HR Management & Compliance

How To Draft an Enforceable Arbitration Agreement in California

Yesterday, guest writer Alka Ramchandani introduced us to the case of a former CarMax employee who challenged the validity of the arbitration agreement the company was trying to bind him to. Today, the conclusion of the case—and some tips for drafting success.

Ramchandani is an attorney at the San Francisco office of Epstein Becker Green, PC.

[For yesterday’s case details, click here.]

The Court of Appeal’s Conclusion

The Court of Appeals found the CarMax facts were different from those in the Sparks case.

In the CarMax case, the arbitration agreement wasn’t “hidden.” It was signed by Casas, and it provided for (1) a specific date for any amendments to the agreement, (2) a 30-day notice requirement, and (3) a posting requirement.

The appellate court further stated that even though the agreement allowed CarMax to unilaterally alter its terms, it wasn’t “illusory” because it contained an implied covenant of good faith and fair dealing that saved it from being unconscionable.

The court clarified, however, that the portion of the agreement that allowed the company to apply modified terms to claims arising before the modification existed was invalid.

Although the agreement had this illegal provision, it still was lawful because CarMax included a provision stating that if there is a conflict with a mandatory provision of law, California law automatically takes precedence over the conflict.


Listen to our recent arbitration webinar, specifically for California employers! Learn more.


So even if an employee asserted a claim that arose before modification of the agreement, CarMax couldn’t apply the modification to the claim. Casas v. CarMax Auto Superstores California LLC (California Court of Appeals, 2nd Appellate District, 2/26/14).

Bottom Line

You can develop mandatory predispute arbitration agreements that are enforceable in California if you do the following:

  1. Limit and define specific times you can modify the contract.
  2. Provide adequate notice to your employees regarding the modification.
  3. Identify when copies of the modified language will be available to employees.
  4. Post notices that identify the modifications in all business locations where your employees are, and inform employees how and when the change will take place.
  5. Limit modifications so they apply to claims that arise only after the modifications take place.
  6. Include a savings clause that states any conflict with a mandatory provision of law will be overruled by applicable California law. It’s also advisable to ensure your dispute resolution provision isn’t hidden away in an employee handbook and that you highlight the provision by having employees sign a separate express acknowledgment of the clause. These steps will help prevent potential issues with enforcing arbitration clauses.

Arbitration, Litigation, & Mediation: What Every HR Professional in California Needs to Know about Dispute Resolution Options

Litigation can be very expensive, but there are limits to what an employer can demand from employees in arbitration. Also, since the employer must pay almost all costs of arbitration, is it really a money saver for employers?

Finally, California courts frequently throw out arbitration agreements, so how do you write one that will stick? And what is the difference between arbitration and mediation?

Watch our recent webinar as our presenter, an experienced California labor and employment advisor and litigator, provides insight into the key differences among arbitration, litigation, or mediation, so you’ll have a better sense of which one may be right for your organization. In addition, he’ll provide you with tips for ensuring that arbitration agreements hold up under California law.

View this popular webinar, and you’ll learn:

  • The important distinctions among arbitration, litigation, or mediation here in California, and the pros and cons of each
  • Key questions to ask to help you determine which option may be the best for your organization.
  • Best practices for ensuring that your arbitration agreements hold up under California law
  • Examples of what “unconscionable” means, so you can tell whether your agreements may be too broadly construed in your favor to preclude enforcement
  • And much more!

In just 90 minutes, you’ll learn how to make your arbitration hold up in court and how to evaluate whether arbitration, mediation, or litigation is the right option for a given employment dispute.

Download your copy of How To Survive an Employee Lawsuit: 10 Tips for Success today!