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Employment Arbitration Agreements – Again

Another California court has ruled that an agreement between an employer and employee that all employment related claims must be arbitrated, instead of taken to court, is unenforceable.  In this most recent case, Trivedi v. Curexo Technology Corporation, the court found that the employer could not force the dispute into binding arbitration because:

  1. The agreement was prepared by the employer;
  2. The employee’s consent to the agreement was required as a condition of employment;
  3. The employee was not given a copy of the arbitration rules that were recited in the agreement as governing the dispute;
  4. The agreement changed the rules on the recovery of attorneys’ fees in discrimination cases, in a way favorable to the employer; and,
  5. The agreement allowed either party to go to court, instead of the arbitration tribunal, to obtain an injunction, if necessary (which the court found tended to favor the employer).

Because of the first three problems, the court found the agreement “procedurally unconscionable.”  The final two reasons made the agreement “substantively unconscionable.”  The court stated that it was compelled to throw out the entire agreement, not just the problematic parts of it, because of the collective impact of the reasons, and the fact that there was more than one reason for substantive unconscionability.

What can an employer do, if anything, to create an enforceable arbitration agreement?  The first two criticisms listed above are actually quite customary and will not necessarily doom an agreement.  The third flaw can easily be prevented by paying more attention to the paperwork at the time of hiring.  The fourth flaw, by itself, may not have rendered the agreement completely unenforceable, but in any event could have been avoided by careful drafting.  The fifth flaw is well known in California as a problematical provision.  In short, had this employer followed more scrupulously the admonitions of the California Supreme Court (see, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83) when drafting the agreement, rather than attempting to give itself some advantages, the arbitration clause may have been saved.  Further comment on the fourth and fifth flaws is useful.

Under state and federal anti-discrimination laws, an employer will not necessarily be entitled to attorneys’ fees if it is the prevailing party, even though a successful employee will be.  The law on this is well developed.  But, Curexo’s agreement provided that the “prevailing” party, whether employer or employee, was to be awarded its attorneys’ fees and costs.  The court was offended by this alteration of the balance of power, despite the employer’s argument that no matter what law governed the arbitrator had discretion to deny a successful employer an award of its attorneys’ fees.  The court was not impressed: call this strike two, after the procedural problems mentioned above.

As to the fifth and final flaw, California courts have dealt with this in the past:  it is generally agreed that the party most likely in need of going to the courthouse to obtain an injunction will be the employer.  So, adding the provision exempting such efforts from arbitration distinctly favors the employer. Strike three.

The lesson:  in an employment setting arbitration agreements must be fair and follow the admonitions of established California law. The drafting process should not be an exercise in seeing how many potentially beneficial provisions the employer can get away with.  If the employer’s considered business strategy is that requiring arbitration of employment disputes is beneficial, then an agreement should be used that assures the accomplishment of that strategy.  The Trivedi case provides additional life-lessons along that strategic pathway.

Stephen C. Gerrish, Employment Group