The California Supreme Court has decided that its landmark ruling in 2000 that required mandatory arbitration agreements to contain certain fairness protections for employees isn’t just limited to discrimination and harassment claims. We’ll explain the court’s new opinion.
Employer Demands Arbitration
Alexander Little worked as a service manager for Auto Stiegler Inc., an Encino-based Mercedes-Benz dealership. Little sued Auto Stiegler, claiming he was terminated in violation of public policy for investigating and reporting warranty fraud. Auto Stiegler tried to compel arbitration, pointing to the three nearly identical arbitration agreements Little had signed during his employment.
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But Little claimed the arbitration agreements couldn’t be enforced because they contained an unfair provision permitting Auto Stiegler to seek a second arbitration if an initial arbitration resulted in an award exceeding $50,000. And under the Supreme Court’s 2000 ruling (in Armendariz v. Foundation Health Psychcare Services Inc.), he argued, such one-sided provisions invalidated an arbitration agreement. A California appeals court, however, said Little had to arbitrate because Armendariz didn’t regulate the fairness of arbitration agreements for wrongful termination claims but only applied to arbitration of bias claims.
Fairness Required
The California Supreme Court has now ruled that the fairness requirements set forth in Armendariz apply not just to discrimination disputes but also to claims for wrongful termination in violation of public policy. Plus, the court ruled that the provision Little contested—permitting Auto Stiegler to seek a second arbitration for awards of more than $50,000—was unconscionable. However, the court said the provision could simply be severed from the agreement so that the remainder of the agreement could still be enforced. Thus, Little must now arbitrate his claim—but the $50,000 provision won’t apply.
Review Your Agreements
Now is a good time for employers with mandatory arbitration agreements to review them to be sure they meet the fairness standards the California Supreme Court set out in Armendariz. Also note that although the court in this case severed the unfair provision and let the arbitration go forward, you might not be so lucky if an employee challenges a provision of your agreement. For a checklist of what your agreements will need to pass muster.