California Labor & Employment Law Blog

By Vanessa W. Whang

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.

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. 

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.