Employment Agreements and Collective Bargaining Agreements need to be clear in identifying the scope of claims that are intended to be covered by arbitration agreements.
In 2009, the U.S. Supreme Court rulIed that parties could agree in their CBAs to include statutory and other claims within the scope of their agreement to arbitrate. The inclusion of such claims must be explicit, clear and unmistakable. 14 Penn Plaza LLC v. Pyett (2009); 556 U.S. 247, 254; 129 S. Ct. 1456; 173 L.Ed.2d 398.
A recent illustrative case is Cortez v. Doty Bros. Equip. Co., 15 Cal. App. 5th 1 (2017). In the case, employees under a collective bargaining agreement brought class action claims asserting that the employer violated state wage and labor law and unfair competition laws. The Court reviewed the CBA and determined that some, but not all, of the alleged state wage and labor law claims were specifically referenced in the arbitration agreement and thus were subject to arbitration. However, the statutory unfair competition claims and certain of the alleged state wage and labor law claims were not within the scope of the arbitration agreement and thus were not subject to arbitration.
On the issue whether class claims could be asserted, the Court ruled that:
Absent language in the arbitration provision itself or extrinsic evidence establishing the parties’ agreement to arbitrate classwide claims, only individual claims may be arbitrated. Silence on the issue may not be construed as agreement.
Finding the CBA silent with regard to the consideration of class claims, the Court ruled that the claims could not be arbitrated on a class action basis.
Courts permit challenges to arbitration agreements. Courts differ on what is sufficient to warrant declaring an arbitration agreement void.
Hawaii appellate court completely embraces the interpretation of arbitration clauses as being “unconscionable” using the analytical rubric of substantive and procedural unconscionability.
In Narayan v. Ritz-Carlton Development Co. 135 Hawaii 327) (2015) “(Narayan I”), the Hawaii Supreme Court invalidated an arbitration agreement in a condominium purchase contractual agreement, finding it to be both substantively and procedurally unconscionable. The US Supreme Court overturned the Hawaii Supreme Court and remanded with direction to follow the ruling in the Direct TV case which held that contracts with arbitration provisions must be treated with equal footing as other types of contracts. Upon remand, the Hawaii Supreme Court in Narayan II (SCAP-13-0002732) July 14, 2017 reaffirmed its rulings in Narayan I that the arbitration provisions addressed therein were unconscionable under long standing Hawaii contract law.
Note to arbitration practitioners:
Because courts will differ in their assessments and standards as to what is substantively or procedurally unconscionable, counsels who advise clients and draft contracts with arbitration clauses need to:
Draft clauses that clearly identify the scope of issues, claims and matters that are to be determined by arbitration. Be specific as to whether statutory claims are within the scope of the arbitration agreement.
Arbitration clauses should clearly adopt a set of arbitration administration rules that fit the circumstances. Review and adapt those arbitration rules to make sure its provisions are suitable and efficient. Commercial arbitration rules entered into between sophisticated and experienced bargaining parties of relative equal bargaining power may be appropriate for commercial disputes but may not be equitable in circumstances such as employment contracts and adhesion contracts entered into by parties with substantial unequal bargaining power.
Make the arbitration clauses prominent (in font size, boldness and position). Incorporating other documents which contain the arbitration agreement increases the risk that a reviewing court will find that substantively unconscionable. Consider providing for the parties to separately initial or sign the arbitration provision or agreement.
Be specific as to whether federal or state arbitration statutes are adopted and applicable to the contractual relationship. There are important differences in the operation of the Federal Arbitration Act and the Hawaii Revised Uniform Arbitration Act.
Where possible, specify the federal or state court forum adopted by the parties.
The U.S. Supreme Court is presently considering in Lewis v. Epic Systems Corp., the issue of whether bans of class actions by employees are a violation of employee rights to engage in concerted actions. Once the U. S. Supreme Court rules on the matter, Counsels and employer and employee representatives should review and clearly address in their employment and collective bargaining agreements whether or not specified kinds of claims may be considered in class actions.
Unconscionability of arbitration agreement in employment contract
A California Court of Appeals refused to compel arbitration in an employment agreement finding the arbitration provisions in an employment agreement procedurally and substantively unconscionable. In Baxter v. Genworth North America Corporation, (Oct. 26, 2017), the employee was required to sign employment documents as a condition of continued employment. The employment document contained a private employer dispute resolution process similar to the multi-step grievance provisions commonly found in collective bargaining agreements. Under the provisions, employees with a dispute were required to proceed with an internal grievance step of conferring with a supervisor and HR, followed by a second step conference with a company manager and HR before proceeding with the third step of mediation followed by arbitration as a fourth and final step.
The employee brought suit alleging discrimination and violation of labor code provisions and the employer sought to compel arbitration. The Court applied the substantive and procedural unconscionability analysis and invalidated the arbitration provisions. The Court stated and ruled that:
Unconscionability is “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”
Both procedural and substantive unconscionability must be present for a court to refuse to enforce a contract, although they need not be present in the same degree.
(T)he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.
Arbitration agreements in the employer-employee context must provide for: (1) neutral arbitrators, (2) more than minimal discovery, (3) a written award, (4) all types of relief that would otherwise be available in court, and (5) no additional costs for the employee beyond what the employee would incur if he or she were bringing the claim in court.
A contract of adhesion is a standardized contract presented on a “take it or leave it” basis, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. A finding of a contract of adhesion is essentially a finding of procedural unconscionability.
Substantive unconscionability analysis focuses on whether contractual provisions are overly harsh or one-sided.
In the case, the Court found numerous arbitration related provisions to be substantively unconscionable, including the following:
Provisions restricting the employee from contacting or interviewing other employees in company and prohibiting employees and their attorneys from obtaining information outside the formal discovery process.
Provisions limiting discovery to ten interrogatories to another party (with each subpart counting as a separate interrogatory), five written requests for documents, and the deposition of two individuals for a total of no more than eight hours, subject to the authority of the arbitrator to increase the number of depositions, interrogatories, and requests for production “for good and sufficient cause shown”
Provisions shortening the statute of limitations to an unreasonable degree.
Provisions requiring that the arbitration must commence within 120 calendar days after an arbitrator is appointed unless “good cause” is shown for an extension or the parties otherwise agree to a later commencement.