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Thelen Reid Brown Raysman & Steiner LLP
The
California Supreme Court has handed down a decision that
could jeopardize arbitration agreements between California
employers and their employees, underscoring the importance
of reviewing such agreements to ensure that they comply
with standards of due process. The Supreme Court held that
due process standards for arbitration of statutory claims
of discrimination also apply to employee claims of wrongful
termination in violation of public policy. Little v.
Auto Stiegler, Inc., 29 Cal. 4th 1064 (2003).
The
Supreme Court also invalidated a provision of the arbitration
agreement providing for appellate review of the arbitrator's
decision and severed this clause from the agreement, enforcing
its remaining terms.
Alexander
Little worked for an automobile dealership, rising to service
manager. After his employment was terminated, he sued his
employer, alleging that he was demoted and terminated in
violation of California public policy because he had reported
warranty fraud by Auto Stiegler. He also alleged breach
of an implied contract of continued employment and an implied
covenant of good faith and fair dealing.
While
employed, Little signed three nearly identical arbitration
agreements. The last agreement provided that "any claim,
dispute, or controversy" arising from or related to
his employment "shall be submitted to and determined
by binding arbitration" as governed by federal and
state laws governing arbitration. The arbitration agreement
also provided that if an arbitrator awarded more than $50,000
in damages, the award was subject to appellate review by
a second arbitrator. The trial court ordered Little to submit
his lawsuit to arbitration, an order later reversed by the
Court of Appeal. The Supreme Court reversed the appellate
court and affirmed the trial court's order compelling arbitration.
By
a 7-0 vote, the Supreme Court invalidated the clause requiring
that any award of more than $50,000 be submitted to another
arbitrator. The court held that such a provision was "unfairly
one-sided" and thus was unconscionable because it was
geared to giving the defendant (the party most likely to
bring an appeal) a substantial opportunity to overturn a
sizable arbitration award. The employer argued that the
clause was not one-sided because it applied to both parties,
but the court found that in reality, it benefited the employer
because employers most often would be faced with an adverse
money award an arbitration.
The
court also unanimously severed this invalid provision and
enforced the remaining terms of the agreement. If an agreement's
central purpose is so tainted with illegality or is riddled
with multiple defects, the entire agreement will be invalidated.
Here, only the appellate aspect of the arbitration procedure
was invalid, and this could be severed while upholding the
remaining terms. In dicta, the court indicated that the
contract's central purpose could be considered illegal if
an employer includes even a single provision that is clearly
contrary to California law.
By
a narrow 4-3 margin, the Supreme Court held that the procedural
requirements applicable to statutory discrimination claims,
announced by the court in 2000 in Armendariz v. Foundation
Health Psychcare Services, Inc., 24 Cal. 4th 83 apply
to claims alleging a wrongful termination in violation of
public policy.
Thus,
to enforce arbitration agreements in disputes raising such
claims, the agreement:
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1.
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May
not limit damages available under the applicable statutes; |
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2.
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Must
allow for discovery sufficient to adequately arbitrate
the claim; |
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3.
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Must
allow for a written arbitration decision and judicial
review sufficient to ensure that arbitrators have complied
with applicable law; and |
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4.
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Provide
that the employer pays all costs unique to the arbitration. |
These
standards do not apply to contract-based claims (breach
of contract, breach of the implied covenant of good faith
and fair dealing) or other claims not based on statute.
But, if an employer's arbitration agreement contravenes
these standards, it runs the risk that a court will invalidate
its agreement and permit employees to bring wrongful termination
and discrimination claims in court, a time-consuming and
potentially costly process.
In
light of Little v. Auto Stiegler, employers should:
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1.
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Review
their arbitration procedures to assure that they do
not contain provisions that could be construed as overly
one-sided or intended to benefit primarily one party
at the expense of the other; and |
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2.
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Periodically
review their agreements to ensure they conform to new
judicial decisions involving arbitration. |
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For more information about the issues covered in this report, please contact Linda S. Husar in our Los Angeles office at 213-576-8017 or at lshusar@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2003 Thelen Reid Brown Raysman & Steiner LLP
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