by Sayema Hameed
The California Court of Appeal has issued a decision holding that an employee arbitration agreement is unenforceable. In Mayers v. Volt Management Corp. (filed February 2, 2012, publication ordered February 27, 2012, Fourth District, Div. Three, Case No. G045036), the plaintiff filed a lawsuit against his former employer alleging various claims under the California Fair Employment and Housing Act (Gov. Code, § 12940 et seq.) (“FEHA”). The defendant employer filed a motion to compel arbitration based on the plaintiff’s agreement to submit employment-related claims to final and binding arbitration, as evidenced by his signed employment application, employment agreement, and acknowledgment of receipt of employee handbook. The trial court denied the motion to compel arbitration. The Court of Appeal affirmed the trial court’s decision.
The arbitration provisions in the employment application, employment agreement, and employee handbook each required that the plaintiff submit employment-related claims to arbitration pursuant to the “applicable rules of the American Arbitration Association in the state” where plaintiff was employed. However, Plaintiff was not provided with a copy of the controlling American Arbitration Association (“AAA”) rules or advised as to how he could find them.
The arbitration provisions also failed to identify which set of AAA rules would apply. They further stated that the “arbitrator shall be entitled to award reasonable attorney’s fees and costs to the prevailing party.” That language exposed the plaintiff to a greater risk of liability for attorney fees than he would have been if he pursued his FEHA claims in court. The Court of Appeal, therefore, concluded that the above provisions were unconscionable and unenforceable, and plaintiff could not be compelled to arbitrate his claims against the defendant. The Court of Appeal distinguished this case from the facts in the recent U.S. Supreme Court decision AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740 (“AT&T Mobility“), in which the Supreme Court ruled that the Federal Arbitration Act (“FAA”) preempted a California Supreme Court decision holding that class action waivers in consumer arbitration agreements are unconscionable and unenforceable.
In AT&T Mobility, the Supreme Court held that California’s rule (prohibiting outright the arbitration of a particular type of claim) directly conflicted with the central purpose of the FAA, which is to ensure that private arbitration agreements are enforced according to their terms. However, as the California Court of Appeal in Mayers v. Volt Management Corp. explained, although the FAA does not permit states to prohibit outright the arbitration of a particular type of claim, the FAA still permits arbitration agreements to be declared unenforceable by principles applicable to contracts in general, such as fraud, duress or unconscionability.
The Court of Appeal then applied the principles of unconscionability under California law to the arbitration provisions at issue and found the provisions to be both procedurally and substantively unconscionable and, therefore, unenforceable. The arbitration provisions had a high degree of procedural unconscionability because they were presented to plaintiff in “printed, standardized forms” that were drafted by defendant, were offered to plaintiff on a take-it-or-leave-it basis, and, most importantly, required plaintiff to submit claims to final and binding arbitration pursuant to an unspecified (and undetermined) set of rules by the AAA.
The arbitration provisions had a high degree of substantive unconscionability because it exposed the plaintiff to a greater risk of liability for attorney’s fees than he would have been if he brought his FEHA claims in court. This case is an important example of the application of unconscionability principles to employee arbitration agreements, and it also demonstrates the limits of the Supreme Court’s decision in AT&T Mobility. Employers should take note of this decision.