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

Jinshu (“John”) Zhang was an equity partner at Dentons U.S. LLP.  After Dentons terminated Zhang’s service over a dispute about his compensation related to a multi-million dollar contingency fee, the parties brought dueling actions in New York and California.  Dentons initiated an arbitration in New York pursuant to the arbitration clause in the partnership agreement, while Zhang brought a wrongful termination action in Los Angeles Superior Court.

The partnership agreement contained a broad arbitration clause that covered “all disputes related to the validity, breach, interpretation, or enforcement of [the partnership agreement]” and designated the place of arbitration as “either Chicago, Illinois or New York, New York.”  The arbitration clause also contained a delegation clause which delegated all questions of arbitrability to the arbitrator.

Dentons filed a motion to compel arbitration in New York and a motion to stay the action in the Los Angeles Superior Court under California Code of Civil Procedure Section 1281.4, which permits a court to stay an action where an application was made to a court “of competent jurisdiction” to order arbitration.  The Superior Court granted but later vacated an injunction staying the New York arbitration.  The Superior Court also stayed the California action, finding that it lacked jurisdiction because the parties delegated questions of arbitrability to the arbitrator.  Zhang sought a writ of mandate, which was denied. The California Supreme Court granted review and transferred the case back to the Court of Appeal, which in this latest opinion denied the petition and determined that the parties had delegated questions of arbitrability to the arbitrator.

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

The Court held that Zhang’s status as an employee was an issue of arbitrability.  Thus, the parties’ clear and unmistakable delegation clause, which provided that issues of arbitrability would be decided by the arbitrator, mandated that the arbitrator, not the court, must determine whether Zhang was an employee such that he could invoke Labor Code Section 925.

Beyond the threshold question of the employee status of a law firm’s equity partner, this ruling may provide some practical guidance to practitioners in drafting future arbitration agreements with out-of-state forum and choice of law provisions.  An exception to Labor Code Section 925 permits employees who are represented by legal counsel to select another state’s law to govern the parties’ agreement.  Thus, in cases where an employee is represented by counsel and is covered by an arbitration agreement which has a delegation clause and an out-of-state choice of law provision, application of Labor Code Section 925 and choice of law may ultimately be determined by an arbitrator outside of California.