On October 20, 2010 a California Court of Appeal certified for publication a decision that may provide employers a reason to review their employee arbitration agreements. In Trivedi v. Curexo Technology Corp., the Court of Appeal affirmed a trial court ruling that invalidated an arbitration agreement due to an improper fee and cost provision and also because it simply inserted a clause providing the parties a right to provisional remedies under California Code of Civil Procedure section 1281.8.

Case Background

Plaintiff Trivedi is a former CEO of Curexo. His employment was terminated in October 2008. He later sued Curexo for age, race, national origin discrimination and related claims. Trivedi attached to his complaint a copy of the parties’ employment agreement, which contained a provision stating that all claims arising out of his employment would be subject to arbitration. Trivedi, however, alleged that the arbitration provision was invalid and asked the trial court to stay its enforcement.

Curexo filed a motion to compel arbitration and to dismiss or stay the state court action. The trial court denied Curexo’s motion, holding that the arbitration provision was both substantively and procedurally unconscionable. The trial court further declined to sever the “problematic provisions” and concluded that the arbitration provision was unenforceable in its entirety.

The Appeal

On Curexo’s appeal, the Court of Appeal reviewed the trial court’s ruling de novo and affirmed on grounds of both substantive and procedural unconscionability.

Substantive Unconscionability. A key component of the court’s decision is its ruling that two provisions of the arbitration agreement were substantively unconscionable.

First, the court held unconscionable a portion of the arbitration provision stating that the prevailing party would be entitled to recover its costs and attorney’s fees. The court held that this provision was inconsistent with judicial interpretations of the California Fair Employment & Housing Act (“FEHA”), which have concluded that an employer may recover attorney’s fees in a case under FEHA only if the plaintiff’s action is “frivolous, unreasonable, without foundation, or brought in bad faith.” Because this provision “placed Trivedi at greater risk than if he retained the right to bring his FEHA claims in court,” the court found it substantively unconscionable

Second, the court held the arbitration provision unconscionable for the additional reason that it unfairly favored the employer’s ability to seek injunctive relief in court under Code of Civil Procedure section 1281.8(b). Section 1281.8(b) provides, in relevant part: “A party to an arbitration agreement may file…an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief.”

The arbitration provision included the following statement, which simply restated in part section 1281.8: “[P]rovisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending, and any provisional injunctive relief by such court shall remain effective until the matter is finally determined by the Arbitrator.” Although the court acknowledged that this provision was “no broader than that provided for in [section 1281.8],” the Court of Appeal nevertheless found the provision unconscionable, simply because the employer is “more likely to invoke the remedy of injunctive relief.”

This conclusion may be troublesome for employers because it holds unconscionable language in an arbitration agreement that simply restated existing law on grounds that the employer would be “more likely” to take advantage of section 1281.8 provisional relief.

Procedural Unconscionability. The court further held that the arbitration provision was procedurally unconscionable because, among other reasons, Trivedi was not provided with a copy of the relevant arbitration rules. The court cited several cases holding that “the failure to provide a copy of the arbitration rules to which the employee would be bound” supports a finding of procedural unconscionability.

Severance. Finally, reviewing for abuse of discretion the trial court’s decision not to sever the problematic clauses from the arbitration, the court held that there was no abuse of discretion because the provision contained multiple unlawful defects.

What Trivedi Means For Employers

Trivedi exemplifies the hostility some courts have to what should be considered valid and enforceable arbitration agreements. As always, employers using employee arbitration agreements should continue to examine the agreements to ensure they comply with current legal authority.