Facts
Decision
Comment



The California Court of Appeal's recent decision in Leos v Darden Restaurants, Inc continues the nationwide trend of courts enforcing arbitration provisions according to their terms.

Facts

The two plaintiffs alleged causes of action against their former employer, Darden Restaurants, Inc, under the Fair Employment and Housing Act and common law causes of action. They also sought declaratory relief that Darden's arbitration provision was unenforceable.

When both employees were hired, they had signed an acknowledgment stating that they had read and reviewed Darden's dispute resolution process booklet containing the arbitration provision at issue. After the plaintiffs filed their lawsuit, Darden filed a motion to compel arbitration pursuant to the dispute resolution process. The dispute resolution process provided a four-step process for the parties to resolve their dispute, the last of which allowed either the employee or Darden to submit the matter to binding arbitration according to the Employment Dispute Resolution Rules of the American Arbitration Association.

Darden filed a motion to compel arbitration pursuant to the California Arbitration Act. The plaintiffs opposed the motion, claiming that the arbitration provision was unconscionable and thus did not satisfy the requirements set forth in California precedent. Following the trial court's denial of the motion to compel arbitration on the ground that the arbitration provision was unconscionable, Darden appealed.

Decision

The court of appeal acknowledged that US Supreme Court precedent behoves the invalidation of arbitration agreements if the court finds that generally applicable contract defences – such as unconscionability – apply to such agreements. Unconscionability has both a procedural and substantive element. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, whereas substantive unconscionability focuses on overly harsh or one-sided results. The court of appeal reiterated that both procedural and substantive unconscionability must be present in order for a court to refuse to enforce a contract because it is unconscionable, but not to the same degree. The more substantively oppressive a contract term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa.

Since the plaintiffs had been required to sign the dispute resolution process acknowledgments as a condition of employment, could not negotiate the terms of the dispute resolution process and had no meaningful choice in the matter, the court quickly concluded that the dispute resolution process was procedurally unconscionable.

Such a quick analysis of procedural unconscionability led to a lower required finding of substantive unconscionability than would suffice to render a term or contract unenforceable as unconscionable.

The plaintiffs argued that the arbitration provision was substantively unconscionable in the following five respects, which the court of appeal dismissed in turn:

  • First, the plaintiffs argued that the provision of the dispute resolution process stating that it "may be updated from time to time as required by law" rendered the entire arbitration provision illusory and unenforceable, or constituted an unconscionable clause. The court rejected this argument, expressing confusion as to how "a clause permitting a modification as required by law can itself be unlawful. If a particular modification is required by law, then the change is necessary to avoid the very result that plaintiffs seek here – the invalidation of the arbitration provision".
  • Second, the plaintiffs challenged three clauses in the arbitration provision of the dispute resolution process governing discovery. The court of appeal held that the provisions governing discovery did not hinder the employees' ability to vindicate their statutory rights because one of the goals of arbitration is to streamline dispute proceedings. As all of the challenged provisions were subject to change on the arbitrator's determination of good cause, the limitations did not render the arbitration provision unconscionable.
  • Third, the plaintiffs contended that because the dispute resolution process provided that employees could choose to arrange for a court reporter at his or her own cost, they were unfairly burdened with arbitration expenses. The court of appeal quickly dismissed this argument. Had the cause of action been pursued in a civil action, the plaintiffs would still have had to pay such an expense pursuant to the California court rules; thus, Darden was permitted to impose the same cost requirements in arbitration proceedings.
  • Fourth, the plaintiffs argued that the dispute resolution process arbitration provision lacked mutuality and did not constitute a bilateral agreement because it contained a clause permitting either party to request available temporary or preliminary injunctive remedies. The court rejected this argument, noting that the arbitration clause did not afford the employer more rights and remedies than would be available to an employee. The arbitration agreement also did not exempt claims likely to be brought by an employer from arbitration, yet require arbitration of claims likely to be brought by an employee.
  • Finally, the plaintiffs contended that the prohibition in the dispute resolution process on class or collective actions in arbitration was unconscionable. The court rejected this argument as irrelevant because the plaintiffs had not brought a class or collective action.

The court of appeal thus reversed the denial of the motion to compel arbitration following a finding that the dispute resolution process was procedurally unconscionable, but not substantively unconscionable.

Comment

This is a significant California case that furthers the trend of courts enforcing arbitration agreements according to their terms, even when there are elements of procedural unconscionability involved. However, this case involved a pro-employee arbitration clause with substantial protections and should be viewed in the context of California cases on arbitration as a whole. While the pendulum does appear to be swinging in favour of arbitration clauses, employers should not view this as a blanket endorsement of all such clauses going forward. Employers must be careful in drafting their arbitration agreements to ensure that the agreements do not curtail employees' substantive rights. California courts will likely consider these cases based on a review of the specific elements of the arbitration clause and the particular way that it is applied in the case at hand.

For further information on this topic please contact Eric S Beane or Ben Gipson at DLA Piper by telephone (+1 310 595 3000), fax (+1 310 595 3300) or email (eric.beane@dlapiper.com or ben.gipson@dlapiper.com).