Arbitration Agreements continue to be the hot topic in the State of California. Despite the California Supreme Court's even-handed ruling in Armendariz v. Foundation Health Psychcare Servs., Inc. (2000) 24 Cal.4th 83, setting forth the essential elements of a valid, conscionable arbitration agreement between an employer and employee1, Senate Bill 1538 seeks to invalidate pre-dispute arbitration agreements between employers and employees. At present, this bill is winding its way through the California legislature. An overview follows:

Senate Bill 1538 ("SB 1538"), sponsored by the State's Fair Employment and Housing Commission, and introduced by Senator John Burton (D-San Francisco, President Pro Tem) in April, 2002 would drastically change California law. First, it would amend existing law to invalidate pre-dispute arbitration agreements between employers and employees as they relate to employment actions under the Fair Employment and Housing Act. Second, an employer's requirement of an arbitration agreement as a condition of employment would constitute an "unlawful employment practice" as defined in California Government Code Section 12952.

The origins of SB 1538 can be traced back to SB 410, entitled "Arbitration." Introduced by Shiela Kuehl (D-Los Angeles) in February, 2001, this bill's intended purpose was to prohibit employers from requiring an employee to agree to arbitrate any claims arising under the FEHA, and void any arbitration agreement obtained in violation of the provision. SB 410 is presently in an "inactive" status, having been returned to the Secretary of the Senate in February, 2002, apparently shelved and subsumed by SB1538.

SB 1538's sponsor, the Fair Employment and Housing Commission, initiated the bill amid growing concerns that arbitration agreements were eroding California's Fair Employment and Housing Act ("FEHA")- self-described by the Commission as "one of the strongest civil rights laws in the nation. . .." See SB 1538, Record of Assembly Committee on Judiciary, Hearing Notes, June 11, 2002, page 5. The Commission complains that arbitration agreements are causing California's workers to sign away their rights under the law, rendering their claims relegated to arbitral forums that lack substantive and procedural protections set forth in the FEHA. Id.

Arguments in Favor of SB 1538

Proponents argue that the arbitration privatizes discrimination disputes and undermines public accountability and enforcement of the laws by limiting the authority of the DFEH to investigate and pursue meritorious claims. Advocates of SB 1538 also claim that closed-door arbitrations diminish the development of discrimination law because, when the cases are heard privately, new and unresolved issues never reach the appellate courts, and the associated case law becomes stagnant. SB 1538 is supported by the AARP of California; the AFL-CIO; the Employment Lawyers Association; Consumer Attorneys of California; and Hotel and Restaurant Employees International Union, amongst others.

Arguments Against the Bill

Leading the battle against SB 1538 is the California Chamber of Commerce. They argue that arbitration is advantageous to both plaintiffs and defendants because its cheaper, faster and more flexible than litigation. They also argue that overall, plaintiffs who arbitrate are generally more satisfied with the results than those who litigate in the courts. Should SB 1538 be passed into law, an employer could be found liable for discrimination if it required employees to agree to arbitrate state discrimination claims. Further, even post-dispute arbitration agreements would be unenforceable, absent a showing by the employer that the employee entered into the agreement after the dispute arose, and only after proving that any waiver or arbitration agreement entered into by the employee was knowing, voluntary, and not a condition of employment.

The Status of SB 1538

The bill passed through the State Senate on May 23, 2002, by a vote of 22-11. In early June, the bill passed the Assembly Judiciary Committee on a 8-4 vote. On August 7, 2002, SB 1538 was approved by the Assembly Appropriations Committee.

Two Recent Ninth Circuit Decisions Both Uphold And Reject Employer -Employee Arbitration Agreements

In Circuit City Stores v. Najd (9th Cir. June 24, 2002) 2002 U.S. App. Lexis 12360, the Ninth Circuit affirmed a District Court's decision and compelled arbitration in a state court action filed by the employee. The plaintiff in Circuit City worked for the employer for about ten years before the employer instituted an "Associate Issue Resolution Program" which included a "Dispute Resolution Agreement", or arbitration agreement. The employer's current employees, including plaintiff Najd, were allowed to opt out of the agreement by simply returning a form to the corporate office. Plaintiff acknowledged receipt of the Program paperwork, but did not opt out of the agreement. Circuit City 2002 U.S. App. Lexis 12360 at 2.

A few years later, Plaintiff was terminated. He filed suit in state court, alleging various common law torts and a violation of California's Fair Employment and Housing Act. ("FEHA.") Circuit City responded by filing a petition in federal court under the Federal Arbitration Act to stay the state court action and compel arbitration, citing the Dispute Resolution Agreement.

The Ninth Circuit found that arbitration should be compelled because the agreement was procedurally conscionable2. The Court distinguished the Najd agreement from cases where it found nearly identical contracts unconscionable, because in Najd, the plaintiff had the right to opt out of the agreement and refused to do so. Circuit City 2002 U.S. App. Lexis 12360, at 8. Further, while silence as to a contract term is generally not construed as acceptance, the Court found acceptance in this case, because the employee acknowledged receipt of the "Resolution Program" paperwork, and because the acknowledgment provision clearly set forth the consequences of failing to opt out of the agreement, and described how the employee could do so. By disregarding this language and doing nothing, plaintiff was found to have accepted the terms of the agreement. Circuit City 2002 U.S. App. Lexis 12360 at 11-12. Additionally, the Court rejected plaintiff's claim that the agreement was invalid due to lack of consideration; the Court stated that the employer's agreement to also submit to arbitration was sufficient. Circuit City 2002 U.S. App. Lexis 12360 at 10.

Conversely, in Ferguson v. Countrywide Credit Industries Inc. (9th Cir. July 23, 2002) U.S. App. Lexis 14739, the Ninth Circuit upheld a Central District Court of California's denial of the employers petition to compel arbitration. In Ferguson, the plaintiff filed a complaint against her employer and her supervisor, alleging state and federal causes of action for sexual harassment, retaliation, and hostile work environment. The employer sought to compel arbitration, in reliance upon the arbitration agreement the employee signed as a prerequisite to employment.

The District Court denied the employer's petition to compel arbitration, and the Ninth Circuit affirmed, on the grounds that the agreement was both procedurally and substantively unconscionable. Both elements must necessarily be present, though not necessarily to the same degree, for an arbitration agreement to be voided. Ferguson, U.S. App. Lexis 14739 at 9. The unequal bargaining position of the employee, and the fact that the arbitration agreement was presented, pre-employment, on a "take it or leave it basis," were sufficient to render the agreement procedurally unconscionable. Ferguson, U.S. App. Lexis 14739 at 12-13.

The agreement was found to be substantively unconscionable because it mandated that the employer and employee share arbitration fees, Ferguson at 16-18, and contract language which excluded from arbitration claims that typically an employer, not an employee, might have- such as claims for equitable relief from intellectual property violations, disclosure of trade secrets. Ferguson at 14-15. All of these terms, and others, served to "maximize employer advantage" and ran afoul of Armendariz. The Court reprimanded the employer for its "insidious pattern" in the agreement, and charged that by including such offensive provisions, the employer sought to "tilt the playing field" in its favor. Ferguson at 21-22.

California Supreme Court Holds Plaintiff to her Settlement Release Word

And finally, in Jefferson v. California Department of Youth Authority (July 1, 2002) 2002 Cal.Lexis 4202, the California Supreme Court concluded that the plaintiff in a workers compensation case settled her Fair Employment and Housing Act ("FEHA") claims along with her workers compensation claims when she signed a settlement release and "released and forever discharged" the Defendant "from all claims and causes of action . . .."

In Jefferson, the employee had already filed a DFEH complaint alleging sexual harassment, and obtained her "right to sue" letter at the time she settled her workers compensation claim. Later she filed suit in state court asserting her FEHA claims. The employer brought a motion for summary judgment, and won, on the grounds that she had previously settled and released such claims. The plaintiff appealed, and the Court of Appeals affirmed, rejecting Plaintiff's argument that preprinted language in a workers' compensation compromise and release form should be narrowly construed, and that "all claims and causes of action" should mean only all workers compensation claims and causes of action.

Instead, the Court found that when a plaintiff has knowledge of a potential claim against her employer at the time of executing a general release and settling a workers compensation case, but has not yet initiated litigation of the potential claims, the employee has the burden of expressly excluding that potential claim from the release. Jefferson at 23. Otherwise, in a settlement agreement, "all claims and causes of action" means all claims and causes of action.

1 As discussed in the December, 2002 edition of Employment Practices Quarterly, an arbitration agreement between the employer and employee is enforceable as long as it: (1) provides for neutral arbitrators; (2) provides for more than minimal discover; (3) requires a written award, (4) provides for all of the types of relief otherwise available in court; and (5) does not require employees to pay either unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum. Armendariz at 102.

2 Given that the agreement was deemed procedurally conscionable, the Court did not examine whether it was substantively unconscionable. Circuit City at 8.

Lewis Brisbois Bisgaard & Smith LLP has prepared this article for informational purposes only and it is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking professional counsel. If you want legal advice, you must consult a lawyer.

© Lewis Brisbois Bisgaard & Smith LLP 2002