Applying the California Supreme Court’s recent decision of Armendariz v. Foundation Psychcare Services, Inc., 24 Cal. 4th 83 (Cal. 2000), the California Court of Appeal found that an arbitration agreement in an employment contract is unconscionable. [Pinedo v. Premium Tobacco, Inc., 2000 Cal. App. Lexis 968 (Dec. 19, 2000).]
In Pinedo, the employee sued his employer under the Fair Employment and Housing Act (FEHA) and Title VII for harassment and discrimination based on national origin. The employer filed a petition to compel arbitration pursuant to an employment agreement. The agreement provided for arbitration in “[a]ny controversy or dispute arising out of or relating to this Agreement or relating to Employee’s employment by Employer.” The agreement further provided for waiver by the plaintiff of the right to a jury trial and “any other statutory remedy [he] might have concerning any such dispute including, but not limited to, disputes concerning claims for harassment or discrimination due to race, religion, sex or age.” The agreement also limited “any award on account of the end of employment . . . to reinstatement and/or back pay.” The agreement bound the plaintiff to initially bear all arbitration fees, and limited the prevailing party’s recovery of costs and fees to reasonable out-of-pocket costs and the costs of the arbitration, but disallowed recovery of attorney fees.
Applying Armendariz, the Court of Appeal affirmed the district court’s decision which denied arbitration. In measuring the validity of an arbitration agreement as it relates to an FEHA claim, the Armendariz court looked at four specific areas: (1) the provision limiting remedies; (2) impact on discovery rights; (3) scope of judicial review; and (4) the employee’s burden with regard to costs and fees of arbitration.
The Court of Appeal found the agreement unconscionable. The Court was particularly troubled by the limitation on the plaintiff’s potential recovery. It noted that the agreement limited the recovery to back pay less any unemployment benefits or pay from another job. Also, by precluding recovery based upon statutory claims, the agreement precluded recovery of damages, including attorney fees, contemplated within the FEHA. The Court also noted that the cost provision was potentially oppressive because it required the employee to initially bear all costs. The requirement that arbitration occur in Oakland, California, also struck the Court as disadvantageous to the employee.
According to the Court, the agreement was also “inherently one-sided,” because it addresses only claims involving terms of employment, which would normally be brought by an employee against the employer. The agreement did not, however, apply to damages that the employer might claim against the employee.
The Court of Appeal concluded that the multiple defects in the agreement “indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer’s advantage.” Thus, the Court would not sever the offending provisions in the agreement and held that the trial court did not err in refusing to compel arbitration.
For an example of a case where the Court of Appeal upheld an arbitration agreement valid after severing one offending provision, see KMTG’s legal alert on Shubin v. William Lyon Homes, Inc., 2000 Cal. App. Lexis 871 (Nov. 14, 2000).
If you have any questions about this Legal Alert, please contact Dorothy Landsberg or Bruce Scheidt, or any attorney in the Employment and Labor Department at (916) 321-4500.
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