbitration agreement does not bind the DFEH to resolve disputes with Cisco by arbitration. The Court of Appeal reasoned that a contract cannot exist unless there is mutual assent, i.e., both parties agreed to the same thing. As a result, parties cannot be compelled to arbitrate a dispute they have not agreed to resolve in that way.
The Court of Appeal rejected Cisco’s argument that the DFEH is bound by the arbitration agreement because it is Doe’s proxy in the lawsuit and is not acting independently. While the Court of Appeal did acknowledge that arbitration agreements can be enforced against third parties in certain situations – for example, when an agency relationship exists between the non-signatory and the signer. However, here, the state legislature gave the DFEH and the employee the ability to sue an employer for violating the FEHA. Therefore, the DFEH acts independently when it sues for FEHA violations and is not a proxy of an aggrieved employee.
The Court of Appeal explained that its conclusion is consistent with state and federal case law. It noted a California Supreme Court case that held an employee’s claim for employment discrimination in violation of FEHA is not categorically exempt from arbitration. The Supreme Court noted that its opinion should not be interpreted to mean that an arbitration agreement can restrict an employee from filing a complaint with the DFEH or that the DFEH is prevented from carrying out its function to file civil lawsuits against employees. The Court Appeal also cited Viking River Cruises v. Moriana (2022) 142 S.Ct. 1906, where the U.S. Supreme Court reaffirmed that arbitration is a matter of consent and a party cannot be compelled to arbitrate without a contractual basis that evidences that the party agreed to do so.
Ultimately, the Court of Appeal affirmed the trial court’s denial of Cisco’s motion to compel arbitration.
Dep’t of Fair Emp. & Hous. v. Cisco Sys. Inc. (Cal. Ct. App. Aug. 5, 2022) 2022 WL 3136003.
Note:
Third parties may be bound by an arbitration agreement when the nonsignatory assumes the obligations of the party who signed the agreement when an agency relationship exists between the nonsignatory and the signer, or the nonsignatory is the “alter ego” of the signer. Here, the DFEH was not bound by the arbitration agreement because it acted independently of the parties by exercising its authority to sue for violations of the FEHA.
