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California Court Rules Arbitration Agreement Unconscionable, Company Didn't Give Employee AAA Rules

  • November 1, 2010

Showing continued hostility toward employee arbitration agreements, the California Court of Appeal has struck down as unconscionable an arbitration agreement because the employer failed to provide the high-level employee a copy of the arbitration rules referenced in the agreement.  Trivedi v. Curexo Technology Corp., No. A127283 (Cal. Ct. App. Oct. 20, 2010).  The Court also objected to the agreement’s cost-shifting and injunctive relief provisions. Declining to sever the unconscionable provisions, it declared the arbitration agreement invalid and permitted the former employee’s court case to proceed.

The Agreement

Curexo Technology Corporation employed Ramesh Trivedi as its President and CEO.  They signed an employment agreement that contained an arbitration provision.  The provision state, in relevant part: “Any dispute arising out of or relating to this Agreement . . . shall be submitted to arbitration . . .  pursuant to the American Arbitration Association’s National Rules for the Resolution of Employment Disputes. . . .”  The arbitration agreement further provided that “provisional injunctive relief may, but need not, be sought in a court of law while arbitration proceedings are pending.”  The prevailing party at arbitration was entitled “to recover from the other party all costs, expenses and reasonable attorney’s fees.”

The Suit

Curexo terminated Trivedi’s employment, and Trivedi sued Curexo for, among other things, age, race, color, and national origin discrimination in violation of the Fair Employment and Housing Act (“FEHA”) and for breach of contract.  Curexo moved to compel arbitration based on the employment agreement.  The trial court denied Curexo’s motion and declared the arbitration clause unconscionable.  It declined to sever the objectionable provisions of the agreement, which it was empowered to do, and struck the arbitration agreement in its entirety.  Curexo appealed.

Procedural and Substantive Unconscionability

In deciding whether to enforce an arbitration agreement, California courts examine whether its terms are both procedurally and substantively unconscionable.  Procedural unconscionability focuses on oppression or unfair surprise.  Substantive unconscionability focuses on overly harsh or one-sided terms.  The two factors are interrelated and are to be balanced as a sliding scale in determining the enforceability of an arbitration provision. 

Trivedi argued that the arbitration agreement was procedurally unconscionable because Curexo presented the agreement on a “take-it-or-leave-it” basis.  Siding with Trivedi, the Court  found that the arbitration agreement not only was presented on a “take-it-or-leave-it” basis, but  that Curexo’s failure to provide Trivedi with a copy of the AAA’s rules rendered the agreement procedurally unconscionable.

The Court then examined whether the arbitration agreement was substantively unconscionable.  Trivedi argued that the cost-shifting provision was unconscionable because it was a disincentive to pursue his FEHA claims in court.  He also argued that the injunction provision unfairly favored Curexo since it was more likely to benefit from the provision. 

Addressing the cost-shifting provision, the Court noted that the FEHA permits a prevailing defendant to recover attorney’s fees only when the plaintiff’s action is frivolous, unreasonable, without foundation, or brought in bad faith.  In this case, however, the arbitration agreement permitted Curexo to recover attorney’s fees if it was the prevailing party for any reason.  Consequently, the Court concluded that the provision “weaken[ed] the legal protection” provided to Trivedi under the FEHA and was substantively unconscionable. 

The Court then addressed the injunctive relief provision and determined that it was unconscionable because Curexo was more likely than Trivedi to seek such relief.

Severability

The Court held that the trial court did not err in failing to sever the unconscionable provisions of the arbitration clause.  The Court stated, “At least two provisions were properly found to be substantively unconscionable.”  Thus, the trial court correctly found that the arbitration agreement was “permeated” with unconscionability.  Accordingly, the Court affirmed the order denying arbitration.

Implications for Employers

As a practical matter, employers generally do not provide copies of arbitration rules (or any other policy, regulation or statute) referenced in an employment agreement to employees, let alone high-level executives like the plaintiff in this case, who easily could obtain such information from their own attorneys or by themselves, on-line.  Indeed, arbitration rules could change during the term of an employment agreement.  The rules that are in effect at the time of arbitration usually apply to the dispute. 

The Court leaves open a number of questions, including whether an agreement would be rendered unconscionable if an employer provided an employee with the AAA rules that subsequently changed, whether an employer must provide any updated rules to the employee as the AAA makes rules changes, and whether in lieu of providing an employee the AAA rules, an employer may tell the employee the rules are on the AAA website and remind him to check for changes periodically.

Finally, by refusing to sever the unconscionable provisions, the employer was denied the benefit of its bargain with its President and CEO.  The Court could have severed the offending provisions and allowed the case to be arbitrated.

Employers should consider reviewing their arbitration agreements and other alternate dispute resolution procedures with counsel to ensure that they can withstand legal challenge.

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