HR Management & Compliance

Arbitration: New Decisions Signal When Flawed Agreements Will–and Won’t–Be Enforced

Two new opinions, one from a federal appeals court and the other from a California appeals court, provide insight into when flawed arbitration agreements will—and won’t—be enforced.

Agreement Too Unfair

In the first case, when Catherine Ingle applied for a job at a Circuit City store in San Diego County, she had to sign an application form that included an agreement to arbitrate all employment-related claims. Several years later, Ingle sued Circuit City for sexual harassment and discrimination, disability discrimination, and retaliation.

Circuit City asked the court to dismiss the case and send it to an arbitrator. But Ingle argued the arbitration agreement she signed was riddled with unfair provisions and should be tossed out.

The Ninth Circuit sided with Ingle and refused to enforce the agreement. The court took the position that mandatory arbitration agreements are “typically and grossly one-sided”—but an employer can attempt to demonstrate its agreement is fair according to standards the California Supreme Court previously set out.

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The court found that Circuit City’s agreement contained so many unfair terms that the agreement was unenforceable. For example, although Ingle had to arbitrate all disputes, Circuit City was free to take claims against her to court. And Ingle was required to pay a $75 fee to Circuit City to initiate a complaint, along with half the arbitration cost. This violated the California Supreme Court’s mandate that when arbitration is imposed as an employment condition, you can’t require employees to shoulder expenses they wouldn’t incur if they filed a lawsuit.

Other provisions the court found unfair gave Circuit City unilateral power to modify or terminate the agreement, restricted remedies available to Ingle, prohibited class actions, and limited Ingle’s time to initiate an arbitration.

Single Flaw Doesn’t Doom Agreement

In the second case, Michael McManus signed two arbitration agreements as a condition of employment when he was hired as consumer growth division director with CIBC World Markets Corp. in Los Angeles. He later sued CIBC for wrongful termination, and CIBC tried to get the case sent to arbitration. McManus argued the arbitration agreements were unenforceable because they required him to pay fees he wouldn’t have to pay if he went to court.

A California Court of Appeal ruled against McManus and sent the case to an arbitrator. The court agreed that a provision requiring McManus to pay a $500 deposit plus $1,200 for each day of an arbitration hearing was illegal under the California Supreme Court standards. However, this single faulty provision didn’t taint the fairness of the entire agreement. Thus, the court severed the cost provision and enforced the rest of the agreement.

Impact of Rulings

These two cases provide insight into how courts have handled arbitration agreements containing illegal provisions. Some terms that don’t meet current fairness standards—such as CIBC’s fee provision—may be severed, leaving the remainder to be enforced. But a court’s willingness to do so will likely depend on how many problem provisions exist and whether the agreement as a whole is unfair.


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