Calif. Supreme Court Provides Blueprint for Arbitration Agreement Strategy
The California Supreme Court recently handed down an intriguing decision that casts doubt on—and in some cases even condemns—some of the most common practices used by employers in both drafting and presenting arbitration agreements to their employees.
October 03, 2019 at 05:04 PM
6 minute read
The California Supreme Court recently handed down an intriguing decision that casts doubt on—and in some cases even condemns—some of the most common practices used by employers in both drafting and presenting arbitration agreements to their employees. In doing so, the court highlighted circumstances under which similar agreements with "an unusually high degree" of procedural unconscionability may be blocked from being enforced. Accordingly, it's important that you understand which of the employer's terms and practices were criticized by the court so you can avoid those same pitfalls in your own arbitration programs moving forward.
|Arbitration Agreements and Enforceability
To understand the holding in OTO v. Kho, we must first understand California law on enforcing arbitration agreements. In general, agreements to arbitrate require the parties to pursue their claims before a private arbitrator (usually a retired judge) outside of the normal court system and, consequently, tend to reduce the expense and complexity of resolving employment disputes. However, a court will refuse to enforce an arbitration agreement if the employee can show that the agreement is both substantively unconscionable, such that the terms themselves were unfair or one-sided; and procedurally unconscionable, such that the way the agreement was presented was unfair, surprising or oppressive. In OTO v. Kho, the court considered both aspects when analyzing the agreement.
|The Arbitration Agreement in Question
The facts of the case were straightforward. After working for the One Toyota of Oakland (OTO) car dealership for about three years, a low-level human resources employee stopped by Ken Kho's desk with a handful of documents, including an arbitration agreement, instructing Kho to sign and return them immediately. The employee hovered around the desk for about four minutes while Kho quickly shuffled through and signed the paperwork. The agreement appeared as a dense, single-spaced paragraph filled with legalese in a text no bigger than 8.5-point font. When the agreement described the process of initiating arbitration, it used convoluted language and run on sentences (i.e., sometimes as long as 12 lines) that referred abstractly to statutes—escaping the mere lay understanding of Kho. As Kho handed back the papers, he took note of the fact that he hadn't been invited to review, discuss or ask questions about the documents he was signing. Moreover, while Kho's first language was Chinese, the documents were only in English.
The following year, Kho left OTO and filed a claim with the California Department of Labor Standard's Enforcement (DLSE) for unpaid wages. In response, OTO petitioned the California Superior Court to vacate any award from the administrative proceedings and to compel the matter Kho's claims to arbitration. On Aug. 29, the California Supreme Court issued its ruling—putting an end to the extensive appeals.
|The Turning Point: 'An Unusually High Degree' Of Procedural Unconscionability
Although, the California Supreme Court struck down the arbitration agreement as both procedurally and substantively unconscionable, the court focused on the agreement's "unusually high degree" of procedural unconscionability—a criticism that went to the heart of how the agreement was presented to Kho. The court highlighted several key problems, including:
- The agreement appeared in a single paragraph containing 51 lines of text in either 7-point or 8.5-point font;
- The agreement contained complex sentences (one of them 12 lines long) filled with unexplained statutory references and legal jargon;
- The agreement was presented to Kho by a low-level employee who stood by while he signed it;
- Kho didn't have time to read the agreement or ask questions and wasn't given a copy afterward;
- The agreement was unclear as to who would pay for the arbitrator, due to the complex legal statutory language; and
- The agreement didn't explain how to bring a dispute to arbitration.
Curiously, OTO also held the agreement to be substantively unconscionable, but only in light of the "unusually high degree" of procedural unconscionability already present. Specifically, the court took aim at the agreement's effective waiver of Kho's right to pursue his wage claim before the administrative agency—which would have provided a more informal and inexpensive forum to resolve his claims. Standing alone, this waiver wouldn't have been enough. However, because of the "unusually high degree" of procedural unconscionability, Kho was deprived of the ability to learn what he was waiving. As stated by the court, "had One Toyota set out the terms of its agreement in a legible format and fairly understanding language, or had it given Kho a reasonable opportunity to seek clarification or advice, this would be different case."
Recommendations
While it's unlikely that any of the above-described terms or practices, standing alone, would render an arbitration agreement unenforceable, OTO provides a critical roadmap for employers who may want to consider the following steps:
- Don't use illegible fonts in your arbitration agreements. The smaller you get, the more you approach the "small print legalese" criticized in OTO;
- Break up the agreement into multiple paragraphs. The more dense the agreement, the more it appears drafted "with an aim to thwart, rather than promote, understanding;"
- Make things as readable and easy to understand as possible. Run-on sentences and ambiguous statutory references are likely going to escape the understanding of most employees;
- Consider including a carve-out that allows employees to still bring claims before administrative agencies like the DLSE. After all, if the agreement hadn't waived Kho's right to seek administrative relief, the case's outcome may have differed.
- Provide copies of the agreement to employees, giving them ample opportunity to review and ask questions. For electronic on-boarding processes, a preliminary team meeting may be helpful.
With these guidelines in mind, it's important that you carefully analyze your own practices related to arbitration agreements and whether your terms might run afoul of the new decision. While each employer and agreement are unique, this decision provides valuable insight into what employers can expect with regard to their own practices and agreements moving forward.
Anthony Guzman is an associate with labor and employment law firm Fisher Phillips in San Francisco. He may be reached at [email protected].
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllRead the Document: 'Google Must Divest Chrome,' DOJ Says, Proposing Remedies in Search Monopoly Case
3 minute readApple Asks Judge to 'Follow the Majority Practice' in Dismissing Patent Dispute Over Night Vision Technology
AI Startup Founder Defrauded Investors of Millions, US Prosecutors Say
3 minute readUber Not Responsible for Turning Over Information on 'Dangerous Riders' to Competitor, Judge Finds
5 minute readTrending Stories
- 1Gibson Dunn Sued By Crypto Client After Lateral Hire Causes Conflict of Interest
- 2Trump's Solicitor General Expected to 'Flip' Prelogar's Positions at Supreme Court
- 3Pharmacy Lawyers See Promise in NY Regulator's Curbs on PBM Industry
- 4Outgoing USPTO Director Kathi Vidal: ‘We All Want the Country to Be in a Better Place’
- 5Supreme Court Will Review Constitutionality Of FCC's Universal Service Fund
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250