Question the 'Enforceability' of Arbitration Agreements

Article excerpt

Oh, the difference a year can make. It wasn't long ago that mandatory arbitration agreements were being hailed as the panacea for all employment disputes. They saved a company time, money and headaches. Suddenly none of that is necessarily true, as cases questioning the enforceability of arbitration agreements are sprouting up all over. Carole Ross, an associate with San Diego law firm Sheppard, Mullin, Richter & Hampton LLP, discusses recent lawsuits and how your company can avoid one.

Let's talk about the recent cases that will affect the atmosphere for mandatory arbitration.

In Gonzalez vs. Hughes Aircraft Employees Federal Credit Union, Diana Gonzalez was hired by Hughes Aircraft Federal Credit Union, and two months after she was hired, the company presented her with a standardized arbitration agreement. The arbitration agreement required all issues to be submitted through an internal grievance process. So all employees who had a problem were required to use that grievance process, and then if they weren't satisfied, if the decision didn't go their way, they had 20 working days to notify the company that they were going to arbitrate the matter. If they didn't follow through in 20 days, according to the policy, they could not arbitrate the matter or sue; all revenues were lost.

What happened?

Diana Gonzalez signed the agreement and had a dispute with her company. She tried to sue for wrongful discharge due to sexual harassment and national origin, and the company filed a petition to compel arbitration. It's important to note that the arbitration agreement said employees were required to sign it as a condition of employment, so Gonzalez was already an employee and her choice was-or appeared to be in the text-sign this or you will no longer have a job.

What did the court rule?

There are different reasons for arbitration agreements to be considered invalid or unenforceable, but the common way is for them to be considered unconscionable. There are two ways to be considered unconscionable--one is procedural and the other is substantive.

What do those terms cover?

Procedural unconscionability relates to the employee's ability to negotiate the terms of a contract. Something is procedurally unconscionable if one party, or in this case an employee, has no real bargaining power, no chance to negotiate the terms.

Here's the line: If the market is so great for an employee and he or she has three job offers and one includes signing an arbitration agreement, the court may not find that's procedurally unconscionable-- that may be fine because this person does have the opportunity to negotiate, or can take another job offer. But the Gonzalez case centered on someone already in a job, who does not have equal bargaining power, who really can't negotiate.

And what is substantive unconscionability?

Substantive unconscionability talks about the terms of a contract-the courts use the phrase "shocks the conscience." The contract's terms are so unfair they shock the conscience. They're unfair, often one-sided or oppressive.

In the case of arbitration agreements, they're one-sided against the employee. For a court to rule against an agreement, it must be both procedurally and substantively unconscionable. Also, the courts tend to use a sliding scale, where if something is amazingly substantively unconscionable, they'll allow lesser amounts of procedural unconscionable and vice versa.

So, for example, how were these proven in the Gonzalez case?

Take procedural unconscionability first-she worked there two months and then they presented her with an arbitration agreement that they forced her to sign. What could she do? She had no negotiating power. So procedural unconscionability was shown. Then the court looked to see if it was substantively unconscionable.

And what did they decide?

One of the issues with the agreement was the short statute of limitations-the 20-day period in which Diana Gonzalez had to notify the company of her intent to arbitrate. …