On the same day, two different California appellate courts reached opposite conclusions as to whether an employer’s arbitration agreement was enforceable or not.
Subcontracting Concepts v. DeMelo — Arbitration Agreement Void and Unenforceable
In one case, Subcontracting Concepts, LLC v. DeMelo, the Court found that the arbitration agreement was both procedurally and substantively unconscionable and, therefore, unenforceable. It was procedurally unconscionable, according to the Court, because the agreement: (1) was imposed as a “take it or leave it” proposition at the time of hire without offering the employee any opportunity to negotiate any of its terms, (2) was a complex, 11 page document “riddled with complex legal terminology” and then presented to a Spanish-speaking employee without any explanation, and (3) failed to state what arbitration rules would apply to the proceeding. The agreement was substantively unconscionable because: (1) it required the employee to pay his own costs for the arbitration, (2) it prohibited the employee from recovering attorneys’ fees or other costs, (3) it restricted the arbitrator’s award to money damages only, forbidding the arbitrator from awarding punitive damages, statutory penalties, or equitable remedies, and (4) it prohibited the employee from arbitrating any PAGA claims.
In short, the arbitration agreement in Subcontracting Concepts was extraordinarily one-sided and unfair, with many offensive and illegal provisions. Thus, the Court agreed with the lower court that the agreement was so “permeated with unconscionability [that] severance of the unconscionable terms is not possible.” As a result, the Court upheld the lower court’s order denying the employer’s petition to compel arbitration.
Diaz v. Sohnen Enterprises — Arbitration Agreement Enforceable
In the other case, Diaz v. Sohnen Enterprises, the employer called a meeting, told the employees that the company was adopting a new dispute resolution process, and gave them all a copy of the new mandatory arbitration agreement. In addition, the employer told the employees that continuing to work would constitute consent for arbitration, even if an employee refuses to sig the agreement. The employer had HR employees explain the terms of new agreement in both English and Spanish. All employees were allowed to take the agreement home to review.
Three weeks after receiving the agreement, the plaintiff’s lawyer contacted the employer and said she was rejecting the agreement but also continuing to work. On the same very same day, plaintiff’s lawyer served the employer with a lawsuit.
The Diaz Court first noted that, under California law, when an employee continues to work after receiving notice that a new arbitration agreement is a condition of continued employment, that employee has consented to the terms of the new agreement. The plaintiff in Diaz was thus bound by the terms of the arbitration agreement because she had worked for 21 days after receiving it. In addition, on the issue of unconscionability, the Court concluded that the plaintiff could not argue that the agreement was unconscionable because her lawyers failed to raise the issue properly in their appellate brief. There being “no evidence of surprise, nor of sharp practices demonstrating substantive unconscionability” before it, the Court ruled that the agreement was enforceable.
The Bottom Line — What California Employers Need to Know
These conflicting cases underscore three important points we make to clients all the time:
- It is critical that employers use competent, experienced employment counsel draft your arbitration agreement to give it the best possible chance of being upheld. Counsel must scour the existing caselaw to determine the most recent decisions and rulings and make sure that the agreement they are drafting incorporates the rules, language, and nuances contained in all of the most recent caselaw.
- Related the the above, employers must continually update their arbitration agreements because new court decisions come down and make new law on almost a monthly basis. That new law could threaten the enforceability of your arbitration agreement, even if it was initially drafted by expert counsel. If new decisions create new rules, or use new language or nuance, then employers should revise their existing arbitration agreements to incorporate these developments. This gives the employer the greatest chance — though never a guarantee, see the next point — that their arbitration agreement will be enforced when they need it.
- The law surrounding employment arbitration agreements is interpreted by human beings — judges and arbitrators. Human beings always bring different viewpoints, concerns, and interpretations. When they go about applying “the law” to your agreement, two different judges or arbitrators could conceivable reach two different outcomes. Even well-intentioned, fair-minded judges can see things differently and reach different outcomes given the ambiguities inherent in all language (which then create ambiguities in “the law” and in the underlying agreement itself). Thus, there is no guarantee that even an expertly drafted, state-of-the-art arbitration agreement will be enforced when you need it.
You can read the full opinion in Subcontracting Concepts, LLC v. DeMelo here.
You can read the full opinion in Diaz v. Sohnen Enterprises here.