Ninth Circuit to Examine the Reach of Mandatory Employment Arbitration Agreements

On March 2, 2021, the United States Court of Appeals for the Ninth Circuit will hear oral argument in a case that could test the boundaries of mandatory arbitration, and determine whether employees can be tethered to arbitration agreements for years after leaving a company.

The potentially precedent-setting decision stems from a single defamation suit brought by former Tesla, Inc. employee Cristina Balan after the tech giant accused her of criminal behavior on the online news source, The Huffington Post.¹ While Tesla’s legal team maintains that all of Balan’s claims must be arbitrated, the U.S. District Court in Seattle disagreed, finding that some of Tesla’s statements to The Huffington Post fell outside the arbitration agreement with its former employee.² With millions of individuals across the country signing arbitration agreements as a condition of their employment, the Ninth’s Circuit’s decision could become a leading case on the topic of employment arbitration, determining when and how employers may still be susceptible to courtroom proceedings.³

Factual and Procedural History

During her employment with Tesla from August 2010 through April 2014, Balan engineered batteries for Tesla’s vehicles.⁴ Notably, she helped design the battery pack for the Model S electric sedan and her initials were stamped onto the car’s battery packaging.⁵ Upon joining Tesla, Balan signed an arbitration agreement (the “Agreement”) requiring “final, binding and confidential arbitration” of “any and all disputes, claims, or causes of action, in law or equity, arising from or relating to your employment, or the termination of your employment.”⁶ The Agreement further states: “you are waiving any and all rights to a jury trial but all court remedies will be available in arbitration.”⁷

Balan’s difficulties with her employer began in 2014, shortly after Tesla CEO Elon Musk emailed his entire staff encouraging them to disregard the idea of a traditional corporate hierarchy. Musk instructed employees to bring ideas or concerns to the superior best equipped to efficiently handle the issue, even if that entailed going above one’s direct manager.⁸ Balan took Musk up on his offer, emailing him about a product safety concern.⁹ According to Balan, her email to Musk voiced a concern that the Model S floor mats had a tendency to curl up under the car’s pedals, yet engineering supervisors felt a recall was too expensive.¹⁰ Additionally, Balan stated that Tesla appeared to award contracts for materials based on past business relations, rather than quality or price.¹¹ Shortly after emailing Musk, Balan alleges she was forced out of Tesla in April 2014 due to her voiced concerns.¹²

Balan eventually brought a wrongful termination suit and the parties entered arbitration, where a final award was rendered on October 18, 2018.¹³ But on September 8, 2017, before the award was issued, The Huffington Post published an article of an interview with Balan. The article commented on the irony that while Musk was publicly touted for his email encouraging staffers to speak up, Balan was allegedly fired for doing just that.¹⁴ On September 11, 2017, The Huffington Post posted Tesla’s response, which proclaimed that Balan’s raised concerns were “nonsensical,” and stated that not “every email sent to senior Tesla leaders (particularly emails that are not relevant to our mission or the job at hand, or are clearly suspect or misleading) warrants a response.”¹⁵ Tesla went on to accuse Balan of attempting to find an alternative supplier without authorization, thus spending company time working on a “secret project” without supervisory approval, booking an unapproved trip to New York at Tesla’s expense, and illegally recording conversations without permission.¹⁶ Balan asked Tesla to take down the response during the arbitration but Tesla refused.¹⁷ Ultimately, Tesla’s response remained live on the internet for about 15 months until she asked The Huffington Post to take it down, which the publisher did.¹⁸

On January 15, 2019, Balan brought a single defamation claim against Tesla for its comments to The Huffington Post, seeking damages and injunctive relief.¹⁹ Tesla moved to compel arbitration, stating the Agreement with Balan encompassed her claim and thus should be adjudicated in private arbitration.²⁰

District Court Decision

Balan argued that construing the Agreement to include her defamation claim was unconscionable.²¹ The district court agreed with her regarding the confidentiality clause in the Agreement, stating that such broad confidentiality clauses lead to the “harsh, one-sided result that Tesla may publicly attack Plaintiff while she may not publicly defend herself.”²² The district court, however, did not agree with Balan’s assertion that the Agreement should be rendered unconscionable solely on the grounds that it encompassed claims originating “an indefinite amount of time after the employment relationship ends.”²³ The district court held that although Tesla “seeks to apply the Agreement to Plaintiff’s defamation claim years after her employment terminated”, this application is not wholly unexpected considering the broad language of the Agreement—that employees agree to arbitrate “any and all disputes arising from or relating to your employment.”²⁴ Notably, the district court questioned Tesla’s attorneys, “It’s your position that, if 30 years from now there is a newspaper article that the plaintiff finds somehow maligns her, that no matter how old she is, no matter how far away her employment was from this, that she has to arbitrate it? She has forever signed away any cause of action that might mention her prior employment?”²⁵ Tesla responded that it was unaware of case law examining this hypothetical time gap, and reiterated in the instant case that Balan’s claims were encompassed by the Agreement.²⁶

The district court then turned to the issue of whether Balan’s defamation claims fell within the scope of the Agreement, stating, “Because arbitration is only required where the parties have contracted for it, ‘the exact content of the allegedly defamatory statement must be closely examined to see whether it extends to matters beyond the parties’ contractual relationship.’”²⁷ In reviewing whether each alleged defamatory statement arose from or related to Balan’s employment or termination, the district court found that statements about her seeking an alternative supplier, writing irrelevant emails, and working on a secret project all arguably arose from or were related to her employment and thus fell within the Agreement’s scope.²⁸ But statements that Balan “illegally recorded internal conversations within Tesla,” and “booked an unapproved trip to New York at Tesla’s expense,” accuse Balan of criminal conduct that is not contemplated under the “employment contract,” and therefore fall outside the scope of the Agreement.²⁹ The district court held that evaluating these statements and Balan’s rebuttals (that the recordings were not criminal and she has never been to New York) does not require understanding even the “barest details of Plaintiff’s employment.”³⁰ The district court concluded that the parties shall arbitrate defamation claims deemed to arise out of Balan’s performance, while adjudicating the remaining statements of alleged criminal conduct at trial.³¹ Thereafter, Tesla appealed to the Ninth Circuit.³²

Tesla’s Appeal

Tesla’s appellate briefs attack the district court’s decision on three main fronts. First, Tesla alleges that the district court applied an incorrect legal standard by relying on the Eighth Circuit’s “significant aspects” test in Morgan v. Smith Barney, Harris Upham & Co., 729 F.2d 1163, 1167-68 (8th Cir. 1984) rather than Ninth Circuit precedent, which only requires that Balan’s allegations “touch” her employment with Tesla. Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 721 (9th Cir. 1999).³³ Tesla argues that the district court’s application of Morgan resulted in the improper consideration of the merits of Balan’s claim, namely what evidence would be involved in proving or disproving it, rather than whether it arose from or related to her employment.³⁴

Second, Tesla argues the district erred in its arbitrability analysis because it examined Balan’s defamation claim in excerpts, rather than the whole publication.³⁵ Tesla relies on Kaelin v. Globe Communications Corp., 162 F.3d 1036, 1040 (9th Cir. 1998) (finding defamation claims must not be analyzed with “snippets taken out of context”).³⁶ Tesla urges that because its response was one publication and Balan brought only one defamation claim, the district court erred when it parsed out some of the statements instead of looking at the publication in its entirety.³⁷ Tesla maintains that even if parsed out, the statements that Balan took an unauthorized trip to New York and secretly recorded her coworkers “touch” on her employment at a minimum.³⁸

Lastly, Tesla argues the district court improperly split Balan’s defamation claim by allowing some statements to be arbitrated, while reserving other parts for trial.³⁹ Balan would arguably not be permitted to split her single defamation claim across multiple lawsuits, thus the district court should not enable this.⁴⁰

Balan’s answering brief articulates why Tesla’s reliance on alleged improper parsing of defamatory statements may be ill-fated.⁴¹ Before oral arguments, the district court asked whether “allegations that go to criminal activity” were not arbitrable and could be split apart.⁴² Tesla’s attorney declined to address bifurcation, instead reiterating that the subject matter of the defamatory statement was not at issue.⁴³ Tesla added that any district court proceeding of non-arbitrable claims must at least be stayed.⁴⁴

In the alternative, Tesla requests that the case be remanded to the district court to decide whether to enforce the Agreement’s incorporation by reference of the JAMS delegation clause, which reserves the threshold question of scope for the arbitrator.⁴⁵ Even if the case is remanded on such grounds, Tesla would need to address the district court’s ruling that the defamatory statements at issue do “not require understanding even the barest details of Plaintiff’s employment,”⁴⁶ arguably leaving no legitimate question of scope. Tesla’s path to success will likely hinge on the Ninth’s Circuit’s decision of whether the statements at issue—specifically that Balan took a personal trip on the company dime and secretly recorded her coworkers—were related to (or touched on) her employment or termination.

The Future of Mandatory Arbitration

While employers have historically favored the controlled cost, efficiency, and confidentiality of arbitrations, the proceedings often keep issues of public interest hidden. In June 2020, a Tesla shareholder submitted a proposal asking the board to examine how mandatory arbitration provisions negatively impact company culture and conceal potentially hostile workplace conduct.⁴⁷ By September, Tesla had rejected the reform proposal. Tesla does, however, appear to have incorporated some policy changes since its 2017 statement to The Huffington Post, namely dissolving its public relations department and declining to respond to any media inquiries.⁴⁸

With approximately 80% of the 100 largest U.S. companies still using arbitration to resolve workplace disputes⁴⁹, the Ninth’s Circuit decision of whether Balan can maintain her case in the trial court as opposed to arbitration could have wide raging implications on the American workforce.