California Arbitration Agreements: Greater Hurdles To Enforceability

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Employers use arbitration agreements to avoid costly and protracted litigation. And, in turn, employers can often rely on courts to enforce their arbitration clauses, either dismissing or staying the case pending completion of arbitration. A California-based employee, however, recently convinced the California Courts of Appeal that his arbitration agreement was too unfair to be enforced, and the court agreed. In Nunez v. Cycad Mgmt. LLC (“Nunez”), 77 Cal. App. 5th 276 (Cal. Ct. App. 2022), the California Courts of Appeal held that an employer’s arbitration clause was unconscionable—that is, too unfair—and, as a result, the arbitration clause was invalid and unenforceable.

That decision was rooted in the doctrine of unconscionability. Originally a contract defense, the doctrine unconscionability excuses a party from compliance with a particular contractual provision when that provision both was negotiated in an oppressive manner and would involve an overly harsh or one-sided result. A plaintiff invoking the doctrine of unconscionability must demonstrate both procedural and substantive unconscionability.

The Facts in Nunez

The plaintiff Jose Nunez was a former employee of Cycad Management, LLC (“Cycad Management”). During his employment, Cycad Management demanded that Mr. Nunez sign the arbitration agreement and only told Mr. Nunez, who did not speak English, that the agreement was related to a “change of company.” According to the court, Cycad Management failed to inform Mr. Nunez that it was asking him to sign an arbitration agreement that would waive his right to a jury trial. Mr. Nunez was told that he would be fired if he didn’t sign the form.

Court Determined Arbitration Agreement To Be Unfair

The court in Nunez found the language and the circumstances surrounding the execution of the arbitration agreement to be fundamentally unfair and refused to enforce agreement for that reason. In finding procedural unconscionability, the court determined that the agreement was presented to Mr. Nunez on a take-it-or-leave-it basis, and thus was a contract of adhesion. As a contract of adhesion, the court found the absence of an opportunity for the employee to review the contract to be particularly unfair, a conclusion reinforced by the fact that the employee only spoke Spanish and the agreement was written entirely in English. The court also noted that Cycad Management failed to inform the employee that the arbitration clause permitted the arbitrator to award attorneys’ fees to the employer, a failure that “supports a finding of unconscionability because it causes surprise.”

After concluding that the arbitration clause was procedurally unconscionable, the court analyzed its substance. The court raised issue with the arbitration clause’s significant limitations on discovery during the course of arbitration. The court found the effect of the discovery limitations to be particularly one-sided and oppressive to employees because, given the nature of an employment action, the employer “is likely to possess many of the relevant documents and employ many of the relevant witnesses.” As a result, the employer need not use discovery tools to complete its investigation; only the employee largely must rely on the discovery tools at his disposal to complete the investigation of his claims. Thus, the practical application of the arbitration clause placed only the employee, not the employer, at a severe disadvantage by virtue of the arbitration clause’s limitations on discovery.

The court also focused on the fact that the clause allowed the arbitrator to award attorneys’ fees to the prevailing party, which could result in the arbitrator assigning to the employee all of the employers’ costs and attorneys’ fees should the employer prevail at arbitration. The court found this aspect fundamentally unfair because, “[a]bsent the agreement, Nunez could litigate without the prospect of paying Cycad’s attorney fees.” In short, enforcement of the arbitration clause could expose the plaintiff to significant liability to which the employee would otherwise not be exposed if he or she was litigating in court. The Nunez court, therefore, concluded that the arbitration clause was both procedurally and substantively unconscionable, and refused to enforce it on these bases.

Takeaways

In light of Nunez, employers should work with their counsel to review their arbitration agreements and develop best practices to ensure their employees’ valid approval of said agreements. Specifically, employers should ensure they provide employees with adequate time and opportunity to review the agreements before signing, inform their employees of the general nature of the arbitration agreement, and provide any non-English speaking employees with a suitable translation. As for the substance, Nunez instructs employers to refrain from introducing discovery limitations in their arbitration provisions. The decision also stands as a reminder to avoid substituting the substantive relief or consequences to which employees would otherwise be entitled or exposed, respectively, if they were litigating in court.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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