California's First District Court of Appeal handed down the latest appellate opinion on arbitration yesterday, affirming a denial of the employer's motion to compel arbitration.
In Baxter v. Genworth North America Corporation, 16 Cal. App. 4th 713 (Oct. 26, 2017), the plaintiff took leave under the California Family Rights Act (Government Code section 12945.2) to care for her mother. She was granted leave and was to return to work by mid-June 2013. Yet in May 2013, her employer told her that her leave expired at the end of May; the plaintiff responded by email that she would return in mid-June as originally scheduled and approved. The plaintiff alleged that within two hours of that email, her employer notified her that her position was being eliminated immediately due to organizational changes. She alleged that her job was given to a white male who was not on medical leave.
The plaintiff filed a civil action alleging claims under the Fair Employment and Housing Act (FEHA), among other things. The employer responded by moving to compel arbitration. The trial court denied the motion, and the Court of Appeal affirmed.
Under California's unconscionability doctrine, an arbitration provision will not be enforced if it is unconscionable. Unconscionability involves two elements: procedural unconscionability and substantive unconscionability. Procedural unconscionability means that one party had an absence of meaningful choice; substantive unconscionability means that contract terms unreasonably favored the other party. Both elements must be present for a court to refuse to enforce a contract, but not to the same degree--where one is weaker, the other must be stronger, and the contract as a whole is looked at under a sliding scale of procedural and substantive unconscionability. See Slip op. at 4-5.
First, the dispute-resolution contract was obviously a contract of adhesion because the employee either had to sign it or quit--there was no meaningful choice. The contract was presented in a "take-it or leave-it manner," and the employee "lacked equal bargaining power." The appellate court held that those facts presented a "high degree of oppressiveness" that supported a finding of procedural unconscionability. Slip op. at 6-7.
Importantly, this opinion in Baxter is clear that the sole fact that the dispute-resolution provision was a contract of adhesion and that this alone rendered the provision procedurally unconscionable provides support to defeat numerous defense arguments to the contrary. The Baxter court distinguished the U.S. Supreme Court's holding in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), on grounds that the Concepcion decision did not analyze adhesion contracts in the context of procedural unconscionability. "The [Concepcion] court had no occasion to consider whether a contract of adhesion would support a finding of procedural unconscionability under California law." Slip op. at 8.
But that is not the end of the analysis. To find an arbitration provision unenforceable, there must be both procedural and substantive unconscionability. (See slip op. at 4 (black-letter law of the doctrine and elements of unconscionability).)
The Baxter court had no problem finding substantive unconscionability. First, the internal-dispute-resolution process prohibited employees from obtaining outside a formal discovery process, including by specifying that “[a]ny employee who is questioned by another employee or by someone else on behalf of another employee concerning another employee’s claim, shall not respond to such questioning or provide information or documents to such individual but should direct the inquiring individual to the Company counsel so that information may be provided through the discovery process.” Yet no such prohibition applied to the employer. The Baxter court approvingly cited the trial court's finding that this prohibition was "grossly unfair" and "has serious public policy implications," including that a complaining employee would have to "gamble as to which potential witnesses to depose within the limits set by the arbitration agreement, whereas the employer would have unfettered access to its employees and could cherry pick the witnesses it might choose to depose," since the employee could not informally talk to other employees and witnesses. Slip op. at 9. The Baxter court further reasoned that this provision "effectively acts as a gag order that limits a complaining employee’s ability to informally investigate a claim." Id. at 10. Because that provision applied only to employees, the arbitration provision is one-sided. Id. Further, employers are prohibited under state and federal law from retaliating against employees who assist a complaining employee with discrimination complaints; the gag order thus violates public policy. Id.
Second, the internal-dispute-resolution process limits employees to ten interrogatories, five document requests, and depositions of two individuals for a total of no more than eight hours; the arbitrator may allow more discovery "for good and sufficient cause shown." Slip op. at 11-12. Importantly, the Baxter court held that these limitations under the facts of the case, a "factually complex case involving an employee who had a 12-year employment history . . . [where] the outcome will depend upon several percipient witnesses, at least six of whom are identified by name in the complaint," meant that the limitations were " almost certainly inadequate to permit [the plaintiff] to fairly pursue her claims." Slip op. at 12.
This holding is a critical development in our appellate law. The opinion is clear that to secure a finding of substantive unconscionability due to discovery limitations, an employee may show that the specific facts and circumstances of the employee's case make the discovery limitations inadequate. And an arbitrator having the ability to allow more discovery only on a showing of "good and sufficient cause" does not save the provision from a finding of substantive unconscionability---requiring the employee to show more than a simple showing of need where the employee establishes as a factual matter that the employee will likely need many more depositions can result in a finding of substantive unconscionability. Slip op. at 14-15.
Third, the internal-dispute-resolution process imposes multiple deadlines on the employee that would not exist outside the process. The employee must first initiate the process within one year of the adverse act. Then a whole series of deadlines applies:
After a claim is initiated at level one of Resolve, an employee must meet certain deadlines before the claim may proceed to the next level. A level two claim must be submitted within 15 business days of the date of Genworth’s written response at level one. A level three demand for mediation must be submitted within 30 calendar days of the date of Genworth’s written response at level two. And a level four arbitration demand must be submitted within 30 calendar days of the date of Genworth’s written response at level three.
Slip op. at 16.
These deadlines seriously truncate the statute of limitations that normally applies. An employee typically has one year to file an administrative complaint with the Department with Fair Employment and Housing (DFEH); the DFEH may take time to investigate and respond; the DFEH may then issue a right-to-sue letter; and the employee would then have another year to file a civil action. This makes the outside limit for an employee to file a civil action under the FEHA as long as three years. Slip op. at 16. Yet under the employer's dispute-resolution process and its series of deadlines, the employee could be required to submit to arbitration much sooner. These deadlines restrictions are therefore substantively unconscionable. Id. at 18.
Fourth, the practical effect of these deadlines means that the employee may be required to arbitrate even before the DFEH has conducted an administrative investigation. This also results in "at least a moderate degree of substantive unconscionability." Slip op. at 19-22.
The Baxter court therefore affirmed the trial court's ruling that the contract is both procedurally and substantively unconscionable.
So what's an employer defendant to do after a finding of unconscionability? Argue that the offending provisions be severed, but arbitration be enforced anyway.
The Baxter court rejected the employer's argument that the trial court should have severed the provisions and enforced the arbitration provision anyway. Because the internal-dispute-resolution provision contained multiple substantively unconscionable provisions, the trial court could not simply strike a few terms to remove the taint of unconscionability. Instead, "[t]he trial court would have had to rewrite the unconscionable provisions in order to ensure mutuality and fairness. The court lacked the power to do so." Slip op. at 25.
Although the arbitration provision in Baxter contained many more one-sided provisions than many typical arbitration contracts, the opinion is nonetheless helpful in analyzing various arbitration provisions. Provisions that limit discovery (in factually complex cases, severe limitations on discovery combined with a requirement of a showing of good and sufficient cause to get more discovery can be substantively unconscionable), limit the limitations period (requiring employees to arbitrate well before their statute of limitations would run in civil court and before the DFEH could conduct an investigation), or limit the employees' ability to interview witnesses and engage in informal investigation could all be ruled substantively unconscionable under Baxter. And the Baxter opinion is clear that adhesion contracts in employment, presented on a take-it-or-leave-it basis where the employee lacks equal bargaining power, present a "high degree of oppressiveness" that supports a finding of procedural unconscionability.
Both sides can take something away from Baxter. Employers will be better-able to craft enforceable arbitration provisions by keeping cases like Baxter in mind, ensuring that they are not creating significant risk of non-enforcement. After all, you can craft any kind of arbitration on paper, but it's worthless if it won't be enforced. And plaintiffs can cite to cases like Baxter when their own arbitration provisions contain limits on discover, trunctated limitations deadlines, etc., to argue that the provision is unenforceable.