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Employer Arbitration Agreements Still A Hot Topic For California Appellate Courts

Over the past month, the California appellate courts have decided two more cases related to the enforceability of employer’s arbitration agreements. As discussed more extensively below, an agreement that is one-sided or oppressive in nature will be found unconscionable. However, in a positive development for employers, a delegation clause (allowing for the arbitrator to decide the arbitration agreement’s enforceability) will be enforced.

In Carmona v. Lincoln Millennium Car Wash, Inc.,2014 WL 1873966, the Second District Court of Appeal denied arbitration in a class action case after finding that the Arbitration and Confidentiality Agreement provided to car wash workers was unconscionable and unenforceable.

In Carmona, the representative Plaintiff and putative class worked for Employer Lincoln Millennium Car Wash. The employees’ native language was Spanish, and they could not read English. At the time the employees were hired, their managers provided them with an agreement requiring final and binding arbitration of any dispute arising out of their employment in accordance with “Employment Dispute rules of the American Arbitration Association.” This Agreement also required the employees to keep any information regarding their employment confidential and to refrain from divulging any information to third parties, including governmental agencies, before addressing their concerns first with their employer. The arbitration and informal resolution provisions were translated into Spanish.

A portion of the Agreement was not translated into Spanish. This English-only portion of the Agreement provided a detailed confidentiality provision and an enforcement provision permitting the employer to obtain injunctive and other relief either in court or before an arbitrator in the event of a breach or threatened breach. This provision also allowed the employer to recover its attorney’s fees and costs in any litigation or arbitration to enforce the confidentiality provision. The employees did not understand the English portions of the Agreement.

The employees were required to sign the Agreement in order to work for the car wash. However, their employer did not explain to them what they were signing, or, that by signing the Agreement, they were waiving their right to appear in court. The employees claimed they did not understand the meaning of the arbitration.

On appeal, the Court affirmed the trial court’s denial of the employer’s motion to compel arbitration pursuant to the Agreement, finding the Agreement was procedurally and substantively unconscionable.
The arbitration agreement was procedurally unconscionable because: (1) it was a contract of adhesion that was presented on a take-it-or-leave-it basis [giving the employees no opportunity to negotiate its terms]; and (2) although the plaintiffs primarily spoke Spanish, the employers translated only part of the agreement into Spanish, leaving important sections in English only.

The Agreement was substantively unconscionable because: (1) it lacked mutuality in that it required the employees to arbitrate, but allowed the employer to choose whether to arbitrate or go to court; and (2) the employer did not “justify the lack of mutuality with reference to business realities.”

In Tiri v. Lucky Chances, Inc 2014 WL 1961845, the First District Court of Appeal found an arbitration agreement’s delegation clause enforceable even though it was presented on a take-it-or-leave-it- basis, and the employee testified she was worried she would lose her job if she did not sign the Agreement.

In Tiri, the Plaintiff had been working as a cook for Lucky Chances, and had been working for the Employer for three years when she was asked to sign an arbitration agreement. The Agreement provided that all disputes would be resolved through “final and binding arbitration” and that the arbitrator, “and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.”

Tiri claimed her employer’s Human Resources Department gave her the Agreement to sign without any explanation of the terms of the Agreement or whether those terms were negotiable. Tiri also claimed she believed she would lose her job if she did not sign the Agreement.

Approximately five years later, Lucky Chances terminated Tiri. In response to Tiri’s filing of wrongful termination case against her employer, the employer asked the trial court to compel arbitration. The trial court denied the Employer’s request for arbitration, finding it was unconscionable and unenforceable because it was a take-it-or-leave-it adhesion contract.

On appeal, the employer argued the trial court erred in deciding the unconscionability issue because the Agreement contained a clear delegation clause (meaning the contract had delegated the authority to decide questions about the enforceability of the Agreement to the arbitrator). Furthermore, the delegation clause was not procedurally unconscionable.

The Court of Appeal agreed with the employer and held that an arbitration agreement may delegate to an arbitrator the authority to decide whether the agreement is enforceable. Additionally, such a delegation clause is not procedurally unconscionable.

With regard to the right to delegate issue, the Court found the delegation clause stated unambiguously that the arbitrator had “exclusive authority” to address all issues regarding the agreement’s enforceability.

With regard to the enforceability of the delegation clause, the Court ruled that the delegation clause was procedurally unconscionable because it was presented to the employee on a take-it-or-leave-it basis, and the employee had no meaningful opportunity to negotiate its terms. Moreover, the Court found the employee was unsophisticated in this matter, the employer had not explained the meaning of the Agreement to the employee, and the employer had not given the employee time to review the Agreement.

Turning to substantive unconscionability, the Court disagreed with the employee’s assertion that allowing an arbitrator to decide enforceability was unfair because the arbitrator has an interest in deciding that a dispute is arbitrable. The Court stated it could not make such a conclusion because to do so “would be tantamount to concluding that delegation clauses in employment arbitration agreements are categorically unenforceable.” The Court indicated this kind of holding would be inconsistent with the U.S. Supreme Court’s case authority, set forth in Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63.

Consequently, the Court concluded, “[C]lear delegation clauses in employment arbitration agreements are substantively unconscionable only if they impose unfair or one-sided burdens that are different from the clauses’ inherent features and consequences.” The Court found such burdens were not present in the delegation clause at issue.

What Does This Mean For Arbitration Agreements?

The above decisions reflect that (1) the courts are still examining Arbitration Agreements on a case-by-case basis to determine the issue of unconscionability; and (2) by affirming arbitrators can determine the issue of enforceability, the courts are signaling their willingness to keep decisions of arbitrability out of California courts.  The bottom line is arbitration agreements are going to pass muster if they meet the conscionability test.

ABOUT THE AUTHOR: Ms. Silva is a graduate of University of the Pacific. She is senior counsel in the firm’s Employment Practices Group. She is a former prosecutor and has considerable trial experience. Contact her at rsilva@tysonmendes.com

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