The California Court of Appeal’s recent decision in Leos v. Darden Restaurants, Inc. continues the nationwide trend of courts enforcing arbitration provisions according to their terms.
The two plaintiffs alleged causes of action against their former employer, Darden Restaurants, Inc. under the Fair Employment and Housing Act and common law causes of action. They also sought declaratory relief that Darden’s arbitration provision was unenforceable.
When both employees were hired, they signed an acknowledgment stating they had read and reviewed Darden’s dispute resolution process (DRP) booklet containing the arbitration provision at issue. After the plaintiffs filed their lawsuit, Darden filed a motion to compel arbitration pursuant to the DRP. The DRP provides a four-step process for the parties to resolve their dispute, the last of which allows either the employee or Darden to submit the matter to binding arbitration according to the Employment Dispute Resolution Rules of the American Arbitration Association.
Darden filed its motion to compel arbitration pursuant to the California Arbitration Act (CAA). The plaintiffs opposed the motion, claiming the arbitration provision was unconscionable and thus did not satisfy the requirements set forth in California precedent. Following the trial court’s denial of the motion to compel arbitration on the ground that the arbitration provision was unconscionable, Darden appealed.
Is it unconscionable?
The Court of Appeals acknowledged that United States Supreme Court precedent behooves the invalidation of arbitration agreements if the court finds that generally applicable contract defenses, such as unconscionability, apply to such agreements. Unconscionability has both a procedural and substantive element. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, whereas substantive unconscionability focuses on overly harsh or one-sided results. The Court of Appeals reiterated that both procedural and substantive unconscionability must be present in order for a court to refuse to enforce a contract because it is unconscionable, but not to the same degree. The more substantively oppressive a contract term, the less evidence of procedural unconscionability is required to conclude that a term is unenforceable, and vice versa.
Because the plaintiffs were required to sign the DRP acknowledgments as conditions of employment, could not negotiate the terms of the DRP and had no meaningful choice in the matter, the Darden court quickly concluded that the DRP was procedurally unconscionable.
Such a quick analysis of procedural unconscionability leads to a lower required finding of substantive unconscionability as sufficient to render the term or contract unenforceable as unconscionable. The plaintiffs argued that the arbitration provision was substantively unconscionable in five respects, and the Court of Appeals dismissed each argument in turn.
The plaintiffs argued that the provision of the DRP stating that it “may be updated from time to time as required by law” rendered the entire arbitration provision illusory and unenforceable, or that it constituted an unconscionable clause. The Darden court rejected this argument, expressing its confusion as to how “a clause permitting a modification as required by law can itself be unlawful. If a particular modification is required by law, then the change is necessary to avoid the very result that plaintiffs seek here – the invalidation of the arbitration provision.”
The plaintiffs also challenged three clauses in the DRP’s arbitration provision governing discovery. The Court of Appeal held the provisions governing discovery did not hinder the employees’ ability to vindicate their statutory rights because one of the goals of arbitration is to streamline dispute proceedings. Because all of the challenged provisions were subject to change upon the arbitrator’s determination of good cause, the limitations did not render the arbitration provision unconscionable.
The Court of Appeal quickly dismissed the plaintiff’s contention that because the DRP provided that the employee may choose to arrange for a court reporter at his or her own cost, the plaintiffs were unfairly burdened with arbitration expenses. Were the cause of action pursued in a civil action, the plaintiff would still have to pay such an expense pursuant to the California Rules of the Court; thus, Darden was permitted to impose the same cost requirements in an arbitration proceeding.
The plaintiffs also argued that the DRP arbitration provision lacked mutuality and did not constitute a bilateral agreement because it contained a clause permitting either party to request available temporary or preliminary injunctive remedies. The Darden Court rejected this argument, noting that the arbitration clause did not provide the employer more rights and remedies than would be available to the employee. The arbitration agreement also did not exempt claims likely to be brought by an employer from arbitration yet require arbitration of claims likely to be brought by an employee.
The plaintiffs finally contended that the DRP’s prohibition on class or collective actions in arbitration was unconscionable. The Court of Appeal rejected this argument as irrelevant because the plaintiffs did not bring a class or collective action.
The Court of Appeal thus reversed the denial of the motion to compel arbitration following a finding that the DRP contained procedural unconscionability but not substantive unconscionability.
Despite the trend, reason to take care
This is a significant California case that furthers the trend of courts enforcing arbitration agreements according to their terms even when there are elements of procedural unconscionability involved. However, this case involved a “pro-employee” arbitration clause with substantial protections and should be viewed in the context of California cases on arbitration as a whole. While the pendulum does appear to be swinging in favor of arbitration clauses, employers should not view this as a carte-blanche endorsement of all such clauses going forward. Employers must be careful in drafting their arbitration agreements to make sure that the agreements do not curtail employees’ substantive rights, and California courts will likely consider these cases based on a review of the particular elements of the arbitration clause, and the particular way it is applied in the situation before it.