California Court Rejects Arbitration Agreement for Unconscionability

On October 27, 2015, the California Court of Appeal, in an unpublished decision, issued yet another ruling applying the unconscionability doctrine to arbitration agreements in the employment context. In Prince v. Pletcher, B260864, a former  production company employee alleged that the defendants violated California’s Fair Employment and Housing Act (FEHA) and committed various other wrongs including fraud, misrepresentation, and breach of contract. The defendants moved to compel arbitration and the plaintiff argued that, among other things, the arbitration agreement was both procedurally and substantively unconscionable. The Court of Appeal affirmed the trial court’s denial of the defendants’ motion to compel arbitration.

Background

Mitchell Pletcher, hired the plaintiff, Jessica Prince, as a featured vocalist and actress in a musical theater production. Pletcher was the sole shareholder in and an officer of the production company Mitchell Anthony Productions, Inc. Prince and Michael Anthony Productions entered into an independent contractor agreement, which, among other things, contained an arbitration provision. According to Prince, the agreement also provided that she would be paid by the day, with at least 5 days of work per week for 12 weeks of rehearsal, followed by performances 5 days per week for 11 weeks. Contrary to the agreement, Prince alleged that Michael Anthony Productions did not provide her with the guaranteed work. As a result, her compensation was substantially cut back. 

Prince also alleged that Pletcher sexually harassed her and that the musical production was a tax evasion scheme rather than a legitimate production. She also alleged that Pletcher told the cast that no one could take other jobs and prevented Prince from taking breaks, forcing her to dance for eight hours at a time. Eventually, Prince claimed, Pletcher gave Prince’s role to an understudy and her last paycheck was allegedly short $400. 

Based on the agreement’s arbitration provision, Pletcher moved to compel arbitration. In response, Prince alleged that: (1) her  breach of contract claim fell outside the arbitration provision; (2) the arbitration provision was procedurally unconscionable due to the parties’ unequal bargaining power and the arbitration provision’s adhesive nature; and (3) the provision was substantively unconscionable due to the requirement that the plaintiff arbitrate in “expensive” federal arbitration and bear her own legal fees and arbitration costs without reference to statutory cost and fee shifting. 

The Court’s Ruling

The California Court of Appeal affirmed the trial court’s denial of the defendant’s motion to compel arbitration. In the opinion, the court specified that, while state and federal laws favor enforcement of valid arbitration agreements, courts will not enforce arbitration agreements that are unconscionable or contrary to public policy. 

In discussing whether an arbitration agreement can be found to be so unconscionable as to preclude enforcement, the appellate court observed that both procedural and substantive unconscionability must be present. Procedural unconscionablity focuses on oppression or surprise (e.g., an employee’s inability to negotiate the agreement’s terms or an employer’s misrepresentations regarding the agreement’s terms), while substantive unconscionability focuses on overly harsh or one-sided results (e.g., provisions that unduly favor the employer or unduly disadvantage the employee). However, the Court of Appeal also noted that both types of unconscionability do not need to be present to the same degree. Instead, it observed that the more procedurally unconscionable the arbitration provision, the less substantive unconscionabilty needs be found and vice versa. Finally, the Court of Appeal reiterated that the unconscionabilty determination is a question of law subject to de novo review. 

The court then addressed the law governing arbitration provisions vis a vis FEHA claims. Specifically, the court cited to the Supreme Court of California’s 2000 decision in Armendariz v. Foundation Health Psychcare Services, Inc., which imposed the following minimum enforceability requirements for arbitration provisions covering FEHA claims: (1) the arbitration provision may not limit damages normally available under statute; (2) there must be discovery sufficient to adequately arbitrate the employee’s statutory claim; (3) there must be a written arbitration decision and judicial review sufficient to ensure that the arbitrators comply with the requirements of the statute, and (4) the employer must pay for all costs unique to arbitration. 

With these well-settled principles in mind, the Court of Appeal found that:

1. The arbitration provision was procedurally unconscionable because agreeing to arbitration was a condition of Prince’s alleged employment and Pletcher used misrepresentations to induce her into executing the agreement.
2. The arbitration provision’s requirement that Prince bear a portion of the arbitrator fees and costs failed to comply with Armendariz’s long-standing instruction that employers bear all fees and costs that are uniquely associated with arbitration, making the arbitration provision unconscionable as a matter of law.
3. The arbitration provision’s requirement that each side bear its own attorneys’ fees was unconscionable because it took away Prince’s right under FEHA to recover attorneys’ fees and costs from her former employer if her claims proved successful.

Practical Impact

California’s courts continue to be hostile to arbitration agreements in the employment context, and they diligently search for grounds to refuse to enforce such agreements. Arbitration agreements that either directly contradict Armendariz’s minimum requirements or seek to limit an employee’s available remedies make this search far too easy. With this in mind, the Prince case reminds employers that arbitration agreements in the employment context should:

1. provide that the employer will pay for all fees and costs that are uniquely associated with arbitration;
2. require employees to pay arbitration filing fees that are no higher than the filing fees imposed by the Superior Court of the county where the arbitration takes place (employers can then forcefully argue that these costs are no more and no less than the costs that an employee would incur if the matter were litigated in court);
3. provide that the arbitrator has the authority to award the parties all forms of relief that would otherwise be available to the parties in court; and
4. not state that both sides will bear their own attorneys’ fees and costs, as the default rule in California (and most other jurisdictions in the United States) is that both sides must bear their own attorneys’ fees and costs absent a statutory fee-shifting statute such as FEHA. At best, such a provision adds nothing to the arbitration provision and, at worst, allows courts to construe the provision as an attempt to foreclose a successful employee’s statutory right to recover attorneys’ fees and costs.