Anthony Guzman of Fisher Phillips. (Photo: Courtesy Photo)

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].