How Not To Write An Employment Agreement Arbitration Clause: Court Of Appeal Rejects One Sided Clause As Procedurally And Substantially Unconscionable

In Carlson v. Home Team Pest Defense, Inc. (Ct. of Appeal A142219), published August 17, 2015, the Court of Appeal held that an employer’s arbitration clause which allowed only the employer to file lawsuits for certain claims, required the employee to pay a share of the arbitration fees and costs, and allowed the arbitrator to award attorney’s fees to only the employer was unenforceable.

Plaintiff was the office manager of Home Team Pest Defense’s (“Home Team”) Antioch, California office. On her first day of work, Plaintiff was required to sign Home Team’s standard “Agreement to Arbitrate.” Plaintiff was told the agreement could not be modified, and that she had to sign it if she wanted to work at the company. After Plaintiff was terminated only five months later, she filed a lawsuit against Home Team in Contra Costa County Superior Court seeking damages and attorney’s fees for wrongful termination, harassment, breach of her employment agreement, unpaid overtime, retaliation, and intentional infliction of emotional distress.

Home Team moved to stay Plaintiff’s superior court lawsuit, and compel arbitration contending that all of Plaintiff’s claims were subject to binding arbitration pursuant to the parties’ employment agreement. Plaintiff opposed the motion arguing that the arbitration clause was invalid and unenforceable. She argued that the clause was procedurally unconscionable as it was presented on a “take-it-or-leave-it” basis, and substantially unconscionable, since, among other things, it allowed Home Team and not her, to bring claims in Superior Court, permitted Home Team and not her, to recover attorney’s fees and prohibited her from having attorney representation at a pre-arbitration mediation.

The trial court agreed with Plaintiff and concluded that the arbitration clause was unenforceable as “one-sided, objectively unreasonable, and lack[ing] mutuality.” The Court of Appeal affirmed the trial court. The Court found that under California’s two pronged standard for determining the enforceability of an employment agreement arbitration, the Home Team’s arbitration clause failed. The Court reiterated that to invalidate an arbitration clause, a party must demonstrate that the clause is both procedurally and substantively unconscionable. “Procedural unconscionability” focuses “on ‘oppression’ or ‘surprise’ due to unequal bargaining power” while “substantive unconscionability” focuses “on ‘overly harsh’ or ‘one sided’ results.” While both “procedural” and “substantive” unconscionability must be found for a clause to be unenforceable, the courts should employ a “sliding scale” – the “more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the [arbitration clause] is unenforceable, and vice versa.”

With respect to Home Team’s arbitration clause, the Court found a “high degree” of both “procedural” and “substantive” unconscionability. The Court held that forcing Plaintiff to sign the arbitration clause “without time for reflection,” or the ability to negotiate its terms and conditions, was procedurally unconscionable. The Court also held that requiring Plaintiff to pay a “filing fee” for bringing a claim, denying her the right to be represented by a lawyer at a “pre-arbitration mediation,” and forcing her to pay a share of the arbitration costs rendered the clause substantively unconscionable.

The arbitration clause used by Home Team provides a textbook example for employers of what not to include in an employment agreement. The Court of Appeal made it clear the clause cannot be one-sided and highlighted other requirements: (1) The clause must provide both sides with the same rights and remedies; (2). The clause cannot require the employee to pay any portion of the arbitration, or have cost elements (such as the filing fee in the Home Team’s agreement) that would “discourage an employee” from bringing a claim; (3) The employee must have adequate time to review the clause; and (4) The employee must be given an opportunity to seek changes to the agreement. [Note this list is not exhaustive.]

A well-crafted, balanced arbitration clause should be enforced by both state and Federal courts, and can benefit both the employer and the employee by limiting the time and cost of a court proceeding. Given the courts’ finding that there is inherent bargaining inequality in the employment context, it is especially important that a mandatory arbitration clause be vetted by counsel, and frequently updated to reflect the latest changes mandated by court holdings.

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August 24, 2015