Arbitration is typically more cost-effective and less time-consuming than litigating in court. Employers can avail themselves of the arbitration process and avoid the onerous rules associated with civil litigation by entering into pre-dispute arbitration agreements with their employees at the time of hire. But a recent California court decision demonstrates the importance of ensuring these agreements are drafted with clarity and in accordance with the stringent requirements imposed by California case law. In December 2016 the Court of Appeal held an arbitration agreement allegedly signed by an employee was unenforceable because the agreement was ambiguous as to both its scope and the governing rules for any such arbitration. Flores v. Nature’s Best Distribution, LLC, 7 Cal. App. 5th 1 (2016).

In Nature’s Best, Julie Flores ("Flores") began working for Nature’s Best Distribution, LLC ("Nature’s Best") in 2001 in its shipping and receiving department. At the time of hire, Flores signed an Alternative Dispute Resolution Agreement (the "arbitration agreement") which required her to submit "all legal, equitable and administrative disputes" to the American Arbitration Association ("AAA"), except for those actually covered by the grievance and arbitration procedures contained in a Collective Bargaining Agreement ("CBA") between Nature’s Best and Teamster’s Local 692. In other words, all disputes not within the scope of the CBA were to be arbitrated with the AAA.

In 2014, Flores sued Nature’s Best for wrongful termination, disability discrimination, and several other related claims after Nature’s Best fired Flores for failing to return to work from medical leave as scheduled. Nature’s Best filed a petition to compel arbitration.

Flores opposed the petition, arguing (1) Nature’s Best failed to authenticate the arbitration agreement; (2) Flores did not remember signing the arbitration agreement; (3) the arbitration agreement failed to identify which set of AAA rules applied to the arbitration; and (4) the arbitration agreement was unconscionable because it was offered on a "take-it-or-leave-it" basis without any opportunity to negotiate its terms.

The trial court denied Nature’s Best’s petition and concluded the arbitration agreement was unenforceable. The trial court found persuasive Flores’ declaration that nobody ever explained to her what arbitration meant, and she did not recall being presented with the arbitration agreement.

Nature’s Best submitted a declaration from its Human Resources Director, stating it was company policy to carefully explain arbitration agreements to all new employees during orientation. The trial court disregarded the declaration because the Human Resources Director was not hired until 2007 and therefor did not have personal knowledge of company procedures in 2001 when the arbitration agreement was signed.

The trial court also found unconscionable the arbitration agreement’s waiver of appeal rights and the requirement that Flores pay half of the costs and expense of any arbitration.

Nature’s Best appealed. In affirming the trial court’s decision, the Court of Appeal did not reach the issue of whether the arbitration agreement was unconscionable. Instead, the appellate court concluded Nature’s Best failed to prove the parties reached an agreement to arbitrate Flores’ claims because the arbitration agreement was ambiguous on its face regarding (1) which of Flores’ claims, if any, were covered by the arbitration agreement; and (2) the governing rules and procedures for arbitration. The appellate court based its decision on the following:

  • The arbitration agreement was not signed by a representative from Nature’s Best, and it merely stated it was between "employee and Company" rather than specifically identifying Nature’s Best as a party to the arbitration agreement.
  • The arbitration agreement’s requirement that Flores "submit all legal, equitable and administrative disputes" to the AAA was insufficient to identify what claims would be subject to arbitration before the AAA, and what claims would be subject to resolution through the grievance and arbitration procedure contained in the CBA. The appellate court characterized Nature’s Best’s position as "inconsistent" on this issue, particularly in light of the fact Nature’s Best submitted evidence of Flores’ membership with Teamster’s Local 692, yet made no effort to explain why Flores’ claims were subject to the AAA as opposed to the CBA.
  • The arbitration agreement failed to identify which version of AAA rules would apply to Flores’ claims. The court stated that Nature’s Best "could have but did not specify the type or version of AAA rules in the Agreement, attach a copy of the governing rules, or provide information such as a Web site link to [Flores], informing her where she might find the governing arbitration rules."

Nature’s Best does not establish any new legal precedent. The case, however, provides important guidance to employers seeking to implement arbitration agreements with their employees. Employers should review their arbitration agreements to ensure they do not share the deficiencies outlined by the Nature’s Best court.

In addition, employers should keep in mind that at a minimum, arbitration agreements in California must satisfy the fairness requirements set forth by the California Supreme Court in Armendariz which are as follows:

  • Provide for the selection of a neutral arbitrator.
  • Allow for more than minimal discovery.
  • Allow for the recovery of all types of relief that would otherwise be available in court.
  • Not require employees to pay any arbitrators’ fees or expenses as a condition of access to the arbitration process.
  • Require a written award to allow for adequate judicial review.

Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000).