Volt Management Corp. ("Volt") hired Plaintiff Stephen Mayers in 2005. He signed an employment agreement, an employment application, and acknowledgement of receipt of the employee handbook. All three documents conspicuously stated that all disputes related to the agreement or Mayers' employment were to be resolved by final and binding arbitration in accordance with the applicable rules of the American Arbitration Association ("AAA"). The documents further stated the arbitrator shall award attorneys' fees and costs to the prevailing party.
In 2010, Mayers filed a lawsuit against Volt alleging several claims under the California Fair Employment and Housing Act ("FEHA"). Volt filed a motion to compel arbitration based on Mayers' agreement to submit employment-related claims to final and binding arbitration. Mayers opposed the motion arguing the arbitration agreement was unconscionable because it was presented on a take-it-or-leave-it basis, did not provide the AAA rules, and contained an illegal attorney fee provision. The trial court denied the motion to compel arbitration and Volt appealed.
The Court of Appeal affirmed the trial court's ruling finding the arbitration agreement was unconscionable as Mayers was not provided a copy of the AAA rules, was not told which set of AAA rules applied, and the prevailing party attorney fees term exposed him to a greater risk of being liable to Volt for attorney fees than if he pursued his FEHA claims in court. The court found the arbitration provision entirely unenforceable as it was permeated with unconscionability.
A court may refuse to enforce a contract or any clause of the contract if it finds a provision unconscionable. Courts balance the procedural and substantive unconscionability of a provision in determining its enforceability. Procedural unconscionability concerns the manner in which the contract was negotiated and the circumstances of the parties at that time, focusing on oppression and surprise. One factor in a finding of substantive unconscionability is an extremely one-sided provision. A court will measure procedural unconscionability on a sliding scale with substantive unconscionability so a court must determine not only whether procedural unconscionability exists, but to what degree it may exist. If a term is so procedurally or substantively oppressive, a court will need little to no evidence of the other unconscionability to conclude a term is unenforceable.
The Court of Appeal found the arbitration provision was oppressive to Mayers as Volt failed to provide him a copy of the AAA rules, failed to identify which particular set of many types of AAA rules was applicable to this contract, and offered the contract on a take-it-or-leave-it basis. The Court of Appeal noted however, that arbitration is a common means of dispute resolution and is a reasonable expectation of the weaker party to a contract, but the contract must identify the rules and provide them to the weaker party.
The arbitration provision was also substantively unconscionable as it comprehensively awarded attorneys' fees to the prevailing party. A court has the discretion to award attorney fees and costs to a prevailing party under FEHA claims. Generally a prevailing plaintiff under a FEHA claim should recover attorney fees unless awarding them would be unjust; a prevailing defendant under a FEHA claim should only be awarded attorney fees if plaintiff's action was frivolous or in bad faith. Volt's arbitration provision generally requires the arbitrator to award attorneys' fees and costs to the prevailing party. The only reasonable interpretation of this clause is that fees must be awarded for all claims, including FEHA claims. The provision is thus substantively unconscionable as it places Mayers at a greater risk in pursuing FEHA claims in arbitration as opposed to court.
Employers entering into employment or independent contractor agreements should modify any existing arbitration provision to identify the actual arbitration rules. Moreover, Employers should attach those rules to the agreement along with a provision stating they are subject to change by the dispute resolution service. When an arbitration provision requires an arbitrator to award attorneys' fees and costs to the prevailing party, a qualification should be included that the arbitrator may only award fees if the laws relating to the particular claim permit the awarding of such fees.
Mayers v. Volt Management Corp. (2012) ___ Cal.Rptr.3d ___ [2012 WL 604390].