Employment Law

Mandatory arbitration agreements continue to result in contradictory court opinions. This is particularly true if one compares recent decisions from the Ninth Circuit with those of the California state courts.

Recent Ninth Circuit Decision
In the most notable Circuit City decision (Circuit City Stores Inc., v Adams, (2001), 532 US 105, 149 LEd 2d 234, 121 S Ct 1302), the US Supreme Court held that the Federal Arbitration Act does not prevent the enforcement of mandatory arbitration agreements, except in very limited situations. Notwithstanding that decision, the Ninth Circuit has since issued several arbitration decisions invalidating arbitration agreements. The Ninth Circuit’s opposition to arbitration agreements can be seen most recently in Ingle v Circuit City Stores, Inc., (9th Cir 2003) 328 F3d 1165 issued by Judges Pregerson, Thompson and Wardlaw and in Circuit City Stores Inc., v Mantor (No.02-55230 July 22, 2003).

Ingle v Circuit City
In Ingle, although this panel of the Ninth Circuit cited the California Supreme Court decisions in Armendariz v Found. Health Psychcare Servs., Inc. (2000) 24 CA4th 83 and Little v Auto Stiegler, Inc., (2003) 29 CA4th 1064 as establishing the general California rule that approves of mandatory arbitration agreements, it concluded that the Circuit City arbitration agreement was procedurally and substantively unconscionable, in part, because it barred class actions and imposed a statute of limitations. In addition, it was imposed on new employees (one-sided), and the burden of proof was on the employer to demonstrate that the effect of the arbitration agreement was bilateral.
The Ingle court set forth a new presumption. It stated that there is "a rebuttable presumption of substantive unconscionability" when the arbitration agreement is procedurally unconscionable. Therefore, the agreement could not stand by severing the objectionable provisions.

Recent Sixth Circuit Decision in Morrison Case
In a recent decision of the Sixth Circuit, the court found differently. In Morrison v Circuit City Stores, Inc., (6th Cir 2003) 317 F3d 646 after an en banc hearing, the court held that the substantively unconscionable provisions (equal cost splitting and certain limitations on remedies) should be severed and the arbitration agreement enforced. The Sixth Circuit stated that it reached this conclusion by following the Supreme Court’s directive in Moses H Cone Memorial Hospital v Mercury Const. Corp., (1983) 460 US 1 at 24-25 to resolve any doubts as to arbitrability "in favor of arbitration."

Circuit City v Mantor and the Opt-Out Procedure
On July 22, 2003, the Ninth Circuit issued another Circuit City case decision. In Circuit City Stores Inc., v Mantor (No. 02-55230 July 22, 2003), Judge Pregerson, the author of the Ingle case, in addition to finding the arbitration agreement invalid for most of the reasons set forth in Ingle, also addressed the use of the "opt-out" procedure. This had been dealt with by a different panel of judges in the cases of Circuit City Stores, Inc., v Najd, (9th Cir 2002) 294 F3d 1104 and Circuit City Stores, Inc., v Ahmed, (9th Cir 2002) 283 F3d 119. In those cases, the Ninth Circuit concluded that a mandatory arbitration agreement containing a provision that allowed an employee a 30 day right to "opt-out" of the arbitration process, resulted in an arbitration agreement that was not procedurally unconscionable. However, in Mantor the court concluded that even though the arbitration agreement contained an opt-out procedure, this did not save the arbitration agreement because there was no "meaningful" opportunity to opt-out. The court found that because Mantor was pressured not to use the opt-out procedure, the arbitration agreement was procedurally unconscionable. In this case, it was a mandatory requirement that the employee sign the agreement if he wanted to be hired and he had no "meaningful" opportunity to exercise the alleged right to opt-out.

Standards for Enforceable Arbitration Agreements
In light of Ingle, there are a number of provisions that should be included in any mandatory arbitration agreement.

First, there should be a clear "severability" clause. In the Cone Memorial Hospital case, the Sixth Circuit noted that when such a clause is included "courts should not lightly conclude that a particular provision of an arbitration agreement taints the entire agreement."

Second, it must be clear that the claims of both the employer and the employee are subject to arbitration. Any statement or inference that the arbitration agreement is limited to claims brought by an employee is substantively unconscionable and is a factor which some courts, such as the Ninth Circuit, will use to invalidate the entire agreement. It should be clear that claims brought by the employer against the employee are expressly covered by the arbitration agreement. The Ninth Circuit’s statements in Ingle, although referring to the "modicum of bilaterality" required by the Armendariz decision, seem to set a much higher standard.

Third, any limitation of the applicable statute of limitations is looked on with disfavor by the Ninth Circuit. In Ingle, the court invalidated a provision limiting the statue to a one year time frame, even though it ran from the time the employee "knew or should have known" of the claim. The Ninth Circuit faulted this clause because it deprived the employee of the benefit of the "continuing violation doctrine."

Fourth, any limitation on the right of the employee to consolidate his claim with others in a class action is improper under the Ingle decision. The court stated: "this bar on class-wide arbitration is patently one-sided." Because the court concluded that such a limitation is "shockingly one-sided," it also concluded that it made the arbitration agreement "substantively unconscionable."

Fifth, according to the Ninth Circuit in Ingle, the requirement that the employee pay the filing fee of $75 dollars to the employer rather than the arbitration service, and the fact that there is no provision, as in federal court, allowing a waiver of the filing fee for an "indigent" party, causes the filing fee provision to be "substantively unconscionable." Thus, to avoid criticism in the Ninth Circuit any filing fee must be paid to the arbitration service and the arbitrator has the authority to waive the filing fee for an indigent employee.

Sixth, there can be no provision requiring the parties to split the arbitrator’s fee. As held in Armendariz, any fees must be limited to the amount which would have been required in a court of law.

Seventh, there can be no limitation on the remedies, which the employee can request from the arbitrator.

Eighth, a provision in the arbitration agreement which allows the employer to "alter or terminate the agreement" is "substantively unconscionable" according to Ingle. However, in a footnote, the Ingle decision does not reach a conclusion that a right to alter or terminate the arbitration agreement, by itself, renders the arbitration agreement unenforceable. (Ingle, fn. 23).

The Ingle court’s antagonism to mandatory arbitration agreements is shown by its intemperate language throughout the decision. However, notwithstanding that opposition, it is still possible to prepare a legally enforceable mandatory arbitration agreement in both state and federal courts, if one carefully avoids the criticized language in Ingle.

California More Likely to Sever Objectionable Clauses
A more liberal analysis is shown by the California appellate court decision in Fittante v Palm Springs Motors, Inc. (2003) 105 CA4th 708. That decision reflects the fact that mandatory arbitration agreements are more likely to be enforced by California state courts. In Fittante, although the court found the fee splitting provision to be unenforceable, together with an improper limitation on the right to appeal, the court concluded that it could sever those provisions from the rest of the mandatory arbitration agreement and enforce the obligation of the employee to proceed in arbitration rather than state court.

Similarly, in McManus v CIBC World Markets Corp. (2003) 109 CA4th 76, the California Court of Appeal cited Fittante with approval and enforced an arbitration agreement even though it contained an unconscionable payment of fees provision, which the court severed from the obligation to arbitrate. In addition, the court concluded that a provision which allowed the employer to seek injunctive relief from the courts was not sufficiently unfair to invalidate the agreement since it was clear that the employer was otherwise obligated to submit any dispute with its employees to arbitration.

Conclusion
Careful adherence to the requirements set forth in Armendariz v Found. Health Psychcare Servs., Inc (2000) 24 CA4th 83, Little v Auto Stiegler, Inc., (2003) 29 CA4th 1064, Ingle v Circuit City Stores, Inc., (9th Cir 2003) 328 F3d 1165, and Circuit City Stores, Inc., v Mantor (No. 02-55230 July 22, 2003) is necessary in order to craft a mandatory arbitration agreement enforceable in both state and federal courts in California. The uncertainty in this area of the law can be seen by the fact that there is a petition for a rehearing pending in the Ingle case, and that petitions for review in the California Supreme Court have been filed in the the Fittante and McManus cases.

Advising California Employers
2d edition, 1556 pages, 2 looseleaf volumes, updated 1/03, BU-32030, $239