In Ramirez v. Charter Communications, Inc, the California Supreme Court held that courts cannot refuse to enforce arbitration agreements simply by finding that three or more provisions are unconscionable. Rather, courts must use a three-prong test to assess whether to remove or limit unconscionable terms and enforce the remainder of the agreement.

The employee in Ramirez signed an arbitration agreement at the outset of her employment. After she was terminated, she filed a lawsuit in court rather than in arbitration. The employer filed a motion to compel the case to arbitration. The trial and appellate court concluded that because there were multiple unconscionable provisions in the employment arbitration agreement, that the employer’s motion should be denied.

The California Supreme Court affirmed the lower court’s findings that the provisions were unconscionable. Despite affirming that the arbitration agreement contained unconscionable terms, the Supreme Court held that the existence of unconscionable terms does not render the agreement per se unconscionable. It explained that there is no bright line rule regarding the number of unconscionable terms in a contract that mandates that a court refuse enforcement of the contract. Instead, it set forth a three-prong test.

It held a court may liberally sever any unconscionable provision of a contract and enforce the rest when:

1. The unconscionable provision(s) are collateral to the main purpose of the contract;
2. It is possible to cure the unconscionability by removing or limiting the provision; and
3. Enforcing the remainder of the contract would be in the interests of justice.

Under the first prong, the court considers whether the main purpose of the contract is tainted by an unlawful purpose (e.g., creating a system that disfavors/disadvantages an employee’s claims and that favors/advantages an employer’s claims). If not, the unconscionable provision(s) are collateral.

Under the second prong, the court considers whether striking or limiting existing terms removes the unconscionability and whether the agreement contains a severance clause indicating the parties’ intent to have the court do so. However, if terms must be added to the contract to remove the unconscionability, the court should not enforce the contract.

Under the third prong, the court considers whether (1) severance of unconscionable terms condones an illegal scheme (e.g., whether severance creates an incentive for employers to draft one-sided agreements in the hopes that employees won’t challenge them, and if they do, that the court would fix the problems for them) and (2) if the agreement indicates a systematic effort to impose arbitration on an employee as an inferior forum that works to the employer’s advantage. If the answer is yes to either question, then in the interests of justice, the court should not enforce the agreement.

The case was remanded for further consideration in light of this three-prong test.

Ramirez v. Charter Communications, Inc. is a reminder to employers to ensure that their employment arbitration agreements are fair and balanced, and the decision clarifies the standard to determine whether courts can sever unconscionable (i.e., one-sided and/or illegal) terms.

If you use an arbitration agreement in your employment contracts or workplace, it is imperative to contact your business attorney to ensure the arbitration agreement will remain enforceable or needs to be redrafted.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

The United States Supreme Court in Lamps Plus v. Varela, recently held a class action may not be ordered to arbitration unless the parties’ arbitration agreement expressly states that class claims may be arbitrated.

The Ninth Circuit had ordered the parties to arbitrate the plaintiffs’ class claim based on its finding that the arbitration agreement was “ambiguous” as to whether class claims could be arbitrated and, as a matter of traditional contract law, ambiguities are resolved against the drafter of the agreement (in this case, the employer). The Supreme Court rejected the Ninth Circuit’s reasoning and held, under the Federal Arbitration Act, arbitration is purely a matter of agreement between the parties and parties to an arbitration agreement cannot be ordered to arbitrate claims that they did not clearly agree to arbitrate. The Supreme Court decided ambiguity cannot be used to imply that the parties agreed to arbitrate class claims in arbitration because class litigation is not the type of action that is suitable for the streamlined adjudication process traditionally associated with the arbitral forum.

Although Supreme Court precedent holds that silence or ambiguity in an arbitration agreement cannot be a basis for concluding that the agreement covers class claims, the lower court decisions in the Lamps Plus case show that some courts continue to try to find ways to get around favorable Supreme Court precedents. It is, therefore, incumbent upon employers to expressly state in an arbitration agreement that class, collective, and/or representative claims may not be arbitrated and that no arbitrator shall have authority to preside over any arbitration on a class, collective, and/or representative basis on behalf of more than one employee.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Many employers desire that their employers be subject to mandatory arbitration agreements with class-action waivers on employees although California discourages such agreements. Some employees refuse to sign arbitration agreements. So, what can an employer do with employees who refuse to sign? One solution is to dismiss the employees who don’t sign the arbitration agreement. However, a dismissal for refusal to sign an arbitration agreement could be challenged as a wrongful termination in violation of public policy. Fortunately, there is a case, Lagatree v. Luce, Forward, Hamilton & Scripps, in which the Court of Appeal decided, since public policy favors arbitration, an employer can lawfully dismiss an employee for refusing to sign an arbitration agreement presented as a condition of employment. However, such an approach poses practical problems. An employer may not want to dismiss each such employee, and selective enforcement may generate discrimination claims.

Another option available to employers is to live with the employee’s choice after the employee is educated about the benefits of arbitration. This path is often chosen where the employer seeks to obtain a voluntary arbitration agreement. Even so, California courts are prone to view employer comments about arbitration as inherently coercive. Therefore, to demonstrate the voluntary nature of the agreement, some employers also offer an extra payment or benefit to those employees who do sign the arbitration agreement. The problem with living with the employees’ choice for employers is, should an employee decide not to sign, the employer is left only with the options to terminate the employee or continue the employment.

An alternative to obtaining the employees’ signatures to an arbitration agreement is to create an arbitration program as a condition of employment, which does not require an employee’s signature for proof of consent. Instead, employee consent is proven by distribution of the arbitration program with a notice that employees will accept the arbitration agreement through continued employment. These agreements are generally enforceable as to at-will employees, so long as they are not unreasonably one-sided.

Due to the lack of settled law many employers will choose not to terminate an employee who refuses to sign an arbitration agreement. Instead, as a business decision, the employer may quantify the risk of class-action litigation and that some employees’ claims will not be subject to arbitration.

Whether you are considering an employee arbitration program or are confronted with a potential claim that may involve an arbitration provision, you should promptly contact your legal counsel.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Last month we reported the California Senate had passed Assembly Bill 465 that was meant to prevent employers from requiring employees to sign an arbitration agreement as a condition of employment. Governor Brown vetoed the measure.

In his veto statement the Governor cited adequate court scrutiny and the far reaching implications of a total ban requiring an agreement to arbitrate as a condition of employment. In addition, he noted cases based on the Federal Arbitration Act pending in Federal Court that could determine such a law is unconstitutional. Therefore, he also believed the law to be premature.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.