United States: California Supreme Court Delivers Good News For Employers With Respect To Arbitration Agreements

Last Updated: July 4 2016
Article by Jiwon Juliana Yhee

Plaintiff Maribel Baltazar was an employee at Forever 21, a clothing retail merchandiser, from 2007 to 2011. When Baltazar was hired in 2007, she was asked to fill out an 11-page employment application, which included an arbitration agreement. The agreement stated that the parties "mutually agree[d]" to the arbitration of "any claim or action arising out of or in any way related to the hire, employment, remuneration, separation or termination of Employee." The agreement further provided that, in the event that the parties proceeded to arbitration, "pursuant to California Code of Civil Procedure [section] 1281.8, either party hereto may apply to a California court for any provisional remedy, including temporary restraining order or preliminary injunction." In 2011, after Baltazar resigned from Forever 21, she filed a complaint against the company, alleging that she suffered verbal and physical harassment, race and sex discrimination, and retaliation in violation of California law. Subsequently, Forever 21 sought to compel arbitration. Baltazar opposed Forever 21's motion to compel arbitration, arguing that the arbitration agreement in her employment application was "unconscionable" and therefore could not be enforced. The California Supreme Court reviewed the arbitration agreement at issue to determine if it was, in fact, unconscionable. Baltazar v. Forever 21, Inc. et al., Case No. S208345.

In order for an arbitration agreement to be unenforceable on the basis of unconscionability, a court must find that the agreement is both procedurally and substantively unconscionable, although procedural or substantive unconscionability need not be present to the same degree. Procedural unconscionability focuses on situations where there is oppression or surprise on the part of a party due to unequal bargaining power. Substantive unconscionability, on the other hand, looks at whether the terms of a contract are manifestly unfair or one-sided. Where there is a strong showing of substantive unconscionability, less evidence of procedural unconscionability is required to come to the conclusion that a contract term is unenforceable on the basis of unconscionability.

In Baltazar v. Forever 21, Baltazar argued, among other things, that her arbitration agreement with Forever 21 was substantively unconscionable because the agreement stated that any party may apply to a California court for any provisional remedy pursuant to California Code of Civil Procedure 1281.8. Baltazar contended that this provision unfairly favored Forever 21 because the employer is more likely than one of its employees to seek provisional relief.

The Baltazar Court was unpersuaded by Baltazar's arguments. There is no substantial unconscionability, the Court held, where a provision of the arbitration agreement merely recites the procedural protections already secured by statute, even if it is more likely that one of the parties would pursue the remedies under that provision than another. The Baltazar Court disapproved of a previous California Court of Appeal case, Trivedi v. Curexo Technology Corp., 189 Cal. App. 4th 387, to the extent that Trivedi suggested anything contrary to Baltazar in this respect.

The California Supreme Court also remained unconvinced by many other arguments that Baltazar offered to demonstrate that her arbitration agreement with Forever 21 was unconscionable, including the argument that the agreement was procedurally unconscionable because Forever 21 was unwilling to hire Baltazar unless she signed the arbitration agreement. The Court, stating that "the unconscionability doctrine is concerned, not with a "simple old-fashioned bad bargain," but with contract terms that are "unreasonably favorable to the more powerful party," found that Balthazar had ultimately decided to accept the arbitration agreement of her own volition in order to work at Forever 21. The Court stated that, by requiring Baltazar to sign the arbitration agreement, Forever 21 had not oppressed, lied to, placed under duress, or otherwise manipulated Baltazar.

Baltazar is a helpful case for employers in California that seek to enforce arbitration agreements. The California Supreme Court has not been shy about striking down arbitration agreements that it has deemed to be one-sided in the past, but Baltazar suggests that the Court will reject attempts to strike down arbitration agreements on technical or abstract bases that have little impact on the matter under dispute. At the very least, the California Supreme Court's decision in Baltazar demonstrates that an arbitration agreement will not be found unenforceable simply because the employer is more likely to exercise a provision of that agreement where the rights under that provision are secured by already existing law. Additionally, Baltazar stands for the proposition that requiring an employee to sign an arbitration agreement as a condition of hire does not necessarily render the arbitration agreement unconscionable. This is good news for employers who either plan to include arbitration agreements in their employment applications or contracts, and for employers who seek to enforce these agreements in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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