California Supreme Court Approves Mandatory Arbitration

Many California employers have required newly hired and current employees to sign agreements obligating employees to arbitrate employment claims rather than file lawsuits. In Armendariz v. Foundation Health Psychcare Services, Inc., the California Supreme Court recently held that such agreements are enforceable if they satisfy certain conditions, most of which assure that the agreements not favor the employer to the employee's detriment.

First, the arbitration agreement must afford an employee the full range of statutory remedies, including punitive damages and attorneys' fees recoverable under the California Fair Employment and Housing Act (FEHA).

Second, the employer alone must "pay all types of costs that are unique to arbitration." This means that if the arbitrator charges an hourly or daily fee, it may not be split by the parties but must be paid exclusively by the employer. The Court noted that in litigation, employees do not have to pay for the services of a judge. The Court reasoned that requiring the employer to pay the arbitrator's fee "will ensure that employees bringing FEHA claims will not be deterred by costs greater than the usual costs incurred during litigation. Moreover, the above rule is fair, inasmuch as it places the cost of arbitration on the party that imposes it."

Third, employees are "entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review pursuant to" the Code of Civil Procedure. The Court did not precisely define what represents "sufficient" discovery, but stated that the arbitrator should balance the "desirable simplicity" of arbitration with the requirements of FEHA. Employers may want to specify in an arbitration clause the pre-hearing discovery that would be available for both sides.

Fourth, in order for judicial review of the arbitrator's decision "to be successfully accomplished, an arbitrator in a FEHA case must issue a written arbitration decision that will reveal, however briefly, the essential findings and conclusions on which the award is based." As such, the arbitration clause or agreement should require a written opinion by the arbitrator.

Fifth, the employer and the employee both must be obligated "to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences," such as all claims arising out of an alleged wrongful termination. The Court did not completely rule out unilateral arbitration agreements, stating that there must be "at least some reasonable justification for such one-sidedness based on 'business realities.'" The Court did not explain what those realities could be.

This requirement may make arbitration less attractive in certain industries. For example, in high technology industries, it is important for employers to preserve their right to seek injunctive relief in court, including a temporary restraining order (TRO), against current and former employees who steal and misuse trade secrets. Before this ruling, many arbitration agreements stated that the employer had the right to seek injunctive relief. The Court did not squarely address such a provision as an additional basis for invalidating the agreement in this case. However, the arbitration agreement rejected in this case did require an employee who was terminated for stealing trade secrets to arbitrate wrongful termination claims and enabled the employer to pursue its claim for theft of trade secrets in court.

Logically, "business realities" should entitle an employer who is experiencing immediate and irreparable harm because of an employee's disclosure or misuse of trade secrets, to obtain a TRO and preliminary injunction in court and then pursue other remedies in arbitration. However, to be safe, consideration should be given to including a provision in the arbitration agreement enabling both parties to seek injunctive relief, but otherwise requiring arbitration of employment-related claims. Such a provision should be enforceable because it is bilateral. An employer will not likely be harmed by a bilateral injunctive provision as there is very little conceivable need for an employee to seek an injunction against an employer.

The Supreme Court in Armendariz also addressed the issue of whether the unlawful provisions in that employer's particular arbitration agreement could be stricken and the rest of the agreement enforced. The Court refused to do so for two reasons. First, because the agreement had multiple defects ("an unlawful damages provision and an unconscionably unilateral arbitration clause"), the Court concluded that the trial court had not abused its discretion in concluding that the agreement "is permeated by an unlawful purpose." Second, the Court asserted that there was no single provision that could be stricken or restricted in order to remedy the agreement. Rather, a court would have to augment that agreement with additional terms, which is not authorized by the applicable statutes.

Complicating the picture is that a three judge panel of the federal Ninth Circuit Court of Appeals (which includes all California federal district courts) ruled in Duffield v. Robertson Stephens & Co. (1998) that employees may not be required, as a condition of employment, to waive their right to file in court claims for employment discrimination under Title VII of the federal Civil Rights Act of 1964 and under FEHA. Armendariz rejected the reasoning and ruling of Duffield, as have other federal courts. Armendariz described the Duffield decision as "a minority of one." Pending resolution of the issue by the U.S. Supreme Court, employees seeking to avoid enforcement of individual arbitration agreements can be expected to file suit under Title VII in federal court.

Employers who have employment arbitration agreements in place should have those agreements reviewed by employment counsel to ensure that they comply with Armendariz. If the agreements have multiple defects, it may be necessary to enter into new agreements with employees. Current employees who are presented with updated arbitration agreements should be given some new consideration in exchange for their signature, such as cash. Employers who contemplate having applicants and/or current employees sign mandatory arbitration agreements should evaluate the pros and cons of such agreements. Arbitration is not a cure-all for employers. For example, many arbitrators have a tendency to "split the baby" in resolving disputes, as it is in their economic interest to attract ongoing customers by having no winner or loser. Consequently, carefully researching potential arbitrators is absolutely critical. Also, now employers will have to pay the full fee of arbitrators which could diminish the savings realized by arbitration.