Court Of Appeal Finds That Employment-Related Arbitration Agreement Is Unconscionable And Unenforceable


In Martinez v. Master Protection Corporation, (— Cal. Rptr. 3d —, 2004 WL 805296, Cal. App. 2 Dist., Apr. 15, 2004), the California Court of Appeal addressed the issues of (1) whether an employment-related arbitration agreement was unconscionable and unenforceable, and (2) whether the trial court had the authority to appoint a substitute arbitrator after the entity chosen by the arbitration agreement refused to arbitrate the matter.


Master Protection Corporation (Employer) required Tony Martinez, Jr. to sign an arbitration agreement as a condition of his employment. The agreement required Martinez to arbitrate all claims arising out of his employment, with the exception of claims for workers' compensation or unemployment benefits. The agreement excluded from arbitration any claims by Employer for unfair competition and disclosure of unauthorized trade secrets or confidential information. After Employer terminated his employment, Martinez filed a lawsuit against Employer for wrongful termination, Labor Code violations, and national origin discrimination. The trial court found that the matter must be submitted to arbitration.

Although the terms of the agreement required the American Arbitration Association (AAA) to conduct the arbitration, the AAA refused to conduct the proceedings. The trial court then appointed an arbitrator, which found in favor of Employer. Martinez petitioned to vacate the award, but the trial court denied his request. Martinez appealed.

Appellate Court Decision

The Court of Appeal concluded that the agreement is unconscionable and unenforceable. The Court found that the arbitration agreement is procedurally unconscionable because it was "part of a 'take it or leave it' employment condition." The Court also found the agreement substantively unconscionable because it (1) requires Martinez to arbitrate the claims that he would most likely assert against Employer, but did not require Employer to arbitrate the claims that it would most likely assert against Martinez, (2) requires Martinez to pay one-half of the arbitration costs and to pay the fees before the arbitration hearing, and (3) only provides a six-month statute of limitations for civil and statutory rights.

The Court also concluded that the trial court erred in appointing an arbitrator when the AAA forum was unavailable. If the forum selected by the parties is unavailable, a court cannot compel arbitration in a different forum by appointing a substitute arbitrator. The Court of Appeal sent the matter back to the trial court so that Martinez can proceed with his lawsuit.

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