California Supreme Court Defines Procedural Requirements For Enforcing An Arbitration Clause

The California Supreme Court, in a unanimous decision written by Justice Mosk, has gone a long way towards defining the procedural requirements for enforcing an arbitration clause, contained in an employee contract, that is challenged as unconscionable.

Suit was brought by two employees who alleged that they were terminated, after having being sexually harassed and discriminated against, “because of their perceived and/or actual sexual orientation (heterosexual).” Their claims were based on the California Fair Employment and Housing Act (the state’s version of the federal Civil Rights Act of 1964). The employer defendant moved for an order to compel arbitration pursuant to an arbitration clause in the employment contracts. The clause required the employee to arbitrate any claim of wrongful termination and limited the remedy to a sum equal to the wages they would have earned from discharge up to the date of an arbitration award.

First, the California Supreme Court sided with a majority of the federal circuit courts in holding that the federal Civil Rights Act of 1991, 105 Stat. 1071, does not prohibit the enforcement of mandatory employment agreements to arbitrate claims under Title VII or equivalent state antidiscrimination statutes. Recognizing that Gilmer, 500 U.S. 20 (1991), held that statutory employment rights outside of the collective bargaining context are arbitrable, the court proceeded to define the limits on enforceability of such arbitration clauses.

The court quoted Mitsubishii Motors Corp, 473 U.S. at 628, usually cited as a pro-arbitration decision, that a party in agreeing to arbitrate a statutory claim “does not forgo the substantive rights afforded by the statute but only submits to their resolution in an arbitral … forum.” Thus, the court said, arbitration agreements that encompass unwaivable statutory rights must be subject to scrutiny to insure that the process by which the rights are vindicated is fair.

The court formulated four minimum requirements (other than that the arbitrator be neutral) for lawful arbitration of statutory rights of employees (relying on the decision in Cole v. Burns Intern. Security Services, 105 F.3d 1465):

(1) All remedies that would be available in court – A number of courts have held that an arbitration agreement may not prohibit such remedies as punitive damages and attorneys fees. The Armendariz decision had little difficulty finding that limiting the remedy to wages between discharge and arbitration was similarly flawed.

(2) Adequate discovery – The court recognized that arbitration need not entitle the parties to the full range of discovery available in court. However, it interpreted the provisions for discovery contained in the California Arbitration Act as at least entitling them to “discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review.” Thus it found no grounds for denying arbitration due to lack of discovery.

(3) Written arbitration award and judicial review – The court held that an arbitrator “must issue a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based.” It found that the arbitration clause here did not preclude written findings and that a challenge based on inadequate judicial review is premature.

(4) Employee must not have to pay arbitration costs – The California Code provides that each party will pay his pro rata share of the expenses and fees of an arbitration. The court noted that “we are unaware of any situation in American jurisprudence in which a beneficiary of a federal statute has been required to pay for the services of the judge assigned to hear her or his case.” Although recognizing that parties in court may be required to pay filing fees and other administrative expenses, the court held that the “arbitration process cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.” Justice Brown, concurring, said the possible imposition of arbitration “forum costs” would not “automatically undermine an employee’s statutory rights” and the issue of apportionment should be left to the arbitrator.

Once the court had found that two of the procedural prerequisites were not satisfied (due to limits on remedies and imposition of costs), it went on to analyze the principles of unconscionability. It found that the lack of mutuality – that the employee was required to arbitrate his claims arising from termination, but the employer was not – also made the agreement “substantively unconscionable.” It concluded that the presence of these unconscionable provisions rendered the entire arbitration agreement unenforceable since they could not be remedied without reforming the contract by augmenting it with additional terms.

Armendariz is mostly a reshuffling of emerging principles governing procedural fairness in arbitration clauses and unconscionability. However, it brings together the various pieces in a coherent pattern and is likely to be a significant precedent for the ongoing imposition of limitations on contractual arbitration, at least in the context of employee statutory rights.

                        author

Edward F. Sherman

Edward F. Sherman, is Vice Chair of the Arbitration Committee of the American Bar Association Section of Dispute Resolution. He is professor of law and former dean of Tulane Law School in New Orleans, Louisiana. Before coming to Tulane in 1996, he taught for 19 years at The University of Texas… MORE >

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