Executive Summary: A panel of the U.S. Court of Appeals for the Ninth Circuit recently overruled a lower court’s decision refusing to enforce an arbitration agreement, holding that the dispute resolution provision of the agreement was valid and enforceable and any invalid provisions could be severed. See Poublon v. C.H. Robinson Company, (9th Cir. Feb. 24, 2017).
In December 2011, plaintiff Lorrie Poublon signed an “Incentive Bonus Agreement” to receive her bonus from her employer, where she worked as an Account Manager. The agreement contained eight provisions, including one that required employees to submit certain claims to mediation, followed by binding arbitration if mediation failed. Another provision featured a class or collective action waiver. After Poublon was terminated in 2012, she alleged she was misclassified as exempt from overtime pay requirements and submitted her claim to mediation. When mediation failed, she filed a class action suit against her former employer, including a count under the California Private Attorneys General Act (PAGA). Pursuant to the agreement, the former employer moved to compel arbitration; however, the court denied this motion. The former employer appealed to the Ninth Circuit, which overruled the lower court’s decision.
The Ninth Circuit’s Decision
Poublon argued that the arbitration agreement was procedurally and substantively unconscionable under California law. The Ninth Circuit panel rejected all of Poublon’s procedural unconscionability arguments and six of the eight substantive unconscionability arguments.
The enforceability of the agreement turned on two provisions: the judicial carve-out provision and the provision that waived collective and class actions. The judicial carve-out provision lacked mutuality since it permitted the company to sue Poublon in court but required the arbitration of her claims. This, the court acknowledged, was unenforceable.
As to the provision waiving Poublon’s right to bring a representative action, the Ninth Circuit panel noted that the waiver of a representative PAGA claim is unenforceable under Iskanian v. CLS Transportation and “contrary to public policy.”
However, despite these two unlawful provisions, the court did not find that the agreement was “permeated with unlawfulness” or substantively unconscionable. Instead, the court held that because the provisions at issue were “collateral to the main purpose of the contract, which is to require arbitration of disputes,” the “severance [of the improper provisions] is appropriate.” The Ninth Circuit held the dispute resolution provision was valid and enforceable once the judicial carve-out was severed and the waiver of representative claims was limited to non-PAGA claims. The Ninth Circuit reversed the lower court’s denial of the motion to compel arbitration and remanded the case to the lower court.
Bottom Line for Employers: This ruling gives employers hope that, even if their arbitration agreements contain broad class and representative waivers that waive PAGA actions, arbitration may still be enforced and class actions avoided. Notably, the court in Poublon did not give any guidance as to the fate of the PAGA action in that case — would it be stayed pending resolution of the employee’s individual wage claims in arbitration? Or must it be arbitrated in the same arbitral forum with Poublon’s individual employment claims? The district court will have to make those decisions.