Arbitration Article No. 8

Unconscionability in Employment Arbitration Clauses

The Ninth Circuit’s May 14, 2007 decision in Davis v. O’Melveny & Myers, no. 04-56039, 2007 DJDAR 6741, is of interest because it provides a detailed analysis of unconscionability under California law in an employment arbitration provision; more importantly, it is one more in a line of appellate cases which affirm that the courts have no hesitancy in invalidating one-sided arbitration agreements. (See, for example, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83; Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519 and Martinez v. Master Protection Corp. (2004) 118 Cal.App.4th 107.)

Davis, a former O’Melveny paralegal, sued the firm for various wage and hour violations. The trial court granted O’Melveny’s motion to dismiss the complaint and to compel arbitration pursuant to a Dispute Resolution Program (DRP) that provided for binding arbitration of most employment-related claims by and against O’Melveny’s employees. The agreement, which O’Melveny had distributed to all of its employees in August 2002, became effective three months later.

Notice language in the DRP provided that an employee’s claim was lost if that person had not given written notice of the claim along with a mediation demand “within one (1) calendar year from the time the condition or situation providing the basis for the claim is known to the employee or with reasonable effort on the employee’s part should have been known …” A confidentiality clause stated, in part, that “all claims, defenses and proceedings … shall be treated in a confidential manner by the mediator, the arbitrator, the parties and their counsel … no one shall divulge to any third party or person not directly involved in the mediation or arbitration the content of the pleadings, papers, orders, hearings, trials, or awards in the arbitration, except as may be necessary to enter judgment upon the arbitrator’s awards as required by applicable law.” The DRP also provided that O’Melveny was exempt from arbitration for “claims by the Firm for injunctive and/or other equitable relief for violations of the attorney-client privilege or work product doctrine or the disclosure of other confidential information.” Finally, the DRP prohibited the employee and the firm from initiating any administrative action, other than a discrimination charge with the EEOC and DFEH.

Davis first found that the above provisions were procedurally unconscionable. “(I)n a very real sense the DRP was ‘take it or leave it.’ The DRP’s terms took effect three months after they were announced regardless of whether an employee liked them or not. An employee’s option was to leave and work somewhere else.” (Id., relying, in part, on Martinez v. Master Proection Corp., supra, 118 Cal.App.4th 107, 114 [“An arbitration agreement that is an essential part of a ‘take it or leave it’ employment condition, without more, is procedurally unconscionable.”].) The Court rejected O’Melveny’s reliance on Dean Witter Reynolds, Inc. v. Superior Court (1989) 259 Cal.App.3d 758 for the proposition that its employees could have avoided the DRP’s consequences by leaving the firm because Dean Witter involved a financial services contract rather than an employment arrangement. Additionally, Davis found that the “take it or leave it” language could not be reconciled with prior Ninth Circuit decisions that specifically rejected the argument that an arbitration provision was saved if employees had time to consider the change. (See Ingle v. Circuit City Stores (9th Cir. 2003) 328 F.3d 1165 [“the amount of time (the employee) had to consider the contract is irrelevant.”]; Ferguson v. Countrywide Credit Industries, Inc. (9th Cir. 2002) 298 F.3d 778.)

Davis next found substantive unconscionability in the previously referenced notice, confidentiality, exemption and administrative provisions of the DRP. Substantive unconscionability “relates to the effect of the contract or provision. A ‘lack of mutuality’ is relevant in analyzing this prong. The term focuses on the terms of the agreement and whether those terms are so one sided as to shock the conscience.” (Davis, supra, quoting Soltani v. Western & Southern Life Ins. Co. (9th Cir. 2001) 258 F.3d 1038, 1043.)

The Court held that the one-year notice provision was unconscionable because it functioned as a statute of limitations which “would deprive [employees] of the benefit of the continuing violation doctrine available in FEHA suits.” (Id., quoting Ingle v. Circuit City Stores, supra, 328 F.3d at p. 1175.) In arriving at this conclusion, Davis distinguished Soltani, which had found a six-months limitations period not to be unsconscionable because, in that matter, the period began to run only after the employee had left his job, which did not implicate the Court’s concerns about the nullification of the “continuing violation” theory.

The confidentiality provision was also substantively unconscionable because it placed O’Melveny in a superior legal position since the inability to talk about the existence of a claim to current or former employees would “handicap … an employee’s ability to investigate and engage in discovery,” “prevent plaintiffs from accessing precedent while allowing O’Melveny to learn how to negotiate and litigate its contracts in the future” and possibly “prevent others from building cases.” At the same time, Davis cautions that California law does not find all confidentiality provisions per se unconscionable. For example, parties can agree to limit the availability of sensitive employee information, such as Social Security numbers.

Davis noted, as to the provision that exempted O’Melveny from arbitration for equitable relief concerning the disclosure of attorney-client, work-product or other confidential information, that Armendariz (at p. 691) allows an employer to preserve a judicial remedy where there is a “legitimate commercial need” or “business reality,” that the need for judicially-mandated injunctive relief to protect against the release of privileged information could constitute a legitimate “business reality” but that the ambiguous need to protect against breaches of confidentiality, by itself, was not a sufficient justification.

Lastly, the prohibition against filing an administrative claim was found to be contrary to both California and U.S. Supreme Court precedent (respectively, Armendariz and Gilmer .v Interstate/Johnson Lane Corporation (1991) 500 U.S. 20, 28).

Despite the mutuality of most of the provisions of the DRP to both employees and O’Melveny, Davis concluded that the four offending sections could not be excised from the agreement because of their scope and number and thus found that the agreement was unenforceable.

With the addition of Davis to the legal landscape, trial courts have another useful precedent for the analysis and interpretation of agreements that mandate arbitration for the enforcement of employee-employer claims.

Copyright Michael D. Marcus May 2007

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