Article of the Week

“Arbitration of Employment Disputes – Shifting Sands and Changing Winds”

by Casey Christensen

Arbitration in the employment context – particularly mandatory arbitration – has been a frequently litigated aspect in employment cases. Employers tend to perceive arbitration as a less hostile, less expensive, and less protracted method to resolve employment disputes. Employees, on the other hand, usually prefer to litigate their cases in court. This article discusses several recent developments impacting binding arbitration in employment cases.

Enforceability Per Se

Courts seem to be viewing arbitration agreements more favorably. In Roman v. Superior Court, 174 Cal. App. 4th 1462 (2009), the court enforced an arbitration clause in an application for employment. The employee sued for discrimination and wrongful termination. The application specified: “I agree, in the event I am hired by the company, that all disputes and claims that might arise out of my employment with the company will be submitted to binding arbitration.” There was little other discussion about rules, remedies, methods, venue, selection of arbitrator, discovery, or other similar issues, although the provision did specify that AAA rules would apply

After a small amount of procedural wrangling in court, the employer moved to compel arbitration. The employee argued the agreement was unconscionable – most critically because the agreement, which stated “I [i.e., the employee] agree” to arbitrate, was one-sided and not mutual. The employee also argued that the employer had waived any right to compel arbitration by participating in the litigation. The court rejected both arguments. The court held the agreement was mutual, despite the “I agree” language, and further held that the agreement's incorporation of AAA rules provided a minimal standard of fairness in the arbitration process. The court also determined that the employer's brief litigation activity (a demurrer and motion to compel discovery, neither decided by the trial court) did not waive the employer's right to demand arbitration.

In another case – Dotson v. Amgen, Inc., 181 Cal. App. 4th 975 (2010) – the Court of Appeal enforced an employment arbitration agreement – reversing the trial court's refusal to do so. The court rejected arguments that the provision was substantively unconscionable because it limited the parties to one deposition each, unless the arbitrator determined that more were needed. The court noted that a goal of arbitration was to make the dispute resolution quicker and more efficient – and that limiting discovery was a proper way to effect that goal. The court also rejected arguments that the arbitrator would be unfair in ruling on requests for additional depositions, stating “[w]e assume that the arbitrator will operate in a reasonable manner in conformity with the law.”

The Court of Appeal found that the existence of procedural unconscionability was minimal because the agreement was not overly long, the agreement was written in unambiguous language, and Dotson was a highly educated attorney with the ability to understand that he was agreeing to arbitration.

Class Action Waivers in Arbitration

On the other hand, arbitration agreements purporting to limit or waive employees' rights to bring class actions remain the subject of significant judicial skepticism. For instance, in Sanchez v. Western Pizza Enterprises, Inc., 172 Cal. App. 4th 154 (2009), a pizza delivery driver alleged that the employer failed to reimburse the plaintiff and other employees for all mileage expenses. Plaintiff filed a putative class action and the employer moved to compel arbitration based on a signed employment arbitration agreement between the employer and plaintiff. The trial court denied the motion.

The Court of Appeal first held that the determination of the enforceability of the arbitration agreement was an issue for the court (not the arbitrator) to decide. The court further held that the class action waiver was unenforceable under the four-factor test set forth by the California Supreme Court in Gentry v. Superior Court, 42 Cal. 4th 443 (2007). The court also found the agreement procedurally unconscionable, even though the agreement itself stated that it was “not a mandatory condition of employment.” Finally, the court found that the agreement was substantively unconscionable in that the arbitrator selection process was not sufficiently mutual.

In the case of Franco v. Athens Disposal Co., Inc., 171 Cal. App. 4th 1277 (2009), the court held that an employment arbitration agreement was unenforceable in its entirety, based on the agreement's inclusion of a provision prohibiting the employee from pursuing class relief or representative relief under the Private Attorney General Act (“PAGA”). The plaintiff filed a class action, asserting denial of meal and rest breaks. The employer moved to compel arbitration based on a written arbitration agreement the plaintiff had signed during his employment. The trial court granted the motion.

Plaintiff appealed, arguing that the arbitration agreement was unenforceable because the class action and PAGA waiver rendered the agreement unconscionable. The Court of Appeal agreed with the plaintiff and held that the arbitration agreement was unenforceable in its entirety. Citing Gentry v. Superior Court, the court stated: “We conclude that the class arbitration waiver is unconscionable with respect to the alleged violations of the meal and rest period laws given the modest size of the potential individual recovery, the potential for retaliation against members of the class, and the fact that absent members of the class may be ill informed about their rights.” The court further concluded that because the agreement prevented the plaintiff from acting as a private attorney general and pursuing penalties on a representative basis, it conflicted with the PAGA.

In Arguelles-Romero v. Superior Court, 184 Cal. App. 4th 825 (2010), however, the Court of Appeal enforced an arbitration agreement notwithstanding a class action waiver. The court determined that the ultimate issue is whether the class action waiver is effectively an exculpatory clause. The Arguelles court determined that “the proper course of action is for a court to consider each test on its own merits, as it applies to the specific circumstances of a case. If the plaintiff can establish procedural unconscionability, the court should consider whether the class action waiver is substantively unconscionable as a matter of law under the circumstances alleged. If the plaintiff can establish that a non-waivable statutory right is at issue, the court should make a discretionary determination under the rule of Gentry.”

FAA or California Law?

Next term, the United States Supreme Court will be deciding whether the Federal Arbitration Act preempts state law. Recently, in AT&T Mobility LLC v. Concepcion, 584 F.3d 849 (9th Cir. 2009), the Ninth Circuit held that a consumer class action waiver clause was unconscionable under California law, and that the Federal Arbitration Act ("FAA") does not preempt California law. The court presumably will decide whether the Ninth Circuit was correct in holding that the FAA does not preempt state law. Such a determination has the potential to significantly affect California employment litigation involving arbitration agreements – particularly those including class action waivers.

Review of Arbitrator Decisions

The California Supreme Court also recently opened the door a crack to judicial review of arbitration awards. In Pearson Dental Supplies v. Superior Court, 48 Cal. 4th 665 (2010), an employee agreed to arbitrate employment-related claims within one year from when the dispute arose or when the employee first became aware of facts giving rise to the dispute. The employee was terminated from his employment on January 31, 2006. Asserting discrimination, the employee filed an administrative complaint on April 5, 2006 and received a right-to-sue letter on April 14, 2006. The employee then filed a civil lawsuit on October 2, 2006.

The employer's motion to compel arbitration was granted on May 12, 2007. On July 24, 2007, the employer filed a motion for summary judgment with the arbitrator, claiming the employee's discrimination claims were time barred according to the one-year time period in which to pursue arbitration for such claims, as set forth in the arbitration agreement. The employee opposed the motion on the grounds that the one-year statute had been tolled pursuant to Code of Civil Procedure §1281.12 and that the agreement was unconscionable. The arbitrator granted the motion for summary judgment and stated that the employee had failed to timely pursue his claims in arbitration. The employee sought review of the arbitrator's decision in court.

The Supreme Court determined such review was proper, and reversed the arbitrator's decision. The court confirmed that when an employee is unable to receive a hearing on the merits of his claims under FEHA because of an arbitrator's legal error, a trial court has the authority to vacate the award. On the factual issue, the court also held that, at the time the employee filed his civil complaint (which stopped the clock from running on his discrimination claim), he still had four months remaining to pursue arbitration. The clock did not start again until the trial court ordered the case to arbitration on May 12, 2007. The employee pursued the case through arbitration within four months from that date, and thus did not waive his right to pursue arbitration and the arbitrator's decision on that basis was erroneous.

Conclusion

Mandatory arbitration of employment disputes remains a controversial issue, in California and elsewhere. As these decisions indicate, the outcome of any dispute tends to be more of a results-oriented “rough justice” inquiry than a predictable application of known standards and factors. But it is clear that such agreements – and the uncertainty surrounding their application and enforceability – will continue to be a significant part of employment litigation for the foreseeable future.

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