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Court Rules Employment-Related Arbitration Clause Is Unconscionable and Not Severable from Rest of Agreement – Employer’s Demand to Arbitrate is Rejected
In many employment contracts, the employer insists that the employee agree to resolve work-related disputes through binding arbitration. And in some cases, the arbitration clauses are very restrictive – an attempt to prevent runaway awards and prevent an employee from asserting certain rights.
In such cases, the court may rule that the arbitration clause is “unconscionable” – so unreasonable that public policy prevents its enforcement. But if there are only certain portions of the arbitration clause that are unconscionable, will the court sever them and still enforce the other portions of the arbitration agreement?
The answer is: it depends.
In Trivedi v. Curexo Technology Corporation, the Court of Appeal for the Third Appellate District held that the offending provisions so permeated the entire arbitration agreement that they could not be severed. Thus, the entire arbitration agreement failed and the plaintiff employee was free to litigate his wrongful termination claim in a court of law before a judge and jury.
In holding portions of the arbitration clause unconscionable, the court did not break much new ground. It simply applied the traditional standard announced by the California Supreme Court in Armendariz v. Foundation Health Pyschcare Services, Inc., 24 Cal.4th 83 (2000). There is one important twist, however – because this arbitration clause required the parties to arbitrate before the American Arbitration Association pursuant to the AAA’s National Rules for the Arbitration of Employment Disputes, the employer’s failure to provide the employee with a copy of those rules at the time the clause was presented for signature was a fatal flaw. That failure rendered the agreement procedurally unconscionable.
But to be legally unconscionable, an agreement must be both procedurally as well as substantively unconscionable.
The agreement was substantively unconscionable because it was too one-sided in favor of the employer. The employee was at greater risk in arbitration than if he’d brought his claims in court; the agreement simply stated that the “prevailing party” could recover fees and costs, whereas in court, the plaintiff is not liable for those items unless the claim is deemed frivolous.
On another substantive ground, the clause failed because it exempted claims for injunctive relief from arbitration – and that provision was skewed to favor the employer, because, as the court observed, the employer was surely the more likely party to invoke it. Hence the employer was free to access the courts, but the employee was not.
So how does one draft a valid arbitration clause in the employment context? The simple answer seems to be: if you want to arbitrate, make the agreement equal for both sides, and make sure the remedies in arbitration track what would occur in a court of law.
In the Trivedi case, the employer did not give up once the court found portions of the agreement to be unconscionable, for the employer asked the court to “sever” the offending portions of the arbitration clause and nevertheless require the employee to arbitrate. The court refused to do so on the ground that the offending clauses permeated the arbitration agreement. The standard for making this determination is that severance will not be allowed if the agreement “contains more than one unlawful provision….Such multiple defects indicate a systematic effort to impose arbitration…not simply as an alternative to litigation, but as an inferior forum that works to the [stronger party’s] advantage.”
For your convenience, a complete copy of the court’s ruling in the Trivedi case is attached.
We often counsel employers and employees in these cases, and we are experienced and adept at drafting and reviewing employment contacts. Call if us you need help in this area.