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Hard to Avoid Potholes
in Mandatory Employment Arbitration
Santa Barbara Lawyer magazine, April 2003

In recent years, employers have ever more frequently imposed arbitration agreements on their employees, as a condition of employment or continued employment. This is not surprising, since employers widely believe that arbitrators are more likely to eschew the high damages that juries sometimes award. The arbitration forum is also widely perceived to be quicker and for that reason, less expensive.

But a lawyer drafting such a clause for an employer's use in California needs to be cautious-the employer's success in using the arbitration forum is tied to how carefully the agreement has been drafted. Since the California Supreme Court's decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000) the standards have been drawn ever more clearly in several court decisions-ignore them at your (and your client's peril).

Pre-dispute mandatory arbitration clauses come in for increased scrutiny since they are adhesive; employees have no bargaining power to resist their imposition. For that reason, the courts have closely scrutinized the clauses to insure fair treatment of employees. In particular, the courts have frequently stated that the change of the forum from court to arbitration is only that-employees should not be required also to relinquish important rights as a result.

The first case so holding was Cole v. Burns International Security Services, 105 F. 3d 1465, a 1997 decision of the D.C. Circuit Court of Appeals. After a learned discussion of the genesis of arbitration and its extension to the employment arena, the federal court upheld the arbitration clause only after "rewriting" it to conform to the court's notions of due process.

In the Armendariz case in 2000, the California Supreme Court thoroughly discussed and followed Cole. The Court announced that an employer's arbitration provision would not be enforced if it lacked these minimum standards: mutuality; neutrality of the arbitrator; all costs beyond those normally incurred in litigation to be borne by the employer; some discovery; some reasons for the award, and the same relief that litigation could provide.

After Armendariz, California appellate courts applied the holding in a variety of factual situations to curb employer overreaching. Here are two examples, from the same panel of the Second District Court of Appeals. In Pinedo v. Premium Tobacco Inc., 85 Cal. App. 4th 774 (2nd Dist. 2000), the trial court refused to compel arbitration and the appellate court affirmed, finding the agreement unconscionable and too one-sided. The agreement limited relief to 6 months back pay, reduced by any amounts the employee recovered due to unemployment benefits or other compensation, required costs initially to be borne by the employee, and denied attorneys' fees, among other things.

Romo v. Y-3 Holdings, 87 Cal App.4th 1153 (2nd Dist.2001) involved overly fancy drafting that landed the employer in an unexpected predicament. The employee handbook was 44 pages long, one section of which was an arbitration agreement. Although the arbitration agreement had signature lines for both an employer representative and the employee, it was not signed. The employee had signed the end of the handbook, but that was titled simply "Employee Acknowledgment." The trial court refused to enforce the arbitration agreement because it found no agreement to arbitrate existed; the appellate court agreed. The employer's drafter had created two separate and severable agreements-the separate signature lines and the language of the arbitration agreement that is was a "sole and entire agreement" were the factors the court pointed to in reaching its decision.

On the other hand, well-drafted programs have survived court scrutiny. Craig v. Brown & Root Inc. 84 Cal. App. 4th 416 (2000), for example, upheld an elaborate ADR mechanism instituted by a large employer. The decision focused on proving consent to an agreement to arbitrate when the employee denies receiving the mailings establishing a dispute resolution program. After applying the Evidence Code presumption of receipt after mailing, the court of appeal followed the Armendariz guidelines and found the agreement not to be unconscionable in any respect.

The California Supreme Court has now had the occasion to return to the Armendariz case and extend it further. The Court's latest pronouncement, Little v. Auto Steigler, Inc., __ Cal. 4th ___ (Feb. 27, 2003) 2003 DJ DAR 2145 predictably extended the Armendariz holding to an employee's non-statutory claims. Along the way, Justice Moreno's opinion for a rather splintered court also took pains to point out other instances of overreaching in the arbitration agreement. Mr. Little worked as a mechanic for Auto Steigler; he brought an action alleged demotion and termination in violation of public policy. He did not seek relief under FEHA. Auto Steigler's arbitration agreement, a marvel of thoroughness, covered the broadest possible range of claims and imposed a litany of highly specific procedures and standards. It also contained provisions for costs sharing between the parties and permitting either party to "appeal" an award of more than $50,000 to a second arbitrator.

The Court first found the "appeal" provision unconscionable. The Court held that, although it appeared to be even handed, in practice it would inordinately benefit the defendant, Auto Stiegler. However, rather than finding the entire arbitration agreement unenforceable as a result, the Court ordered only that provision severed, finding that its effect did not permeate the rest of the agreement. In passing, the Court refused to find that the arbitration provision's other aspects "which make arbitration more closely follow judicial procedures, are unconscionably one-sided. It is not at all obvious that such provisions would inordinately benefit Auto Steigler rather than Little" the Court said. 2003 DJDAR at 2148, n. 1.

The Court next held that there was no reason not to extend the scope of the Armendariz protections to a so-called Tameny claim for violation of public policy. (Tameny v. Atlantic Richfield Co., 27 Cal. 3d 167 (1980)) The Armendariz requirements were premised on the belief that certain statutory rights are unwaivable; therefore, the requirements must be met if such rights were to be vindicated in an arbitration forum. Justice Moreno stated: "A Tameny claim is almost by definition unwaivable" because the public policy exception to the at-will employment rule is based on fundamental policies tied to the constitution or statute. Just as an employer could not ask an employee to waive Tameny claims, it can not burden them so as to preclude their vindication in an arbitration forum, the Court held. Id. at 2148. The Court declined to follow a later D.C. Circuit decision, Brown v. Wheat First Securities, Inc., 257 F.3d 821 (D.C.Cir. 2001) which had limited Cole to statutory discrimination claims. In Brown, the Circuit Court had determined that it was the respect due legislative intent that supported the special protections Cole announced. Those should apply only to statutory, not common law, claims.

And what about the costs of the arbitration proceeding? An intervening decision of the United States Supreme Court arguably nullified the Armendariz requirements requiring the employer to pay the costs in employment arbitration. Green Tree Financial Corp.-Alabama v Randolph, 531 U.S. 79 (2000) involved not employment but the purchase of a mobile home. There the Court upheld compelling arbitration, finding no evidence in the record that costs imposed on the buyer plaintiff would be unacceptably large. Imposed cost sharing alone does not make the agreement inherently unenforceable. 

Speaking more broadly, does Armendariz contravene the Federal Arbitration Act? In Little, the California Court said no. The "Armendariz requirements are … applications of general state law contract principles regarding the unwaivability of public rights to the unique context of arbitration and are not preempted by the FAA.". Moreover, the Court held, its approach to cost shifting survived the Green Tree decision, since the FAA does not require state courts to adopt the same means as federal courts in ensuring the vindication of public rights Id. at 2151. Only time will tell if the California court is right in this regard.

Does Little represent another step on the road to requiring the Armendariz safeguards in arbitration of all employee claims? The concurring and dissenting opinion by Justice Brown (joined by Justices Baxter and Chin) says yes: [U]nder the majority's logic, any arbitration of an intentional tort claim must abide by the Cole/Armendariz requirements because such claims are unwaivable under Civil Code section 1668."

Whether the prediction of Justice Brown is accurate, there is a lesson here-if you overreach in the arbitration agreement you draft for your client, your client risks later losing the ability to enforce it. While the court may decide simply to sever the objectionable provision, it could find instead that the unfairness permeates the agreement to arbitrate, causing it to be unenforceable.

Employers and their counsel would be well advised to remember the first and most basic lesson-arbitration is a change of forum only. Any effort to restrict the rights of employees under mandatory arbitration agreements beyond requiring the use of the arbitration forum will be closely scrutinized by the courts for any one-sided effect or unfairness.

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