In a recent legal dispute, Mahram v. The Kroger Co., a California Court of Appeal delivered a decision that may have implications for employment arbitration agreements. Although the case at hand involved a consumer transaction, the reasoning used by the court could influence how employment arbitration agreements are interpreted.

The Case at a Glance

Payam Mahram used Instacart, an online grocery delivery service, to purchase groceries from The Kroger Co. d/b/a Ralphs Grocery Company (“Ralphs”), a grocery store. In signing up to use Instacart (online), Mahram agreed to Instacart’s terms of service, which included an arbitration agreement. After using Instacart to order groceries from Ralphs, Mahram sued Ralphs – but not Instacart – claiming false advertising and unfair competition. Mahram alleged that Ralphs raised its advertised prices once he applied a coupon to his Instacart purchase. Ralphs, however, moved to compel arbitration based on the arbitration agreement between Mahram and Instacart. The crux of Ralphs' argument was that, as a retailer working with Instacart, it should be considered a third-party beneficiary of the arbitration agreement. In other words, Ralphs argued it should be permitted to enforce the arbitration agreement between Mahram and Instacart even though Ralphs was not a party or signatory to the agreement.

The Court of Appeal ultimately affirmed the denial of Ralphs' motion, affirming that Mahram had agreed to arbitrate disputes solely with Instacart, not with Ralphs or any other third party. The ruling emphasized that, under California law, third-party beneficiaries to a contract can only enforce that contract if the contracting parties had a clear, “motivating purpose” to benefit the third party.

What This May Mean for Employment Arbitration Agreements

The Mahram ruling could have important implications for employment arbitration agreements, particularly in the following areas:

1.  Clarity in Delegation Clauses

One of the key points in Mahram was whether the arbitration agreement’s delegation clause unmistakably assigned the decision of arbitrability to an arbitrator. The court held that the language in the Instacart agreement did not unmistakably delegate the question of who is bound by the arbitration clause to an arbitrator because there was no evidence Mahram agreed to arbitrate anything with Ralphs, leading the court to make that determination instead.

For employment agreements, this ruling underscores the importance of drafting clear and specific delegation clauses. Employers should ensure that any language around arbitrability and third-party beneficiaries is explicit and leaves no room for ambiguity. If the contract is unclear, courts may step in and make decisions that might not align with the employer’s intentions.

2.  Third-Party Beneficiary Considerations

The Mahram decision reiterates existing law that the key factor in whether a third-party beneficiary can enforce an arbitration agreement is whether the parties to the agreement had a “motivating purpose” of providing a benefit to the third party. In employment contexts, this raises questions about who might be considered a third-party beneficiary to an arbitration clause.

This decision highlights the need for employers to clearly identify in the arbitration agreement any third parties who might be intended beneficiaries (including management employees of the employer and affiliated entities), or using descriptive language of the relationship between signatories to the arbitration agreement and third party beneficiaries where identifying such third parties by name may be impractical. Where feasible, employers should ensure that the language of the agreement explicitly covers any affiliated entities or third parties who might need to enforce the arbitration provision. Alternatively, those affiliated entities or third parties can avoid potential third-party beneficiary legal challenges by becoming signatories of the arbitration agreement.

3. Impact on Arbitration Strategies

The Mahram ruling also signals a broader caution in using arbitration agreements as a catch-all tool for dispute resolution. Employers who include arbitration clauses in their contracts should be prepared for potential challenges, particularly if there is any ambiguity in the contract’s terms. Courts may scrutinize these agreements closely, and unless the terms are unmistakably clear, employers could find themselves in a courtroom rather than an arbitration forum.

Conclusion

The Mahram decision serves as a critical reminder to draft arbitration agreements with precision. Ambiguities in arbitration clauses—particularly around delegation clauses and third-party beneficiaries—can lead to unintended consequences and lost opportunities to resolve disputes through arbitration. Employers should review their current arbitration agreements and consult legal counsel to ensure that these agreements are as clear and enforceable as possible. Doing so will help protect against challenges and ensure that arbitration remains a viable option for resolving employment disputes.