California Affirms Employer Arbitration Agreement, Providing Guidance

Providing further clarity for the enforceability of arbitration agreements in employment contracts, California’s First District Court of Appeal upheld a boilerplate arbitration clause in Peng v. First Republic Bank, No. A135503 (Cal. Ct. App. September 26, 2013).

Peng, an assistant manager for First Republic Bank, signed an employment agreement requiring arbitration before the AAA of all claims “arising out of or relating to the Employee’s employment.”  When First Republic terminated Peng, she sued for wrongful termination, discrimination, and retaliation. The trial court denied First Republic’s motion to compel arbitration because the employment agreement did not attach or specify the AAA’s arbitration rules and it allowed First Republic to modify the employment agreement unilaterally.  These defects, the trial court concluded, rendered the arbitration agreement procedurally and substantively unconscionable.

The Court of Appeal reversed on both grounds.  Unlike other arbitration clauses that incorporate arbitration rules that substantively limit an employee’s rights by limiting discovery or remedies, for example—thus requiring the employer to specify those rules to avoid oppression and surprise—the AAA’s rules referenced in Peng’s arbitration agreement do not substantively impact those rights.  Further, the ready access to AAA’s rules on the internet also avoided surprise to Peng.  Therefore, the arbitration clause was not procedurally oppressive.

Regarding substantive unconscionability, fact and law nullified this argument, as well.  Despite its right to do so in the employment agreement, First Republic did not attempt to modify the agreement unilaterally.  In addition, California’s implied covenant of good faith and fair dealing prohibits an employer from modifying an employment agreement to the detriment of the employee’s rights once a claim accrues.  As a result, Peng’s arbitration agreement was not unreasonably one-sided and not substantively unconscionable.

Peng offers the following guidelines for drafting and implementing employee arbitration agreements: (1) avoid arbitration rules that deprive employees of substantive rights, (2) attach a copy of any special or uncommon rules to the arbitration agreement, and (3) avoid changing the employment agreement’s ground rules, especially where the modification impairs the employee’s rights.