Continuing what appears to be an attempt to eliminate the use of private arbitration agreements, the California Court of Appeal has struck down a pre-employment arbitration agreement for at least the fourth time over the past year.  Ontiveros v. DHL Express (USA), Inc., No. A114848 (Cal. Ct. App. June 30, 2008).  Declaring the agreement “unconscionable,” a California Court of Appeal ruled that a provision giving the arbitrator the authority to decide enforceability was unenforceable.  The agreement also failed to comply with the minimum requirements for lawful arbitration of non-waivable civil rights claims set forth by the California Supreme Court in Armendariz v. Foundation Health Psychcare Svcs., Inc., 24 Cal. 4th 83 (Cal. 2000).  Accordingly, the court affirmed the trial court’s order denying the employer’s motion to compel arbitration and allowed the plaintiff’s claims of sex discrimination, harassment, and retaliation to proceed in court. 

This ruling follows several other appellate decisions declaring arbitration agreements unenforceable.  See, e.g., Metters v. Ralphs Grocery Co., No. G038380 (Cal. Ct. App., Apr. 1, 2008); Gentry v. Superior Court, No. 07-998, cert. denied (U.S. Mar. 31, 2008); Murphy v. Check n’ Go of Cal., Inc., 156 Cal. App. 4th 138, 145 (Cal. Ct. App. 2007).  (For a more detailed discussion of these cases, please refer to Alternative Dispute Resolution Legal Updates.)

The facts in Ontiveros are straight-forward.  In 1999, the employer’s predecessor (Airborne Express) hired the plaintiff to work as a field service supervisor.  At the time, the plaintiff signed a “Mutual Agreement to Arbitrate Claims” which covered all employment claims.  The agreement also provided, “The Arbitrator . . . shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or part of this Agreement is void or voidable.”  The agreement limited discovery to one deposition of a witness and any expert witness and required the parties to share the costs of arbitration.  No representative of Airborne Express signed the agreement. 

In April 2000, plaintiff was promoted to aircraft operations supervisor for the Northern Bay Area, including Oakland International Airport.  According to plaintiff, after her April 2000 promotion, she was subjected to ongoing sexual harassment and retaliation.  In 2004, plaintiff took a short-term disability leave and eventually left defendant’s employ.  Thereafter, the plaintiff sued the employer for alleged sex discrimination, harassment, and retaliation under the California Fair Employment and Housing Act.  The employer filed a motion to compel arbitration.  In response to the employer’s motion, the plaintiff submitted an affidavit in which she denied knowing that she had signed an arbitration agreement at the time of hire and claimed that no one explained any of the various forms to her.  The trial court denied the employer’s motion for arbitration, finding that the employer did not establish that it was a successor to the agreement and, even if it was, the agreement was unconscionable.  The employer appealed. 

The employer argued on appeal that the trial court should not have addressed the issue of unconscionability because the agreement required the arbitrator to determine this issue.  Rejecting the employer’s argument, the court agreed with the trial court’s finding that the agreement was unconscionable.  Relying on Murphy v. Check n’ Go of Cal., Inc., 156 Cal. App. 4th 138, 145 (Cal. Ct. App. 2007) (discussed at California Pre-Employment Arbitration Agreement Ruled Unconscionable), the court found that most laypersons would not expect unconscionability issues to be decided by the arbitrator, particularly where they disputed entering into an arbitration agreement in the first instance, as was the case here.  The court also stated that it had a “genuine concern about the potential for the inequitable use of such arbitration provisions in areas, such as employment, where the parties are not at arm’s length and do not have equal bargaining power.  In such situations, in which one party tends to be a repeat player, the arbitrator has a unique self-interest in deciding that a dispute is arbitrable.”  Accordingly, like its sister appellate court in Murphy, this court held that a court, not an arbitrator, “is the proper gatekeeper to determine unconscionability.”

In addition, the agreement failed to comply with the minimum requirements for lawful arbitration of non-waivable civil rights claims set forth in Armendariz v. Foundation Health Psychcare Svcs., Inc.  In Armendariz, the California Supreme Court held that a mandatory employment arbitration agreement is lawful if it: (1) provides for neutral arbitrators; (2) provides for more than minimal discovery; (3) requires a written award; (4) provides for all types of relief that would otherwise be available in court; and (5) does not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.  Specifically, the agreement in this case limited discovery and required the plaintiff to share in the arbitration costs.

This case reminds employers involved in acquisitions to conduct careful due diligence regarding existing employment agreements and to work closely with employment counsel to ensure that those agreements comply with the current law.  Without such review, employers will run the risk that the acquired agreements are unenforceable, as was the case in Ontiveros.  (The agreement in Ontiveros was signed one year before the Armendariz decision.) 

Employers should review their arbitration programs to ensure compliance with the Armendariz standards by providing for neutral arbitrators, discovery, written awards, and full relief.  In addition, arbitration programs should not require employees to bear any of the arbitration costs.  Finally, employers should consult with counsel to determine whether their programs should be modified as to the scope of an arbitrator’s authority.