The recent appellate decision in Villalobos v. Maersk, Inc. et al. delivers a potent warning to California employers regarding the limits of arbitration agreements and the need for careful drafting, particularly for workforces engaged in interstate commerce. The litigation began when a logistics employee, who handled cargo moving through foreign and interstate commerce, sued Maersk for wage violations, including claims under the Private Attorneys General Act (PAGA). When Maersk attempted to compel arbitration based on a signed employment agreement, the trial court denied the motion. The appellate court affirmed this refusal, compelling the PAGA action and claims for unpaid minimum wages to proceed in court. The ruling hinged on three distinct legal principles, each offering a critical lesson in contract drafting and jurisdictional scope.

The first and immediate hurdle for the employer was the presumption against delegating arbitrability to the arbitrator. The appellate court's scrutiny began with the formation of the agreement itself, which was constructed from two separate documents: an "Employee Agreement to Arbitrate" and an associated "Mutual Arbitration Policy". The employee signed the first document as a condition of his employment, acknowledging that he had received and reviewed the second. The Employee Agreement vaguely stipulated that arbitration would be conducted under the Federal Arbitration Act (FAA) and the "applicable procedural rules" of the American Arbitration Association (AAA), without identifying which specific rules applied or where they could be found. Only the separate Arbitration Policy specified that the AAA's Employment Arbitration Rules would govern procedures and directed the employee to the arbitrator’s website to review them. Crucially, neither the employee agreement nor the arbitration policy explicitly stated that the arbitrator had the power to rule on the existence, scope, or validity of the arbitration agreement. The court decisively rejected this fragmented approach, characterizing the reliance on the policy and incorporated external rules as an insufficient and an overly complex "three-step process" for an employee to ascertain the intent to delegate. The court held that the high standard of "clear and unmistakable" evidence requires the parties to have "actually focused on the issue". Merely referencing the AAA rules, without an express, unambiguous clause delegating authority to the arbitrator included in the employment agreement itself, failed to meet this threshold.

The Villalobos court then turned to the applicability of the Federal Arbitration Act (FAA). Although the FAA generally preempts state law restrictions on arbitration, it contains an exception for "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce" (9 U.S.C. § 1). The court affirmed that the employee, a warehouse worker involved in loading, unloading, and organizing goods intended for interstate shipment, qualified as a "transportation worker" under this exemption. This determination was important as it meant that FAA did not apply. The arbitration agreement was therefore subject to the provisions of the California Arbitration Act (CAA) and state law, which are significantly more onerous than the FAA.

Because the FAA was inapplicable, the court relied on California's robust protections to exclude two categories of claims from arbitration. Under California law, claims brought under PAGA – which are representative actions brought on behalf of the state – are generally not subject to predispute arbitration. Given the inapplicability of the FAA (which would otherwise allow individual PAGA claims arbitrated per the Supreme Court’s holding in Viking River Cruises v. Moriana), the state's prohibition against waiving the right to litigate representative PAGA actions took effect, compelling these claims to remain in court. Additionally, the Villalobos court relied upon California Labor Code section 229, which explicitly preserves the right of employees to pursue actions in court for the collection of "due and unpaid wages" and associated penalties, "without regard to the existence of any private agreement to arbitrate" – a statute that is typically preempted by the FAA. This statutory exception mandated that the claims for nonpayment of minimum wages and related waiting time penalties under Labor Code § 203 also remain in court.

The Villalobos decision underscores a critical need for precision in employment contract drafting, especially for logistics and transportation companies operating in California. Employers must move beyond boilerplate agreements and implement arbitration clauses tailored to the jurisdictional realities of their workforce to withstand judicial scrutiny. Companies utilizing employees in the supply chain, warehousing, or transportation of goods across state lines should assume those workers fall under the FAA's "transportation worker" exemption. This means that, for FAA-exempt workforces, PAGA claims will not be compelled to arbitration and must be addressed in court, and claims seeking recovery of unpaid minimum wages are statutorily exempt from arbitration under California Labor Code section 229. Further, arbitration agreements must now include a conspicuous, express clause within the body of the contract that unambiguously delegates decisions on arbitrability to the arbitrator, as reliance on external rules is now likely insufficient. 

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