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 Of Unpaid Wage Claims

Many employers prefer arbitration to lawsuits and administrative hearings. Although the law permits employers to require arbitration of employment disputes, California courts have imposed some restrictions. See, for example, Armendariz v. Foundation Health Psychcare Services, Inc., 4 Cal.4th 83, 6 P.3d 669, 99 Cal.Rptr.2d 745 (2000) (requiring an arbitration agreement to include certain procedural protections for employment claims under anti-discrimination laws).

In Sonic-Calabasas, Inc. v. Moreno, Case No. S174475 (Cal. Sup. Ct. Feb. 24, 2011), the California Supreme Court delineated the role of arbitration in unpaid wage claims filed with the California Labor Commissioner. The California Labor Code gives employees with unpaid wage claims a choice -- they may go directly to court with an ordinary civil action, or they may seek administrative relief by filing a wage claim with the Labor Commissioner (a process called a "Berman" hearing). In a Berman hearing, the Labor Commissioner's staff assists the employee in putting on the wage case. To obtain de novo review in court (where the Labor Commissioner may represent the employee), the employer must post a bond for the full amount of any award. If it loses the appeal, it must pay the employee's attorney fees. If the employer wins its appeal, it can not recover its own attorney fees.

The Sonic-Calabasas employer argued that its arbitration agreement with its employees waived the Berman hearing process, but the Supreme Court ruled that such a waiver was unconscionable and against public policy. However, the employer may invoke the arbitration agreement to have its appeal from any award following a Berman hearing determined by an arbitrator. In light of Armendariz, the employee would presumably retain the procedural advantages of the bond requirement and the fee-shifting provision in arbitration.

If you are interested in adopting arbitration procedures for your employees, the American Arbitration Association provides rules and other materials for prompt and effective resolution of workplace disputes through arbitration.