California Court Gives the Green Light for Arbitration of Wrongful Termination Suit

Sanchez v. CarMax Auto Superstores California, LLC, B244772 (March 4, 2014): The California Court of Appeal recently found that an employer’s arbitration agreement and dispute resolution rules and procedures (DRRP) are not “unduly harsh, oppressive, or one-sided” even though they set limitations on discovery and require the employee to complete an arbitration request form. The three-judge panel rejected the trial court’s decision to deny the employer’s motion for arbitration on the basis that the arbitration agreement and DRRP “are permeated with unconscionability.”

In 2006, Michael Sanchez was hired as a service manager by CarMax Auto Superstores California, LLC. In February 2011, CarMax fired Sanchez for unsatisfactory performance. Sanchez, who alleges he was fired for raising safety issues, filed a lawsuit against CarMax for wrongful termination, violations of the California Labor Code and the California Business and Professions Code, and breach of an implied contract not to terminate employment without good cause (among other causes of action).

In response to the lawsuit, CarMax filed a motion to compel arbitration based on a dispute resolution agreement that Sanchez signed as part of his employment application in October 2006. The trial court rejected CarMax’s motion to compel arbitration, finding the arbitration agreement to be unconscionable. CarMax appealed that decision.

The Court of Appeal disagreed with the trial court’s finding that the arbitration agreement was substantively unconscionable. In particular, with respect to the provision limiting discovery to 20 interrogatories and 3 depositions (unless the arbitrator finds a substantial need for more), the court pointed out that Sanchez made no showing that the limit on discovery “would necessarily prevent [him] from vindicating his statutory rights.”

The Court of Appeal also held that the arbitration agreement was not one-sided. According to the court, the agreement “provides that both CarMax and [Sanchez] agree to settle all ‘claims, disputes, or controversies’ in binding arbitration.” Likewise, the court found that challenged provisions in the DRRP were not unconscionable. Specifically, the court noted that the DRRP’s requirements were not unconscionable on their face and applied “with full force and effect” to both parties. In particular, the court noted that the requirement that the employee complete an arbitration request form when initiating arbitration and the requirement that the employee prove that the company’s conduct was a violation of applicable law (in order to prevail in arbitration) were not unconscionable. Because none of the provisions addressed by the trial court were substantively unconscionable, the Court of Appeal reversed the order denying CarMax’s request to compel arbitration.

According to Jack Sholkoff, a shareholder in the Los Angeles office of Ogletree Deakins, who successfully argued this case before the California Court of Appeal: “By both detailing and approving CarMax’s various arbitration standards and procedures, the court’s decision provides significant guidance to employers seeking to create enforceable and effective arbitration agreements. With arbitration agreements becoming even more prevalent, the court’s decision also provides much needed clarity in a hotly litigated area.”