Employment Law 1

Everett F. Meiners, partner, Parker, Milliken, Clark, O’Hara & Samuelian, Los Angeles. Contributing author to Advising California Employers, published by CEB.

At the present time, pre-dispute mandatory arbitration agreements are enforceable against employees, provided that the employer complies with the specific requirements as set forth in the cases discussed below. However, the practitioner should note that there are several pending state and federal legislative proposals that could modify this right in the future.

Pre-dispute Arbitration Agreements Under California Law

Armendariz v Foundation Health Psychcare
Services, Inc.

The California Supreme Court case of Armendariz v Foundation Health Psychcare Services, Inc. (2000) 24 C4th 83, 99 CR2d 745, expressly approved the use of pre-dispute arbitration agreements by California employers, subject to several specific requirements that must be included in the arbitration agreement in order for it to be enforceable. These requirements can be summarized as follows:

1. A neutral arbitrator
2. Adequate discovery
3. A written decision
4. Limitation on the cost of arbitration for the employee
5. Full recovery of damages
6. Bilaterality

Because the arbitration agreement in Armendariz did not include all of these protections, it was held to be unenforceable. However, the court set forth the general requirements that had to be met in order for a mandatory pre-dispute arbitration agreement to be enforceable under California law. At the end of this article is a list of those provisions which generally comport with the requirements of Armendariz.

Pre-Dispute Arbitration Agreements under Federal Law

Circuit City Stores Inc. v Adams

In Circuit City Stores Inc. v Adams (2001) 532 US 105, 149 L ed 2d 234, 121 S Ct 1302, the United States Supreme Court upheld the enforceability of mandatory arbitration agreements under the Federal Arbitration Act. This reversed prior decisions of the Ninth Circuit Court of Appeal.

This case, together with the Armendariz case, provides that in California an employer may legally enforce a mandatory arbitration clause in an employment agreement with its employees.

Decisions in Federal and State Courts
after Armendariz and Circuit City

Invalid Arbitration Clause Contents Circuit City Stores, Inc. v Adams (9th Cir 2002)

On remand from the USSC, the Ninth Circuit (Circuit City Stores, Inc. v Adams (9th Cir 2002) 279 F3d 889), recognized that the FAA did not prevent Circuit City from having an enforceable arbitration clause. However, it concluded that the particular clause at issue was not enforceable because it:

1. limited the amount of damages that could be
recovered;
2. required the employee to pay for one-half of the costs of the arbitration; and
3. did not require Circuit City to arbitrate any claims
it had against the employee.

Thus, the Ninth Circuit found that the arbitration clause did not satisfy the major elements specified in Armendariz that would have made it legally enforceable against an employee.

Ferguson v Countrywide Credit Industries, Inc.

The recent decision of the Ninth Circuit in Ferguson v Countrywide Credit Industries, Inc, (9th Cir, July 23, 2002, No. 01-55985) emphasizes the fact that any deviation from the Armendariz standards may result in the invalidation of the agreement by the Ninth Circuit. In Countrywide the court invalidated a mandatory arbitration agreement that was entered into by the plaintiff as a requirement of employment with Countrywide. The court found that this mandatory requirement made the agreement “procedurally” unconscionable. Following Armendariz, the court also reviewed the agreement to determine if it was “substantively” unconscionable. The court noted that it had to be both procedurally and substantively unconscionable under Armendariz to be invalidated as a matter of law.

The Countrywide court also found that the mandatory arbitration agreement was substantively unconscionable because of the provisions which “tilt the playing field” in favor of the company. This included provisions that did not require Countrywide to submit all of its claims to arbitration, required the employee to pay more than would be incurred in court, and contained discovery conditions that could work to the employees’ disadvantage.

“Opt-Out” Clause Makes Arbitration Agreement Enforceable Circuit City Stores, Inc. v. Ahmed

Only a few weeks after the previously discussed Adams case, the Ninth Circuit issued a decision which found that another Circuit City arbitration agreement, in the case of Circuit City Stores, Inc. v. Ahmed (9th Cir March 2002) 283 F3d 1198, was legally enforceable because it was not unilaterally imposed on the employee. In the Ahmed case, when the employee was hired he was given a packet of employment information. One of the documents provided was a “binding arbitration of legal disputes.” Although Ahmed was required to sign the arbitration agreement in order to become employed by Circuit City, the agreement contained a form to “opt-out” of the arbitration procedure. The instructions accompanying the “opt-out” form gave Ahmed 30 days to exercise that option and stated that his exercise of the option would not effect his employment.

The Ninth Circuit, in upholding the legal enforceability of the arbitration clause, noted, “the terms of the arbitration agreement were clearly spelled out in written materials and a videotape presentation; Ahmed was encouraged to contact Circuit City representatives or to consult an attorney prior to deciding whether to participate in the program; and he was given 30 days to decide whether to participate in the program.”

Thus, under this Ninth Circuit decision, if an employee is given a meaningful opportunity to decline arbitration, but nevertheless agrees to it (i.e., does not exercise his right to “opt-out” of the procedure) it will be legally enforceable in the Ninth Circuit.

Circuit City Stores, Inc. v Najd

This position was reaffirmed in another Circuit City Stores case issued by the Ninth Circuit on June 24, 2002. In Circuit City Stores, Inc. v Najd, (9th Cir June 24, 2002, No. 99-56571), the court again upheld an “opt-out” mandatory arbitration clause by concluding that the plaintiff’s failure to opt-out of the arbitration clause established his assent to it and precluded a finding that the clause was procedurally unconscionable.

Arbitration Rules In Non-Fair Employment and Housing Act (FEHA) Wrongful Termination Cases Little v Auto Stiegler Inc.

The decision by the California Court of Appeals in the case of Little v Auto Stiegler Inc. 112 CR 2d 56, raised the issue of the enforceability of an arbitration clause which did not satisfy some of the requirements of Armendariz in a case involving non-FEHA claims. In Little, the employee alleged that he was terminated because he reported his employer for warranty fraud. However, he did not allege that he was terminated in violation of the California Fair Employment and Housing Act or any other anti-discrimination statute. In view of this, the court concluded that the Armendariz requirements for a valid arbitration clause were not necessary to enforce the agreement.

The California Supreme Court granted a Petition for Review of the Little case and, therefore, the Court of Appeal decision is no longer legally effective. In due course, the Supreme Court will issue a decision with respect to the requirements that must be satisfied in agreements to arbitrate non-FEHA and non-statutory claims of wrongful termination.

Provisions Necessary for a Valid Pre-Dispute Arbitration Agreement

The following is a list of provisions that are necessary for a valid pre-dispute mandatory arbitration agreement under recent state and federal cases.

1. The agreement must require both the employer and the employee to submit all of their claims against the other to a recognized arbitration service.
2. The agreement must state specifically that it is applicable to “discrimination” claims under state and federal law, as well as all other types of claims.
3. The agreement must contain a provision for a neutral arbitrator. (Employers may wish to specify that the arbitrator has a certain minimum number of years experience in hearing employment disputes).
4. The agreement must contain a provision requiring a written award with a statement of facts and reasons for the decision.
5. The agreement must contain a provision limiting the costs to the employee to no more than those which would be incurred in a court proceeding.
6. The agreement must contain a specific provision allowing all forms of damages, including punitive damages.

Right to Appeal

It should be noted that unless specifically provided for in the arbitration agreement, an arbitrator has no jurisdiction to consider a motion for reconsideration of the merits of the award. In addition, there is no provision for an appeal of his factual or legal findings. In the recent case of Crowell v Downey Community Hospital Foundation (2002) 95 CA4th 730, 115 CR 2d 810, the court concluded that the parties to an arbitration agreement cannot confer jurisdiction on an appellate court to hear an appeal as to the factual and legal findings of the arbitrator. Thus, if the parties desire the right to appeal the arbitrator’s factual and legal decision, the arbitration agreement must contain a provision establishing a private appellate arbitration panel.

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