Conducting Civil Discovery May Result in Waiver of Right to Arbitrate
In Zamora v. Lehman, a California court held this week that a party to an arbitration agreement waives the right to compel arbitration by engaging in conduct inconsistent with the agreement to arbitrate. In this case, one of the parties to a lawsuit waited until four months before trial to seek to compel arbitration of the dispute. Prior to requesting arbitration, the party conducted discovery in the court proceedings. The court noted that the parties’ arbitration agreement did not allow for discovery in arbitration and that by conducting discovery in the court action, the party acted inconsistently with the agreement to arbitrate. As such, the court found that the party had waived the right to compel arbitration of the dispute. The party seeking arbitration argued that any waiver would have to be “knowing” and that there was no knowing waiver because the party forgot that there was an arbitration agreement and did not recall the existence of the agreement until four months before trial and after conducting discovery. The party argued that upon “discovering” the agreement, she diligently pursued arbitration. The court rejected this argument and held that any right to arbitrate had been waived.
This case serves as a good reminder that parties to arbitration agreements must act diligently to pursue the right to arbitrate. Conduct inconsistent with arbitration may result in a finding of waiver.
Supreme Court to Review Whether FAA Preempts California Arbitration Agreement Rules
By Ryan McCoy
Recently, in AT&T Mobility LLC v. Concepcion (Laster), the 9th Circuit held that the phone company's consumer class action waiver clause was unconscionable under California law, and that the Federal Arbitration Act ("FAA") does not preempt California law. Both conclusions are significant given the Supreme Court's prior holding in in Stoltt-Nielsen v. Animal Feeds, which held that the FAA does not authorize arbitrators to require class action arbitration when an arbitration agreement is silent on the issue.
The United States Supreme Court granted certiorari and will hear the case in the upcoming term. The Court is expected to decide whether the 9th Circuit was correct in holding that the FAA does not preempt state law. This decision has the potential to impact the enforceability of class action waivers in arbitration agreements in California. We will continue to keep you updated with respect to this case.
Court Affirms Enforceability of Class Action Waivers in Arbitration Agreements
Since the California Supreme Court’s decisions in Discover Bank v. Superior Court and Gentry v. Superior Court, Plaintiffs’ attorneys have argued that class action waivers in arbitration agreements are effectively dead in California. Defense attorneys, on the other hand, have pointed out that Gentry actually affirmed that in proper circumstances such a waiver will be enforced. Gentry sets forth four factors that bear on enforceability: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members' rights through individual arbitration.
In Arguelles-Romero v. Superior Court, the Second Appellate District recently affirmed that class action waivers in arbitration agreements can be enforceable in the proper circumstances. The Arguelles court harmonized Discover Bank’s test regarding procedural unconscionability and Gentry’s test regarding effective vindication of non-waivable statutory rights, finding that the ultimate inquiry in each is whether the class action waiver would, in effect, work as an exculpatory clause. For example, if the class action waiver would permit a defendant to take small amounts of money from its customers or employees without fear of a lawsuit, the clause will be unenforceable. The Arguelles court determined that “the proper course of action is for a court to consider each test on its own merits, as it applies to the specific circumstances of a case. If the plaintiff can establish procedural unconscionability, the court should consider whether, under the circumstances alleged, the class action waiver is substantively unconscionable as a matter of law [the Discover Bank test]. If the plaintiff can establish a non-waivable statutory right is at issue, the court should make a discretionary determination under the rule of Gentry.”
The lesson for employers is that class action waivers in arbitration agreements remain alive and well in California. I ndeed, in two recent cases this firm prevailed on motions to compel arbitration of employment claims where the Plaintiffs had sought to proceed as a class action. The courts in each case found the arbitration agreements enforceable, including their class action waiver provisions. Employers should evaluate their agreements in light of these recent holdings to ensure they have the best chance of being similarly enforced.
California Broadens Judicial Review of Arbitrator Error
In Pearson Dental Supplies, Inc. v. Superior Court, the California Supreme Court loosened the standards for judicial review of arbitrator’s decisions with regards to employment discrimination claims under the Fair Employment and Housing Act (“FEHA”). The employer and employee in Pearson had an arbitration agreement that stated the employee would submit all employment-related claims to arbitration within one year from when the dispute arose or when the employee first became aware of facts giving rise to the dispute. The employee was terminated from his employment on January 31, 2006, which he believed was discriminatory based upon his age. The employee filed an administrative complaint with the Department of Fair Employment & Housing on April 5, 2006 and received a right-to-sue letter on April 14, 2006. The employee then filed a civil lawsuit on October 2, 2006.
After a brief delay, the employer filed a motion to compel arbitration, which was granted on May 2, 2007. The employee filed a petition with the Court of Appeal, challenging the trial court’s order, which was denied. Thereafter, on June 13, 2007, the employee and employer proceeded to arbitration. On July 24, 2007, the employer filed a motion for summary judgment with the arbitrator, claiming the employee’s discrimination claims were time barred according to the one-year time period in which to pursue arbitration for such claims, as set forth in the arbitration agreement. The employee opposed the motion on the grounds that the one year statute had been tolled pursuant to Code of Civil Procedure section 1281.12 and that the agreement was unconscionable. The arbitrator granted the motion for summary judgment and stated that the employee had failed to timely pursue his claims in arbitration.
The employee petitioned the superior court to review the arbitrator’s decision. Despite the employer’s opposition, the trial court vacated the arbitrator’s decision, stating that the arbitrator had made a clear error of law by misinterpreting the tolling provisions of Code of Civil Procedure section 1281.12, and therefore had acted in excess of his jurisdiction. The superior court relied on the holding in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), for its authority to vacate the decision, which stated that a court is supposed to review an arbitrator’s awards to ensure the protection of an employee’s unwaivable statutory rights arising under FEHA.
The employer appealed the superior court’s decision, and the Court of Appeal reversed the superior court’s holding. The employee then petitioned for review with the California Supreme Court, which was granted.
With regard to whether the arbitrator had committed an error of law by granting the employer’s motion for summary judgment, the Court concluded that he did. Code of Civil Procedure section 1281.12 states in pertinent part: “[i]f an arbitration agreement requires that arbitration of a controversy be demanded or initiated by a party to the arbitration agreement within a period of time, the commencement of a civil action by that party based upon that controversy, within that period of time, shall toll the applicable time limitations contained in the arbitration agreement with respect to that controversy, from the date the civil action is commenced until 30 days after a final determination by the court that the party is required to arbitrate the controversy, or 30 days after the final termination of the civil action . . .” The purpose of this section is to prevent a party from having to forego court evaluation in order to abide by an arbitration agreement, the validity of which may be questionable. Based upon the Court’s interpretation of what it means to “toll” a statute, the Court determined that the employee had timely pursued arbitration. Specifically, at the time the employee filed his civil complaint, and tolled the period in which to pursue his discrimination claim, he still had four months remaining within the one year period to pursue arbitration. This one year time period did not begin to run again until trial court granted the motion to compel arbitration, which was arguably on May 12, 2007, when the court issued its written order. Accordingly, the employee had four months from that point to pursue arbitration, which he did. Therefore, the employee did not waive his right to pursue arbitration and the arbitrator’s decision on that basis was erroneous.
The Court also agreed that it was within the superior court’s authority to review the arbitrator’s award. Although the Court recognized that the parameters upon which an arbitrator’s award may be judicially reviewed is limited, it confirmed that when an employee is subject to a mandatory arbitration agreement and is unable to receive a hearing on the merits of his claims under FEHA or any other unwaivable statutory right, because of an arbitrator’s legal error, a trial court has the authority to vacate the award.
The Court also opined on the secondary issue raised by the employee as to whether the arbitration agreement was unconscionable. The employee claimed that language within the agreement precluded the employee from seeking administrative remedies and therefore was unconscionable. The Court disagreed. First, the Court stated that the employee had failed to raise this argument when opposing the employer’s motion to compel arbitration, and therefore had waived it. Secondly, the Court determined that even if the employee had not waived the argument, the agreement was not unconscionable. In reading the provisions of the agreement in a manner that rendered the agreement lawful, so as to uphold the public policy of enforcing arbitration agreements, the Court determined that the language of the agreement that restricted the employee from submitting his claims for adjudication before an administrative entity was not unconscionable.
This holding by the Supreme Court provides a potential avenue for employees dissatisfied with an arbitrator’s award concerning his/her FEHA claims or other statutory claims, to challenge the award through judicial review based upon the argument that the arbitrator has misapplied the law and denied the employee his/her statutory rights.
Ninth Circuit Refuses to Enforce Arbitration Agreement
By Dan Forman
Quixtar, Amway's successor-in-interest, required its distributors to enter into agreements, under Michigan law, that included a carefully crafted three step ADR process for dispute resolution. The first two steps involved non-binding "conciliation" and the third step was mandatory arbitration. When Quixtar was sued in a purported "class action" under allegations of RICO violations and California's B&P Code section 17200 for allegedly operating an illegal pyramid scheme, Quixtar attempted to have the case dismissed or ordered to arbitration pursuant to its standard ADR agreement. The District Court held that the ADR agreement was not enforceable as it was an unconscionable agreement that lacked either procedural or substantive due process.
Unfortunately for Quixtar, the Ninth Circuit agreed and refused to enforce the agreement, applying California law, not Michigan law. The court looked to California precedent regarding enforceability of arbitration agreements in the employment context.
The Court held that the agreement was procedurally unconscionable because (1) there were no negotiations over the terms of the contract, and (2) the agreement was presented to distributors on a take it or leave it basis. Further, because Quixtar retained the right to amend the rules pertaining to ADR at any time, the Court found that substantive unconscionability multiplied "the degree of procedural unconsionability."
The Ninth Circuit then carefully identified numerous other problems raised by the ADR contracts:
1. Lacking mutuality - distributors were required to resolve disputes under the "ADR" process but Quixtar was not.
2. The Court held that Quixtar's non-binding "conciliation" program only provided Quixtar with a free peek of the plaintiff's case giving certain advantage to Quixtar (that it referred to as the "employer").
3. Unfair time restrictions - Distributors were precluded from starting an arbitration until at least 90 days after the claim arose and, per the agreement, were limited to a two year statute of limitations to bring any claim. However, Quixtar had no similar limit. And, because there were no time limits for Quixtar to take action, it could delay the claim until after the statute of limitations had run against the distributor.
4. A unilateral confidentiality provision - the agreement also contained a confidentiality agreement whereby as soon as the distributors learned of a claim against Quixtar, they could not disclose the claim, the basis, anything learned in discovery or any award. However, Quixtar was not bound by the confidentiality provisions. Further, the provision was not fair to the distributors as it prevented them from exploring and investigating their claims or conducting discovery and Quixtar would benefit from accumulating knowledge as to how to defend itself against claims from its distributors.
5. In addition, the arbitrator selection process was tainted. Quixtar's distributors had the choice of selecting a "Quixtar-trained" arbitrator, who's fees were capped, or a non-Quixtar-trained arbitrator, with no fee cap. According to the Court, Quixtar-trained arbitrators go through two complete days of Quixtar seminars intended to produce a favorable view of Quixtar which included "subtle manipulation on issues which could be expected to be considered by the arbitrators." The District Court concluded that a distributor "should not have to pay extra to avoid the unfairness created by Quixtar's orientation program."
6. Finally, the ADR Agreement's fee shifting clause put the distributors (in the instant matter) at risk of incurring greater costs than they would bear if they were to litigate in court. While a successful RICO plaintiff may be awarded his attorneys' fees, an unsuccessful RICO plaintiff is not at risk for such fees, unless the action were to proceed under the ADR agreement.
Given the totality of substantive and procedural due process, the Ninth Circuit would not sever any of the provisions finding that the agreements were "too tainted to be saved through minor adjustments and the agreements were "permeated with unconscionable provisions."
Certainly, Quixtar had gone to great effort and expense to attempt to create an ADR procedure that would save it time, public exposure and the uncertainty of the Court system. However, in order to enforce arbitration or ADR Agreements in California, mutuality of obligations is of great importance to the courts. In this case, it is possible that the Ninth Circuit would not have taken issue with so much of the agreement had Quixtar been bound to play by the same "rules" that it imposed on its distributors. The Pokorny v. Quixtar, Inc. decision is here.
Be sure to seek out legal counsel in conjunction with creating any ADR contract to maximize the opportunity that such contracts will be enforceable.
California Court Enforces Arbitration Agreement
By Candice Boyd
In Dotson v. Amgen, Inc., the Court of Appeal for the Second Appellate District, Division Six held that an employment arbitration agreement was an enforceable contract. The California court reversed a trial court's order denying an employer's motion to compel arbitration. The Court of Appeal held that the arbitration agreement entered into between an employer and employee was not unconscionable. In reaching its decision, the Court of Appeal evaluated whether the arbitration agreement's terms were both procedurally and substantively unconscionable. The Court of Appeal found that there was no substantive unconscionability in a provision in the arbitration agreement that limited the parties to one deposition each, unless the arbitrator determined that more were needed. The Court of Appeal reasoned that this provision was reasonable and merely manifested one of the goals of arbitration - to be a streamlined process. One of the ways this goal is achieved is by setting limitations on discovery. Also, the Court of Appeal determined that the trial court wrongly assumed that the arbitrator would be unfair in determining whether additional depositions were needed, "We assume that the arbitrator will operate in a reasonable manner in conformity with the law."
The Court of Appeal found that the existence of procedural unconscionability was minimal because the agreement was not overly long, the agreement was written in unambiguous language, and Dotson was a highly educated attorney with the ability to understand that he was agreeing to arbitration.
Even if it assumed that the discovery provision in the agreement was unconscionable, the Court of Appeal determined that the trial court abused its discretion by failing to take it out of the agreement. "Where, as here, only one provision of the agreement is found to be unconscionable and that provision can easily be severed without affected the remainder of the agreement, the proper course is to do so."
This decision provides a positive message to employers – some courts are willing to enforce arbitration agreements. In order to increase the likelihood that an arbitration agreement will be enforced, employers must ensure that the agreement satisfies at least minimal standards of fairness, including sufficient discovery.
New Legislation Restricts Use of Mandatory Arbitration Agreements by Defense Contractors
By Mark Spring
The Arbitration Fairness Act (HR 1020) (http://www.govtrack.us/congress/bill.xpd?bill=h111-1020), which would ban pre-dispute mandatory arbitration agreements in non-union employment, remains stalled in Congress. It likely will not get looked at further until the healthcare bill debate is resolved.
However, Congress and President Obama did act last month to restrict pre-dispute mandatory arbitration for non-union workers employed by certain government contractors. Buried in the Fiscal Year 2010 Department of Defense Appropriations Act (HR 3326)(http://www.govtrack.us/congress/bill.xpd?bill=h111-3326), signed by Obama in mid-December, is language that prohibits any employer that receives more than one million dollars from the Department of Defense from requiring employees or independent contractors working for them to sign agreements that require that disputes under Title VII of the Civil Rights Act of 1964 be subject to mandatory binding arbitration. Section 8116 of the Act provides
(a) None of the funds appropriated or otherwise made available by this Act may be expended for any Federal contract for an amount in excess of $1,000,000 that is awarded more than 60 days after the effective date of this Act, unless the contractor agrees not to:
(1) enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention; or
(2) take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates that the employee or independent contractor resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.
In addition, there is also language requiring contractors that are covered by this provision to certify that their subcontractors also will abide by these restrictions. The Act gives the DOD the ability to waive these requirements, but only if waiver is necessary for national security interests.
This amendment was added by Senator Al Franken of Minnesota. In a clear example of bad facts make bad law, the motivating factor for this amendment was the case of Jamie Leigh Jones. Jones worked for Halliburton in Iraq and alleged that she was gang raped by co-workers in 2005. A pre-dispute mandatory arbitration agreement was used by Halliburton to try to keep Jones from filing a Title VII claim. Although the 5th Circuit Court of Appeals ultimately ruled that the arbitration agreement did not apply to the gang rape, it took almost three years of court battles for Jones to simply be able to move forward with her claims. For a complete copy of the Court of Appeals opinion, issued in September, click here: http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20380-CV0.wpd.pdf
PROPERLY DRAFTED PRE-DISPUTE ARBITRATION AGREEMENT PRECLUDES LABOR COMMISSIONER HEARING
Late last week, the Second District Court of Appeal published its decision in Sonic-Calabasas A, Inc. v. Moreno, holding that a properly drafted arbitration agreement can be used by the employer to force an employee who filed a wage claim under section 98.2 of the California Labor Code to proceed with the claim under the terms and conditions of the arbitration agreement in the arbitral forum. First, the Court of Appeal looked at section 229 of the California Labor Code and held that because the arbitration agreement was drafted under the provisions of the Federal Arbitration Act, the FAA superseded section 229 of the California Labor Code and therefore that statute was not a bar to arbitration. Second, the Court analyzed the arbitration agreement under the Armenderiz and Gentry standards. The Court of Appeal found that these prior California Supreme Court decisions did not preclude mandatory arbitration of the wage claim.
A complete copy of the Sonic-Calabasas opinion is available here. The lesson of this decision is that employers can successfully avoid having to litigate wage claims before the California Labor Commissioner with a properly worded mandatory arbitration agreement drafted under the FAA.
California Court Enforces Arbitration Provision in Employment Application
A California Court of Appeal issued a surprising opinion last week in Roman v. Superior Court (Flo-Kem, Inc.), holding that an arbitration provision in an employment application signed by an employee constituted an enforceable agreement to arbitrate the employee’s discrimination and wrongful termination claims. The specific language in the application was as follows: “I agree, in the event I am hired by the company, that all disputes and claims that might arise out of my employment with the company will be submitted to binding arbitration.” The application did not contain any substantive rules governing the arbitration process, instead stating simply that the arbitration would be conducted under the rules of the American Arbitration Association. The employee initialed the arbitration provision in the application.
Following the employee’s termination later the same year, the employee filed suit alleging discrimination. The employer demurred to the complaint without raising the issue of arbitration, and also served written discovery followed by a motion to compel. Before hearing on the demurrer and motion to compel, the employer filed a motion to compel arbitration. The employee opposed the motion to compel arbitration, arguing that the arbitration agreement was unenforceable, on the grounds that it was procedurally and substantively unconscionable. The employee also argued that the employer had waived any right to compel arbitration by participating in the litigation. The court rejected all of the employee’s arguments. Of note, the court held that the agreement was a mutual agreement to arbitrate, even though the agreement stated “I agree” to arbitrate. The court also held that the agreement’s lack of any substantive rules governing the arbitration process did not render the agreement substantively unconscionable. The court held that the agreement’s incorporation of AAA rules sufficed to satisfy minimal standards of fairness in the arbitration process. Finally, the court held that the employer’s participation in the litigation prior to moving to compel arbitration, did not constitute a waiver of the right to arbitrate. The court held that the employer moved to compel arbitration prior to any hearing on the demurrer or motion to compel discovery, and the fact that some written discovery had been exchanged was insufficient to constitute a waiver because even in arbitration the parties would have to respond to some written discovery.
The Roman case is an interesting one, given the recent trend of California courts to closely scrutinize and refuse to enforce employment arbitration agreements. Notwithstanding the result in the Roman case, employers are cautioned against relying on the same type of agreement utilized by the employer in Roman, and are further cautioned against affirmatively participating in litigation prior to seeking enforcement of an arbitration agreement because it is far from clear whether another court would reach the same result on the issues of enforceability of the arbitration agreement and waiver.
Supreme Court Enforces Arbitration of Discrimination Claim in Union Setting
By Nancy Berner
In a 5-4 decision issued Wednesday, April 1, the U. S. Supreme Court overturned the district and appellate courts to hold that labor contracts may require union members to settle age discrimination claims via arbitration. The decision in 14 Penn Plaza LLC et al. v. Pyett et al., written by Justice Clarence Thomas, permits enforcement of an arbitration clause embodied in a collective bargaining agreement that waives employees rights to bring statutory claims in federal court. While the factual scenario dealt specifically with enforcement of a provision of a collective bargaining agreement, Justice Thomas’ decision is suggestive of a broader application.
Facts of the Case
The Plaintiffs in the underlying case were members of the Service Employees International Union (SEIU) who worked as night lobby watchmen at office buildings in New York City. Due to a change in the security guard provider, Plaintiffs were reassigned to jobs as porters and cleaner, jobs that they maintained were inferior and were assigned on the impermissible basis of age. The Plaintiffs received right-to-sue notices from the EEOC, and promptly brought claims asserting violation of the Age Discrimination in Employment Act (“ADEA”). In the ensuing lawsuit, both the District Court and the Second Circuit Court of Appeals agreed that the employer’s motion to compel arbitration should be denied because case law forbade enforcement of collective-bargaining provisions mandating arbitration of ADEA claims. (Alexander v. Gardner-Denver Co. 415 U.S. 36 (1974)).
Supreme Court Holding
The Supreme Court flatly disagreed, holding that the union and the employer “collectively bargained in good faith and agreed that employment-related discrimination claims, including claims brought under the ADEA, would be resolved in arbitration.” The Court noted that “[a]s in any contractual negotiation, a union may agree to the inclusion of an arbitration provision in a collective-bargaining agreement in return for other concessions from the employer.” In essence, the Court stated that if the union, representing the employees, and the employer reached an agreement both could live with, the courts should not interfere, in the absence of expressed legislative intent to preclude a waiver of judicial remedies, an intent that is absent from the ADEA.
Broader Implications?
In distinguishing 14 Penn Plaza from Gardner-Denver and its progeny, Justice Thomas opined that “the right to a judicial forum is not the nonwaivable ‘substantive right’ protected by the ADEA.” Additionally, and perhaps significantly, “[n]othing in the law suggests a distinction between the status of arbitration agreements signed by an individual employee and those agreed to by a union representative.” Individual agreements to arbitration have a murky past, as they are often characterized by those who wish to avoid them as unconscionable contracts of adhesion. Nonetheless, it now appears likely that a clear and unmistakable waiver of the right to pursue a discrimination claim in court will be upheld, if the arbitration agreement conforms to the admittedly stringent legal standards governing arbitration agreements. As always, employers are advised to seek a legal opinion on arbitration agreements presented to employees.
Another Employment Arbitration Agreement Found Unenforceable
Earlier this week, another California Court of Appeal ruled that an employment arbitration agreement was unconscionable and unenforceable based in part on the agreement’s inclusion of a class action waiver. In Sanchez v. Western Pizza Enterprises, Inc., the plaintiff worked as a delivery driver for a pizza restaurant. The plaintiff alleged that the employer violated California law by failing to reimburse the plaintiff and other employees for all mileage expenses. Plaintiff filed a putative class action and the employer moved to compel arbitration based on a signed employment arbitration agreement between the employer and the plaintiff. The trial court denied the motion to compel arbitration, finding that the agreement was unconscionable and unenforceable. The employer appealed, but the appellate court agreed with the trial court’s ruling. The court first held that the determination of the enforceability of the arbitration agreement was an issue for the court, not the arbitrator, to decide. The court distinguished a number of cases holding that this is an issue for an arbitrator to decide, finding that in those cases the arbitration agreement expressly provided for arbitrator determination of issues of enforceability. The court found that the arbitration agreement before it did not clearly provide for arbitrator determination of this issue.
Further analyzing the arbitration agreement before it, the court held that the agreement’s inclusion of a class action waiver was unenforceable under the four-factor test set forth by the California Supreme Court in Gentry v. Superior Court, 42 Cal.4th 443 (2007). The court also found the agreement procedurally unconscionable, notwithstanding the fact that the agreement on its face made clear that execution of the agreement was “not a mandatory condition of employment.” Finally, the court found that the agreement was substantively unconscionable in that the arbitrator selection process was not sufficiently mutual. The decision is here.
The Sanchez case is another reminder that employment arbitration agreements remain a subject of much litigation and close judicial scrutiny in California. In addition, litigation over expense reimbursement policies is increasing in popularity. Employers should review their policies related to these subjects.
Class Action and PAGA Waiver in Arbitration Agreement Found Unconscionable
In Franco v. Athens Disposal Co., Inc., the court held that an employment arbitration agreement was unconscionable and unenforceable in its entirety, based on the agreement’s inclusion of a provision prohibiting the employee from pursuing class relief or representative relief under PAGA in arbitration. The plaintiff in the case filed a class action in state court alleging his former employer violated the Labor Code by, among other things, denying him and the putative class members meal and rest breaks. The employer filed a petition to compel arbitration based on a written arbitration agreement the plaintiff had signed during his employment. The trial court found the arbitration agreement enforceable and granted the petition to compel arbitration. Plaintiff appealed, arguing that the arbitration agreement was unenforceable because the class action and PAGA waiver rendered the agreement unconscionable.
The Court of Appeal agreed with the plaintiff and held that the arbitration agreement was unenforceable in its entirety. Relying heavily on the California Supreme Court’s decision in Gentry v. Superior Court, 42 Cal.4th 443 (2007), the court stated: “We conclude that the class arbitration waiver is unconscionable with respect to the alleged violations of the meal and rest period laws given the modest size of the potential individual recovery, the potential for retaliation against members of the class, and the fact that absent members of the class may be ill informed about their rights.” The court further concluded that because the agreement prevented the plaintiff from acting as a private attorney general and pursuing penalties on a representative basis, it conflicted with the Private Attorney Generals Act of 2004, which was enacted to further the goal of comprehensive enforcement of state labor laws.
This case is another reminder that California courts continue to closely scrutizine employment arbitration agreements. These agreements must be carefully drafted to ensure enforceability.
Shortened Limitations Period in Mandatory Arbitration Agreement Upheld
In Pearson Dental Supplies, Inc. v. Sup. Court of Los Angeles (Turcios), 2008 WL 3867617, an employee failed to demand arbitration within one year from his termination as required in a mandatory arbitration agreement and was held to have waived his FEHA age discrimination claim. In Pearson Dental Supplies, Inc., an arbitrator granted summary judgment in favor of the employer finding that the employee had failed to timely submit his FEHA claim to arbitration and thus waived it. The trial court reversed the arbitrator's decision, but the Second Appellate District Court of Appeal upheld the arbitrator's decision, holding that the one-year limitations period did not unreasonably restrict the employee's ability to vindicate his rights under FEHA.
The court rejected the employee’s argument that the arbitrator's application of the one-year limitations period in the arbitration agreement contravened public policy because it shortened the FEHA limitations period. In reaching its decision, the court distinguished several Ninth Circuit decisions finding a one-year limitations period in an arbitration agreement substantively unconscionable by pointing to the fact that in those cases the one-year time limit potentially deprived the plaintiffs of the ability to proceed with a theory of continuing violations. (In Pearson Dental Supplies, Inc., the employee's claims involved a termination, i.e., one discrete act.) The court also highlighted the fact that the plaintiff failed to raise unconscionability of the one-year limitations period with the trial court when the defendant moved to compel the matter to arbitration and, because of that, the court could not review the arbitrator's decision for errors of fact or law, even if the error causes substantial injustice to a party.
While this is a welcome victory for employers and can be said to strengthen an employer's ability to use mandatory arbitration agreements involving individual FEHA claims, the case is somewhat limited to its facts. Employers seeking to utilize arbitration agreements should continue to utilize experienced California employment lawyers when drafting and implementing them. Additionally, it remains to be seen whether this case is taken up to the California Supreme Court for further review.
Employment Arbitration Agreements Take Another Hit
California's Fourth District Court of Appeal recently dealt another blow to arbitration agreements in the employment context. In Metters v. Ralphs Grocery Company, the court affirmed the denial of a motion to compel arbitration of a discrimination and harassment case. The plaintiff, Metters, had signed a dispute resolution form entitled "Notice of Dispute and Request for Resolution Form," to submit his discrimination and harassment claims to the Company for internal investigation. The dispute resolution form contained an arbitration provision and when the employee eventually sued Ralph's, the company moved to compel the case to arbitration. However, the trial and appellate courts found the dispute resolution form was insufficient evidence of an agreement to arbitrate. The form included plain language explaining that the employee, by submitting the form, was agreeing to mandatory, binding arbitration of any "covered disputes" as defined in a "policy" that was referenced but, according to Metters, not attached to the form or provided to him. The Court found that the document did not look like a contract and did not sufficiently alert the employee that, by signing the form, he was agreeing to binding arbitration. "A transactional attorney sitting in an office somewhere…[might] be able to figure out what it meant," but the Court felt that the employee should not have been expected to figure out that the dispute resolution form bound him to arbitrate his claims. The trial court, finding no "meeting of the minds" between the parties on an agreement to arbitrate disputes, refused to compel the case to arbitration and the California Court of Appeal affirmed.
To avoid the result in Metters, California employers would be well-advised to: 1) create free-standing arbitration agreements that are not buried or hidden within other documents; 2) draft arbitration agreements to make them appear contractual in nature; 3) ensure arbitration agreements do not substantially rely on extraneous documents or policies incorporated by reference; 4) ensure that the language of the arbitration agreement is clear so that the employee is alerted to the arbitration provision; and 5) have arbitration agreements reviewed by competent legal counsel to ensure compliance with California law. While the Metters case is largely limited to very detailed facts, this case is another reminder that arbitration agreements continue to be subject to close scrutiny by California courts.
Ninth Circuit refuses to enforce law-firm's arbitration agreement with its employee.
The Ninth Circuit Court of Appeals recently refused to enforce an arbitration agreement between a paralegal and her law firm employer. In rejecting the firm's attempt to compel arbitration of the employee's claim for overtime compensation and denial of meal and rest periods, the court ruled that the arbitration agreement was both procedurally and substantively unconscionable, and thus unenforceable.
Specifically, the arbitration agreement at issue in Davis v. O'Melveny & Myers was deemed procedurally unconscionable because it was imposed on the employee as a condition of employment, with no opportunity to negotiate. The court also found that the agreement was substantively unconscionable because it: (1) shortened the statute of limitations applicable to the employee's claim; (2) contained an overbroad confidentiality provision which, among other things, limited the employee's ability to contact potential witnesses); (3) allowed the law firm, but not the employee, to seek certain injunctive relief in court; and, (4) prohibited the employee from filing claims with the federal Department of Labor or the California Labor Commissioner. Because these provisions could not be stricken without gutting the agreement, the entire agreement was deemed void and unenforceable.
For specific questions regarding the enforceability of arbitration agreements you may be using in the workplace, please contact us directly.
Court Approves Waiver of Class Actions in Arbitration Agreements
Arbitration of employment related disputes has many advantages. It is often (but not always) a faster, cheaper and more confidential way to resolution a dispute. Another advantage for defendants is eliminating the need for a jury -- and hence the risk of a "runaway jury" delivering a grossly excessive verdict. For these reasons alone, an increasing number of employers have instituted arbitration programs in recent years. Another potential advantage currently being debated in the Courts is the extent to which the parties may craft their arbitration agreement to exclude class actions.
Under federal law, such class action exclusions are generally enforceable. Under California law, by contrast, such class arbitration waivers are often, but not always, struck down as unconscionable and unenforceable. The recent case of Gentry v. Superior Court (Circuit City Stores, Inc.), however, demonstrated that such class action waiver agreements can be enforceable in California if they are properly drafted and implemented.
Under California law, a contract is unenforceable when one party is both forced to enter into the agreement under one-sided circumstances (known as "procedural" unconscionability) and the agreement is also unfairly one-sided in its substantive terms (known as "substantive" unconscionability). For example, in Discover Bank v. Superior Court (Szetla), the court struck down a provision waiving class arbitration that had been sent to consumers in the "bill stuffer" that came with their credit card statements. The Court found that this waiver was procedurally unconscionable because it had been buried in fine print. The Court also found the provision to be substantively unconscionable because most consumer claims would be so small that they would never be enforced by individuals.
In Gentry, however, the Court found that the facts were different. First, the arbitration program had not been imposed under procedurally unconscionable circumstances. The employer, Circuit City, had "clearly spelled out" the pros and cons of arbitration to its employees in written materials and a videotape presentation and had given them the choice to "opt out" of the program for up to 30 days. Second, the provision waiving class actions was held not to be substantively unconscionable because, unlike the small claims of individual credit card consumers, Gentry's claims were for substantial amounts of unpaid overtime as a result of allegedly being misclassified as a salaried-exempt manager. The Court reasoned that these claims provided a sufficient incentive for individual enforcement and that class-wide arbitration was therefore not the only feasible means of enforcement. For all these reasons, the Court upheld the arbitration agreement, including Gentry's agreement to waive any right to prosecute a class-wide arbitration.
Gentry is thus an extremely significant decision for California employers. It shows that a well-crafted arbitration program can prevent individual claims from mushrooming into expensive, time-consuming class actions.
UPDATE: The California Supreme Court granted review of the Gentry case in April 2006.