California Court of Appeal Drives Another Stake Into the Heart of Pre-Dispute Employment Arbitration Agreements

A decade ago, the California Supreme Court, in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), held that pre-dispute employment arbitration agreements are enforceable provided that they meet certain minimum requirements for statutory claims and are otherwise valid under state law. A California Court of Appeal has once again found circumstances where those requirements were not met, sending the parties to a jury rather than an arbitrator. The recent decision in Trivedi v. Curexo Technology Corporation, 189 Cal.App.4th (2010), reflects the California courts’ ongoing hostility to employment arbitration agreements, this time largely because the employer failed to hand the employee a copy of the arbitration forum rules.

In Armendariz, the California Supreme Court held that to be valid under state law all arbitration agreements may not be unconscionable, either procedurally (as to how the agreement was entered) or substantively (as to the terms of the agreement). Under the Armendariz standard, courts apply a “sliding scale” approach to evaluate the relationship between procedural and substantive unconscionability, such that a strong showing of one will bolster a weak showing of the other. Courts are empowered to consider whether any unconscionable provisions can be severed from the agreement.

Unlike disputes over employment arbitration typically brought by unsophisticated employees claiming to have unwittingly waived their right to a jury trial, Trivedi involved a plaintiff who was the president and CEO of Curexo Technology (Curexo). Ramesh Trivedi and Curexo had entered into an employment agreement with an arbitration clause under which the parties agreed to arbitrate any disputes before a sole arbitrator selected from the well-known American Arbitration Association (AAA) pursuant to AAA’s National Rules for the Resolution of Employment Disputes. On the face if it, the arbitration clause appeared fair in that it did not restrict the employee’s right to discovery or the ability to bring certain claims or limit the size of claims. The agreement provided — no doubt to the employer’s later regret — that the “prevailing party” would be entitled to recover its costs and attorney fees from the other party.

After Curexo terminated Trivedi (on Halloween in 2008), the former executive sued Curexo in the Alameda County Superior Court alleging 10 causes of action including age, race, color, and national origin discrimination in violation of the Fair Employment and Housing Act (FEHA), as well as claims of unfair business practices, breach of contract, bad faith, and intentional infliction of emotional distress. The trial court denied Curexo’s motion to compel arbitration, finding the arbitration clause to be both procedurally and substantively unconscionable, and refused to sever the “problematic provisions,” thus concluding the arbitration clause was unenforceable and allowing the action to proceed in court.

Procedural Unconscionability

The Trivedi court held that the arbitration clause was procedurally unconscionable on three grounds — it was prepared by Curexo, it was a mandatory take-it-or-leave-it part of the employment agreement, and Trivedi was not given a copy of the AAA rules. The court noted that “the failure to give Trivedi a copy of the AAA rules was no trifling matter” because “the rules extend over 26 single-spaced pages,” yet made no reference to the fact that AAA makes the rules readily available for downloading on its website.¹ The Trivedi court did not address whether an arbitration provision would be unconscionable if the employer failed to provide the employee with arbitration forum rules as they are subsequently revised. The court also cited the “lack of prominence” of the arbitration clause because it “was in the same typeface and was no more conspicuous than any other provision in the employment agreement,” and noted this is one factor a court may consider in determining unconscionability.

Substantive Unconscionability

The court also held that the arbitration clause was substantively unconscionable for two reasons. First, by providing that the “prevailing party” would be entitled to recover costs and attorneys’ fees, the arbitration clause was inconsistent with judicial interpretations that under the FEHA a prevailing defendant may recover such costs and fees only where the plaintiff’s action was “frivolous, unreasonable, without foundation, or brought in bad faith.” The court found that compelling Trivedi to arbitrate under the clause placed Trivedi “at greater risk than if he brought his FEHA claims in court.” The court rejected the employer’s attempt to save the arbitration clause by its argument that, in any event, the AAA rules require the arbitrator to award fees in accordance with applicable law. The court stated that “relying on a document that Trivedi was never provided cannot relieve Curexo of the effect of the unlawful provision in the arbitration clause which it drafted and insisted upon.”

As a second and separate ground, the court found the Curexo arbitration clause’s injunctive relief provision to be substantively unconscionable. The provision included the statement that “provisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending” and the Court of Appeal agreed with the trial court’s reasoning in finding unconscionability because “it is more likely that [the employer] would seek injunctive relief.” The Court of Appeal, however, disagreed with the trial court’s finding that the injunctive relief provision allowed for broader relief than could be obtained under the Code of Civil Procedure.

Significance for Employers

The Trivedi decision highlights the continued hostility with which California courts evaluate employment arbitration agreements. Employers should consult with counsel in reviewing employee arbitration agreements to determine whether there are provisions that could be construed as unconscionable, either procedurally or substantively, in light of Trivedi.

• For now, employers should consider providing employees with a copy of the applicable arbitration rules, have the employee acknowledge in writing receipt of the rules, and provide the Internet web address where the employee may access the current rules as they may be revised from time to time.
• Employers may want to take note of the court’s discussion regarding the “formatting” of arbitration provisions. Employers should ensure that arbitration provisions within employment agreements stand out prominently by use of a more “conspicuous typeface” through bolding, underlining, and/or a larger font. Alternatively, employers may consider using a separate stand-alone arbitration agreement.
• Attorney fee provisions in arbitration agreements are more likely to be upheld if they simply state that costs and fees will be recoverable “in accordance with applicable law.”
• Employers should evaluate the relative risks and benefits to including references in arbitration agreements to pursuing injunctive relief in court.

While reviewing arbitration agreements, employers should re-evaluate whether arbitration is the best forum for the adjudication of employee disputes. As always, employers should consult with counsel to assess the benefits and risks of arbitration.

For more information on this alert, please contact any of the lawyers listed below:

Boston
John Adkins, john.adkins@bingham.com, 617.951.8551
Jenny Cooper, jenny.cooper@bingham.com, 617.951.8473
Louis Rodriques, Co-chair, Labor and Employment Group, louis.rodriques@bingham.com, 617.951.8340

Los Angeles/Orange County
Jacqueline Cookerly Aguilera, jackie.aguilera@bingham.com, 213.229.8439
Debra Fischer, debbie.fischer@bingham.com, 213.680.6418

San Francisco
James Severson, james.severson@bingham.com, 415.393.2242 

New York 
Douglas Schwarz, douglas.schwarz@bingham.com, 212.705.7437

Tokyo
Mie Fujimoto, mie.fujimoto@bingham.com, 81.3.6721.3138

---

¹ The court did not address whether, if the AAA rules were not used, the agreement would have been unconscionable if the Code of Civil Procedure was not attached.