Recent decisions by the California Supreme Court, the Ninth Circuit Court of Appeals, and the California Court of Appeal demonstrate that California courts will scrutinize and find unconscionable employee arbitration agreements that excessively tilt the playing field in favor of the employer.  These decisions collectively provide guidance on terms to avoid and those to implement when drafting an employee arbitration agreement under California law.

On October 17, 2013, the California Supreme Court held that the doctrine of unconscionability remains a viable challenge to employee arbitration agreements notwithstanding the U.S. Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) and American Express Co., et al. v. Italian Colors Restaurant, et al., 133 S.Ct. 2304 (2013).  In Sonic-Calabasas A, Inc. v. Moreno, No. BS107161 (Cal. Sup. Ct. October 17, 2013) (“Sonic II”), the Supreme Court made it clear that California courts remain free to evaluate arbitration agreements by applying the sliding scale considerations of procedural and substantive unconscionability.

On October 28, 2013, in Chavarria v. Ralphs Grocery Co. (Case No. 11-56673), the Ninth Circuit applied California law and held that Ralphs’ arbitration clause was unconscionable.  The defects were several: (1) Ralphs presented the employment agreement on a “take it or leave it” basis when the employee submitted the employment application; (2) Ralphs did not give the plaintiff her arbitration agreement until three weeks after she had signed it; (3) the arbitrator selection process almost always resulted in selection of the employer’s arbitrator; (4) the arbitration clause precluded the use of institutional administrators provided by forums such as the American Arbitration Association and JAMS, which have established procedures to select an arbitrator; and (5) the agreement required the arbitrator to apportion fees at the outset of the arbitration process, effectively preventing the plaintiff’s access to the arbitration forum.

In Peng v. First Republic Bank (Case No. A135503), California’s First District Court of Appeal found that First Republic’s employee arbitration agreement was not unconscionable, reversing the trial court.  A key consideration for the court was the fact that First Republic had designated a forum and process—the AAA and its rules—that were readily accessible and did not substantively impair the employee’s rights by limiting discovery or remedies.  First Republic also enhanced its case because it did not attempt to modify the agreement unilaterally despite its contractual right to do so.

These decisions offer several “do’s and don’ts” that characterize arbitration agreements likely to survive a challenge that the clause is unconscionable:

• Do choose a reputable arbitration forum whose rules are accessible and balanced.
• Do give the arbitration terms to the employee when he signs the agreement.
• Don’t bury the arbitration clause.  Make it readily identifiable.
• Don’t front-load costs on the employee that effectively makes it too expensive for him to pursue a claim.
• Don’t stack the deck in the arbitrator selection process: the arbitration clause probably won’t survive if the only arbitrator that gets selected is the employer’s choice.
• Don’t change the rules after the arbitration agreement has been signed.

Every employer wants its arbitration clause to be effective so that it gains the perceived efficiencies of arbitration (including important benefits such as class action waivers).  The company should therefore ask whether its arbitration agreement both eliminates a meaningful choice for the employee and dramatically favors the employer.  If the answers are “yes,” then it should be revised to mitigate the risk that a California court will decide that the clause is unconscionable.

If you have any questions, please contact Robert Bleicher at rbleicher@carr-mcclellan.com or at (650) 342-9600.