Two California state appellate courts have recently upheld mandatory employment arbitration agreements under the standards set forth by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. (For an summary of Armendariz, see October 2000 Newsletter.)
On October 26, 2000, the Court of Appeal for the Second Appellate District upheld an employer's Dispute Resolution Program that required all employees to arbitrate all claims related in any way to [their] employment. In Craig v. Brown & Root, Inc., the court found that the Program met the requirements of Armendariz given that it:
(1) Provides for a neutral arbitrator [use of the American Arbitration Association];
(2) Provides for adequate discovery, since the employer has by implication consented to permit adequate discovery by agreeing to arbitrate (citing Armendariz);
(3) Requires the arbitrator to issue a written award subject to judicial review; and
(4) Satisfies the requirement that the employer pay fees unique to arbitration; [The Program imposes a cost of only $50 on the employee, which, the court noted, is substantially less than the filing fee for a superior court action and also provides that the employee who decides to hire an attorney to be involved in the process can receive up to $2,500 toward attorneys fees from the employer.]
The Craig court also noted that the Program lacked any of the self-interested employer provisions specifically mentioned in Armendariz. The court found that the Program:
(1) Provides all remedies that are available in court would be available in the arbitration [ If you win, you can be awarded anything you might seek through a court of law. ]; and
(2) Provides all claims must be arbitrated and does not include any reservation by the employer of its right to sue the employee in court.
Significantly, the decision also supports the proposition that an employee's consent to mandatory arbitration can be based almost solely on continued employment. The Craig court found that the plaintiff's agreement to arbitrate her claims pursuant to the employer's Program was implied from the fact that the plaintiff continued her employment after receiving notification of the Program. As support for its holding that continued employment constitutes acceptance of a mandatory arbitration agreement instituted by an employer, the court cited another recent California Supreme Court case, Asmus v. Pacific Bell (June 1, 2000). Asmus held that [a]n employer may unilaterally terminate a policy that contains a specific condition, if the condition is one of indefinite duration, and the employer effects the change after a reasonable time, on reasonable notice, and without interfering with the employee's vested benefits. The Asmus court also stated that [f]or an effective modification, there is consideration in the form of continued employee services.
The employer in Craig presented evidence that, on two separate occasions, it mailed its Dispute Resolution Program information to the plaintiff's correct home address, and the information had not been returned. In a declaration, the plaintiff denied having received the materials. The appellate court found that based employer's records showing its mailings to the plaintiff, the plaintiff's legally-presumed receipt of the terms of the Program, and the plaintiff's continued employment, the plaintiff impliedly agreed to be bound by its terms. Thus, an otherwise valid arbitration agreement can be enforced in the absence of any written acknowledgement by the employee if the employee continues to work for the employer for a period of time after the date the employer can show that it notified the employee of its binding arbitration provision.
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On November 14, 2000, in Shubin v. William Lyon Homes, Inc., the Court of Appeal for the First Appellate District upheld a mandatory employment arbitration agreement under the standards in Armendariz despite finding it procedurally unconscionable as well as substantively unconscionable in one respect. The court held that the one substantively unconscionable provision could be severed from the agreement, thus rendering the remainder of the arbitration agreement enforceable.
The court first agreed with the trial court that the arbitration agreement was procedurally unconscionable. As a standardized contract imposed on employees as a condition of employment with no realistic opportunity for negotiation, the agreement constituted a contract of adhesion. Finding substantial evidence to uphold the trial court's ruling that the agreement was procedurally unconscionable, the court noted that, according to the employee, the employer presented the agreement (along with other personnel documents) to the employee after she began employment, stood over the employee while she signed them, and did not give her time to read them before signing, resulting in the employee feeling she had no choice but to sign the documents. In addition, the employee never received copies of the agreement. Finally, after the employee had filed an administrative charge, the employer attempted to get the employee to sign another Employment Agreement but refused to allow the employee to take a copy home and review it with her counsel. The court found this evidence justified the inference that it was the employer's practice to ask its employees to sign important employment documents under circumstances where the employee had little chance to carefully read them and no realistic opportunity to suggest modifications. Thus, the agreement was procedurally unconscionable.
Recognizing that unconscionability has both a procedural and substantive element and that both must be present for a court to refuse to enforce a contract, the Shubin court continued its analysis under Armendariz.
Noting that after Armendariz, arbitration agreements are neither favored nor disfavored, the court stepped through the minimum standards in Armendariz and focused on three specific provisions: (1) adequate discovery; (2) lack of mutuality; and (3) the duty to pay costs of a court or an administrative remedy.
First, the Shubin court found that the lack of a provision in the agreement for adequate discovery was not in itself grounds for holding an agreement unenforceable. Citing Armendariz, the court stated that by agreeing to arbitrate, the employer impliedly consented to such discovery necessary for an employee to vindicate her claims. The agreement specified the use of the JAMS/Endispute rules that purported to limit discovery. Nevertheless, the Shubin court declined to use this provision as a basis to invalidate the agreement.
Second, the arbitration agreement in Shubin contained a provision that excluded claims with respect to [the employee's duty to preserve the employer's interests in confidentiality]. The employee argued (and the trial court agreed) that on the basis of this provision, the arbitration agreement lacked mutuality and gave the employer, but not the employee, access to the courts. The appellate court disagreed and distinguished the provision in Shubin from the provision found substantively unconscionable in Armendariz, stating that the clause did not itself preclude the employee from resorting to the courts in all instances relating to confidential information. Reasoning that the exceptions relating to confidential information apply to both sides, the court said that the clause itself did not expressly distinguish between the rights of the employer and the employee. The court stated that the arbitration clause would not, for example, preclude the employee from seeking declaratory relief from a court as to whether she was violating the terms of the confidentiality agreement. On the other hand, if the clause contained language to the effect that only claims by the employer were excluded, the court's reasoning would fail. (However, if the words by the employer could be severed from the agreement and result in removal of the lack of mutuality in the agreement, a court could do so under the reasoning in Armendariz.) Again, the Shubin court declined to use this provision as a basis to invalidate the agreement.
Third, the court then addressed the costs provision in the agreement, which stated:
Should either party pursue any other legal or administrative action against the other regarding any matter included within this binding arbitration clause, the responding party shall be entitled to recover its costs, expenses and attorneys' fees incurred as a result of such action.
Armendariz held that a mandatory employment arbitration agreement that contains within its scope the arbitration of FEHA claims impliedly obligates the employer to pay all types of costs that are unique to arbitration. Noting that the clause in this case extends beyond those related to arbitration, the court found that despite the clause in the agreement, the employee would still be able to recover costs, expenses and attorneys' fees in a court action pursuant to California Civil Code section 1717. Because that statutory provision disregards the language to the contrary in the contract itself, the court seemed to dismiss the issue. However, the court stated that section 1717 does not apply to administrative proceedings, and, therefore, could not operate to provide the employee her fees and costs, even if she prevailed in an administrative hearing. Stating that the clause chills the exercise of the employee's right to legitimately pursue her claim before the Division of Fair Employment and Housing, the court found the costs provision of the arbitration agreement substantively unconscionable.
Despite such finding, the Shubin court found the agreement enforceable under Armendariz, concluding that the agreement was not permeated by unconscionability. The court reasoned that by striking the words or administrative from the costs provision, the central purpose of the contract would not be adversely affected, and severance was appropriate. Therefore, the court ordered the trial court to sever those two words from the clause and enforce the remaining portions of the agreement.
Shubin and Craig illustrate how appellate courts must engage in a step-by-step analysis of each standard set forth in Armendariz to determine whether a particular mandatory arbitration agreement is enforceable. One question not conclusively answered by either case is the stage at which unconscionability will be deemed to permeate the entire agreement. Because the appellate court in Shubin found only one provision unconscionable and subject to severance, its remains unclear what result would occur if more than one provision were found unconscionable, but also appropriate to sever. As additional post-Armendariz decisions are handed down, the landscape surrounding the enforcement of mandatory arbitration agreements in the employment context should become increasingly clear.