There is no such thing as an “airtight” arbitration agreement.
Employers will inevitably find their arbitration agreements under attack by employees seeking to litigate in court. This is true even when arbitrating disputes presents benefits for both parties by promoting efficiency, cost savings, and a simplified means of dispute resolution. Still, employers’ arbitration agreements are often be subject to challenge, making it of the utmost importance to ensure that agreements are carefully drafted and updated according to the most recent developments in the law.
This article will cover some of the most significant areas of concern in drafting a good arbitration agreement, as well as a few of the most important recent case decisions to come down in California.
Basics of Drafting a Solid Arbitration Agreement
The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1, et seq., sets the standard for the enforceability of pre-dispute arbitration agreements. The California Arbitration Act (Cal. Code Civ. Proc. §§ 1280-1294.2) governs arbitrations seated in California and incorporates many of the provisions of the FAA. Since arbitration agreements are essentially contracts, parties seeking to escape the effect of arbitration provisions often look first to basic contract defenses. The FAA “permits agreements to be invalidated by generally applicable contract defense, such as fraud, duress, or unconscionability.” AT&T Mobility v. Concepcion (2011) 131 S. Ct. 1740, 1746.
Careful drafting, however, can have a strong peemptory effect against most contract defenses, even before a party can assert them. On the other hand, a poorly drafted agreement can result in the complete failure of the agreement, resulting in unnecessary expense and dissatisfied parties.
Avoiding an unconscionability is one the most important factors in drafting an enforceable arbitration agreement.
consists of two separate components: procedural and substantive unconscionability.
“Procedural unconscionability turns on adhesiveness—a set of circumstances in which the weaker or adhering party is presented a contract drafted by the stronger party on a take it or leave it basis.” Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174. When an arbitration agreement is required by an employer as a condition of employment, the arbitration agreement is deemed to be adhesive. Amendariz v. Foundation Healthy Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114-115.
“Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided.” Armendariz, supra, 24 Cal.4th at 119. Several different formulations of substantive unconscionability appear in California cases, such as “overly harsh,” “unduly oppressive,” “so one-sided as to ‘shock the conscience,’” and “unfairly one-sided.” Thus, in order to avoid having an arbitration agreement succumb to the common pitfall of unconscionability, the drafter must be acutely aware of these considerations.
Unwaiveable Public Rights
The next critical area involves the following four elements, which were set forth by the California Supreme Court in Amendariz to ensure that a litigant’s public rights are preserved in arbitration:
No Limitation of Remedies: The arbitration provision must not limit any statutorily imposed remedies that may be available to the employee.
Adequate Discovery: The arbitration provision must allow the parties to obtain a full range of discovery.
Written Arbitration Award: The arbitration award must call for the arbitrator to issue a written decision, which reveals the essential findings and conclusions of the award.
Employer Must Bear Costs of Arbitration: The arbitration provision cannot place the burden of paying the costs of arbitration upon the employee.
These important elements must be kept in mind to prevent an arbitration agreement from abrogating an employee’s public rights afforded in litigation.
Recent Cases Affecting Drafting
of Arbitration Agreements
Even a carefully drafted arbitration agreement, which incorporates each and every key factor discussed above, may still be struck down, due to a lack of awareness of the latest decisions affecting arbitration agreements.
Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237
This case contains the most recent discussion by the California Supreme Court about unconscionability and why some specific types of terms are or are not procedurally or substantively unconscionable.
Among other things, the Supreme Court held that failure to attach the AAA rules alone was not enough for denying enforcement. It also found that an injunction provision did not favor the employer, because the employer was more likely to seek injunctive relief. And, it held that the insertion of a confidentiality requirement did not make the agreement substantively unconscionable. Finally, the Court rejected the argument that the agreement lacked mutuality because the listed specific claims subject to arbitration were claims that were more likely to be brought by the employee.
Important Takeaway: Be careful not to give the employer any greater right to injunctive relief than that provided by statute.
Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233
This case dealt with the hot-button issue in arbitration matters or class action waivers. Here, the Court held that trial court erred in dismissing the employee’s class claims, because the arbitration agreement did not permit arbitration of class claims. It then remanded the case with an order that the trial court vacate its order dismissing the class claims and to enter a new order submitting to the arbitrator the issue of whether the parties had agreed to class arbitration.
Important Takeaway: Be sure to include a carefully drafted class action waiver, in order to avoid the confusion that occurred in this case.
Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227
In this case, the Court found that the agreement at issue was moderately unconscionable because it did not specify which set of American Arbitration Association (AAA) rules applied and did not attach the rules that would govern the arbitration. Although it noted that other cases, concluded that the failure to attach the referenced AAA rules alone was insufficient to support a finding of uncionscionability.
Important Takeaway: In order to avoid an issue like the one in Carbajal, the drafter should at least specify which set of AAA rules are to govern the arbitration, if not actually attach the rules themselves.
Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373
In this case, the trial court denied employer’s motion to compel arbitration, because the agreement included a unilateral right for the employer to modify the agreement. However, on appeal the court reversed and held that the provision, which only permitted the employer to modify the agreement as to future claims to comply with any future developments or changes in the law and only after providing the employee with thirty days notice and obtaining a signed writing from the employer and employee acknowledging the change.
Important Takeaway: The modification clause in this case is a model for any drafter seeking to insert such a clause into an arbitration agreement.
If you need any arbitration agreement reviewed or drafted please contact us at TLF 714-772-7400 or email the Managing Attorney Pamela Tahim Thakur at firstname.lastname@example.org.