California Labor &
Employment Law Blog
Oct. 23 2010

Another Arbitration Agreement Found Unenforceable

Topics: Arbitration Agreements, Court Decisions

The most recently published opinion dealing with the enforceability of an arbitration clause by an employer reflects California Courts' hostility to such agreements.

After its former President and CEO sued for alleged race discrimination and a range of related claims, the employer asked the Court to order the matter to arbitration pursuant to the parties' facially neutral arbitration agreement. While it is not clear when the agreement was entered, the employee was terminated on Halloween 2008. The arbitration clause in question appeared quite even handed on its face, did not restrict an employee's discovery rights, ability to bring claims and/or the size of such claims, and provided for arbitration before one arbitrator of the AAA under the AAA's National Rules for the Resolution of Employment Disputes. However, to the ultimate chagrin of the employer, it also provided that the "prevailing party shall be entitled to recover...;attorney fees incurred in any arbitration...;." and that "provisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is finally determined by the Arbitrator."

There was little dispute that the agreement was "procedurally unconscionable" as it was offered on a "take it or leave it" basis, that the AAA's rules were not attached for the review of the employee or that any special attention was drawn to the arbitration provision.

The Court also swiftly concluded that FEHA's differential standards for allowing awards of attorneys' fees to successful employees in FEHA cases compared to the higher standard whereby employers may be awarded attorneys' fees caused substantive due process problems with the "prevailing party" language of the arbitration agreement. The employer argued that the AAA's rules, however, disposed of any inequity as the AAA only allowed attorneys' fee awards "in accordance with applicable law" and therefore the arbitrator was bound to apply California law. The Court refused to consider whether an arbitrator would follow California law relying instead on the express language of the agreement that might award fees to a prevailing party "because it would weaken the legal protection provided to plaintiffs who bring nonfrivolous actions from being assessed fees and costs." The Court also discarded the employer's argument that the AAA's rules saved the arbitration clause holding "relying on a document that [employee] was never provided cannot relieve [employer] of the effect of the unlawful provision in the arbitration clause."

In addition, the Court concluded that arbitration agreement's injunction language further violated substantive due process. Ironically, the Court of Appeal found that the injunction language in the arbitration clause comported with California law and was no broader than the type of injunctive relief that could be obtained under the Code of Civil Procedure. Nonetheless, it upheld the trial court's unsupported finding that it was "more likely that [the employer] would seek injunctive relief." The Court of Appeal rationalized its decision citing precedent that held that employers are more likely to utilize equitable jurisdiction to stop employee competition or to protect intellectual property.

Finally, having bootstrapped the second finding of substantive unconscionability, the Court held that the arbitration clause could not be saved under the Civil Code that allows Courts the discretion to blue pencil unenforceable language from an agreement. The Court asserted that because it had found two unconscionability problems with the arbitration agreement that the arbitration agreement could be fairly characterized as being permeated with unconscionability, and entirely unenforceable.

This decision suggests that employers who seek to enforce arbitration agreements may be better positioned to defend the enforceability of such agreements if they (1) provide a complete copy of the arbitration rules that they are proposing at the time that the arbitration agreement is signed, (2) eliminate attorney fee provisions from such contracts, and (3) eliminate injunctive relief language even if such language is fully compliant with California law. Employers should consult with counsel if they are considering requiring or amending any arbitration agreements in the employment context.

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