CA Court of Appeals Refused to Enforce Arbitration Provision in Employment Agreement
Arbitration is a form of Alternative Dispute Resolution (ADR) that allows employers and non-union employees to resolve disputes out of court by submitting the matter to a mutually-selected arbitrator. Arbitration is generally preferred by employers because the proceedings are confidential, speedy, less expensive than litigation, flexible, and most importantly final. Employment attorneys must be careful while drafting or reviewing employment agreements that include arbitration provisions. In a recent decision, Mayers v. Volt Management (2012), the California Court of Appeals refused to grant employer’s motion to compel arbitration in the employee’s disability discrimination claims brought under the California Fair Employment and Housing Act (FEHA) on the ground that arbitration provisions were unconscionable and therefore unenforceable. The case is an interesting read because it sets forth an analytical framework for determining procedural and substantive unconscionability in the post-ATT-Conception era.
In Mayers v. Volt Management, Plaintiff filed a lawsuit against his former employer, Volt Management Corp., alleging claims for disability discrimination, failure to accommodate, failure to engage in the interactive process, retaliation for taking leave under the Moore-Brown-Roberti Family Rights Act and age discrimination. Defendant filed a motion to compel arbitration based on plaintiff’s agreement to submit employment related claims to final and binding arbitration, as evidenced by his signed employment application, employment agreement, and acknowledgment of receipt of the employee handbook. The trial court denied the motion.
Plaintiff's employment application included the following arbitration language:
Any dispute, controversy or claim arising out of, involving, affecting or related in any way to this agreement or a breach of this agreement, or arising out of, involving, affecting or related in any way to your employment or the conditions of your employment or the termination of your employment, including but not limited to disputes, controversies or claims arising out of or related to the actions of [defendant]’s other employees, under federal, state and/or local laws, shall be resolved by final and binding arbitration, pursuant to the Federal Arbitration Act, in accordance with the applicable rules of the American Arbitration Association in the state where you are or were last employed by [defendant]. The arbitrator shall be entitled to award reasonable attorneys fees and costs to the prevailing party. The award shall be in writing, signed by the arbitrator, and shall provide the reasons for the award. Judgment upon the arbitrator’s award may be filed in and enforced by any court having jurisdiction. This agreement to arbitrate disputes does not prevent you from filing a charge or claim with any governmental administrative agency as permitted by applicable law.”
Plaintiff opposed the motion to compel arbitration by arguing that the specific arbitration provisions before the court contained elements of procedural and substantive unconscionability, which render those elements unconscionable.
After a brief summary of AT&T v. Conception, the court noted that Plaintiff did not argue the arbitration provisions were unenforceable under California law because they required the arbitration of a particular type of claim. Nor has Plaintiff based his unconscionability argument “ on the uniqueness of an agreement to arbitrate.” Therefore, the court reviewed enforceability of the arbitration provisions at issue in light of general principles of unconscionability under California law (i.e. Civil Code section 1670.5, subdivision (a)). The following are the key holdings:
1) The failure to provide a copy of the arbitration rules to which the employee would be bound supported a finding of procedural unconscionability.
The arbitration provisions contained in the employment application, employment agreement, and employee handbook each required that plaintiff submit employment-related claims to arbitration pursuant to the “applicable rules of the American Arbitration Association in the state” where plaintiff was employed or was last employed by defendant. Plaintiff was not provided with a copy of the controlling American Arbitration Association (AAA) rules or advised as to how he could find or review them. The arbitration provisions do not identify the particular set of AAA rules that would apply to the final and binding arbitration of plaintiff’s claims. Instead, the arbitration provisions vaguely refer to “the applicable rules of the American Arbitration Association” in the state where plaintiff was last employed by defendant.
The provisions also failed to identify which set of rules promulgated by the AAA would apply.
2) The arbitration provision awarding attorney fees to prevailing defendant violated the spirit of FEMA that allows an award of attorney fees to prevailing defendant only where a claim was brought in bad faith.
Under the arbitration provision at issue, the arbitrator “shall be entitled to award reasonable attorney’s fees and costs to the prevailing party. The court held that such a prevailing party attorney fees term exposed plaintiff to a greater risk of being liable to defendant for attorney fees than he would have been had he pursued his FEHA claims in court.
California courts have held that, in a FEMA case, a prevailing plaintiff should ordinarily recover attorney fees unless special circumstances would render the award unjust, whereas a prevailing defendant may recover attorney fees only when the plaintiff’s action was frivolous, unreasonable, without foundation, or brought in bad faith. In contrast to case law under FEHA, the agreement at issue did not limit the defendant’s right to recover to instances where the plaintiff’s claims are found to be ‘frivolous, unreasonable, without foundation, or brought in bad faith.’ Thus, enforcing the arbitration clause and compelling the plaintiff to arbitrate his FEHA claims lessens his incentive to pursue claims deemed important to the public interest, and weakens the legal protection provided to plaintiffs who bring nonfrivolous actions from being assessed fees and costs.”
Practical Impact of Mayers v. Volt Management
The case presents a few valuable lessons for employers and human resources personnel who often have to decide what language should be included in the arbitration clause.
First, the rules of arbitration must be clearly identified in the employment agreement and a copy of the rules (or a downloadable link) must be provided to employees. In the event, the arbitration provision refers to AAA rules, the provision must identify the particular set of AAA rules that would apply to the final and binding arbitration of plaintiff’s claims.
Second, the attorney fee language must be carefully drafted and should not be overly broad to the extent that it violates public policy or contravenes the intent of legislature. This is especially true in wage-and-hour claims where many statutory attorney’s fees are available only to prevailing plaintiffs.