In California, Not All Arbitration Agreements Are Enforceable
Arbitration agreements can be an excellent tool for managing exposure to costly litigation and the unwanted publicity associated with employment-related lawsuits. Unfortunately, arbitration agreements between employers and employees are not ironclad, and California courts often refuse to enforce them. A recent case serves as an important reminder that just because an employee signs an arbitration agreement, it doesn’t mean that arbitration is actually required. Now, before you go tearing up your current arbitration agreement, that doesn’t mean they’re worthless. Employer-employee arbitration agreements can be enforceable, but under what circumstances?
In Baxter v. Genworth North America Corporation (2017) 16 Cal.App.5th 713, an appellate court unanimously upheld a trial court’s refusal to enforce an arbitration agreement despite the fact that the employee signed the agreement, and the dispute was well within the agreement’s scope. As a result, Genworth will be forced to resolve this employment-related dispute in a court of law.
This begs the question: Why did these courts refuse to enforce Genworth’s arbitration agreement? The simple answer is because Genworth’s agreement was drafted in a way that overly, and unfairly, favored the employer.
Under California law, courts are not required to enforce arbitration agreements when there is evidence of both “procedural” and “substantive” inequity. Procedural inequity, or “unconscionability” as courts say, is found where this is an absence of negotiations, unequal bargaining power, or elements of surprise (e.g., contract terms buried in fine print). Substantive unconscionability, on the other hand, exists where the terms of the agreement unreasonably favor the more powerful party. This latter factor is where Genworth went wrong. The court found that Genworth’s arbitration agreement had the effect of denying the employee a sufficient opportunity to investigate and argue her case. In other words, while none of the provisions in Genworth’s agreement were illegal per se, the combined effect of the provisions went too far in favoring Genworth.
What This Means for Employers:
This case is a reminder to all employers that arbitration agreements are not enforceable by virtue of an employee’s signature alone. Employer-employee arbitration agreements must be carefully drafted to meet California’s requirements for fairness. Simply stated, employees must have an adequate opportunity to investigate, file, and argue their case. Therefore, at minimum, employer-employee arbitration agreements must provide for: (1) neutral arbitrators; (2) adequate opportunities for the exchange of evidence; (3) a written award; (4) all types of relief that would otherwise be available in court; and (5) no additional costs for the employee beyond what the employee would incur if the claim was brought in court. Contact Barsamian & Moody to have your company’s arbitration agreement reviewed, updated, or drafted.
The goal of this article is to provide employers with current labor and employment law information. The contents should neither be interpreted as, nor construed as legal advice or opinion. The reader should consult with Barsamian & Moody at (559) 248-2360 for individual responses to questions or concerns regarding any given situation.