New California Arbitration Case Highlights Importance of Agreement Language

By XobeeAdmin on March 7, 2016 in Legal Update
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Unconscionable Provisions Can Make an Agreement Unenforceable
The California Court of Appeal recently found an arbitration agreement unenforceable due to multiple unfair provisions in the agreement. The February 26, 2016 decision in Carbajal v. CWPSC, Inc. (2016) — Cal.Rptr.3d —- (2016 WL 757552) is a reminder that the substance of an arbitration agreement will be scrutinized by the courts and being precise in the language used will be important in enforcing the agreement.

California law will hold arbitration agreements unenforceable – just like other contracts – if they are unconscionable. Both procedural and substantive unconscionability are required. The former looks to the formation of the agreement, while the latter looks to the fairness of the terms of the agreement. Both types of unconscionability must be present, but the more substantively unconscionable the agreement is, the less procedurally unconscionable it must be, and vice versa (courts refer to this as a “sliding scale”).

The Carbajal Court found the agreement to be procedurally unconscionable because it was a contract of adhesion, meaning it was a “take-it-or-leave-it” situation where the employee had little or no opportunity to negotiate its terms. This is common in many employment arbitration agreements. The Court also noted the fact that the employer failed to identify which rules of the American Arbitration Association would govern the arbitration process or where the employee could find those rules.

Substantive unconscionability focuses on fairness and whether the stronger party seeks to gain an unfair and unjustified advantage in the arbitration proceeding. These provisions have been described by courts as “overly harsh,” “unduly oppressive,” “so one-sided as to shock the conscience,” and “unfairly one-sided.” What this means is there is a “substantial degree of unfairness beyond a simple old-fashioned bad bargain.” The Court found the agreement met this standard because of provisions related to injunctive relief and attorney’s fees. Specifically, the agreement lacked mutuality because it required the plaintiff to arbitrate her most likely claims (such as wrongful termination or unpaid wage claims) but the parties could go to a civil court to obtain an injunction, which the employer is much more likely to seek than the employee. The agreement also purports to waive the employer’s obligation to post a statutorily-required bond in order to obtain an injunction. All of this was found to be for the employer’s advantage without any justification to do so.

The arbitration agreement also purported to limit the employee’s ability to recover attorney’s fees, which are available for many common employee claims based on the Labor Code and Fair Employment and Housing Act. The Carbajal agreement stated that each party will bear its own attorney’s fees, which the Court interpreted to deprive the employee of her statutory right to attorney’s fees. The Court rejected the employer’s argument that a provision authorizing the arbitrator to award all types of relief that would otherwise be available under state or federal law should be understood to permit attorney’s fees.

Courts may excise unconscionable provisions and enforce the remainder of the agreement. The Carbajal Court did not do so. Instead, it held that the agreement was so permeated with unconscionable provisions that it should not be enforced. According to the Court, “more than one unlawful provision” shows a “systematic effort” to impose an inferior forum to the employee’s disadvantage.

Advice to Employers
Employers should review their arbitration agreements to identify any provisions that could be deemed procedurally or substantively unconscionable. Below are some suggestions:

  • Identify the rules that will govern the arbitration (i.e., American Arbitration Association Employment Arbitration Rules);
  • Include a way for employees to view the arbitration rules by attaching a copy of the rules or otherwise making them available to the employee;
  • Make sure the agreement is mutual – the agreement should cover claims the employer is likely to bring, as well as claims by the employee; and
  • Do not attempt to limit a statutory right or remedy available to the employee, such as attorney’s fees;

The law in this area changes frequently – keep informed of current developments. If you have any questions about arbitration agreements, please contact the Sutton Hague Law Corporation or qualified legal counsel.