Successful challenge to arbitration

Employee successfully challenges enforcement of an arbitration agreement.

The First District Court of Appeal recently decided whether an arbitration agreement between an employer and employee could be enforced. In Carlson v. Home Team Pest Defense, Inc. (Cal. App. 1st Dist. Aug. 17, 2015) 2015 Cal. App. LEXIS 702, the appellate court addressed the issues of (1) whether the agreement was “unconscionable” such that it would not be enforced, and (2) whether an unenforceable section of the agreement could be set aside in order to save the remainder of the agreement.

In this case, Ms. Carlson sued her employer, Home Team Pest Defense, Inc., for various employment claims. Home Team moved the trial court to compel arbitration. The trial court denied the motion, after which Home Team appealed.

On appeal, the court first considered the unconscionability issue. In California, arbitration agreements will not be enforced if they are “procedurally” and “substantively” unconscionable. Procedural refers to “take it or leave it” agreements or hidden arbitration terms. Substantive concerns overly harsh or one-sided terms.

In terms of the procedural unconscionability question, the arbitration agreement referenced a Dispute Resolution Policy and the rules of the American Arbitration Association. On Ms. Carlson’s first day of work, she asked to see the Policy, but it was not available. Home Team told Ms. Carlson that if she did not sign the agreement the offer of employment would be withdrawn and she would lose her right to unemployment benefits even though the Policy document would not be available for at least a couple of weeks. In fact, Ms. Carlson never saw the Policy or the AAA rules during her employment with Home Team. Based on these facts, the appellate court concluded that the arbitration agreement was highly procedurally unconscionable because it was a take it or leave it agreement with hidden terms.

As to the substantive unconscionability question, an offer letter to Ms. Carlson provided that Home Team could pursue claims in court against her relating to unfair competition, solicitation of customers or employees, or misuse of trade secrets. As a result, the most likely claims that Home Team might have could be brought in court, whereas Ms. Carlson had to arbitrate most claims she might pursue. Also, the arbitration policy required Ms. Carlson to make a request for dispute resolution before beginning arbitration, during which she could not have representation. Failure to do so waived her right to arbitration. But Home Team had no such obligation. Finally, the arbitration agreement provided that Ms. Carlson had to pay a filing fee at the start of arbitration, after which all fees and expenses would be split between the parties. Previous court decisions have established that when employees may incur more costs than if they pursued the matter in court there is substantive unconscionability. As a result, the court of appeal found that the arbitration agreement was substantively unconscionable because it was unfairly one-sided in favor of Home Team.

The appellate court then turned to the issue of whether the trial court should have severed the cost-sharing portion of the arbitration agreement. A court may refuse to enforce an arbitration agreement rather than sever a portion if it is “permeated” by unconscionability. In this case, the unconscionable terms included not only the cost-sharing but the one-sided access to the courts for Home Team, and the pre-arbitration requirement that exclusively applied to Ms. Carlson. In addition, the high degree of procedural unconscionability justified a decision not to sever the cost-sharing portion of the agreement.

While the courts are generally disposed to enforce arbitration agreements, this decision provides a roadmap for avoiding arbitration if the facts are similar enough.

 

Posted by deanroyerlaw