California Court Deals Arbitration Agreements A Blow

Employers use arbitration agreements for many reasons, including avoiding costly and time-consuming litigation.  Employers often look to courts to enforce their arbitration clauses, either dismissing or staying the case pending completion of arbitration.  However, a California-based employee 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, Defendant, Cycad Management, LLC (“Cycad Management”), hired Jose Nunez as a gardener and required him to sign an employment agreement. The employment agreement contained an arbitration clause that mandates arbitration of “all disputes between Employee and Company relating, in any manner whatsoever, to the employment or termination” of the employee.  Following a dispute, the Plaintiff sued his employer, and the employer demanded arbitration.  In response, Plaintiff argued that Defendant waived the right to arbitrate, that he did not sign the employment agreement or signed without informed consent, and that the employment agreement is unconscionable.

Following its review, the California Courts of Appeal held that the Defendant’s s arbitration clause was unconscionable and, as a result, the arbitration clause was invalid and unenforceable.

That decision found its footing in the doctrine of unconscionability.  The doctrine of unconscionability was initially a contract defense.  Courts have applied the doctrine to excuse a party from compliance with a particular contractual provision when that provision was oppressively negotiated and would involve an overly harsh or one-sided result.  Significantly, a plaintiff invoking the doctrine of unconscionability must demonstrate both procedural and substantive unconscionability.

The Facts in Nunez

Jose Nunez was a former employee of Cycad Management.  Cycad Management demanded that Mr. Nunez sign the arbitration agreement during his employment.  In doing so, Cycad Management presented the employment agreement (written entirely in English) to Mr. Nunez, who did not speak English.  According to the court, Cycad Management failed to inform Mr. Nunez that the employment agreement waived his right to a jury trial.  Finally, Cycad Management told Mr. Nunez that he would be fired if he didn’t sign the form.

Court Determined Arbitration Agreement To Be Unfair

As mentioned above, for a court to apply the unconscionability doctrine, a plaintiff must demonstrate both procedural and substantive unconscionability.  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 the agreement for that reason.

In finding procedural unconscionability, the court determined that Cycad Management presented the agreement 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, especially considering that Mr. Nunez 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 an issue with the arbitration clause’s significant limitations on discovery during an arbitration.  Specifically, the court found the discovery limitations to be particularly one-sided and oppressive to employees.  Given the nature of an employment action, the employer “is likely to possess many 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 primarily must rely on the discovery process to conduct their investigation.  Thus, the practical application of the arbitration clause placed the employee, not the employer, at a severe disadvantage under 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 all the employers’ costs and attorneys’ fees to the employee 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 Plaintiff to significant liability to which the employee would otherwise not be exposed if they were litigating in court.  The Nunez court, therefore, concluded that the arbitration clause was both procedurally and substantively unconscionable and refused to enforce it.

Takeaways

Considering Nunez, employers should work with their counsel to review their arbitration agreements and develop best practices regarding their execution. 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 offer any non-English speaking employees a suitable translation.  Additionally, the court’s analysis in Nunez instructs employers to refrain from introducing discovery limitations in their arbitration provisions.