California Supreme Court Finds Another Employment Arbitration Agreement Unenforceable As Drafted

By Yona Conzevoy and Christopher S. Andre 

Despite the Federal Arbitration Act and the California Arbitration Act, both of which provide essentially that arbitration agreements are valid and enforceable, it can scarcely be gainsaid that California courts will for the foreseeable future continue to closely scrutinize pre-dispute arbitration agreements between employers and employees.  Such arbitration agreements have frequently been struck down as contrary to public policy, unconscionable substantively, and/or unconscionable procedurally on account of various features of such agreements.

In Sonic-Calabasas, Inc. v. Moreno, the California Supreme Court again found an arbitration agreement to be unenforceable as written.  The court held arbitration agreement at issue in effect impermissibly required employees to waive their right to pursue claims for allegedly unpaid wages by submitting such claims to the California Labor Commissioner by a process sometimes referred to as a "Berman hearing" whereby claims are addressed at an informal hearing conducted by the Labor Commissioner.  That process permits either an employee or an employer dissatisfied with the results of the Berman hearing to "appeal" the result to the Superior Court for a new trial conducted by the court.

In finding the arbitration agreement unenforceable as written, the Supreme Court held that requiring employees to waive their statutory rights to pursue wage claims via a Berman hearing is contrary to public policy and conscionable and therefore unenforceable.  However, the Court held also that an employer can require employees to arbitrate such disputes after a Berman hearing has been conducted.  In other words, the Court held the arbitration agreement would be enforceable after a Berman hearing is conducted if either side is unsatisfied with the result of the Berman hearing.

Having an enforceable arbitration agreement can help make an individual discrimination, harassment, or retaliation case less attractive to a plaintiff's attorney.  Plaintiff's attorneys sometimes rely on the prospect of a jury trial to increase the value of such a case.  However, the law regarding what provisions of an employment arbitration agreement will be enforced and what provisions will not be enforced frequently changes as California appellate courts issue reported decisions regarding the enforceability of such arbitration agreements.  Employers therefore should have such agreements reviewed periodically by competent employment counsel.

Court Refuses to Compel Arbitration by Third Parties Not Signed to Arbitration Agreement

By Ronald W. Novotny

On June 1, 2010, the California Court of Appeal refused to enforce an arbitration agreement to require the arbitration of claims asserted against third parties who did not agree to arbitration.  In Valencia v. Smyth, purchasers of real property sued their agent, the property owners and the owners’ broker and listing agent, and three additional parties (two title companies and the trustee of the deed of trust) for fraud, breach of fiduciary duty, negligence, and other claims arising out of the alleged misappropriation of the purchasers’ escrow funds.  The owners attempted to enforce an arbitration agreement entered into with the buyers in which they agreed to arbitrate “any dispute or claim in Law or Equity arising between them out of this Agreement or any resulting transaction,” which neither the title companies nor the trustee were parties to.  The trial court had refused to enforce the agreement, and required that all parties be joined in a consolidated judicial proceeding, because the claims against the third parties arose out of the same transaction or series of related transactions and there was a “possibility of conflicting rulings on a common issue of law or fact.”

The Court of Appeal affirmed this ruling based on the provisions of the California Arbitration Act, Code of Civil Proc. Section 1281.2, which permit a court to deny arbitration in a case involving third parties who have not agreed to arbitrate.  Although arbitration of the entire dispute could have been ordered if the parties had adopted the procedural provisions of the Federal Arbitration Act, the court found that they had not done so -- even though the Arbitration Agreement stated that “Interpretation  of this agreement to arbitrate shall be governed by” the FAA. 

The case demonstrates the importance of the wording of arbitration agreements to determining how they will be enforced.  It is particularly important for employers who seek to enforce their agreements to arbitrate claims brought by former employees to properly reference the Federal Arbitration Act int heir agreements, if they want to compel arbitration of their disputes against third parties who have not signed the arbitration agreement.