HR Management & Compliance

Modifying an Arbitration Agreement Is No Picnic

The California Court of Appeal recently provided guidance on how to modify employment arbitration agreements. Here’s a takeaway analysis of the court’s decision and what it means for you.

Today’s post is courtesy of attorney Alka Ramchandani of the San Francisco office of Epstein Becker Green, PC.

Compelling an Arbitration Agreement Is Hard Work

Mario Casas was an employee of CarMax from August 8, 2008, until December 17, 2010, when the company fired him for poor results in customer service surveys.

He filed a complaint in Los Angeles County Superior Court alleging several claims against CarMax, including wrongful termination, breach of an implied contract not to terminate employment without good cause, intentional infliction of emotional distress, negligent hiring, negligent retention, negligent supervision, defamation, and several violations of the California Labor Code and the California Business Professions Code.

He argued that the real reason he was fired was that he refused to participate in illegal activities such as inflating sales numbers, defrauding potential purchasers, and hiding accounts from purchasers.


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In response to the complaint, CarMax asked the court to compel arbitration based on a dispute resolution agreement Casas signed in mid-2008 as part of his employment application. Casas had signed an acknowledgment of receipt of the agreement, which CarMax had in effect since December 2005.

The agreement provided that: 

  • CarMax could alter or terminate the terms of the agreement on December 31 of any year so long as it gave 30 calendar days’ notice;
  • Any modified version of the agreement would still apply to claims arising before the modification; and
  • Any notice of modifications to the terms of the agreement would be provided to employees by posting a notice at each CarMax location on or before December 1 of any year the company decided to modify the terms.

Copies of the modified agreement were published in packets, which were available after December 31.

Casas opposed the request to compel arbitration, arguing that the agreement wasn’t an enforceable contract and was procedurally and substantively unconscionable.

Illusory Agreements Are Unenforceable

The trial court found that the agreement was "illusory" because it gave CarMax the right to alter or terminate the agreement unilaterally, it failed to call attention to the arbitration requirement in the handbook, and the employer could unilaterally modify the handbook.

The trial court based its findings on an earlier case called Sparks v. Vista Del Mar Child & Family Services, in which the California Court of Appeals held that a dispute resolution policy located in an employee handbook was "illusory."

In that case, the employee handbook provided that the company could amend, revise, or modify any provisions of the handbook, including the arbitration agreement, at any time without notice. The employee in the case stated that he wasn’t aware the arbitration clause existed in the handbook. 

But the Court of Appeals saw things differently.

Tune in tomorrow for the conclusion of the case and the steps you need to follow to develop enforceable predispute arbitration agreements in California.

 
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