September 2000 California Supreme Court Permits Mandatory Arbitration Of Employment Discrimination And Wrongful Termination Claims

The California Supreme Court has determined that mandatory employment arbitration agreements governing employee claims under California law are enforceable as long as certain basic fairness requirements are met.

On August 24, 2000, the Supreme Court held that claims under California's Fair Employment and Housing Act (FEHA) may be subject to mandatory arbitration as long as the parties' arbitration agreement permits an employee to vindicate his or her statutory rights and the agreement is bilateral. Armendariz v. Foundation Health Psychcare Services, Inc., 2000 Cal. Lexis 6120 (2000).

The Supreme Court emphasized that the employer cannot limit the statutory remedies (such as punitive damages and attorneys' fees) and that the agreement must meet certain other minimum requirements. Specifically, the agreement must provide for a neutral arbitrator, adequate discovery, a written decision that would permit a limited form of judicial review, and limitations on the costs of arbitration. The Court cautioned that where an agreement is unconscionable, it might be more appropriate for a court to refuse to enforce the arbitration agreement as a whole, rather than to strike the offending provisions and to enforce the remaining arbitration provisions.1

The Lower Court Rulings In Armendariz

The underlying action in Armendariz arose out of claims by two former employees of Psychcare who alleged that they were sexually harassed and discriminated against, and that their termination of employment was due to their perceived and/ or actual heterosexual orientation. The employees alleged a violation of FEHA and three other causes of action for wrongful termination based on tort and contract theories of recovery; they filed in superior court, despite the fact that they had executed an employment application form requiring arbitration of any claims of wrongful termination as well as a separate employment arbitration agreement containing the same arbitration clause.

Psychcare filed a motion for an order to compel arbitration. The trial court denied the The Supreme Court emphasized that the employer cannot limit the statutory remedies . . . and that the agreement must meet certain minimum requirements motion on the ground that the arbitration agreement was an unconscionable contract, finding that the agreement was an "adhesion contract" and that several provisions of the agreement (such as a limitation of damages to back pay and a preclusion of discovery) were "so...