Thursday, July 14, 2011

Court Of Appeal Holds Employer-Employee Arbitration Agreement Is Unconscionable And Therefore Unenforceable

By Christopher S. Andre and Scott K. Dauscher

In Zullo v. Superior Court, the California Court of Appeal once again struck down an employer-employee arbitration agreement based on the court's conclusion that the arbitration agreement was both procedurally and substantively unconscionable and therefore unenforceable.  The decision serves as a reminder to employers that arbitration provisions considered to be overly one-sided in favor of the employer are likely to be struck down by California courts.
The arbitration agreement at issue contained terms providing: (1) that employment related claims by employees must be resolved by binding arbitration (excepting only certain claims) but permitted the employer to bring claims against employees in court,  (2) that claims by employees would be arbitrated according to American Arbitration Association Employment Dispute Resolution rules, which were apparently not provided to employees, (3) that employees must request arbitration within one year of the date a dispute occurred or the claim(s) are waived, and (4) that employees must respond within ten calendar days to communications regarding selection of an arbitrator and scheduling the arbitration hearing or the claim(s) are waived.
Relying heavily on the California Supreme Court's decision in Armendariz v. Foundation Health Psyschcare Services, Inc. (2000) 24 Cal.4th 83, the Court of Appeal held the arbitration agreement at issue is both procedurally and substantively unconscionable.  In that case, the California Supreme Court held, among other things, that the agreements at issue impermissibly required employees to submit claims to arbitration while permitting the employer to bring suit in court and impermissibly limited the damages available to aggrieved employees.
Taking its guidance from the Supreme Court's decision and from subsequent decisions applying it, the court in Zullo concluded the arbitration agreement at issue "is a contract of adhesion, fails to give adequate notice of the arbitration rules that will apply, and allows [the employer] the full range of remedies and forums for resolution of whatever claims it might have against [its employees] while limiting [its employees] to binding arbitration of [their] claims against [the employer].  It also imposes strict time limits within which petitioner must respond to any arbitration-related communication without imposing similar requirements on [the employer]."
The court in Zullo held, also, that the arbitration agreement at issue was so "permeated by unconscionability" that the provisions of the arbitration agreement the court found unconscionable could not be stricken ,and the remainder of the agreement could not be enforced according to the remaining permissible terms.  The court states: "The illegality cannot be excised here.  Striking the forfeiture provision would not cure the other problem, which is that the agreement applies only to the [employee].  There is no single provision we can strike in order to remove that unconscionable taint."