California courts continue to demonstrate little patience for employment arbitration agreements that they deem are one-sided in the employer’s favor. In Ramirez v. Charter Communications, Inc., the appellate court affirmed a lower-court’s ruling holding that an employment arbitration agreement was unconscionable and, therefore, unenforceable.
The Ramirez court started its review with the well-established principle that unconscionability requires demonstrating both procedural and substantive unconscionability. Procedural unconscionability focuses on “ ‘surprise’ due to unequal bargaining power.” Substantive unconscionability focuses on “ ‘overly harsh’ or ‘one-sided’ results.” While both procedural and substantive unconscionability need to exist, the elements do not need to exist in the same degree: “[t]he more one is present, the less the other is required.”
In Ramirez, the employee was required to sign the arbitration agreement as a condition of employment. This is called a contract of adhesion. A contract of adhesion is not a bar to enforcement, but it does create a low level of procedural unconscionability. In such cases, therefore, “the agreement must be enforced unless the degree of substantive unconscionability is high.” It should be noted that the plaintiff in Ramirez entered into the arbitration agreement prior to the ruling in United States v. Bonita, which upheld a California ban on mandatory employee arbitration agreements. As such, a contract of adhesion following the Bonita decision is unenforceable as a matter of law.
The Ramirez court held that the degree of substantive unconscionability was high due to multiple overly harsh, one-sided terms. First, the agreement shortened the potential statute of limitations for discrimination-based claims from three-years to one-year. While an arbitration agreement can alter a statute of limitations period, the shortened period was overly-harsh. Moreover, the one-year statute of limitations could create a conflict requiring an employee to initiate arbitration prior to completion of administrative investigations.
Second, the agreement included a provision that the employer would recover fees and costs for bringing a successful motion to compel arbitration. Prior California decisions have held that employment arbitration agreements may not alter fee-shifting provisions provided by statute. Under the Fair Employment and Housing Act (“FEHA”), an employer may only recover attorneys’ fees if a plaintiff’s lawsuit “was frivolous, unreasonable, or groundless.” This is a high burden of proof on the employer. The Ramirez arbitration agreement allowed the employer to recover fees without meeting the high burden of proof and, thus, was contrary to established law.
Third, the arbitration agreement lacked mutuality. The agreement required the employee to arbitrate claims normally brought by an employee, including claims under the FEHA, the Family Medical Leave Act, and the Americans with Disabilities Act. The agreement, however, excluded claims normally brought by the employer, including claims arising from severance agreements, non-compete agreements, and theft or embezzlement. The agreement, therefore, was one-sided and unconscionable.
Fourth, the agreement included limitations on discovery that were overly-harsh. The court specifically pointed to a provision that limited each side to four depositions. The plaintiff in Ramirez showed that litigation would require deposing at least seven individuals. The agreement, therefore, placed unreasonable limitations on the plaintiff’s ability to litigate her claims.
Finally, the court rejected the employer’s argument that the offending terms of the agreement could be severed while still allowing the matter to go to arbitration. The number of unconscionable terms, along with the procedural unconscionability, prevented the court from simply severing portions of the arbitration agreement.
The Ramirez decision is yet another cautionary tale for employers looking to implement arbitration agreements. Such agreements must be implemented with care. The employer must not mandate that employees enter into arbitration agreements. Further, the terms of the agreement should not overly favor the employer and should not substantially alter the employees’ rights under state and federal laws.
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Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law. He has extensive experience defending private business and public entities in litigation and advising clients on labor compliance issues.
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