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California Appellate Court Refuses To Enforce Employer's Arbitration Policy

December 28, 1999

Many employers, seeking to avoid the risks and expense inherent in jury trials of wrongful discharge and discrimination claims, require their employees to enter into agreements under which all employment-related disputes are to be resolved exclusively in arbitration. While such agreements have been held, in many cases, to be fully effective to bar court litigation, California courts closely scrutinize their terms, and will not enforce agreements to arbitrate where the agreement is found to unduly restrict or compromise the employees' right of access to the courts. In one recent case, for example, the California Court of Appeal, First Appellate District, affirmed the trial court's denial of an employer's motion to compel arbitration, finding that the arbitration agreement at issue was unenforceable. Ramirez v. Circuit City Stores, Inc., 1999 Cal.App. Lexis 1083 (December 10, 1999)

Ramirez was employed by Circuit City as an installer of equipment in automobiles. At the time Ramirez applied for employment, he was required to sign the "Circuit City Dispute Resolution Agreement" as a condition of being hired. The agreement required him to settle any and all claims arising out of his employment by final and binding arbitration in accordance with Circuit City's "Dispute Resolution Rules and Procedures." The agreement also stated that unless Ramirez withdrew his application within three days, he would be bound by the terms of the agreement.

Notwithstanding this agreement, Ramirez filed a class action lawsuit against Circuit City alleging wage and hour violations. Circuit City moved for dismissal of the lawsuit, asserting that it was barred by the arbitration agreement. The court disagreed.

In evaluating the enforceability of the Circuit City arbitration agreement, the court noted that the agreement was a nine-page, typed, single-spaced document which contained all of the following provisions:

(1) employees were required to arbitrate any and all employment-related disputes, including claims of age and other forms of discrimination and claims for violation of the Fair Labor Standards Act;
(2) employees could not institute a class action against Circuit City, either through the courts or arbitration;
(3) discovery was limited;
(4) claims were required to be filed within one year after the date the employee knew or should have known of the facts underlying his or her claim;
(5) the employee had the burden of proving, by a preponderance of the evidence, that Circuit City violated applicable law;
(6) types of relief available to the employee included certain forms of injunctive relief, reinstatement, full or partial back pay for a period of time, up to 24 months of pay if reinstatement was not possible, or compensatory damages;
(7) punitive damages were limited to an amount equal to any monetary award for backpay or pay in lieu of reinstatement, or $5000, whichever amount was greater;
(8) the parties would share the costs of arbitration and the employee would pay his or her own attorneys fees; and
(9) if the employee prevailed at arbitration, the arbitrator had the discretion to require Circuit City to pay the employee's costs and award reasonable attorneys fees.

The court found that the arbitration agreement was a "contract of adhesion," or a standardized contract imposed and drafted by a stronger party and presented to the weaker party on a take-it-or-leave-it basis. Ramirez essentially had no choice but to sign the arbitration agreement if he wanted to work at Circuit City. To argue that Ramirez simply could have chosen not to apply for a job at Circuit City, the court reasoned, "ignores the realities of the marketplace" and the situations of persons such as Ramirez, who presumably need a job and lack much in the way of salable skills. Ramirez had no meaningful choice other than to accept the terms of the arbitration agreement.

However, the mere fact that that the agreement was a contract of adhesion did not, standing alone, render it unenforceable. The court reasoned, rather, that "the lack of meaningful choice...would not be enough to render the agreement unenforceable if the terms of the agreement were even-handed; however, they are not." The court found Circuit City's arbitration agreement to be unenforceable primarily because of its unilateral nature-the wording of the agreement required its employees, but not Circuit City, to arbitrate any claims: "It is by now well-settled that an agreement that requires the weaker party to arbitrate any claims he or she may have, but permits the stronger party to seek redress through the courts, is presumptively unconscionable."
Although the unilateral nature of Circuit City's arbitration agreement was alone sufficient to find the agreement unenforceable, the court also found the following provisions of the agreement to be suspect: (1) the disallowance of class actions; (2) the limitation of punitive damages to the amount of any back pay award, 24 months of pay, or $5000, whichever amount was greatest; (3) making the award of costs and attorney fees to the prevailing employee discretionary, rather than mandatory, as is the case under civil rights statutes; and (4) making the complaining employee potentially liable for Circuit City's costs and attorneys fees.

The court's analysis in Ramirez v. Circuit City reveals that California employers must continue to exercise care in promulgating arbitration policies and agreements. While such agreements can be a valuable tool in reducing the expense and risks of litigation, this decision shows that an employer who attempts to accomplish too much through such an agreement risks having the agreement struck down in its entirety. Moreover, employers should keep in mind that the standards applied in the Ramirez case are binding only in state courts in California. Recently, federal courts in the Ninth Circuit (which includes California and several other western states) have largely refused to enforce mandatory arbitration agreements between employee and employer outside of collective bargaining agreements. On the other hand, both state and federal courts in New York are much more amenable to enforcing individual arbitration agreements, and New York employers have frequently succeeded in having discrimination and other employment-related lawsuits stayed on the basis of such agreements.