Employer’s Right to Change Dispute Resolution Process Is Held In Check By Implied Covenant of Good Faith and Fair Dealing

     Having just blogged on June 5, 2013, about an opinion authored by Justice Mallano, reversing an order granting a motion to compel arbitration, I now blog about an opinion authored by Justice Mallano, reversing an order denying a motion to compel arbitration.  Leos v. Darden Restaurants, Inc., B241630 (2nd Dist. Div. 1 June 4, 2013) (Mallano, J. author 3:0) (unpublished).

     Leos is a sexual harassment case filed by employees against their employer, Darden Restaurants, Inc.  Employer moved to compel arbitration, and the trial court denied the motion on the grounds that the arbitration provision was unconscionable.   Employer appealed.

     Applying the standard two-prong unconscionability analysis, the Court of Appeal found the Dispute Resolution Process (DRP) procedurally unconscionable “[b]ecause plaintiffs were required to sign the DRP acknowledgment as a condition of employment, were unable to negotiate the terms of the DRP, and had no meaningful choice in the matter . . . “  But the second prong – substantive unconscionability – was missing.

     The most interesting argument was the employee’s argument that the employer’s right to modify the DRP at will made the contract unconscionable and illusory.  However, in California, the employer’s unilateral right to modify an arbitration provision is subject to the limitations imposed by the covenant of good faith and fair dealing.  24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199 (1998).  The exception is that the arbitration agreement is indeed illusory and unenforceable if the employer’s unilateral modifications apply where an employee’s claims have already accrued or are known to the employer.  Peleg v. Neiman Marcus Group, Inc., 204 Cal.App.4th 1425 (2012).

    Here, the employer was saved by drafting language that gave it the right to modify “as required by law.”  “We fail to understand,” wrote Justice Mallano, “how a clause permitting modification as required by law can itself be unlawful.”  That’s a drafting tip for employers!

     The trial court’s order denying arbitration was reversed.