When the California Supreme Court approved mandatory arbitration for employment disputes last year, one question left unanswered was how existing arbitration agreements that don’t meet all the standards the court set forth would be handled. The contrasting approaches taken in two recent Court of Appeal decisions provide some guidance as to how the line will be drawn between agreements that can be modified and enforced, and those that are unenforceable because of numerous illegal provisions.
400+ pages of state-specific, easy-read reference materials at your fingertips—fully updated! Check out the Guide to Employment Law for California Employers and get up to speed on everything you need to know.
Worker Claims Arbitration Unfair
In the first case, Kristy Shubin, a receptionist in the Northern California office of William Lyons Homes Inc., sued for pregnancy discrimination. She argued that the mandatory arbitration clause she signed shouldn’t be enforced because it was unfair in many respects.
First, according to Shubin, she had to sign several documents while the office manager stood over her. She said she didn’t have time to read them, nor was she given copies.
Second, while the agreement required Shubin to arbitrate all her claims, the employer could go to court if disputes arose over her use of its trade secrets. She also argued that her ability to obtain information about the company’s case was more limited before an arbitration hearing than it would be in a court proceeding.
Third, under the agreement, employees who filed a claim, whether in court or for arbitration, would have to pay the employer’s costs, expenses and attorneys’ fees even if the employee won.
Arbitration Standards Met
The Court of Appeal found that this arbitration agreement met most of the Supreme Court’s requirements (see CEA October 2000). The court said the limit on information exchange by the parties was not a fatal flaw because the employer implicitly consented to provide necessary facts by agreeing to arbitration. And the employer’s ability to go to court over disclosure of confidential information was not one-sided because either party could ask the court to determine whether the employee had violated confidentiality obligations.
Unfair Provisions Deleted; Agreement Enforced
The court ruled it was unfair to require an employee who initiated a lawsuit or arbitration to pay the employer’s costs, expenses and attorneys’ fees even if the worker prevailed. Nevertheless, the court said this provision could be modified without affecting the rest of the agreement, and so it interpreted the agreement to require that the employer pay all arbitration costs.
The court also found it was unfair for the employer to pressure Shubin to sign the arbitration document with little chance to carefully read it or negotiate its provisions. But since the court was eliminating the inequitable provisions of the agreement, there was no harm to Shubin from the circumstances under which she signed the paperwork.
Multiple Flaws Make Agreement Invalid
In the second arbitration dispute, Ben Pinedo, a former Los Angeles-area delivery driver for Premium Tobacco Stores Inc., sued his employer, claiming he was forced to quit after being subjected to harassment and discrimination.
In this case, another Court of Appeal found the arbitration clause to be too one-sided to enforce. It considered the following provisions to be unreasonable:
- The employee was limited to an award of six months’ wages minus unemployment benefits and pay from another job. And he couldn’t recover other damages permitted by law, including attorneys’ fees. Plus, the limit on damages applied only to the employee and not the employer.
- The employee initially was required to pay all arbitration costs, which would be returned if he won.
- The agreement was inherently one-sided because it required arbitration only for claims that would normally be brought by the employee against the employer.
Multiple Defects Reflect Unfair Advantage
The court concluded that the arbitration program’s many flaws indicated a systematic effort to impose arbitration on employees not simply as an alternative to litigation, but as a way to create a process that would work to the employer’s advantage. Therefore, the court refused to enforce the arbitration clause.
Practical Impact
These cases give some insight into how courts will handle arbitration agreements that were signed before the Supreme Court’s ruling. Some provisions that aren’t up to date may be ignored or modified and the agreement enforced despite them. But a court’s willingness to do so may depend on how many problems exist and whether the agreement as a whole is unfair.
One-sided provisions that require arbitration only for employee claims, limit an employee’s damages or force the worker to pay arbitration costs are red flags that greatly increase the chances a court will simply throw out the arbitration agreement altogether.