In a case certified for publication only late last month, the California Court of Appeal struck a mandatory arbitration clause that was contained in an employment contract. See Trivedi v. Curexo Technology Corporation, 189 Cal. App. 4th 387 (2010), which is the latest in a long line of cases providing guidance as to what provisions may lead to an unenforceable arbitration agreement. Trivedi was not your typical dispute over employment arbitration, where the court is seeking to protect a possibly powerless and/or unsophisticated employee from unwittingly waiving the right to a jury trial. Rather, the Trivedi plaintiff was the President and CEO of the company, a fact that, somewhat surprisingly, appears to have played no role in the Court's analysis.
As a preliminary matter, the Court found several points to be quite troubling. For example, the arbitration provision was presented on a "take it or leave it" basis and so allowed for no negotiations. Second, the agreement referred to arbitration before the American Arbitration Association, but the company failed to provide a copy of the AAA rules to the executive. Finally, while not a point on which the Court in the end relied, it did nonetheless note the arbitration provision was in the same type face and no more conspicuous than any other contract provision.
The Court concluded the at-issue arbitration provision was substantively unconscionable on two separate grounds. First, by providing that the "prevailing party" was entitled to recover attorneys' fees and costs incurred in the arbitration, the agreement forced the employee to waive an important public policy protection of the Fair Employment and Housing Act (FEHA), which limits an employer's right to recover attorneys' fees in instances where the employee's claims are found to be frivolous, unreasonable, without foundation, or brought in bad faith. In other words, the employee faced a much greater risk by bringing an FEHA claim to arbitration than if he retained the right to a jury trial. Second, by allowing the parties access to the courts for injunctive relief but no other claims or remedies, the agreement was unconscionably one-sided in the employer's favor for the simple reason that employers are more likely to seek injunctive relief. The Court lastly held that the lower court had not abused its discretion by refusing to sever these two offending clauses as they reasonably caused the agreement to be "permeated by unconscionability."
Employers beware and make sure your employment agreements are fair.