Founder and Managing Shareholder
A pair of recent California court decisions have dealt double blows to the enforceability of arbitration agreements in the employment setting. In both cases, the courts found that the agreements were unenforceable because they were procedurally and substantively unconscionable. Under the prior California Supreme Court decision Armendariz v. Foundation Health Psychare Service, Inc., the Court found that an arbitration agreement is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. Under Armendariz, to render an arbitration agreement unenforceable as unconscionable, the agreement must be both procedurally and substantively unconscionable. Procedural unconscionability is based on the circumstances of the negotiation and formation of the agreement, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability pertains to the fairness of an agreement’s actual terms and whether such terms are overly harsh or one-sided.
These two cases, coupled with the new legislation in AB 51, constitute an all-out assault on employment arbitration agreements. Although well-founded legal challenges to these measures are in the offing, in the meantime employers are faced with uncertainty in how to continue using arbitration agreements.
One Toyota of Oakland v. Kho
The plaintiff, a dealership service technician, brought a claim for unpaid wages before the Labor Commissioner. The dealer attempted to move the case to arbitration under the arbitration agreement the employee signed, but the trial court found that the arbitration agreement was unenforceable as procedurally unconscionable. The California Supreme Court applied the Armendariz decision to this case, finding that that the arbitration agreement used by the dealership had an “extraordinarily high” degree of procedural unconscionability because the employee was required to sign the agreement to keep his job, the agreement’s content or significance was not explained to the employee, the employee was expected to sign the agreement on the spot, without time to review or consider it, and the agreement was written in very small single-spaced font in dense legalese that was difficult to understand. The Court also found that the arbitration agreement was substantively unconscionable, because it would be very difficult for a lay person to arbitrate due to the myriad of technical and procedural steps necessary to navigate the arbitration system and rules set forth in the agreement (all things that previous Supreme Court precedent affirmed), and as a result, the employee would need an attorney to represent them in arbitration. Under its logic, in contrast, it is relatively simple and inexpensive for an employee to bring a claim through the Labor Commissioner, as that process involves merely filling out a complaint form and the Labor Commissioner handles moving the case forward in an efficient manner compared to the arbitration process.
Although this case was focused on the wage/hour setting with the availability of the Labor Commissioner as an alternative forum for the employee’s claims, and the unconscionability issue is specific to the facts of each case, this case is nevertheless disturbing to employers who utilize arbitration agreements that cover wage/hour claims. Although the dealer in One Toyota of Oakland case may have better handled administering the arbitration agreement to its employees, it is common that such agreements are distributed to employees among other mandatory employment paperwork without much fanfare or extensive explanation. As such, this decision warrants review of not only the provisions within the arbitration agreement, but the manner and context in which the employer administers the agreement to its employees.
Davis v. TWC Dealer Group
This California Court of Appeals case came on the heels of the One Toyota of Oakland decision and largely mimicked the Supreme Court’s hostility towards employment arbitration agreements on the same unconscionability grounds. In that case, the employer (another car dealership) issued multiple arbitration agreements to the employee (some simultaneously with each other). The Court of Appeals found procedural and substantive unconsionability based on the following factors:
- The agreement was difficult to read and understand as it was in dense, small print, complex and technical legalese packed into large paragraphs;
- The agreement was mandatory and employees who need a job are not in a position to reject it;
- There was lack of mutuality as only the employee was required to sign the agreement, and the absence of an employer signature indicated that the employer was not bound by it;
- The agreement indicated that it could be revised at any time in writing by the employer with no notice to the employee;
- The existence of three separate arbitration agreements, the terms of which contradicted each other; and
- The blanket waiver of class action claims could be construed to preclude PAGA claims, which has been found to violate public policy.
Unlike One Toyota of Oakland, the Davis holding is not focused on arbitration of only wage/hour or any other specific type of claim. Employers should review the above cases in light of their own arbitration agreements and confer with legal counsel about continuing to use arbitration agreements or whether revisions to existing agreements are advisable.
As mentioned above, it is likely the U.S. Supreme Court will find that this area is pre-empted by the Federal Arbitration Act. In the meantime, employers who use arbitration agreements for employment disputes should consult with counsel as to possible measures to improve the likelihood that such agreements may be enforceable.
Lamps Plus, Inc. v. Varela 139 S. Ct. 1407
On April 24, 2019, the Supreme Court of the United States (“SCOTUS”) answered the question whether an ambiguous contractual agreement provides the necessary contractual basis to conclude that the parties consent to class arbitration under the Federal Arbitration Act (“FAA”). It does not.
This case originated when a hacker tricked a Lamps Plus Inc. (“Lamps Plus”) worker into divulging the sensitive tax information of multiple Lamps Plus employees. This stolen identity and tax information was then used to file a fraudulent federal tax income return for Lamps Plus employee, Frank Varela. Varela filed a putative class action against Lamps Plus bringing state and federal claims in a federal district court in California. A putative class action involves a lawsuit brought by at least one plaintiff on behalf of a potential group of like individuals suffering a common claim. Here, Varela brought claims on behalf of all Lamps Plus employees whose confidential tax information had been compromised by the data breach.
Lamps Plus responded by seeking to compel arbitration based on a provision buried in Varela’s initial employment agreement. Specifically, Lamps Plus sought to compel individual arbitration with Varela, which would knock Varela’s claim out of court and force Varela to arbitrate his claim under the employment agreement that Lamps Plus had drafted itself. The district court, however, rejected Lamps Plus’s motion to compel individual arbitration, and instead, authorized class arbitration upon its own discretion.
Individual arbitration is generally preferred over class arbitration because the parties don’t have to adhere to rigorous court procedures and appellate review to receive a decision. It is informal and operates at a lower cost by providing greater efficiency and speed, including the option to select expert adjudicators to decide niche questions. Class arbitrations, on the other hand, proceed slower and incur significantly more costs. This category of arbitration, “sacrifices the principal advantage of [individual] arbitration – its informality – and makes the process slower, more costly, and more likely to generate procedural morass than final judgement.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350.
With this in mind, Varela appealed to the United States Court of Appeals for the Ninth Circuit, arguing that the Supreme Court’s previous decision in Stolt-Nielsen S.A. v. AnimalsFeeds Int’l Corp bars the district court from compelling class wide arbitration when an agreement is silent on the availability of such arbitration. However, the Ninth Circuit ruled that Stolt-Nielsen was not controlling because Varela’s employment agreement was not silent, but rather ambiguous, in regard to the specific question pertaining to class arbitration. The Ninth Circuit affirmed the district court’s decision, rejecting Varela’s assertion that compelled class arbitration was made in error, and the SCOTUS granted certiorari.
Chief Justice Roberts delivered the opinion of the SCOTUS, holding that an ambiguous contractual agreement does not provide the necessary contractual basis to conclude that the parties agreed to submit to class arbitration under the FAA. A fundamental principal of the FAA is that arbitration “is a matter of consent, not coercion.” Stolt-Nielsen, 559 U.S. Absent an express contractual basis evidencing consent of the parties, Courts cannot just infer consent to submit to class arbitration. Just as silence was deemed insufficient by the Court to evidence consent in Stolt-Nielsen, ambiguous contractual provisions are insufficient to evidence consent in the case at bar. This is because class arbitration carries significantly more risk than individual arbitration, and often comes at the defendant’s expense. The SCOTUS reversed the Ninth Circuit and remanded the case for further proceedings.
The holding in Lamps Plus, Inc. v. Varela is noteworthy for all individuals and corporate entities drafting and negotiating arbitration provisions embedded in a multitude of business contracts. In particular, the American Bar Association declares the Lamps Plus decision “a victory for employers seeking to arbitrate workplace claims on an individual basis.” This is due to the fact that employers are often in an unequal position of bargaining power and are thus able to craft and shape the agreement in a manner that specifies how to arbitrate in a way most beneficial to the employer. When the employer can draft an agreement to prohibit class arbitration and a potential employee is not in a position to negotiate, then the court – interpreting the intent of the parties – is left looking only at the intent of the employer. Because class arbitration significantly increases time, cost, and risk, contractual ambiguity will not provide a sufficient basis to infer the parties consent. Employers should be explicit when drafting arbitration agreements and employees should mindful and wary when signing agreements with arbitration provisions.