California Court Adds to List of Unconscionable Arbitration Provisions

In a recent decision, a California Court of Appeals found a pre-dispute employment arbitration agreement to be unconscionable where it contained two unenforceable provisions: (1) a waiver of class arbitration for all claims and (2) the selection from a “panel” of arbitrators that was actually only one individual.

In Sanchez v. Western Pizza Enterprise (March 17, 2009, No. B203961), Sanchez worked for Western Pizza as a delivery driver and brought an action against his employer for failure to reimburse job expenses and to pay minimum wage. Western Pizza moved to compel arbitration per the agreement signed by Sanchez. The trial court denied the motion and the Court of Appeals affirmed that decision.

Relying on the California Supreme Court decision, Gentry v. Superior Court (42 Cal.4th 443) the Court of Appeals held that the class arbitration waiver was against public policy because it interfered with Sanchez’s ability to vindicate his unwaivable statutory rights. The class arbitration waiver provision in question prohibited the arbitrator from combining any claim or dispute brought by the employee with any other claim or dispute brought by another party against the company, including other employees. The court used a four factor test established in Gentry to evaluate whether a class arbitration waiver impermissibly interferes with unwaivable statutory rights. The four factors the court considered are: (1) the modest size of potential individual recovery; (2) the potential for retaliation against class members; (3) whether potential members may be otherwise informed of their rights; and (4) other obstacles to vindicating class members’ rights. According to the court, any individual recovery would be modest, the potential for retaliation against the low wage drivers was significant, and, since most drivers had limited English language skills, they were likely unaware of their rights. The court concluded that the class arbitration waiver was unenforceable because class arbitration was likely to be a more efficient means of vindicating the employees’ rights.

In addition to Gentry, the court turned to the California Supreme Court decision, Armendariz v. Foundation Health Psychcare Services (24 Cal.4th 83), to evaluate whether the other provisions of the arbitration agreement were unconscionable. The court held the provision regarding selecting an arbitrator was procedurally unconscionable because the agreement suggests that there are multiple arbitrators to choose from, but actually there was only one. Additionally the court noted that unequal bargaining power between the employer and employees likely caused the employees to feel pressure to sign the optional arbitration agreement.

The court found this provision to be substantively unconscionable because, as required by Armendariz, the arbitration provision regarding the selection of an arbitrator did not provide for a neutral arbitrator. The arbitration provision, as written, created a “false sense of mutuality” since there was only one arbitrator available. Additionally, the court noted that Western Pizza would be a repeat player before this arbitrator, which carried a risk of financial interdependence between the arbitrator and Western Pizza. Furthermore, it would give the company an unfair advantage through their repeat dealings with the same arbitrator.

Finally, the Court of Appeals discussed whether the unenforceable provisions should be severed or if the court should refuse to enforce the entire agreement. The court noted that it had the option to sever unenforceable provisions, however where the central purpose of the agreement is “tainted by illegality” the court may invalidate the whole agreement. Here, the court declined to exercise its discretion to sever the unenforceable provision, instead holding that the agreement was too tainted by its unlawful purpose to modify its provisions.

Employer Take-Aways:

Pre-dispute agreements to arbitrate claims have been the subject of great judicial scrutiny over the past few years. The decision of Sanchez, when read with the requirements laid out in Armendariz and subsequent cases, now requires pre-dispute arbitration agreements to:

  • Provide for selection of neutral arbitrators;
  • Not unduly limit the time frame in which claims may be brought;
  • Allow for more than minimal discovery;
  • Require a written award;
  • Not limit relief that would otherwise be available in court;
  • Not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum;
  • Not require the employee to waive class arbitration to unwaivable statutory rights; and
  • Select arbitrators in a manner such that the employer is not unfairly advantaged.

Despite these requirements, arbitration agreements can still be beneficial to employers (although the decision whether to utilize such agreements should be done after consultation with counsel regarding the pros and cons of such agreements). Employers utilizing pre-dispute arbitration agreements need to ensure that the agreements comply with these requirements. As demonstrated in Sanchez, violating any of these could result in a court invalidating the entirety of your arbitration agreement.