The Ninth Circuit, long hostile to arbitration provisions in employment agreements, has found an employer's form arbitration agreement "presumptively unconscionable" under California contract law. In Ingle v. Circuit City Stores, No. 99-56570 (9th Cir. May 13, 2003), the federal Court of Appeals struck down the employer's form arbitration agreement because of its "insidious pattern of objectionable provisions" that required employees to forego statutory rights and remedies. This decision is troublesome because it renders many arbitration provisions unenforceable under California law and shifts the burden of proof of unconscionability. The burden of proof typically lies with the party asserting it, in this case the employee who refuses to arbitrate after signing or acknowledging the employer's arbitration agreement. Under Ingle, the employer bears the burden of proof to show that its arbitration agreement requiring waiver of the right to trial of claims based on violation of public policy or statutory violations is bilateral. This means that the employer and employee are equally bound by the terms of the agreement, and the agreement does not deprive the employee of certain remedies, claims, or rights. Unless the employer can carry this burden of proof, its arbitration agreement may be deemed unconscionable and unenforceable.
The Court targeted several commonly used terms in arbitration agreements and found that they either unfairly limited an employee's statutory rights and remedies or unilaterally granted the employer benefits not afforded to the employee:
- The "one-sided coverage term," which limits the applicability of the agreement to claims brought by the employee, while imposing no similar restriction on the employer;
- The strict one-year statute of limitations term, which deprives employees of the benefits of the continuing violation theory;
- The bar on class-wide arbitration, contrary to "firmly rooted principles" of both the federal and California legal systems;
- The fee provision requiring that an employee pay the employer a $75 filing fee in order to initiate a complaint against employer and the failure to provide for an indigence-based fee waiver;
- The allocation-of-costs provision, requiring that a nonprevailing employee be held liable for the employer's arbitration costs and requiring the prevailing employees to cover their own costs, unless the arbitrator decides otherwise;
- The proscription of otherwise available statutory remedies and the limits on an employee's damages otherwise provided by federal law; and
- The employer's unilateral right to terminate or modify the agreement.
Employers who require arbitration agreements as a condition of employment should review their agreements to eliminate or equalize any provisions that are the same or similar to those in Ingle. The employer should also consider whether other changes should be made in order to maximize the likelihood that the agreement can withstand a court challenge. Guidance for the employer seeking to "court proof" an arbitration agreement can be found in Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83 (Cal.2000), which discusses procedural and substantive unconscionability and sets forth the minimum requirements for sustainable agreements to arbitrate statutory and public rights claims.
The Circuit City agreement was stand-alone and addressed solely the subject of arbitration. Some arbitration agreements, however, are contained within the context of a larger employment agreement that addresses other terms and conditions of employment. Under current California law, it is unlikely that a court would invalidate an entire agreement if it found a single portion or term unconscionable. California Civil Code section 1670.5 permits the enforceability of partially void contracts. Additionally, the California courts have applied the concept that the standards of minimum fairness enunciated in Armendariz are essential to avoiding unconscionability only to statutory and public policy claims, and not to claims arising solely from contract. Thus, the possibility of invalidating an entire employment agreement with an unconscionable arbitration clause would seem remote if the arbitration clause in the agreement relates solely to claims arising under that agreement, as distinguished from all claims arising from the employment relationship. However, the question whether an entire employment contract might be rendered void in its entirety by inclusion of an unconscionable arbitration provision has not been tested in any published court decision.
Any employment agreement that binds an employee to arbitration of all employment-related disputes should be evaluated in light of Ingle by companies' human resource professionals and law department or legal counsel.
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