CaliforniaA 2010 landmark California Supreme Court decision upheld the right of California employers to require employees to sign mandatory arbitration agreements as a condition of employment, as long as the agreements meet certain requirements. In Armendariz v. Foundation Health Psychcare Services, Inc., the court set forth the unconscionability standards for assessing whether employment arbitration agreements are unconscionable. That is, to be conscionable, arbitration agreements must be mutual, they must not limit damages, they must be fair, they must provide both sides the ability to conduct adequate discovery, and they must not require employees to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.

Since Armendariz, California courts have applied these standards to various arbitration agreements. Some courts have enforced mandatory arbitration agreements, while others have refused, holding such agreements unconscionable. When it comes to arbitration, federal law reflects a policy of favoring arbitration. The United States Supreme Court has stated that courts must place arbitration agreements on an equal footing with other contracts, and must enforce them according to their terms. Given the favorable federal policy towards arbitration agreements, questions arose regarding whether California law under "Armendariz", the Court conflicted with the federal requirement that arbitration agreements be enforced according to their terms.

Following the United States Supreme Court decision in AT&T Mobility v. Concepcion in 2011, there was some question as to whether California employment arbitration agreements remained subject to the unconscionability analysis of Armendariz.

In Concepcion, the U.S. Supreme Court appeared to be critical of California law when it stated that California frequently applies the unconscionability rules to find arbitration agreements unconscionable. Further, the U.S. Supreme Court stated that the Federal Arbitration Act's preemptive effect might extend even to grounds traditionally thought to exist at law or in equity for the revocation of any contract. However, California courts have reasoned that Concepcion should be applied narrowly, and have continued to apply Armendariz. For instance, in Samaniego v. Empire Today, LLC, a 2012 California appellate court decision held that the holding in Concepcion does alter the fact that California employment arbitration agreements are still subject to the unconscionability analysis of Armendariz.

California courts continue to construe and explain the Armendariz factors such as in the recent June 2013 case of Leos v. Darden Restaurants, Inc., where the plaintiff claimed that the arbitration agreement failed to satisfy several of the Armendariz factors. The Court of Appeal explained the Armendariz factors and held that although the agreement at issue in the case was procedurally unconscionable, it was not substantively unconscionable, and was therefore enforceable. As Armendariz is still the law, employers should review their arbitration agreements to ensure that they comply with the current state of the law.

Because of the uncertainty and limitations of arbitration provisions in the employment context, some employers are looking at the possibility of using general reference provisions instead. Under a general reference, the matter proceeds much like a bench (non-jury) trial, before a neutral hearing officer (usually a retired judge). There is no right to a jury, but the rules of evidence apply and the judgment is appealable. To date, there is a dearth of case law in California on the enforceability of such provisions, but some attorneys feel that, since they have some of the protections lacking in arbitration proceedings, the prospects for enforcing them are good.

Sage R. KnauftReyna E. MaciasFeel free to contact the authors with any questions:  

Partner - Orange
Sage R. Knauft at
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Senior Associate - Orange
Reyna E. Macias at
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