California Supreme Court Rejects Unconscionability Attack on Arbitration Agreement

In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the California Supreme Court has rejected an attempt to invalidate an agreement based on its provision for applications to a court for preliminary injunctive relief while the arbitration is pending. The provision simply reiterated a right that is conferred by statute in the absence of such a provision.

Beginning with Armendariz v. Foundation Health Psychcare, 6 P. 3d 669 (Cal. 2000), the California Supreme Court has carefully policed the use of arbitration agreements imposed as a condition of employment. It has directed California courts to refuse enforcement of such agreements if they are procedurally and substantively unconscionable. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, substantive unconscionability on overly harsh or one-sided results. Since virtually all arbitration agreements in the employment context are procedurally unconscionable, the analysis usually focuses on substantive unconscionability. The Armendariz case held that arbitration agreements forced on employees as a condition of employment are not enforceable unless they assure neutrality of the arbitrator, the provision of adequate discovery, require a written decision that will permit a limited form of judicial review, limit costs to what an employee would face in a judicial forum, and make available all remedies that the employee could pursue in court. Since then the Court has:

• Invalidated a provision that allowed appeals to a second arbitrator of awards that exceeded $50,000. Little v. Auto Stiegler, Inc., 63 P.3d 979 (2003).
• Set aside an arbitrator's award that deprived an employee of a hearing on the merits of his unwaivable statutory employment claim based on a clear error of law. Pearson Dental Supplies, Inc. v. Superior Court, 229 P.3d 83 (2010).
• Invalidated an arbitration agreement that would have barred an employee from seeking relief in an administrative hearing before the Labor Commissioner. Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659, 121 Cal. Rptr. 3d 58, 247 P.3d 130 (2011). The Court later reversed itself after the U.S. Supreme Court directed it to reconsider. Sonic-Calabasas A, Inc. v. Moreno, 311 P.3d 184 (2013).
• Refused to enforce an arbitration agreement to the extent it would have required employees to submit PAGA claims to arbitration. Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 173 Cal. Rptr. 3d 289, 327 P.3d 129 (2014).

Its latest decision is Baltazar v. Forever 21, Inc., Case No. S208345 (Mar. 28, 2016). There, the employee had signed a take it or leave it arbitration agreement, which contained three provisions that she claimed were substantively unconscionable:

1. It allowed the parties to seek a temporary restraining order or preliminary injunctive relief in the superior court, which the employee argued the employer was more likely to take advantage of. That was not unconscionable, because it did no more than recite the procedural protections already available under Code of Civil Procedure section 1281.8(b).
2. It listed only employee claims as examples of the types of claims that were subject to arbitration. That was not unconscionable, because the agreement otherwise made clear that all employment claims were subject to arbitration.
3. It required that all necessary steps be taken to protect the employer's trade secrets and proprietary and confidential information from public disclosure. That was not unconscionable, because there was a legitimate commercial need for such protection, and the agreement did not preclude the employee from seeking similar protection for her own confidential information.

Arbitration Update

The California Supreme Court continues to make law on enforcement of arbitration agreements. In Armendariz v. Foundation Health Psychcare, 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P. 3d 669 (2000), the Court ruled that an arbitration award on a claim under the Fair Employment and Housing Act (FEHA) is not enforceable unless the arbitrator issue a written arbitration decision that explains the essential findings and conclusions on which the award is based. The purpose of the requirement is to assure effective judicial review to ensure that the arbitrator has complied with the statutory requirements. The extend of such judicial review has not been clear.

In Pearson Dental Supplies, Inc. v. Superior Court, 48 Cal.4th 665 (2010), the Court affirmed a Court of Appeal decision vacating an award that deprived the employee plaintiff of a hearing on his FEHA claim by misinterpreting a relevant tolling statute, and then failing to explain in writing why the plaintiff would not benefit from the tolling statute.The Supreme Court explained that the challenged award had an employee subject to a mandatory arbitration agreement from obtaining a hearing on the merits of a claim, but cautioned that not all legal errors would necessarily be reviewable.

In the most recent case, Richey v. Autonation, Inc., Case No. S207536 (Jan. 29, 2015), the award in an FMLA/CFRA case denied relief to the employee based on application of an "honest belief" standard applied by some federal courts, but not yet adopted in California. Although the Court had the opportunity to determine whether that was an error, and whether such an error was grounds for vacating an arbitration award, it passed. Instead, the Court ruled that, even if there had been an error, it was harmless. The evidence that the employer had fired the employee for a knowing violation of company policy was overwhelming. Articulation of the correct standard for review must await another case.

Private Attorney General and Class Action Waivers

A recent case alleging Labor Code violations by Ralphs Grocery Co. discusses the current state of the law regarding waivers of the right to pursue class actions and private attorney general claims. The arbitration policy at issue in Brown v. Ralphs Grocery Co., Case No. B222689 (2nd Dist. Ct. App. Jul. 12, 2011) provided for arbitration of all employment-related disputes. It also stated that there was no right for such disputes "to be heard or arbitrated on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of the general public, of other Ralphs employees (or any of them), or of other persons alleged to be similarly situated. . . . [T]here are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy."

The California Supreme Court has frequently refused to enforce arbitration clauses that are invoked to interfere with rights for the benefit of individual citizens. See, e.g., Armendariz v. Foundation Health Psychcare, 24 Cal.4th 83 99 Cal.Rptr.2d 745, 6 P. 3d 669 (2000) (refusing to require arbitration of FEHA claims because arbitration procedure interfered with public interest). Just about as frequently, the United States Supreme Court has overturned such decisions for violating the Federal Arbitration Act. See Southland Corp. v. Keating, 465 U.S. 1 (1984) (California could not bar arbitration of claims under the Franchise Investment Law); Perry v. Thomas, 482 U.S. 483 (1987) (California could not refuse to enforce arbitration of wage disputes); Preston v. Ferrer, 552 U.S. 346 (2008) (California Labor Commissioner's authority could not supplant that of the arbitrator). Most recently, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court overturned the Discover Bank rule, which had called class action waivers in consumer arbitration agreements into question.

In Brown, the Second District Court of Appeal enforced the class action waiver, but ruled that the attempted private attorney general waiver was invalid. The plaintiff had asserted a claim under the Private Attorney General Act of 2004, which allows actions to recover civil penalties brought by employees on his or her own behalf and on behalf of current or former employees. According to the Court of Appeal, AT&T Mobility did not apply because an employee brings a PAGA action as a proxy for the state.

In dissent, Justice Kriegler opined that AT&T Mobility required the court to uphold the entirety of the arbitration agreement.

California Supreme Court Alters Standard for Review of Employment Arbitration Awards

The California Supreme Court has ruled that trial courts may review the legal correctness of arbitration decisions involving employment claims based on statutory rights. This marks another swing in the pendulum marking judicial attitudes toward arbitration.

Until the enactment of the Federal Arbitration Act in 1925 American courts were hostile to the ouster of judicial jurisdiction through the use of arbitration agreements -- an attitude imported from English common law. The FAA requires American courts generally to enforce arbitration agreements and arbitration awards.

Over the ensuing years, American courts gave broad deference to arbitration proceedings. In California, that deference reached its zenith in Moncharsh v. Heily & Blase, 3 Cal.4th 1 (1992), where the California Supreme Court, applying the California arbitration statute, ruled that the merits of an arbitration award were not subject to judicial review, except on the grounds that (a) the award was procured by corruption, fraud or other undue means, (b) corruption in any of the arbitrators, (c) the rights of a party were substantially prejudiced by misconduct of the arbitrator, (d) the arbitrators exceeded their powers, or (e) the rights of a party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing. The Moncharsh Court also made clear that arbitrators do not exceed their powers by making errors of law.

With the California Supreme Court's decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), the pendulum began swinging back toward judicial skepticism toward arbitration. In that case, the Court ruled that employees' statutory claims against their employers could the subject of arbitration agreements, so long as those agreements meant certain procedural standards, including the preparation of a written decision by the arbitrator.

On April 26, 2010, the pendulum swung further in the same direction with the Supreme Court's decision in Pearson Dental Supplies, Inc. v. Superior Court, Case No. S167169 (Apr. 26, 2010). In that case, an arbitrator ruled that an employee's age discrimination claim was barred by his failure to file it within the year permitted under the arbitration agreement. In doing so, he made a clear error of law by not applying the tolling provision of California Code of Civil Procedure section 1281.12, which provides that any limitations period established by an arbitration agreement is tolled by the filing of a civil action. The Court determined that this error exceeded the arbitrator's powers, because it impermissibly prevented the employee from pursuing his statutory rights under the Fair Employment and Housing Act.