Some Questions Resolved, Others Remain: Mandatory Employment Arbitration in California
In its seminal decision two years ago in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the U.S. Supreme Court ruled that the Federal Arbitration Act, 9 U.S.C. § 1, generally permits employers to require prospective employees to enter into pre-dispute arbitration agreements as a condition of employment. Nevertheless, the two years since Adams was decided have been marked by continuing uncertainty among federal courts in the nine western states, including
EEOC v. Luce, Forward, Hamilton & Scripps:
The Ninth Circuit Upholds Mandatory Arbitration of Title VII Claims
The Court's decision in Equal Employment Opportunity Commission v. Luce, Forward, Hamilton & Scripps ("Luce Forward III") formally overruled the Ninth Circuit's earlier decision in Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998), holding that Duffield was "wrongly decided."
The decision of the full Court in Luce Forward III was widely anticipated as a resolution to the unsettled state of affairs within the Ninth Circuit with respect to compulsory arbitration of employment disputes. Duffield held in 1998 that compulsory agreements to arbitrate employment claims arising under Title VII were not enforceable. On the other hand, California courts, applying state law, have long held that compulsory agreements to arbitrate are enforceable, provided they meet the "conscionability" standards set forth by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669 (Cal. 2000). Thus, employers in the Ninth Circuit, and particularly in
The Luce Forward case arose when Donald Lagatree was offered a position as a legal secretary at the law firm Luce Forward Hamilton and Scripps, LLP, conditioned on his agreement to arbitrate all employment-related disputes. His offer letter contained, as an express condition of the job offer, a compulsory, pre-dispute arbitration clause. The arbitration clause provided that he agreed to submit all claims arising from, or related to, his employment, or termination of his employment, to binding arbitration. After working at the law firm for two days, Lagatree refused to sign the arbitration agreement and Luce Forward revoked the job offer.
Lagatree sued the law firm in
The majority opinion in Luce Forward III went beyond the grudging admission of the panel in Luce Forward II that Duffield had been implicitly overruled, squarely holding that: "[O]ur decision in Duffield stands alone. All of the other Circuits have concluded that Title VII does not bar compulsory arbitration agreements." This holding sparked angry dissents from some members of the panel, accusing the majority of allowing employers to force employees to choose between their jobs and their right to bring future Title VII claims in court. Despite these dissents, in the event the EEOC seeks Supreme Court review, the Supreme Court is unlikely to hear the case, because the Ninth Circuit has resolved the split of authority among the Circuits as to the enforceability of compulsory agreements to arbitrate Title VII claims. Accordingly, the Ninth Circuit's decision in Luce Forward III restores the availability of arbitration agreements to employers doing business within the Ninth Circuit's jurisdiction.
Departing California Governor Vetoes Bill That Would Have Banned Pre-Dispute Arbitration Agreements For Claims Under FEHA
In one of his last acts as California Governor, Gray Davis vetoed a bill in October 2003 that would have prohibited employers from requiring employees to agree to arbitrate discrimination claims as a condition of employment. AB 1715, which was enacted by the Legislature on party-line votes, would have invalidated all existing agreements in which employees and employers had agreed to arbitrate claims under the state's Fair Employment and Housing Act ("FEHA"). The vetoed legislation would have allowed employers and employees to enter into new arbitration agreements, but only if the employee's consent to arbitration was "knowing, voluntary, and not made a condition of employment or continued employment."
Although Governor Schwarzenegger has only been in office since November 2003, there is little reason to believe that this pro-business Governor will be willing to sign a similar bill should the Legislature decide to pursue such legislation again. That stated, there remains the possibility that future federal legislation could change the present landscape. For example, a number of members of the U.S. House of Representatives filed a brief with the Ninth Circuit supporting Duffield's prohibition on such agreements. More recently, Congressman Dennis Kucinich of Ohio and other Democratic members of the House and Senate announced plans to introduce the "Preservation of Civil Rights Protections Act of 2003" which would bar pre-dispute agreements to arbitrate claims arising under federal statutes and would require that any agreement to arbitrate such claims be entered into only after a dispute has arisen, to ensure that the waiver of an employee's right to a jury trial is truly knowing and voluntary.
For now, it is clear that employers in
While Mandatory Arbitration Agreements Are Now Permissible in
For the third time in 18 months, the U.S. Court of Appeals for the Ninth Circuit ruled on July 22, 2003 that Circuit City's employment arbitration agreement was unenforceable under California law. In Circuit City Stores, Inc. v. Mantor, 335 F.3d 1101 (9th Cir. 2003), the Ninth Circuit held that Circuit City's arbitration agreement was both procedurally and substantively unconscionable under California contract law. As a result, the Court reversed the lower court's order compelling arbitration and remanded the case to the lower court with instructions to allow the civil action to continue in state court.
The plaintiff in Mantor worked for
In 2001, a year after he was terminated from his employment, Mantor brought a civil action in state court, asserting twelve causes of action, including wrongful termination, fraud, defamation, unpaid wages and age discrimination. Circuit City moved to compel arbitration of these claims, which was granted by the lower court, and Mantor appealed.
On appeal, the Ninth Circuit noted that under
Turning to the arbitration agreement before it, the Court determined that Mantor had no meaningful opportunity to opt-out of the arbitration program, given the fact that management "impliedly and expressly pressured" him not to opt-out and even resorted to threatening his job outright should he refuse to sign the agreement. The Court concluded that, at a minimum, a party must have "reasonable notice of his opportunity to negotiate or reject the terms of a contract, and he must have an actual, meaningful, and reasonable choice to exercise that discretion." Otherwise, the Court held, the agreement is procedurally unconscionable.
As noted above, however, procedural unconscionability, standing alone, is insufficient to render an arbitration agreement unenforceable—the agreement is only invalid if it is substantively unconscionable as well. In this regard, the Ninth Circuit acknowledged that
Lastly, just as in its earlier decision in Ingle v. Circuit City Stores, 328 F.3d 1165 (9th Cir. 2003), the Court in Mantor reiterated that there is a rebuttable presumption that a mandatory employment agreement is unconscionable unless the employer can demonstrate that the effect of the contract is bilateral, meaning that it binds both parties equally to arbitrate their claims. Having reiterated that position, the Court still offered no guidance as to how employers could overcome this presumption. Because the Court concluded that the
Given the Ninth Circuit's prior decisions strictly scrutinizing employment arbitration agreements, this decision is not altogether surprising. However, it is important to note that the Ninth Circuit did not strike down the arbitration agreement simply because it lacked an opt-out provision; rather, the Court struck down the mandatory agreement because it also contained what the Court deemed to be substantively unconscionable terms. Accordingly, assuming an arbitration agreement does not contain any substantively unconscionable terms, an employer will still be able to utilize mandatory employment arbitration agreements, notwithstanding the Mantor decision.
In sum, 2003 was a good year for