
25 Jul ENFORCEABILITY OF PRE-DISPUTE ARBITRATION AGREEMENTS
In the latest case on the enforceability of mandatory pre-dispute arbitration agreements, the California Supreme Court reviewed the denial of the employer’s motion to compel arbitration of a FEHA discrimination case.
In Ramirez v. Charter Communications, Inc. (7/15/24), the employer’s motion to compel arbitration of a former employee’s discrimination claims was denied by the trial court on the grounds that the agreement was unconscionable. The Court of Appeal agreed, and affirmed the denial of the motion to compel. On appeal to the California Supreme Court, the Court reiterated the longstanding rule that to invalidate an arbitration agreement, the agreement must be both procedurally and substantively unconscionable. The fact that the agreement was an adhesion contract and presented on a “take it or leave it basis” was sufficient to show procedural unconscionability.
As to substantive unconscionability, the Supreme Court agreed with the Court of Appeal that the agreement contained several unlawful provisions: (1) exclusion from arbitration claims that would most likely be brought by the employer but requiring the employee to arbitrate all employment claims; (2) shortened time limits for bringing a FEHA claim in arbitration; and (3) allowing an award of interim attorney’s fees for a successful motion to compel arbitration regardless of whether the employee’s refusal to arbitrate was frivolous or in bad faith (i.e., the standard for reverse attorney’s fees in FEHA cases). Conversely, the Supreme Court disagreed with the Court of Appeal that the agreement’s limited discovery provisions were also unconscionable.
The opinion also provides further clarification on when unconscionable provisions should be severed, and the agreement enforced. While the Court declined to adopt a “bright line” rule, the factors to consider on severance are: (1) whether “the central purpose of the contract is tainted with illegality”; (2) can the offending provision be severed and the rest of the agreement remain intact without re-writing the agreement; (3) would the interests of justice be furthered by severance; (4) deterring overreaching employers; and (5) the intent of the parties.
Lastly, the Supreme Court rejected the employer’s argument that the application of general unconscionability standards to arbitration agreements violates the Federal Arbitration Act. The Court remanded the case back to the Court of Appeal to reconsider the enforceability of the arbitration agreement in light of its ruling on the discovery provision and standards for severance.
The enforceability of arbitration agreements will no doubt continue to be disputed in employment cases. As with other litigation risks, the uncertainty over contested arbitration agreements should play an important role in mediation.