Titans Clash And Uncertainty Abounds - The Ongoing Turmoil Regarding Enforceability Of Mandatory Employment Arbitration Agreements In California

California has long been at odds with the liberal federal policy favoring arbitration that was established in the Federal Arbitration Act (FAA or Act). Congress enacted the FAA in 1925 to overcome "widespread judicial hostility" to arbitration and to prevent states from requiring a judicial forum for the resolution of claims that parties have agreed to resolve by arbitration.* Yet California courts continue to show a willingness to set aside private arbitration agreements in favor of preserving claimants' access to judicial and administrative forums. Although the U.S. Supreme Court has found a number of these laws and decisions to be preempted by the FAA, recent decisions by California courts indicate that the uncertainty surrounding the enforceability of mandatory employment arbitration agreements in California is far from over.

The FAA's "Broad Principle of Enforceability"

The primary substance of the FAA is found in section 2 of the Act, which states that arbitration provisions in contracts "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contact."1 Under this section, courts are required to place arbitration agreements on equal footing with other contracts and "rigorously" enforce them according to the terms agreed to by the parties.2 The exception language at the end of the section, commonly referred to as the savings clause, allows for the invalidation of arbitration provisions by "generally applicable contract defenses, such as fraud, duress, or unconscionability."3 However, as the U.S. Supreme Court firmly established in two earlier cases involving California courts refusing to enforce arbitration agreements due to conflicts with state law, the FAA's broad principle of enforceability is not subject to any limitations under state law other than the general contract defenses.4

California's Unconscionability Doctrine

In more recent cases, California courts have sought to avoid FAA preemption by applying the state's broad unconscionability doctrine to invalidate private arbitration agreements. Under California law, unconscionability requires "a 'procedural' and a 'substantive' element, the former focusing on 'oppression' or 'surprise' due to unequal bargaining power, the latter on 'overly harsh' or 'one-sided' results."5 Mandatory pre-employment arbitration agreements are generally found to be procedurally unconscionable, as "few employees are in a position to refuse a job because of an arbitration agreement."6 Circumstances under which California courts have found arbitration agreements substantively unconscionable include provisions requiring the waiver of unwaivable rights or agreements exhibiting a lack of mutuality.

While unconscionability is a basis for invalidating an agreement under the FAA's savings clause, California's broad application of this doctrine and the U.S. Supreme Court's subsequent pushback has led to significant uncertainty as to what forms of employment arbitration agreements are enforceable in California. What follows is a discussion of three key areas where the enforceability of arbitration agreements remains in question.

Areas of Continuing Uncertainty

Waiver of Administrative Remedies

Whether an arbitration agreement may contain a waiver of statutory pre-litigation administrative procedures remains in dispute. In Sonic Calabasas v. Moreno, 51 Cal. 4th 659 (2011), a closely divided California Supreme Court refused to compel arbitration, holding that an arbitration provision requiring employees to waive their statutory right to request administrative resolution of wage-related disputes was unconscionable and contrary to public policy. Under the so-called "Berman" hearing process, an employee may file wage-related complaints with the Labor Commissioner and request a hearing.7 The commissioner may then conduct a hearing, prosecute a civil suit...