While arbitration clauses have become standard in employment contracts, both employers and employees must pay close attention to the specific wording to determine their enforceability. Two recent decisions underscore the importance of specific language within arbitration agreements and its influence on how parties approach and navigate the arbitration process. 

Arzate v. Ace American Insurance Company

Recently, the Second Appellate District Court of Appeal held that an employer did not waive their right to arbitration because the language in the applicable arbitration agreements referred to "the party that wants to assert a legal claim governed by the arbitration agreements." 

In Arzate v. Ace American Insurance Company, defendant ACE American Insurance Company faced a class action complaint from the plaintiffs' employees alleging they were misclassified as exempt employees and denied benefits required for nonexempt employees, such as overtime pay and meal and rest periods. ACE moved to compel arbitration based on the arbitration agreements the plaintiffs signed as a condition of employment. However, the plaintiffs asserted that ACE waived its right to arbitration because it failed to initiate arbitration within the agreement's 30-day time period. The court disagreed with the plaintiffs and undertook a contractual interpretation route to determine whether ACE waived its right to arbitrate. 

First, the arbitration agreements consisted of three parts: (1) a signed document titled "Arbitration Agreement"; (2) an ACE employment dispute arbitration policy; and (3) an arbitration policy regarding arbitration rules and procedures. The court honed in on a portion of the ACE employment dispute arbitration rules and procedures that provided:

A party who wants to start the [a]rbitration [p]rocedure should submit a demand within the time periods required by applicable law. An employee's demand letter must be sent by certified mail to ACE Employee Relations…If ACE is demanding arbitration, it will send its demand letter…by certified mail to the employee's last known home address.

Based on the language in the arbitration policy and arbitration rules from the American Arbitration Association ("AAA"), the court interpreted the policy requiring the plaintiffs to initiate the proceedings. Specifically, the sentence, "[a] party who wants to start the arbitration procedure should submit a demand within the time periods required by applicable law" (emphasis added), obliged plaintiffs, not ACE, to file the arbitration demand. The court interpreted the term "demand" to "presuppose that the party filing a demand is seeking a remedy." The court highlighted the importance of interpreting the arbitration policy within the context of the arbitration agreements, particularly how the agreements incorporated the requirement that arbitration be the "required and final means of resolution for the resolution of any employment-related legal claim not resolved by the internal dispute resolution processes," and how the policy prevented ACE and the plaintiffs from going to court over employment-related disputes. Accordingly, the party initiating arbitration is considered the one seeking redress for an employment dispute.  

Therefore, parties drafting arbitration provisions or those wishing to enforce existing provisions should heed the language used in arbitration agreements to determine whose responsibility it is to start the arbitration procedure. 

Ramirez v. Charter Communications, Inc. 

Just last month, the Court of Appeals in Ramirez v. Charter Communications, Inc. held that severing unconscionable provisions from an arbitration agreement was not enough to cure an agreement that demonstrated an employer's systematic efforts to gain an unfair forum advantage by imposing arbitration on an employee. Following the California Supreme Court's remand, the court addressed the arbitration agreement, specifically whether three of the four substantively unconscionable provisions could be severed from the contract.

The facts centered on an arbitration agreement within defendant Charter Communications' ("Charter") computerized onboarding process. The onboarding required prospective employees to read several company documents and policies that were agreed to through e-signature. One of the documents was a Mutual Arbitration Agreement policy ("Agreement"). In July 2019, Charter hired plaintiff Angelica Ramirez ("Ramirez"), who accepted the Mutual Arbitration Agreement policy using the onboarding process. After being fired in July 2020, Ramirez brought claims of discrimination, harassment, retaliation under FEHA, and wrongful discharge against Charter. When Charter sought to enforce the arbitration agreement, Ramirez countered that the agreement was procedurally unconscionable as an adhesion contract and that several provisions were substantively unconscionable. The California Supreme Court agreed that the provisions were unconscionable because of: "(1) the lack of mutuality in the covered and excluded claims provisions; (2) the shortened limitations periods for filing claims; and (3) the potential for an unlawful award of attorneys’ fees."

When examining unconscionable contract terms, the court followed a qualitative approach, asking whether "the central purpose of the contract is tainted with illegality." If that is the case, the contract cannot be cured, and the court should refuse to enforce the contract. If the contract is not "tainted with illegality," the court should consider whether the unconscionability can be cured through severance or restriction of its terms. The court should evaluate whether severing or curing the unconscionable terms would serve the interests of justice. In particular, if a contract contains a severance clause, the court should take into account that the parties intended the contract to be curable by removing defective terms and to be enforced. However, a court cannot rewrite agreements or impose terms not agreed to by the parties. Accordingly, courts may "liberally sever any unconscionable portion of a contract and enforce the rest when: the illegality is collateral to the contract's main purpose; it is possible to cure the illegality by means of severance; and enforcing the balance of the contract would be in the interests of justice." 

Nevertheless, the Ramirez court rejected Charter's position that severance could cure the illegality in the Agreement. First, the court specified that the central purpose of the Agreement was not to allow mutual arbitration of disputes. Instead, the lack of mutuality of covered claims highlighted that the "real purpose of the agreement" subjected an employee to arbitration "as a means of maximizing employer advantage." Next, although the court agreed that deleting certain sentences would cure problematic provisions, doing so would effectively rewrite the Agreement to include claims Ramirez did not agree to arbitrate, which was impermissible.

A key issue the court noted was that even if it disregarded the contract's purpose and severed unconscionable provisions, enforcing the remainder of the contract would not serve the interests of justice. The court cautioned that the multiple defects in the Agreement implied that Charter engaged in a systematic effort to impose arbitration on its employees, "not simply as an alternative to litigation, but to secure a forum that works to the stronger party's advantage." Specifically, the Agreement mandated: (1) Ramirez would be subject to arbitrate her claims against Charter, but claims by Charter against Ramirez would be exempt from arbitration; (2) Ramirez would potentially have to initiate arbitration of her FEHA claims before an administrative investigation could be conducted; and (3) she would be required to pay Charter’s attorneys' fees and costs even if some of her arguments were successful if a court compelled arbitration. Allowing Charter to enforce the remainder of the contract was untenable. The court observed that accepting Charter's position that severance would cure the contract would incentivize "an employer to draft a one-sided arbitration agreement in the hope employees would not challenge the unlawful provisions, but if they do, the court would simply modify the agreement to include the bilateral terms the employer should have included in the first place." Therefore, the court stressed that enforcing Charter's Arbitration Agreement, even with severed provisions, would still betray fairness and empower employers to utilize this approach in the future.

Takeaway:

In light of recent California case law, employers should carefully review the language in their arbitration agreements to clearly define which party is responsible for initiating arbitration and ensure their agreements align with the interests of justice. 

While severability clauses allow courts to remove unconscionable portions of a contract and enforce the remainder, they are not a catch-all solution. Employers should review their contracts and arbitration agreements to assess whether severability can truly cure the contract. Particularly, whether an illegal or unconscionable provision is "collateral" to the contract's main purpose and if enforcing the rest of the contract would contradict the interests of justice, such as providing an unfair forum advantage. 

Additionally, both employees and employers should familiarize themselves with the express language and applicable laws in their arbitration agreements. Understanding which law or rule governs the agreement or provision will help clarify the terms within the agreements and determine each party's rights to enforce or challenge the provision.