Many companies require their employees to agree to arbitrate disputes about working conditions. But what happens if a government agency intervenes on behalf of an employee; is that agency also bound by the arbitration agreement?

Cisco Systems, Inc., believed the answer was yes. The California Court of Appeal disagreed (Department of Fair Employment and Housing v Cisco Systems, Inc.)

Cisco Systems, one of California’s and the nation’s largest technology companies, hired an employee referred to as John Doe in September of 2015, to work as an engineer in its Santa Clara facility.

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 later, Doe filed a complaint with the state’s Department of Fair Employment and Housing, the agency that enforces California’s employment discrimination laws.

He alleged that two supervisors had denied him opportunities and disparaged him because, under the traditional caste system of India, he is from the lowest caste, and they are from the highest. He also claimed that Cisco retaliated when he complained to the company.

(India’s caste system dates back at least 3,000 years. It divides the Hindu population into five tiers: Dalits, traditionally confined to work as street sweepers and latrine cleaners; Shudras, laborers; Vaishyas, farmers, traders, and merchants; Kshatriyas, warriors and rulers; and Brahmins, priests and teachers. Family names often indicate an individual’s caste. Despite reform efforts, the system can still affect Indian culture, politics and business.)

The Department informed Cisco that it had determined that Doe’s complaint had merit. It then sued the company and two supervisors in Santa Clara County Superior Court. It asked the court for an injunction against further violations, compensation for Doe, and other relief. Doe was not a party to the suit.

Cisco asked the court to compel the Department to arbitrate the matter, rather than litigating it. The company contended that the agency was acting on Doe’s behalf and thus was bound by the arbitration agreement Doe had signed as a condition of his employment.

The trial court denied Cisco’s request. The company then appealed.

The key issue, said the appellate court, was whether an arbitration agreement, such as the one between Cisco and Doe, can bind a third party – in this case, the Department.

An arbitration agreement is simply a contract, the justices noted. In it, the parties agree to give up the right to take disputes to court, in exchange for receiving a generally faster and less costly decision from an agreed-upon arbitrator.

But any contract requires mutual consent, the justices pointed out; a contract can’t exist unless the parties have agreed to the same thing. Parties cannot be compelled to arbitrate a dispute that they have not agreed to resolve that way.

Since the Department never consented to resolve disputes with Cisco by arbitration, it “ordinarily” cannot be compelled to arbitrate the complaint involving Doe.

There are some very specific circumstances in which a third party could be bound by an arbitration agreement, the justices acknowledged, such as when that third party is acting as the agent of a signer or is the alter ego of a signer.

Cisco claimed that was the case here; the Department, it said, was acting as Doe’s proxy, and thus should be bound by the arbitration agreement.

The justices disagreed. The Department acts on behalf of the public, not just an affected employee, they noted. It, not the employee, decides whether to pursue an employer, and it can seek remedies that are not available to an employee.

Even if an employee joins in the litigation filed by the Department, he or she must be represented by separate counsel, and doesn’t control the Department’s decision-making about the litigation.

The United States Supreme Court, the justices pointed out, has similarly held that the federal agency that enforces employment discrimination laws is not bound by an employee’s agreement to arbitrate.

The appellate court upheld the trial court’s denial of Cisco’s motion to compel arbitration and awarded costs to the Department.

By Laurie Murphy