Background
The Ninth Circuit Court of Appeals has again found that mandatory arbitration
clauses adopted by employers are invalid. This time, one employer was a major
law firm, O’Melveny & Myers, and the other was Cingular Wireless.
These cases continue the invalidation by the Ninth Circuit of arbitration
clauses that employers have adopted to avoid the significant time and cost
required to litigate wrongful termination lawsuits. However, a careful review
of the Ninth Circuit decisions, and the careful crafting of a mandatory
arbitration agreement to meet all the requirements of the Ninth Circuit, will
result in a fully enforceable arbitration clause that employees will be required
to follow, and which will be enforced by California courts and the Ninth Circuit.
Facts of the O’Melveny Case
The law firm adopted a dispute resolution program in 2002 that required its
employees to arbitrate any dispute with them. It was distributed by office mail
and posted on its office intranet site. The employees were advised that it would
be effective three months after it was published, and would apply to all employees,
including paralegals and associate attorneys.
When Davis filed her lawsuit for various violations of the Fair Labor Standards
Act and California laws governing overtime and rest breaks, the law firm filed a
motion to compel arbitration and dismiss the lawsuit. Davis contended that many of
the provisions of the arbitration agreement were unconscionable and that therefore
she should not be required to arbitrate her dispute.
Although the District Court found the agreement was enforceable, the Ninth Circuit
agreed with the plaintiff and held that the agreement was unconscionable on several
grounds. Thus, it denied the motion to compel arbitration and required the case to
proceed to trial in the United States District Court.
O’Melveny Case: Legal Analysis
The Ninth Circuit initially noted that a contractual clause requiring an employee
to arbitrate its disputes with its employer is unenforceable if it is
both procedurally
unconscionable and substantively unconscionable.
The Court concluded that the agreement was procedurally unconscionable because it was a
“take it or leave it” agreement, notwithstanding the fact that the employees were advised
that it would not go into effect until three months after it was announced. The law firm
argued that the agreement was not procedurally unconscionable because the 90-day period
provided enough time to allow an employee who didn’t want to accept those terms to seek
other employment. The Court disagreed, noting that if the employees had been given a right
to retain their job and to “opt-out” of the arbitration clause within the 90 day period,
the arbitration agreement would not have been procedurally unconscionable. However, because
employees were required to forfeit their jobs or agree to submit to arbitration, the arbitration
agreement was procedurally unconscionable.
The next step in the Court’s analysis was to determine if the arbitration agreement was
substantively unconscionable. The Court found a number of problematic provisions. Foremost was
the fact that employees were required to bring any claim within one year from the time a claim
was known to an employee. The Ninth Circuit found that the limitation on the time to bring a
claim was substantively unconscionable, especially in light of the fact that the normal statute
of limitations for such a claim was substantially longer and because such a limitation would
prevent an equitable claim for a continuing violation.
The broad confidentiality clause was another unconscionable provision; the Court noted that the
confidentiality provision was so broad as to “prevent an employee from contacting other employees
to assist in litigating (or arbitrating) an employee’s case.” The Court noted that “even facially
mutual confidentiality provisions can effectively lack mutuality and therefore be unconscionable.”
Under this analysis, even limited confidentiality clauses may be found to be unconscionable.
The Court also found the agreement was unconscionable because the law firm reserved to itself the
right to seek injunctive relief for a violation of, among other things, the disclosure of
confidential information. The Court noted that this was a “non-mutual” right, making the
agreement one-sided and substantively unconscionable.
The Court faulted that portion of the agreement that prohibited the filing of administrative
charges with anyone except the EEOC and the California DFEH. The provision was unconscionable
because it prohibited other administrative charges to entities such as the Department of Labor
and the California Labor Commissioner.
Finally, the Court found that there were too many provisions that were unconscionable to allow it
to “sever” the offending provisions. (“These provisions cannot be stricken or excised without gutting
the agreement.”) Thus, it concluded that not only was the agreement procedurally unconscionable
(because it was a “take it or leave it” agreement) but that it was also substantively unconscionable
because of the foregoing problems, and therefore the entire arbitration clause was invalidated and
deemed unenforceable.
The Cingular Case
This case presented the issue of the validity of a class action waiver in the arbitration
agreement Cingular had in its contract with each customer. The Ninth Circuit, relying on
both Ninth Circuit and California cases, had no problem in determining that “class arbitration
waivers in contracts of adhesion are both procedurally and substantively unconscionable.”
The Ninth Circuit noted that the California Supreme Court in
Discovery Bank v. Superior
Court, 36 Cal. 4th 148 (2005) and other California Court of Appeal cases, have held that
waiver of class action clauses were unconscionable in those cases involving 1) a consumer
contract of adhesion, 2) where the parties incur small amounts of damages, and 3) it is
alleged that “the party with the superior bargaining power has carried out a scheme to
deliberately cheat large numbers of consumers out of individually small sums of money.”
The Ninth Circuit found that Cingular arbitration agreement “satisfies them all and
cannot be distinguished from
Discover Bank.”
In addition, because the Cingular arbitration clause stated that if the class action
waiver provision was found to be unenforceable that the entire arbitration agreement
was “null and void,” the Ninth Circuit held that Cingular’s entire arbitration clause
was void.
Effect of Cingular Case
Thus, in contracts of adhesion a waiver of class action clause will also be found
to be invalid when the claimants have incurred small amounts of damages. Waiver
of class action clauses should not be included in mandatory arbitration agreements,
unless none of the foregoing three criteria are applicable.
Effect of Both Cases
It should be noted that the Ninth Circuit did not conclude that mandatory arbitration
clauses are per se unenforceable. However, they must have numerous provisions allowing
an employee to exercise most of the basic rights which are allowed in a court of law.
Even though the clause may be procedurally unconscionable (e.g. “take it or leave it” provision)
it may still be enforceable if it is not substantively unconscionable. As noted in this case an
enforceable mandatory arbitration agreement under holdings by the Ninth Circuit must
at least include the following elements:
- No limitation on the right to bring a claim that is shorter
then the applicable statute of limitations;
- Mutuality of obligation, including recourse to injunctive relief;
- If the agreement contains a “confidentiality clause” it must be
limited in breadth;
- No limitation on the right of an employee to file an administrative
claim with a state or federal administrative body.
- No limitation on class actions where the elements of the Cingular
case are present.
In addition to the foregoing, giving the employee the right to “opt-out” of the
arbitration agreement, and retain employment, will defeat the claim of procedural
unconscionability.
Pending Legislation To Invalidate Mandatory Arbitration
It should be noted that mandatory arbitration agreements continue to be the
subject of periodic attempts by the United States Congress to be declared
enforceable. The Arbitration Fairness Act of 2007 was recently introduced in
the Senate (S.1782) and the House of Representatives (H.R. 3010) and would
ban mandatory arbitration agreements involving employment, consumer rights,
franchise or civil rights.
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