In the employment context, an arbitration agreement is a contract between an employer and an employee in which the parties agree to resolve disputes in front of an arbitrator rather than in civil court. These agreements are often standard in new hire paperwork.
Employers like arbitration because it is considered to be more efficient and less expensive than traditional litigation. However, employee rights advocates view arbitration as disadvantageous to employees because employees generally lose access to rights that are fundamental in civil litigation, such as the right to a jury and the right to appeal.
Though the trend in California has been increasing hostility towards arbitration agreements (from the courts, the legislature, and the public), two of the three cases discussed below were favorable to employers seeking to enforce arbitration agreements.
Claims Under Business & Professions Code Section 17200 are Subject to Arbitration
In Clifford v. Quest Software, 38 Cal.App.5th 745, a California appellate court held that claims against an employer brought under Business and Professions Code section 17200, also known as California’s Unfair Competition Law (“UCL”), are subject to mandatory arbitration. (The UCL prohibits “unfair competition,” a very broad term that includes “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.”)
Daniel Clifford sued his employer, Quest Software Inc., for violations California wage and hour laws and the UCL on the grounds that Quest misclassified him as an exempt employee. Quest moved to compel arbitration. The trial court granted Quest’s motion as to Clifford’s wage and hour claims, but denied the motion as to his UCL claim, citing Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303.
The Court of Appeal reversed as to Clifford’s UCL claim. The court held that, assuming Cruz remains good law (which the court declined to decide), Cruzprohibits arbitration for claims for “public” injunctive relief, meaning injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public. However, the court found that Cruz does not prohibit arbitration of claims for private injunctive relief (intended to resolve a private dispute between the parties and rectify individual wrongs) or restitution, which is the type of relief Clifford was seeking. Therefore, his UCL claim was subject to arbitration along with his wage hour claims.
You can read the opinion in Clifford v. Quest Softwarehere.
Employer May Compel Arbitration of Claims that Pre-Date the Arbitration Agreement
In Quiroz Franco v. Greystone Ridge Condo., 39 Cal.App.5th 221, a California Court of Appeal held that the employer should have been allowed to compel arbitration, even though the employee’s claims and lawsuit predated his executed arbitration agreement.
In Franco, employees of Greystone Ridge Condominium were asked to sign an agreement requiring them to submit to final and binding arbitration for “any and all claims” related to their employment, “pre-hire through post-termination.” Shortly thereafter, employee Victor Quiroz Franco filed a complaint against Greystone for employment-related claims. Two days after he filed the complaint, Quiroz Franco signed and returned the arbitration agreement. Greystone moved to compel arbitration, and Quiroz Franco opposed on the grounds that the arbitration agreement did not expressly state that claims that accrued prior to the date the arbitration agreement was executed would be subject to arbitration.
The trial court denied the motion to compel arbitration, but the Court of Appeal reversed. In doing so, the appellate court found that the language of the arbitration agreement was clear and unequivocal and did not include any qualifying language limiting the agreement to claims that had not yet accrued. Rather, the court found that the agreement’s reference to “pre-hire” claims expressed an intent to cover all claims, regardless of when they accrued, so long as they were not otherwise expressly excluded by the agreement.
You can read the opinion in Quiroz Franco v. Greystone Ridge Condo. here.
Arbitration Agreement Waiving “Berman Hearing” to Resolve Wage Claims is Not Enforceable
In OTO LLC v. Kho, 8 Cal.5th 111, the California Supreme Court invalidated an arbitration agreement because it was unconscionable.
The plaintiff, a service technician named Ken Kho, filed a claim for unpaid wages with the California Labor Commissioner against his former employer, One Toyota of Oakland (“OTO”). Kho’s claim was set for what is known as a “Berman hearing” before the Labor Commissioner when OTO filed a petition to compel arbitration. The hearing went forward anyway, and the hearing officer awarded Kho over $158,000. OTO appealed to the superior court, which vacated the award but declined to compel arbitration. The Court of Appeal reversed, and the California Supreme Court granted review to determine whether the procedure provided for in the arbitration agreement (which largely mirrored civil litigation) could be an acceptable substitute for the “Berman” process to which Kho would otherwise be entitled.
The California Supreme Court first examined whether the agreement was procedurally unconscionable (meaning the conditions of contract formation were unconscionable due to, for instance, inequalities between the parties as to relative bargaining power) and found an “extraordinarily high” degree of procedural unconscionability. Kho was presented with the arbitration agreement, among other documents, three years after being hired and told to sign them immediately or lose his job. The contents of the documents were not explained to him, and he had no meaningful opportunity to read the documents, which were written in English though Kho was a native Chinese speaker, or to ask questions about their content. He was also not provided a copy of the documents he signed in either English or Chinese. In addition, the court noted that the agreement was “written in an extremely small font” such that it was “visually impenetrable” and “challenged the limits of legibility.”
The court also examined whether the arbitration agreement was substantively unconscionable, meaning the terms of the contract were excessively oppressive or harsh. The agreement applied to “nearly any employment-related claims” and established a process that “closely resembl[ed] civil litigation.” Though this type of process has been found to be acceptable with respect to other types of claims, the Kho court found it to be “so inaccessible and unaffordable . . . that it does not offer an effective means for resolving wage disputes” when compared to the less formal Berman process, which “was specifically designed to give claimants a ‘speedy, informal and affordable method’ for resolving wage disputes.”
The court stopped short of ruling that waiving Berman procedures renders an arbitration agreement unconscionable, but rather held that the agreement in this case was unconscionable and unenforceable because it was imposed in a procedurally unconscionable way.
If OTO appeals the California Supreme Court’s decision, the appeal could be heard by the United States Supreme Court. We will keep you updated on any development as they arise.
You can read the opinion in OTO LLC v. Kho here.