Why it matters

Concluding that an arbitration agreement was both substantively and procedurally unconscionable, a California appellate panel affirmed denial of an employer’s motion to compel arbitration. Maya Baxter sued Genworth for wrongful termination. Pursuant to a Conditions of Employment Acknowledgment form completed by Baxter, Genworth moved to compel arbitration of the action. A trial court determined the agreement was unconscionable, and the appellate panel affirmed. Although the fact Baxter had to sign the agreement as a condition of continued employment amounted to “modest” procedural unconscionability, the panel found several features of substantive unconscionability that tipped the scales in favor of the employee, including default discovery limitations and a prohibition against contacting witnesses. Finding the agreement “permeated” by unconscionability, the court affirmed denial of the motion to compel arbitration.

Detailed discussion

Maya Baxter began working for AssetMark Investment Services in 2001 and became an employee of Genworth when it acquired her previous employer in 2006. As a condition of Baxter’s continued employment, Genworth required her to sign a Conditions of Employment Acknowledgment form, which included an agreement to resolve employment-related disputes according to guidelines known as the Resolve Employee Issue Resolution Program.

The Resolve program contained four stages of alternative dispute resolution. If a problem arose, employees were first required to submit concerns in writing to a Resolve administrator for discussion with an immediate manager and human resources representative. Level two involved a meeting with a higher-level manager and an HR rep. Escalation to level three sent the dispute to mediation, with arbitration at level four.

Baxter filed suit against Genworth alleging that she was terminated after she expressed concern about employee evaluation forms that included race, age and gender coding, which she believed was discriminatory and unlawful. The employer countered with a motion to compel arbitration based on Baxter’s agreement to participate in the Resolve program.

A trial court denied the motion, finding the arbitration agreement to be both procedurally and substantively unconscionable. Genworth appealed, but a California Court of Appeal affirmed. The appellate panel began with procedural unconscionability. “Here, Baxter had no opportunity to negotiate the terms of the Resolve program,” the court wrote. “Nor did she have any meaningful choice in the matter. She could either quit her job of over five years or agree to the arbitration terms that were a condition of her continued employment. The Resolve program was presented in a take-it or leave-it manner. Baxter lacked equal bargaining power. These facts present a ‘high degree of oppressiveness’ supporting a finding of procedural unconscionability.”

Turning to substantive unconscionability, the court expressed concern about several provisions of the agreement. The Resolve guidelines prohibited employees and their attorneys from obtaining information outside the formal discovery process, including attempts to question other employees about the aggrieved employee’s claim. No such prohibition on contacting other employees applied to Genworth.

“This provision of the Resolve guidelines effectively acts as a gag order that limits a complaining employee’s ability to informally investigate a claim,” the panel said. “As the trial court observed, without the ability to conduct such an informal investigation, an employee will be hampered in his or her ability to effectively tailor the limited discovery allowed under the arbitration agreement. Because the same prohibition does not apply to Genworth, the arbitration agreement is unfairly one-sided.”

The employer also violated public policy by forbidding employees from assisting each other with claims of discrimination except within the confines of the limited formal discovery allowed, the court added.

Default limitations on discovery—such as a cap of 10 interrogatories (with each subpart counting as a separate interrogatory) and just two depositions—also troubled the panel. “Employment disputes are factually complex, and their outcomes ‘are often determined by the testimony of multiple percipient witnesses, as well as written information about the disputed employment practice,’” the court wrote. “Seemingly neutral limitations on discovery in employment disputes may be non-mutual in effect.”

In Baxter’s case, her 12-year employment history would require the testimony of several witnesses (with six already identified in her complaint), documents related to multiple policies and procedures, and communications about her discipline and termination. “The default limitations on discovery are almost certainly inadequate to permit Baxter to fairly pursue her claims,” the court said.

Even though the Resolve program provided the arbitrator with the power to permit additional discovery, it required a vague standard of “good and sufficient cause,” and “a reasonable arbitrator would feel constrained under the terms of the Resolve program to expand discovery to the extent necessary to vindicate Baxter’s statutory rights,” the panel said. “Under the circumstances, it is reasonable to conclude that her ability to prove her claims would be frustrated.”

The court found additional provisions that were problematic, including a shortened limitations period to pursue relief and default timelines for concluding the arbitration, resulting in a finding that the agreement was unconscionable and therefore unenforceable.

“As a contract of adhesion that Baxter was forced to accept as a condition of her continued employment, Resolve is procedurally unconscionable,” the panel wrote. “And, the provisions in Resolve that prohibit contacting other employees about a claim, restrict formal discovery, shorten limitations periods, and effectively limit an employee’s right to seek administrative remedies before an arbitration is conducted provide more than ample grounds to support a conclusion that Resolve is substantively unconscionable.”

The court refused to sever any of the unconscionable provisions, finding that the agreement was so permeated it could not be salvaged, affirming denial of the motion to compel.

To read the opinion in Baxter v. Genworth North America Corp., click here.