In Shubin v. William Lyon Homes, Inc., 2000 Cal App. Lexis 871, the California Court of Appeal found that an arbitration clause in an employment agreement was enforceable in all respects but one.
Kristy Shubin (Employee) signed an employment agreement with William Lyon Homes, Inc. (Employer) that included a clause providing for arbitration of almost all disputes arising out of or relating to employment. (The agreement exempted from the arbitration requirement workers’ compensation and unemployment claims and claims relating to taking or using confidential information.) Employee filed a claim under the Fair Employment and Housing Act (FEHA) alleging discrimination and harassment based on gender and pregnancy. Employer moved to compel arbitration based on the employment agreement. The trial court denied the motion to compel arbitration finding that the arbitration clause was procedurally and substantively unconscionable. Employer appealed.
In reviewing the trial court’s finding of unconscionability, the Court of Appeal first addressed the general validity of the arbitration clause. The Court looked at the following five factors that are required to make an arbitration clause valid with regard to FEHA claims:
- Neutrality of the arbitrator – A neutral arbitrator is required in the arbitration process. Neither party challenged the requirement of a neutral arbitrator under the agreement.
- Limitation of remedies – An arbitration agreement may not limit statutorily imposed remedies such as punitive damages and attorney fees. The agreement did not do so in this case.
- Adequate discovery – The Court found that, when Employer agreed to arbitrate the claim, it implicitly consented to discovery sufficient for Employee to adequately arbitrate her claim. Therefore, the arbitration clause could not be held invalid on this basis.
- Written arbitration award and judicial review – In order for judicial review to be accomplished, an arbitrator in an FEHA case must issue a written decision giving the essential findings and conclusions on which the arbitrator’s decision is based. The Court of Appeal found that the arbitration clause did not exclude written findings and would be interpreted as providing for them.
- Payment of costs and arbitration fees – A mandatory arbitration agreement that requires arbitration of FEHA claims impliedly obliges the employer to pay all types of costs that are unique to arbitration. Therefore, the Court of Appeal read such an agreement into the arbitration clause.
Thus, the Court of Appeal found that the arbitration clause met the requirements of a valid arbitration agreement for FEHA claims. However, the Court then had to address an issue that applies generally to all arbitration clauses that are a condition of employment – was the arbitration agreement unconscionable? This issue involves the question of whether the contract was a contract of adhesion. The Court found that the arbitration clause in this case was a contract of adhesion because (1) it was a standardized contract, (2) imposed on Employee as a condition of employment, (3) with no realistic opportunity for Employee to negotiate its terms.
The Court then turned to the issue of whether the arbitration clause was procedurally and substantively unconscionable (to be unconscionable, a contract must have both elements). Procedural unconscionability involves “oppression” or “surprise” due to unequal bargaining power. The court found procedural unconscionability because Employee was hurried and pressured into signing the employment agreement without time to read it and had no realistic opportunity to suggest modifications.
Substantive unconscionability focuses on whether the clause is “overly harsh” or “one sided.” The Court of Appeal found substantive unconscionability in only one area — the provision in the arbitration clause that provided, if either party pursued "any other legal or administrative action" regarding any matter covered by the arbitration clause, the responding party would be entitled to recover its costs and attorney fees incurred in responding. The Court found that Employee could potentially be held liable for Employer’s costs and attorney fees if she filed a discrimination claim administratively before the Department of Fair Employment and Housing (DFEH), even if Employee prevailed on the claim. The Court viewed this as a disincentive to Employee to pursue her legal right to make a claim before the DFEH. Thus, the Court found that this part of the arbitration clause was unconscionable.
Despite finding one part of the arbitration clause unconscionable, the Court declined to strike down the entire arbitration clause. Rather, it severed the phrase “or administrative” from the clause and upheld the remaining portions of the clause.
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