An arbitration agreement was not procedurally unconscionable because the employer failed to attach a copy of the relevant arbitration rules to the agreement, the California Court of Appeal has ruled. Peng v. First Republic Bank, No. A135503 (Cal. Ct. App. Sept. 26, 2013). The Court also ruled that the agreement was not substantively unconscionable because it provided that the employer may unilaterally modify the agreement. The Court reversed the trial court’s order denying the employer’s request for arbitration of the employee’s discrimination and wrongful termination claims.
Anna Peng was an assistant manager for First Republic Bank. She signed an arbitration agreement requiring arbitration of all claims “arising out of or relating to the Employee’s employment.” The agreement provided that the rules of the American Arbitration Association (“AAA”) would apply; however, the AAA rules were not attached to the arbitration agreement. The agreement also allowed First Republic to modify it at any time.
First Republic terminated Peng’s employment, and she sued First Republic for race and gender discrimination, retaliation, and wrongful termination. First Republic asked the trial court to compel arbitration based on the agreement. The trial court denied the request, finding that First Republic’s failure to provide the AAA rules and the unilateral modification provision in the agreement rendered it unconscionable. First Republic appealed.
In deciding whether to enforce an arbitration agreement, California courts examine whether its terms are both procedurally and substantively unconscionable. A sliding scale is used to assess procedural unconscionability in proportion to substantive unconscionability: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa. Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 114 (Cal. 2000).
When examining the procedural unconscionability, a court examines two factors: oppression and surprise. “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (Cal. Ct. App. 1997). Substantive unconscionability occurs in the employment context when an arbitration agreement is “one-sided” in favor of the employer without sufficient justification; for example, when “the employee’s claims against the employer, but not the employer’s claims against the employee, are subject to arbitration.” Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1072 (Cal. Ct. App. 2003).
Agreement Not Invalid
Addressing procedural unconscionability, the appellate court noted that the trial court relied on Mayers v. Volt Management Corp., 203 Cal. App. 4th 1194 (Cal. Ct App. 2012), in ruling that First Republic’s failure to attach the AAA rules to the arbitration agreement rendered it unconscionable. However, the Court pointed out, Mayers had been depublished pending review by the California Supreme Court and was no longer valid law. Further, the Court found that the other cases on which the former employee relied were “unpersuasive.” In those cases, arbitration agreements referenced alternate dispute resolution rules that resulted in substantive limitations on the employee’s rights, such as the right to engage in discovery or the right to relief. Thus, the employers’ failure to provide the rules in those cases was oppressive because the employees had no way of knowing about the rules’ limitations. By contrast, in this case, the AAA rules did not have any substantive impact on the plaintiff’s rights under the arbitration agreement. Accordingly, the Court concluded that the employer’s failure to attach the AAA rules was insufficient to render the agreement procedurally unconscionable.
Turning to substantive unconscionability, the Court found that the unilateral modification provision did not render the arbitration agreement unconscionable because that provision was limited by the “covenant of good faith and fair dealing implied in every contract.” Relying on Serpa v. California Surety Investigations, Inc., 215 Cal. App. 4th 695 (Cal. Ct. App. 2013) (for more on Serpa, see our article, Arbitration Agreement in Employee Handbook Enforceable, California Court of Appeal Rules), the Court found that the implied covenant of good faith and fair dealing prevented First Republic from unfairly frustrating the plaintiff’s rights under the agreement. The plaintiff did not assert that First Republic altered the agreement in any way. Therefore, the Court concluded that the unilateral-modification provision was not substantively unconscionable and reversed the order denying arbitration.