Court of Appeal Moves the Arbitration Goal Posts Again

One of the frustrations with employment arbitration is that the courts continue to invent new ways of invalidating them. Employers who favor arbitration are stuck with re-issuing agreements with each new court decision.

The California Court of Appeal's decision in Trivedi v. Curexo Technology Corp. is the latest effort to invalidate arbitration contracts.

First, the court found that the arbitration agreement was "procedurally unconscionable." That is the first step, because a court has to find both procedural and substantive unconscionability. Since the employer usually presents an arbitration agreement as "take it or leave it," an arbitration agreement usually has some "procedural unconscionability" because it is an "adhesion contract" (take it or leave it.).

But the court did not stop at adhesion contract. In a footnote, the court said that the arbitration clause was in the same type face as the rest of the employment contract in which it was contained. The court found that its lack of "prominence" was "one factor" courts consider in determining unconscionability. With this statement, the court proves once again that the doctrine of "unconscionability" is being used as an end-run around the Federal Arbitration Act. If the court required "prominence" as a condition of enforcing the agreement, the requirement would plainly violate the U.S. Supreme Court's decision in Doctor's Associates v. Cassarotto, 517 U.S. 681 (1996). In that case, Montana required arbitration agreements to be in all-caps and on the first page of a contract.

But wait, there's more. The court also held that the employer referenced the American Arbitration Association employment arbitration rules. These rules are expressly DESIGNED to implement procedural fairness. Get this - the employer did not attach the rules to the arbitration agreement. As a result, the court found, the agreement was procedurally unconscionable(!)
I just linked to the rules above. They're as easy to obtain as the Code of Civil Procedure or California case law. The employer did not attach the Code of Civil Procedure either. If the AAA rules were not used, would the agreement have been unconscionable because the Code of Civil Procedure was not attached? What if the California Supreme Court's Armendariz case was not attached? (That case imposes several requirements on lawful agreements.)

Anyway, the court then turned to substantive unconscionability. The arbitration agreement permitted the arbitrator to award fees to the prevailing party. The court held this provision to be unconscionable, because case law says that defendants may recover fees in FEHA cases only when the plaintiff's claims are frivolous, unreasonable, or without foundation. The funny thing is that the FEHA statute itself simply says that the "prevailing party" may recover fees. So, the decision requires the arbitration agreement to spell out what case law says?? The court ignored the reality that the arbitrator will consider case law in making his or her decision. The court also dismissed the employer's argument that the AAA rules require the arbitrator to award fees in accordance with applicable law.

The court also concluded that the agreement's reference to injunction relief was consistent with the Code of Civil Procedure, but was nevertheless evidence of unconscionability. The logic is that the employer would take advantage of that provision more frequently than the employee. The court leaves us to guess how a provision that is no broader than an existing statute is evidence that an agreement is invalid.

Finally, the court refused to sever the attorney's fees or injunction provision. It found the agreement was "permeated" by unconscionability because of the injunctive relief and attorney's fees provisions. The court neglected to cite the key case on severability, Little v. Auto Stiegler Inc., 29 Cal.4th 1064 (2003). The court also made no mention of how the agreement was "permeated" with unconscionability given the rather mild clauses the court found to be unconscionable.

Anyway, if this case stays on the books, it's going to require significant changes to arbitration agreements. Employers should consider either directing employees to dispute resolution rules on the web or, preferably, give the employees a copy with the agreement. Additionally, attorney's fees and injunctive relief provisions should contain the qualifying language, "as permitted by applicable law."

This case is a good example of why the U.S. Supreme Court is going to decide whether these "unconscionability" cases are a mere end run around the Federal Arbitration Act. Look for the Court's decision in AT&T v. Concepcion in a few months. Ross Runkel's excellent resources on Concepcion are here.

The decision in Trivedi v. Curexo Technology Corp. is here.

DGV