In the first week of February, the California Court of Appeal issued two decisions impacting employers' use of mandatory arbitration provisions in employee contracts. In the first case decided on February 3, 2025, the First Appellate District determined the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 ("EFAA" or "Act") preempts state law enforcement of mandatory arbitration for sexual harassment disputes. Further, parties may not use choice-of-law provisions to contract around the EFAA's regulations. Siding with the employee, the Appellate Court vacated the order to compel arbitration, finding the EFAA applied to the entire case because one claim fell within the scope of the Act.
In the second case decided on February 4, 2025, the Sixth Appellate District found that the opportunity for both parties to expand third-party discovery when authorized by the arbitrator allows each party adequate access to discovery to vindicate its claims. Siding with the employer, the court held the arbitration agreement was not substantively unconscionable because it provided the arbitrator discretion to permit additional third-party discovery; thus, the arbitration provision was enforceable.
These two holdings impact the use and scope of arbitration agreements for California employers.
Background on Casey v. Superior Court
In Casey v. Superior Court of Contra Costa County ("Casey"), a former employee brought suit against an employer alleging four causes of action, including a sexual harassment claim. The employee opposed the employer's motion to compel arbitration, arguing the EFAA permitted her to decline arbitration, regardless of the binding arbitration clause within her employment contract. The trial court determined, though, that the EFAA did not apply due to a choice-of-law provision within the parties' employment contract; thus, the trial court granted the employer's motion to compel arbitration. On appeal, the Court of Appeal reversed.
The appellate court first considered the lawfulness and applicability of the EFAA to the parties' suit. Because Congress has authority under the commerce clause to enact laws that exhibit a nexus to interstate commerce, the EFAA does extend to contracts that relate to interstate commerce. The court determined the EFAA applied here, recognizing sufficient evidence of out-of-state contact by the employer.
Next, the court found that the EFAA preempted the employer's claim to compel arbitration because it was impossible for the employer to comply with both state and federal requirements. The EFAA contains a "categorical rule of unenforceability" to cases relating to sexual harassment disputes. Given the EFAA's preemption over conflicting state law, California contract law, which would require arbitration of the matter due to a binding employment agreement, does not govern. Instead, the Court found the parties' contractual arbitration agreement "immaterial" because of the EFAA's applicability.
Finally, the Appellate Court addressed the scope of the Act's applicability when a case contains other claims in addition to sexual harassment claims. The Court found that "where a plaintiff's lawsuit contains at least one claim that fits within the scope of the EFAA, the arbitration agreement is unenforceable as to all claims asserted in the lawsuit." Because the EFAA applies to a "case" rather than a "claim," the Act extended to all of the employee's claims, making the entire case exempt from arbitration.
Background on Vo v. Technology Credit Union
In Vo v. Technology Credit Union ("Vo"), the appellate court reversed the trial court's decision, granting the employer's motion to compel arbitration. Like in Casey, the employer in Vo entered into an employment agreement that contained a mandatory arbitration provision. This provision required the parties to abide by the rules and procedures of the arbitration service identified in the contract, which allowed for expanded third-party discovery at the discretion of the arbitrator. The employee filed suit against his former employer alleging a variety of Fair Employment and Housing Act ("FEHA") violations. Thereafter, the employee opposed the employer's motion to compel arbitration, asserting the arbitration provision was both procedurally and substantively unconscionable as it limited discovery in violation of the California Arbitration Act.
Following the standard articulated by the California Supreme Court in Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478 ("Ramirez"), the Vo Court relied on five factors to assess substantive unconscionability based on issues relating to civil discovery: "(1) the types of claims covered by the agreement, (2) the amount of discovery allowed, (3) the degree to which that amount may differ from the amount available in conventional litigation, (4) any asymmetries between the parties with regard to discovery, and (5) the arbitrator's authority to order additional discovery." In assessing these factors, the court determined "review[ing] an arbitration agreement for unconscionability turns on whether a party has access to adequate discovery to vindicate its claims."
The arbitration agreement in Vo applied equally to the employer and employee since both parties were bound to the same rules of the arbitration company. As both parties were treated equally, there were no asymmetries imposed on one party in terms of discovery. Further, in reviewing the agreement at the time of formation, the Court found the amount of discovery later required of the employee did not impact validity. "The discovery provision could not be substantively unconscionable simply because the plaintiff eventually required more depositions than the provision allowed in writing." Finally, providing the arbitrator with the authority to expand discovery when necessary ensured adequate discovery was available if necessary to both parties. Accordingly, there was no finding of substantive unconscionability in the provision regarding arbitrator discretion in expanded third-party discovery. Therefore, the arbitration agreement was neither unconscionable nor unenforceable.
Impacts on Arbitration Provisions in Employment Agreements
These recent decisions in Casey v. Superior Court of Contra Costa County and Vo v. Technology Credit Union provide clarification to employers as to the enforceability of the arbitration provisions within their employment contracts. Likewise, these decisions inform employees that they may be able to forego the arbitration requirement and insist on their federal right to litigate in court in cases involving claims of sexual harassment.
Specifically, the Casey decision establishes that California courts will likely enforce the EFAA provisions strictly to protect employees. Employers should assess the arbitration agreements within their employment contracts to ensure the agreements conform to state law and federal law, including the EFAA. More particularly, employers should note that an arbitration agreement eliminating an employee's right to litigate in court may be moot should the employee raise a sexual harassment claim. Additionally, contractual arbitration provisions that would otherwise be upheld by state law cannot be utilized to override federal protections, and employers may not use choice-of-law provisions to circumnavigate federal law.
The Vo ruling underscores the enforceability of arbitration agreements that incorporate procedures authorizing arbitrator discretion to manage discovery, which can be particularly relevant in employment cases involving statutory claims under FEHA. The Vo decision also highlights the ability of employers to enter into arbitration agreements where an arbitration rule gives the arbitrator authority to limit expanded discovery. To ensure enforceability, both parties should be bound by the same arbitration rules; absent inequality to one party, however, the arbitration provision will still stand.
California employers should review their existing arbitration agreements to ensure that the agreements comply with these rulings and other recent changes in the law surrounding arbitration.
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