Last week, the California Court of Appeal held that an employer's mandatory arbitration policy was unenforceable because it was unconscionable (i.e. too one-sided and unfair to be enforced).  The opinion is a good reminder that simply having an arbitration agreement does not mean it will be enforceable when a dispute arises.  California courts impose several requirements that employers can easily overlook when instituting arbitration policies.  

The Dispute

Maya Baxter sued her former employer, Genworth North America, for wrongful termination and other related causes of action.  When Genworth became Baxter's employer, Baxter signed a "Conditions of Employment Acknowledgment" form, which included an alternative dispute resolution program with a mandatory arbitration provision.  When Baxter later filed suit, Genworth moved to compel arbitration, but the Superior Court denied the motion.

Arbitration Agreement Was Unconscionable

California courts use a two-part unconscionability analysis to determine whether an agreement to arbitrate is both procedurally and substantively unconscionable.  Both kinds of unconscionability must be present for an agreement to be invalidated by a court.  

The Court of Appeal agreed with the trial court that Genworth's arbitration agreement was procedurally unconscionable because it was presented on a take-it-or-leave-it basis, and Baxter had no meaningful opportunity to negotiate its terms.

The arbitration agreement was also substantively unconscionable for several reasons:

• First, the program imposed limitations on employees' ability to gather information from other employees in support of their claims.  Besides the fact that the prohibition was unfair because it was one sided, the Court also stated that it "also raises public policy concerns because it effectively threatens employees who choose to voluntarily cooperate with an employee who complains about unlawful discrimination."

• Second, the arbitration program imposed limitations on discovery.  Although California law does not bar discovery limitations per se, the Supreme Court in Armendariz made clear that the agreement must allow for "more than minimal discovery."  Even though Genworth's arbitration program permitted the arbitrator to allow additional discovery in appropriate cases, the Court of Appeal held that this was not enough to overcome the unfairness of the default discovery limitations imposed by the agreement.  

• Third, the deadlines imposed by the arbitration agreement were unconscionable.  As the Court of Appeal explained, "[w]hile parties to an arbitration agreement may agree to shorten the applicable limitations period for bringing an action, a shortened limitations period must be reasonable." 

• Fourth, the Court held that because of the strict time lines imposed by the agreement, an employee was effectively forced to forgo pursing administrative remedies under the Fair Employment and Housing Act (FEHA) before an arbitration would be conducted.  Even though an employee could later pursue an administrative hearing, "dispensing with that process before a statutory FEHA claim must be arbitrated establish at least a moderate degree of substantive unconscionability."  

• Fifth, the arbitration agreement also set default length limitations for the arbitration that the arbitrator was expected to impose.  The Court observed that although time length limitations are not per se unreasonable, in complex cases they could operate unfairly.  

The Court of Appeal also held that the trial court did not abuse its discretion in refusing to sever the offending provisions and leave the agreement intact.  

Takeaway

 Allowing employees to opt-out of arbitration provisions is good for other reasons, but should also help with a procedural unconscionability analysis.  Consider the benefits and risk carefully before including time and discovery limitations, even with provisions that allow arbitrators to make exceptions.  The arbitrator's ability to make exceptions may not prove to be enough to save the agreement.  

Employers and their counsel should take a close look at existing arbitration agreements and make any revisions as appropriate to ensure compliance with California law.