Arbitration Agreement Limited to Employment Claims Survives ‘Unconscionability’ Attack

Quick Hits

• The Ninth Circuit ruled the arbitration agreement was enforceable because it was limited to employment-related claims.
• The court clarified that the broad language of “including but not limited to” in the agreement did not render it overly expansive, as other language in the agreement indicated it was limited to employment contexts.
• The court distinguished the case from recent California court decisions that have declined to enforce agreements based on allegations that they are unlimited in scope and duration and lack mutuality.

Conscionability Analysis

The Ninth Circuit rejected the district court’s reliance on recent California state court decisions that called into question the enforceability of employment arbitration agreements where they cover claims unrelated to employment, are of indefinite duration, or cover third-party beneficiaries, including an employer’s non-signatory agents and employees.

Scope

First, the Ninth Circuit found the agreement in question required only arbitration of employment-related claims. The court rejected the district court’s conclusion that the “including but not limited to” language in the agreement made it so broad that it covered essentially any claim. Instead, the Ninth Circuit determined the agreement’s terms were “narrowed by the subsequent list of specific terms: ‘my hiring, my employment, my compensation, and/or the end of my employment, with the Company.’”

Notably, the Ninth Circuit suggested that the agreement was limited in scope (“when it comes to the potential for claims unrelated to employment to arise”) because the employer’s business provided a specific service, as opposed to an arbitration agreement with an employer that has numerous businesses with which a claim might arise outside of the employment context.

Duration

The Ninth Circuit then rejected the district court’s conclusion that the agreement was unconscionable because it was unlimited in duration.

“The fact that the [agreement] is limited to employment-related disputes imposes an inherent limitation on the agreement’s duration,” the Ninth Circuit stated.

Unlike the 2024 Cook case, in which a California appellate court read an arbitration agreement to apply to all claims (even those unrelated to employment), the Ninth Circuit found the agreement in Cocom covered only those claims related to employment. Therefore, claims “stop accruing when the employment relationship ends.”

Mutuality

The Ninth Circuit also rejected the plaintiff-appellee’s contention that the agreement lacked mutuality. Although the agreement covered claims involving the employer’s related entities, officers, directors, employees, clients, and vendors, the court held that any asymmetry did not rise to substantive unconscionability because the agreement’s coverage was limited to employment-related claims. Any potential claims the employee might have against the listed third parties unrelated to their roles with the employer would not be covered by the agreement, the Ninth Circuit stated. The court further noted that arbitration agreements are not unconscionable simply because they benefit third parties.

Preclusive Effect and PAGA Waiver

The Ninth Circuit also found the agreement’s “bar on using arbitration awards for preclusive or precedential effect was not substantively unconscionable,” reasoning that this provision simply restated California’s default rule.

Finally, the court addressed the agreement’s provisions that waived representative actions under California’s Private Attorneys General Act (PAGA), which allows employees to prosecute alleged violations of the California Labor Code by filing lawsuits on their own behalf and/or on behalf of other workers. The Ninth Circuit did not decide whether those waivers were unconscionable, but found that even if they were, they could be severed from the agreement and thereby “vindicate the intent of the parties as expressed in the [agreement’s] severability provision.”

Key Takeaways

The Ninth Circuit’s ruling provides significant clarification on the conscionability of arbitration agreements under California law and highlights potential limits on Cook and other recent California court decisions that have declined to enforce agreements based on allegations that they are unlimited in scope and duration and lack mutuality. Key to the Ninth Circuit’s ruling was the finding that the agreement at issue was limited to employment-related claims, which necessarily limited the agreement’s duration and its application with respect to potential claims outside of the employment context against covered third parties.

In light of this key ruling and recent case law, employers may want to review their employment arbitration agreements to consider whether they are properly limited in scope. The Ninth Circuit’s ruling indicates that clearly specifying in agreements that they are limited to employment-related claims may make them more likely to be held enforceable under California law.

An Arbitration Agreement Package is available through Ogletree Deakins. Additional template packages are also available.

Ogletree Deakins’ Arbitration and Alternative Dispute Resolution Practice Group and California Class Action and PAGA Practice Group will continue to monitor developments and will provide updates on the Arbitration and Alternative Dispute Resolution, California, and Class Action blogs as additional information becomes available.

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