Arbitration agreements represent a critical tool for employers aiming to circumvent the protracted and costly litigation of employee disputes in civil courts. However, recent judicial scrutiny in California necessitates meticulous drafting to ensure the legality of these agreements.
In a recently published appellate decision, Cook v. University of Southern California (USC), et al., the court ruled against the employer and denied its motion to compel arbitration due to unconscionability in the agreement. The court found the agreement indefinite in scope and duration, lacking mutuality regarding the entities it covered, and therefore, determined it was permeated with unconscionability.
Unconscionability in Arbitration Agreements
An arbitration agreement will be valid and enforceable so long as there is no reason under state law that would render the contract revocable, such as unconscionability. Unconscionability has both procedural and substantive elements, the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results. (OTO, LLC v. Kho (2019) 8 Cal.5th 111,118.) Procedural unconscionability was found at only a low degree by the trial court in the Cook case and was not an issue on appeal—so the analysis primarily focused on substantive unconscionability.
Factual and Procedural Background
Pamela Cook filed a lawsuit against her former employer, USC, and two coworkers alleging discrimination and harassment, despite the fact she signed an arbitration agreement. The University sought to compel arbitration of her claims, but the trial court ultimately deemed the agreement both procedurally and substantively unconscionable, impacting its enforceability.
The court highlighted several problematic clauses:
- First, a provision provided: “Therefore, the University and faculty or staff member named below (‘Employee’) agree to the resolution by arbitration of all claims, whether or not arising out of Employee’s University employment, remuneration, or termination…” (emphasis added).
- This provision is overly broad because it encompassed claims unrelated to Cook’s employment.
- The agreement also states it, “shall survive the termination of Employee’s employment, and may only be revoked or modified in a written document that expressly refers to the ‘Agreement to Arbitrate Claims’ and is signed by the President of the University.” (emphasis added).
- This provision made the agreement unlimited in duration, which is unconscionable.
- The agreement further applies to all claims, “that Employee may have against the University or any of its related entities, including, but not limited to, faculty practice plans, or their officers, trustees, administrators, employees or agents, in their capacity as such or otherwise…” (emphasis added.)
- This provision showed a lack of mutuality because it required arbitration of claims Cook had against related USC entities but did not require that those same USC entities be forced to arbitrate claims it may have against Cook.
The court was unwilling to sever these terms because it found that unconscionability permeated the entire agreement, and the only way to correct these issues would be to completely rewrite it. Therefore, the trial court denied the motion to compel filed by defendants.
Appellate Review
Defendants appealed the trial court’s decision to deny their motion to compel arbitration. With regard to the scope, the appellate court found that the plain and express language of the agreement applied to claims unrelated to her employment with USC. The appellate court rejected all the legal arguments USC attempted to make to the contrary, finding the legal opinions inapplicable to the matter because all the other examples USC pointed to included language that limited claims to those arising from the employment relationship.
When considering duration, the appellate court also determined that the fact the agreement survives termination indefinitely and may only be revoked if the President of USC agrees renders the agreement unconscionable. It was not persuaded by USC’s argument that since it did not specify a term of duration, it should be considered terminable at will.
The appellate court also agreed with the trial court that there was a serious lack of mutuality in the agreement because the plain language provided significant benefits to USC and its related entities without any reciprocal benefit to Cook.
Lastly, the appellate court determined that the trial court’s finding that the unconscionable terms could not be severed from the agreement was a reasonable exercise of its discretion.
Employer Takeaways
Employers must regularly review arbitration agreements to ensure compliance and should check that the agreements:
- Limit the scope of claims to those that arise from the employment relationship;
- Limit the duration of the agreement; and
- Contain clear and mutual terms regarding the rights and obligations of the parties.
Overall, employers should be reviewing their arbitration agreements at least annually to ensure they are valid and in line with the current views of California courts.
If you have questions about employment arbitration agreements in California or any related issues, contact Sarah Woolston or another Cook Brown attorney.
