Is Your Company’s Arbitration Agreement Enforceable?

In today’s workplace, arbitration agreements between employers and employees are increasingly common. However, in the recent past, California courts have taken a somewhat controversial stance on these agreements by carving out exceptions to invalidate certain arbitration clauses. While California courts cannot use state statutory law to invalidate these agreements, since state laws disfavoring arbitration are preempted by the Federal Arbitration Act, such provisions are still subject to invalidation on the same grounds applicable to contractual provisions generally (i.e. unconscionability, fraud, duress, etc.).

Focusing specifically on unconscionability, a California Appellate court recently ruled that arbitration agreements Inter-Coast International Training, Inc. DBA InterCoast Colleges had its workers sign after it was sued for wage-and-hour class action violations, are unenforceable. In the case, Plaintiffs Anthony Nguyen and Cheryl Alexander brought a wage-and-hour class action lawsuit against InterCoast Colleges. Shortly after the case was filed in 2011, the company revised its employee handbook to include a mandatory arbitration agreement covering all employment disputes. InterCoast required employees, including many potential class members, to sign the new handbook. InterCoast then filed a motion to try and compel arbitration. The trial court denied the motion and found the arbitration agreements to be unconscionable. The court reasoned that the arbitration provisions were not sufficiently highlighted or separated from the rest of the agreement and were difficult to read, which supported the Plaintiffs’ claim of surprise. Furthermore, it also found that the agreements were unconscionable due to the company’s failure to inform employees of the pending lawsuit and how signing the arbitration agreement would affect their ability to participate in the litigation. The appellate court agreed with the lower court’s decision, adding that the agreement failed to clarify that the “provision was both forward- and backward-looking” and that it “was equally silent about class actions.” As a result, InterCoast’s arbitration agreement was deemed unenforceable.

This recent ruling highlights the importance of transparency in employee arbitration agreements. Courts will often key in on oppressive terms or unfair circumstances. While an agreement can be invalidated on fraud or duress grounds, it is much more likely to be found unconscionable. There are two aspects to unconscionability: procedural and substantive. A successful unconscionability argument requires both. First, procedural unconscionability focuses on the circumstances regarding the formation or negotiation of the agreement. For example, the appellate court found that the meetings InterCoast had where employees signed the agreement constituted surprise and were oppressive because the employees had no real bargaining power. Second, substantive unconscionability focuses on the fairness of the actual terms of the agreement. Again, the court found that InterCoast’s arbitration provision was substantively unconscionable because it failed to inform employees that they could be waiving their rights to participate in the current class action lawsuit against the company.

As such, employers need to take care in how they draft arbitration agreements and in how they have employees sign them. To increase the chances the agreement will be enforceable, an employer should, ideally, have them in place before an employee sues. Additionally, the company should inform employees of how the agreement will affect their rights, as well as how signing it will affect their ability to participate in any pending litigation, and give them an opportunity to opt-out without repercussion. Furthermore, the language of the arbitration agreement should be clear and unambiguous, especially in regards to the time and scope of the agreement. Finally, if the arbitration provision is included in a larger agreement, the company should take adequate steps to highlight this section and separate it from other parts of the overarching agreement. These steps can help prevent your company’s arbitration agreement from being found unenforceable due to both substantive and procedural unconscionability.