This month’s key California employment law cases involve arbitration and PAGA issues.

Arbitration - Farrar v. Direct Commerce, Inc., 9 Cal. App. 5th 1257, 215 Cal. Rptr. 3d 785 (2017)

Summary: Arbitration agreement signed by top executive was enforceable, despite lack of opportunity to negotiate, arbitration service provider change, and exclusion of claims arising from separate confidentiality agreement.

Facts: Defendant employer hired plaintiff as its vice president of business development. During negotiations regarding her compensation, defendant emailed plaintiff an offer letter that contained an arbitration provision. Five days later plaintiff received a revised offer letter, also containing an arbitration provision. The arbitration provision in the final letter differed from the arbitration provision in the initial offer letter in two key ways. First, the initial letter specified arbitration would be before the American Arbitration Association, while the final letter provided arbitration would be administered by ADR Services. Second, the provision in the final letter identifying claims excluded from arbitration referred to an “Assignment of Inventions & Confidentiality,” rather than a “Confidentiality and Inventions Agreement” referenced in the first letter. After defendant terminated plaintiff’s employment, she filed a complaint alleging employment law claims and defendant moved to compel arbitration. The trial court denied defendant’s motion on the grounds that the arbitration provision was procedurally and substantively unconscionable. It was procedurally unconscionable because: (1) plaintiff had no meaningful choice whether to accept the arbitration agreement, (2) she was surprised by the change in providers, (3) the arbitration rules were not attached, and (4) the confidentiality agreement was not given to her until after she signed the final offer letter. The provision was substantively unconscionable because of the exclusion of claims related to the confidentiality agreement.

Court’s Decision: The Court of Appeal reversed. Although plaintiff was a top level executive who had the opportunity to negotiate the terms of her employment, there was some procedural unconscionability because she had no opportunity to negotiate over the arbitration provision. However, the procedural unconscionability was minimal because the changes to the arbitration service provider and to the title of the confidentiality agreement were insignificant, and she had an opportunity to obtain a copy of the confidentiality agreement. While the wholesale carve-out of claims related to the confidentiality agreement, rather than just securing provisional judicial remedies, was substantively unconscionable, the unconscionability could be remedied by severing the exclusion.

Practical Implications: Employers should be careful about arbitration clauses that completely exclude claims for breach of a confidentiality agreement. If an exclusion is needed (as arbitrators can award provisional relief), the better practice is to limit the exclusion to only provisional remedies such as injunctive relief.

Arbitration/PAGA - Betancourt v. Prudential Overall Supply, 9 Cal. App. 5th 439 (2017)

Summary: Employer cannot compel arbitration in action brought under California Private Attorneys General Act even if plaintiff’s sole cause of action under PAGA seeks relief not available under PAGA.

Facts: Plaintiff filed an action against defendant, his former employer, asserting one cause of action under the California Private Attorneys General Act (“PAGA”), which allows a private individual to seek Labor Code penalties otherwise only available to the State of California. Defendant filed a motion to compel arbitration, asserting that plaintiff’s PAGA claim was not exempt from arbitration because it sought relief PAGA does not provide, such as business expenses, unpaid wages and interest. Defendant argued that the PAGA action was, in substance, a standard wage and hour case, and therefore was subject to arbitration. The trial court denied defendant’s motion, finding that under Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), a PAGA claim is not subject to an arbitration agreement, and to the extent plaintiff’s requested remedies were inconsistent with a PAGA action, the proper procedure would be for defendant to file a motion to strike.

Court’s Decision: The California Court of Appeal affirmed. If defendant believed plaintiff’s PAGA complaint alleged non-PAGA claims, then defendant should have challenged the pleading with a motion to strike. A motion to compel arbitration is not the proper procedural vehicle for addressing alleged defects in a complaint. The court also rejected defendant’s argument that Iskanian merely held that waivers of the right to bring a representative action are unenforceable, but did not prohibit an employer and an employee from agreeing to use arbitration as the forum for a PAGA claim. Because a PAGA claim is a dispute between an employer and the state, an agreement between an employer and an employee cannot bind the state to arbitration.

Practical Implications: The PAGA statute continues to complicate employment disputes and make them more difficult to resolve. Under this case and many others, PAGA claims brought in state court are not susceptible to arbitration.