Arbitrator must decide whether NY or CA law should apply – labor disputes/tribunals

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A California court has ruled that an arbitrator (not a judge) must decide the applicability of California Labor Code Section 925 to a dispute between a law firm and its former law firm. Zhang v. Supreme Court, 2022 WL 16832570 (Cal. Ct. App. 2022). This ruling potentially undermines the protections of Section 925 of the Labor Code, which allows an employee to void a contractual provision that requires the employee to address a claim outside of California that arose in the state.

Jinshu (“John”) Zhang was an equity partner at Dentons US LLP. After Dentons terminated Zhang’s service over a multimillion-dollar contingency compensation dispute over his compensation, the parties filed dueling suits in New York and California. Dentons initiated arbitration in New York under the arbitration clause in the partnership agreement, while Zhang filed a wrongful termination action in Los Angeles Superior Court.

The partnership agreement contained a broad arbitration clause covering “any disputes relating to the validity, violation, interpretation or enforcement of [the partnership agreement]and designate the place of arbitration as “Chicago, Illinois or New York, New York”.

Dentons filed a motion to compel arbitration in New York and a motion to stay the claim in Los Angeles Superior Court under California Code of Civil Procedure Section 1281.4, which allows a court to suspend a claim when a petition is filed in a court “of competent jurisdiction” to order arbitration. The Superior Court granted, but later vacated, an order to stay the arbitration in New York. The Superior Court also stayed the action in California, ruling that it lacked jurisdiction because the parties delegated arbitration issues to the arbitrator. Zhang sought a mandate, which was denied. The California Supreme Court granted review and referred the case back to the Court of Appeals, which in its final opinion denied the petition, finding that the parties had delegated arbitration issues to the arbitrator.

Zhang argued that the New York court was not a court of competent jurisdiction to compel arbitration because Section 925 of the Labor Code prohibits an employer from requiring a California “employee” to rule on a claim that originated in California. The Court of Appeals rejected Zhang’s analysis, ruling that the argument ignored the threshold issue: whether the equity partner was an “employee” who could invoke Section 925 of the Labor Code in the first instance.

The court ruled that Zhang’s status as an employee was a matter of arbitration. Thus, the parties’ clear and unequivocal delegation clause, which provided that matters of arbitration be decided by the arbitrator, required the arbitrator, not the court, to determine whether Zhang was an employee, so that he could invoke Article 925 of the Labor law.

Aside from the threshold issue of the employee status of a law firm’s equity partner, this ruling may provide practical guidance for practitioners in drafting future arbitration agreements with out-of-state forum and choice of law provisions. An exception to Section 925 of the labor code allows employees represented by legal counsel to choose another state’s law to govern the parties’ agreement. Thus, in cases where an employee is represented by counsel and is subject to an arbitration agreement with a delegation clause and an out-of-state choice of law provision, the application of section 925 of the Labor Code and the choice of law may ultimately be determined by an arbitrator outside of California.

Arbitrator must decide whether NY or CA law should apply

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