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California Supreme Court Provides Guidance on Mandatory Employment Arbitration Agreements

August 29, 2000

As jury verdicts continue to soar (see What Damages Cap? Significant Jury Awards in Employment Cases in 1999), many employers have looked to mandatory arbitration agreements to limit the expense and uncertainty of employment litigation. At least in part because many employers believe that arbitration is not the most expedient method for obtaining relief from an employee's actual or threatened misappropriation of trade secrets or unfair competition, arbitration agreements frequently impose on employees a unilateral requirement to arbitrate (rather than filing a claim against the employer in court). As one recent decision demonstrates, however, California courts do not look favorably on unilateral arbitration agreements. Armendariz v. Foundation Health Psychcare Services, Inc., No. S075942 (August 24, 2000).

In Armendariz, the California Supreme Court described the circumstances under which such an agreement can be enforced against a California employee alleging employment discrimination. Borrowing from federal law, the California court held that an agreement to arbitrate statutory discrimination claims is lawful, but only if certain requirements are met. First, the agreement should provide for a neutral arbitrator which, in any event, is a requirement in any arbitration. Second, the agreement should provide for all of the types of relief that would be available in a court of law, such that it does not exclude punitive damages or attorneys' fees, or impose monetary limits on a plaintiff's recovery. Third, the agreement should provide for adequate discovery, which may be less than what is allowed in court, but which must include, at least, access to essential documents and witnesses. Fourth, the agreement should require the issuance of a written award revealing, "however briefly, the essential findings and conclusions on which the award is based". Finally, the agreement should not impose unreasonable costs on the employee; i.e, costs in excess of what the employee would be required to bear if the matter were litigated in court.

Applying these principles to the facts at hand, the Court considered the fact that the employees in Armendariz were required to arbitrate their claims against the employer, but the employer was not required to arbitrate claims it might have against the employees. The Court concluded that such a unilateral requirement to arbitrate was unfair to employees: if the employee is required by the terms of an arbitration agreement to forego a judicial forum, a similar requirement must be imposed on the employer. Particularly since there is a procedure under California state law which permits an employer to go to court to preserve the status quo pending an arbitration hearing, the court felt comfortable insisting upon a "modicum of bilaterality."

The remaining issue addressed by Armendariz relates to the circumstances under which a court can simply sever or restrict an unconscionable provision, as opposed to refusing to enforce the agreement at all. According to the court, the latter course in appropriate when the agreement "is permeated by unconscionability." In the case before it, the court found the agreement unconscionable (because it limited the employee's remedies and only required arbitration on the part of the employee, not the employer), but declined simply to sever the unconscionable provisions. It gave two reasons for taking this position. First, there was more than one unconscionable provision in the arbitration agreement at issue. Second, to correct the lack of mutuality, the court would be required to add language to the contract, as opposed to simply severing or restricting an offending term. The court did not believe that it was statutorily authorized to take this action.

The Armendariz decision provides useful guidance as to how California courts will interpret and enforce mandatory employment arbitration provisions. Employers with operations in California must now hope that federal law in the Ninth Circuit will be brought into accord, since the Ninth Circuit is presently the only federal circuit that refuses to enforce agreements to arbitrate employment claims. The U.S. Supreme Court apparently intends to address that issue in the next term in a case entitled Circuit City Stores, Inc. v. Adams, 194 F.3d 1070 (9th Cir. 2000), cert. granted, May 22, 2000, __ U.S. __, 120 S.Ct. 2004 Until then, some uncertainty remains, and employers in California should consult counsel prior to seeking to impose arbitration agreements on employees.