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Rulings on California Arbitration Agreements Stiffen Challenges Facing Employers

Reflecting what appears to be an abiding hostility toward private arbitration agreements, the California Court of Appeal has ruled that “no meeting of the minds” occurred between the employer and employee regarding the employer’s dispute resolution procedures, and hence, no valid agreement to arbitrate existed between the parties. The court affirmed the trial court’s denial of the employer’s motion to compel arbitration. Metters v. Ralphs Grocery Co., No. G038380 (Cal. Ct. App., Apr. 1, 2008).

The plaintiff claimed that throughout his employment he was subjected to racial harassment and discrimination. During his annual evaluation in 2005, the plaintiff responded “yes” to the question: “Do you have any complaints or incidents of unlawful harassment, discrimination or retaliation that you want to report?” Thereafter, the manager of employee relations sent to the plaintiff a letter enclosing the company’s Notice of Dispute & Request for Resolution Form (“Dispute Form”), the Company's Policy against Unlawful Harassment, Discrimination and Retaliation, and a copy of the Mediation & Binding Arbitration Policy (“Arbitration Policy”). The letter asked the plaintiff to return the completed and signed Dispute Form within 15 days. The plaintiff did not respond.

Several months later, the plaintiff contacted the company’s internal hotline and complained of discrimination and harassment. In response to the call, the employee relations manager sent to the plaintiff a second letter similar to the first containing the same enclosures. One month later, the plaintiff submitted the Dispute Form, claiming harassment and discrimination based on race, color, and national origin/ancestry. The Dispute Form included a provision regarding mediation and binding arbitration, stating:

The Company’s Dispute Resolution Program includes a Mediation & Binding Arbitration Policy (the “Policy”). The Policy provides for one day of voluntary mediation (only if both you and the Company agree) of “Covered Disputes” (as defined in the Policy) with a neutral third-party mediator at the Company’s expense, and requires the resolution of such Covered Disputes only through mandatory final & binding arbitration by a neutral third-party arbitrator (instead of a judge or jury) if they are not or cannot be resolved through mediation pursuant to the Policy or other informal dispute resolution efforts.

The Dispute Form also states:

By submitting the foregoing dispute for resolution, I hereby acknowledge, understand, and agree that (1) a copy of the … Policy . . . has been made available to me through the Company’s Manager of Employee Relations. . . prior to submitting the dispute for resolution, (2) I have received, read, understand, and will fully comply with … the Policy, (3) if any of my Covered Disputes under the Policy are not resolved directly with the Company’s management and I wish to pursue them further, I must resolve them only through voluntary mediation and/or mandatory final and binding arbitration pursuant to … the Policy, and (4) I have not been required to complete, sign or return this form to make a complaint under the Company’s policies against unlawful harassment, discrimination and retaliation or to have such complaints investigated or remedied by the Company.

The plaintiff eventually commenced a lawsuit against the employer for racial discrimination and harassment in violation of the California Fair Employment and Housing Act. The employer moved to compel arbitration based on the plaintiff’s completed Dispute Form. Although he received the Dispute Form, the plaintiff claimed that he never received a copy of the Mediation & Binding Arbitration Policy. He also alleged that the employee relations manager instructed him to complete and submit the Dispute Form. The plaintiff allegedly understood that he must complete, sign, and submit the Dispute Form before his claims would be investigated. He claimed that no one told him about arbitration and that he never agreed to arbitrate his claims. The trial court denied the employer’s motion to compel arbitration, finding that there was no meeting of the minds regarding an agreement to arbitrate. The employer appealed.

Relying on the general contract law rule that “ordinarily one who signs an instrument which on its face is a contract is deemed to assent to all its terms,” the employer argued that the arbitration agreement was valid because the plaintiff signed the agreement averring he received and read the Arbitration Policy. The court rejected the employer’s argument. It noted that the Dispute Form did not look like a traditional contract and the arbitration provisions of the Dispute Form were confusing and overly legalistic. Specifically, the Form explains that the Policy applies to “Covered Disputes,” but failed to define such disputes. The Dispute Form further stated that Covered Disputes would be resolved through “voluntary mediation and/or mandatory final and binding arbitration” if not resolved by informal means. The court stated that “[t]he context of this form did not alert [the employee] he was agreeing to anything, let alone arbitration.”

The employer argued that the Dispute Form incorporated the Arbitration Policy by reference and that the plaintiff was bound by its terms. The court again rejected the employer’s argument, crediting the plaintiff’s contention that he had not received the Arbitration Policy and that he believed the Dispute Form must be completed to start an investigation of his claims. The court noted that, although Arbitration Policy permitted “informal” resolutions of complaints, it nevertheless required employees to complete a Dispute Form. The court observed: “In other words, an employee ha[d] no real choice to avoid arbitration if he want[ed] some action taken on his complaint. When, as here, the complaint is for discrimination under the FEHA, the employer's duty to investigate promptly is affirmative and mandatory, not dependent on whether the employee agrees to arbitration.”

Ruling on Class Waivers Allowed to Stand

In another case, the U.S. Supreme Court denied an employer’s request to review a California Supreme Court decision striking down employment arbitration agreements prohibiting class-wide litigation where it is found that class arbitration would be a “significantly more effective way of vindicating the rights of affected employees than individual arbitration.” Gentry v. Superior Court, No. 07-998, cert. denied (U.S. Mar. 31, 2008). The purpose of the employer’s class-action waiver was to compel employees to litigate their wage claims individually, rather than collectively, particularly where damages are likely minimal and attorneys’ fees would be insignificant. By allowing the California decision to stand, the employer may be forced to arbitrate wage and hour class claims.

The California Supreme Court decision did not categorically prohibit all class action waivers. However, when examining arbitration agreements waiving class-wide relief, trial courts must ensure that the agreements will not operate as a “de facto” waiver of unwaivable statutory rights. Trial courts must determine whether class arbitration would be significantly more effective than individual arbitration by examining the following factors: the size of potential individual recoveries, the potential for retaliation against current employees, the willingness of plaintiffs’ attorneys to take such cases, “and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.”

Impact on Employers

The Ralphs Grocery decision and the U.S. Supreme Court’s denial of review in Gentry confirm that, at least in California, employers face an uphill battle in enforcing arbitration agreements. These cases may motivate employees to challenge such agreements. In light of these decisions, employers should review their arbitration programs and consult with counsel to determine whether their programs may be modified to decrease their susceptibility to challenge by employees.