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.

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.