California Court Of Appeal Extends Armendariz To Cover Independent Contractors

In the seminal case Armendariz v. Foundation Health Psychcare, the Supreme Court of California established the standard for determining the enforceability of mandatory arbitration agreements for employees. Armendariz generally held that mandatory arbitration agreements were enforceable if they were mutual and did not "serve as a vehicle for the waiver of statutory rights." Armendariz set forth a number of minimum requirements that must be met for a mandatory employment arbitration agreement to be valid, including requiring a neutral arbitrator, providing for sufficient discovery, requiring a written decision adequate enough to allow judicial review, allowing for all remedies available in a judicial action, and not requiring the employee to pay unreasonable costs or fees. In the recent case Wherry v. Award, Inc., the Fourth Appellate District extended the Armendariz standard beyond the employment relationship and applied the same standard to mandatory arbitration agreements for independent contractors.

In Wherry, Plaintiffs Karena Wherry and Rocelyn Traieh entered into independent contractor agreements with Defendants to act as real estate salespeople. The agreements contained mandatory arbitration provisions. After approximately one year, the relationships between Plaintiffs and Defendants were terminated and, shortly thereafter, Plaintiffs sued Defendants for gender discrimination, sexual harassment, and retaliation under the Fair Employment and Housing Act ("FEHA"). Defendants moved to compel arbitration.

The Court of Appeal refused to compel arbitration, holding that the arbitration agreements were procedurally and substantively unconscionable. The Court held that the agreements were procedurally unconscionable because they were given to Plaintiffs on a take it or leave it basis, without the possibility of negotiating any of the material terms.

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