A recent decision by a California Court of Appeal emphasizes the importance of a valid arbitration agreement between employers and employees.
A recent decision by a California Court of Appeal emphasizes the importance of a valid arbitration agreement between employers and employees. In Murphy v. Check ‘N Go (10/17/2007), the Court of Appeal affirmed the trial court’s decision to deny an employer’s motion to compel arbitration based upon an unconscionable arbitration agreement. Importantly, the Court of Appeal determined that the class action waiver provision of the agreement was unconscionable.
In Murphy, a former “salaried retail manager,” Lisa Murphy, brought a putative class action lawsuit against her former employer, Check ‘N Go, for various violations of the California Labor Code (e.g., unpaid overtime, missed meal and rest periods, etc.). Check ‘N Go filed a motion to compel arbitration based upon the parties’ prior arbitration agreement. In response, Ms. Murphy claimed that the arbitration agreement was unconscionable because it was procedurally and substantively unfair. The trial court agreed with Ms. Murphy, and held that the arbitration agreement was both procedurally and substantively unconscionable.
In order for an arbitration agreement to be deemed unenforceable, it must be both procedurally and substantively unconscionable. Thus, the Court of Appeal examined both the procedural and substantive aspects of the parties’ arbitration agreement. As to the procedural aspects of the arbitration agreement, the Court of Appeal determined that the agreement was a “contract of adhesion” because Ms. Murphy claimed: (1) she received the agreement in the inter-office mail; (2) no one explained the agreement to her; and (3) she was never told the agreement was optional or negotiable.
As to the substantive provisions, Ms. Murphy alleged that the agreement was unconscionable because: (1) it required the arbitrator to determine unconscionability; (2) it included a class action waiver; and (3) required the arbitration of pre-existing disputes (i.e., events occurring prior to the signing of the arbitration agreement). The Court of Appeal, focusing on the class action waiver provision, determined that the arbitration agreement was substantively unconscionable because the class action waiver acted as an “exculpatory clause” for Check ‘N Go. In so holding, the Court of Appeal relied on the California Supreme Court’s recent decision in Gentry v. Superior Court (2007), which drastically narrowed the availability of class action waivers to a few limited, factual circumstances.
Employers’ Bottom Line:
Frequently, employers have employees sign arbitration agreements at the time of hire, only to consign the agreements to the employees’ personnel files until a lawsuit arises (often several years after the employees were initially hired). Unfortunately, given the ever changing standards for enforceable arbitration agreements in California, by the time a lawsuit actually arises, there is a good chance the parties’ arbitration agreement is no longer enforceable. Thus, we recommend an annual review of employees’ arbitration agreements to better your chances of enforcing the agreement should a lawsuit ever arise.
If you have any questions regarding this case or California arbitration agreements, please contact the Ford & Harrison attorney with whom you typically work or the author of this Alert, Jesse Caryl, at jcaryl@fordharrison.com or (213) 237-2450.