Issue
In Davis v. O’Melveny & Myers, (— F.3d —, 2007 WL 1394530, C.A.9 (Cal.), May 14, 2007), the United States Court of Appeals considered a challenge to an employer-imposed binding arbitration process to resolve employee claims against the employer. The court found that because the process was both procedurally and substantively “unconscionable,” it therefore could not be enforced under California law.
Facts
Jacqueline Davis (“Davis”) worked as a paralegal at the Los Angeles office of O’Melveny & Myers (“O’Melveny”), an international law firm. In 2002, O’Melveny told its employees that to resolve any claims stemming from disputes with the firm, they would be required to submit to a binding Dispute Resolution Program (“DRP”). The DRP specified that employees, as a condition of their employment, could not initiate lawsuits or administrative actions against O’Melveny.
In 2004, Davis filed a lawsuit against O’Melveny, alleging failure to pay overtime and denying meal and rest breaks, and further charging that the DRP was unconscionable and that its provisions were unenforceable under various state and federal laws. O’Melveny moved to dismiss the action and compel arbitration, and the district court upheld the DRP and granted O’Melveny’s motion. Davis appealed.
Decision
Under California law, a contractual clause is unenforceable if it is both procedurally and substantively unconscionable, the court said, citing Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 690 (Cal. 2000).
O’Melveny’s DRP was “take it or leave it,” because an employee’s only alternative to agreeing to it was to leave and work elsewhere, the court said. In Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002), the court found such a “take it or leave it” arbitration agreement procedurally unconscionable because employees and job applicants had no opportunity to seek to modify the agreement, or to opt out of it without sacrificing their jobs. O’Melveny’s DRP was similarly flawed, the court said, and therefore procedurally unconscionable.
The court also found four terms of the DRP which rendered it substantively unconscionable. First, a provision requiring employees to give notice of a claim within one year of knowing of the facts giving rise to it, or to forever forfeit their right to pursue it, placed the employee at too severe a disadvantage in pursuing claims of “continuing violations,” the court said. Second, a confidentiality provision of the DRP, barring employees from mentioning their claims to anyone not part of the arbitration, was overly broad because it limited employees’ ability to investigate and participate in discovery. Third, the court found a “business justification” provision, allowing O’Melveny, but not employees, to pursue judicial remedies on the basis of its need to protect confidential information was overly broad and therefore too one-sided. Fourth, the DRP’s ban against employees seeking administrative remedies violates precedents protecting employees’ rights to come forward in support of the public good.
The court found that the DRP was both procedurally and substantively unconscionable, therefore unenforceable under California law. The district court’s judgment was reversed and the case remanded for further proceedings.
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