California Appellate Decision Raises New Considerations for Arbitration Agreements

Quick Hits

• A California appellate court refused to enforce an employment arbitration agreement after finding three common provisions were unconscionable.
• The ruling raises new considerations for employers that want enforceable arbitration agreements, especially in California, and such employers may want to update their agreements.

On May 24, 2024, the California Second District Court of Appeal affirmed a lower court’s decision refusing to enforce an arbitration agreement. The appellate court took issue with common provisions pertaining to the scope of claims covered by the agreement, the duration of the agreement, and the parties covered by the agreement. Specifically, the appellate court found three provisions in the arbitration agreement to be unconscionable:

• Scope—The agreement provided that the parties would arbitrate “all claims, whether or not arising out of [employee’s] employment” (emphasis added). The court labeled such language “unconscionably broad.”
• Duration—The arbitration stated that it “shall survive the termination of [e]mployee’s employment, and may only be revoked or modified in a written document that expressly refers to the ‘Agreement to Arbitrate Claims’ and is signed by” the employer’s president (emphasis added). The court found this provision gave the agreement an “infinite duration” and was unconscionable.
• Mutuality—The agreement applied to all claims the employee may have against the employer “or any of its related entities,” including other employees and the employer’s administrators, officers, and agents, “and all claims that the [employer] may have against [e]mployee” (emphasis added). The court found this provision one-sided because it required the employee to arbitrate claims against the employer and its related entities but required only the employer and not the related entities to arbitrate claims against the employee.

The appellate court found these terms unconscionable without citing any controlling authority. The court also refused to sever them from the agreement, concluding that the unconscionability “permeated” the agreement and could not be cured.

Notably, the appellate court reached these conclusions without including in its discussion whether the findings of unconscionability and the refusal to sever the provisions at issue complied with the Federal Arbitration Act (FAA). That statute requires states to treat arbitration agreements the same as other contracts, but the court did not even mention, much less address, the FAA or precedent interpreting the FAA.

The case is one of several recent California court decisions that have been skeptical of employment arbitration agreements, including a July 2024 decision by the Supreme Court of California that provides courts with discretion to refuse to enforce agreements even if only one term is found to be unlawful.

Key Takeaways

The California Court of Appeal concluded three provisions in this arbitration agreement addressing scope, duration, and mutuality, which are similar to provisions in many other agreements, were unconscionable as written. In light of this new development, employers with arbitration agreements, especially in California, may want to update their agreements.

Ogletree Deakins will continue to monitor developments and will provide updates on its Arbitration and Alternative Dispute Resolution and California blogs.

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