Arbitration Provision Drafted By Employer in Contract of Adhesion Was Too One-Sided

     The next case, though unpublished, nicely lays out principles relevant to an arbitration clause in the employment context, including procedural and substantive unconscionability, Federal Arbitration Act (FAA) preemption, and severability. Mayers v. Volt Managemnt Corp.,Case No. G045036 (4th Dist. Div. 3 February 2, 2012). This is a useful opinion to read when drafting an arbitration clause in an employment agreement. If only Volt had had the opportunity to read the opinion in advance, it might have avoided a shock. (A reason to keep “current” with our blog.).

     Justice Fybel, the author, summarizes the holding, affirming the trial court’s finding of unenforceability, and refusal to sever unenforceable provisions:

“The arbitration provisions contained in the employment application, employment agreement, and employee handbook each required that plaintiff submit employment-related claims to arbitration pursuant to the ‘applicable rules of the American Arbitration Association in the state’ where plaintiff was employed or was last employed by defendant. Plaintiff was not provided with a copy of the controlling American Arbitration Association (AAA) rules or advised as to how he could find or review them. The provisions also failed to identify which set of rules promulgated by the AAA would apply. They further stated that the ‘arbitrator shall be entitled to award reasonable attorney’s fees and costs to the prevailing party.’ For the reasons discussed post, such a prevailing party attorney fees term exposed plaintiff to a greater risk of being liable to defendant for attorney fees than he would have been had he pursued his FEHA claims in court.”

     A prevailing FEHA defendant, usually the employer, only recoups fees if the employee’s claims were frivolous, unreasonable, without foundation, or in bad faith. Here, the arbitration provision changed the ground rules, enabling the employer, as a mere prevailing party, to recover fees. That factor pointed to substantive unconscionability.

     The FAA preempts state law that places an arbitration agreement on an unequal footing and makes it more difficult to enforce than other contracts. But that was not the case here, since unconscionability is a defense to enforcement of contracts in general, not to a specific type of contract.

     Finally, the trial judge did not err by refusing to sever arbitration provisions, where unconscionability permeated the contract.

     Moral: Though it may at first blush seem self-defeating for the employer to draft a fair arbitration provision, that is the route to enforceability.