The California Supreme Court has declared that California has a “strong public policy in favor of enforcing arbitration agreements.”
Where the employee has the power to negotiate the of an arbitration provision, however, or where the arbitration give both the employer and employee some substantive advantages — even if unequal advantages — a court will not find the arbitration provision unenforceable due to unconscionability.
The California Court of Appeal recently applied these principles in an unpublished opinion in a case brought by George Gardner, the former Chief Executive Officer of Yucaipa Trading Co., which does business through a small chain of Rio Ranch Markets in the Inland Empire, and Kimberly Mederos, Yucaipa’s former marketing chief. The appellate reversed the trial court’s order finding the arbitration provisions in the executives’ employment agreements procedurally and substantively unconscionable.
A party seeking to avoid arbitration based on unconscionability must show the provision was imposed in a procedurally oppressive or surprising manner and that the of the arbitration provision were so substantively one-sided as to “shock the conscience.” A party resisting enforcement of an arbitration provision need not show the presence of procedural and substantive unconscionability in the same degree, but must show the presence of each in some degree.
An arbitration provision is procedurally oppressive when the weaker party has no power to negotiate over it and no meaningful choice about whether to accept it. Unfair surprise occurs when the provision is buried in a wordy document.
The court of appeal found Gardner could not show Yucaipa’s arbitration provision was procedurally unconscionable because, represented by counsel, he spent over two months negotiating his employment agreement, including the arbitration provision. Yucaipa agreed to revise the arbitration provision so that Yucaipa alone would bear all arbitration expenses. That showed the parties had relatively equal bargaining power. Mederos had a two-hour dinner conversation with Yucaipa’s chairman about the of her agreement after which Yucaipa made minor changes to the agreement she requested.
Gardner and Mederos unsuccessfully relied on a 2004 court of appeal ruling that an employee’s ability to negotiate other aspects of his employment, such as salary, has no bearing on whether he had the power to negotiate an arbitration provision presented on a take-it-or-leave-it basis. The court of appeal in this case apparently inferred Mederos’s unexercised power to negotiate over the arbitration provision from Gardner’s success in doing so. Yucaipa’s unwillingness to drop the arbitration provision altogether did not make it procedurally unconscionable. “Parties are not required to make large concessions on every point sought during negotiations to demonstrate equal bargaining power.”
Since a party challenging an arbitration provision must demonstrate both procedural and substantive unconscionability, the court of appeal could have stopped there. The court proceeded to find the arbitration provision also was not substantively unconscionable.
The former executives attempted to demonstrate the substantive unconscionability of the arbitration protocol in the employment agreement by pointing out that the agreement allowed “either party” to seek an injunction in court only “as provided in” the agreement. The agreement only expressly allowed Yucaipa the right to seek an injunction in court, for violations of the agreement’s restrictive covenant provision and a provision requiring the employees to preserve company secrets.
The court of appeal concluded that the contract language did not necessarily authorize resort to the court for injunctive relief only where the agreements expressly conferred that right. The agreements also could be read to allow a party to seek injunctive relief unless it was prohibited by the agreement. Since Yucaipa drafted the agreements, the ambiguity would be resolved in the employees’ favor.
Moreover, California law allows any party to an arbitration agreement to seek an injunction or other non-monetary remedy from a court on a showing that the award sought in arbitration could be rendered meaningless without such an injunction.
It did not matter that Yucaipa arguably had greater rights under the agreements to seek an injunction. “A contract is not required to be perfectly symmetrical in order to escape substantive unconscionability.” The arbitration provision need only have a “modicum” of evenhandedness. And Yucaipa and the former executives each had some rights under the agreements’ arbitration provision and its injunction exception.
But the key takeaway from this non-precedential ruling is this: An employee with the power to negotiate the of an arbitration provision in an employment agreement may be unable later to establish the requisite procedural unconscionability to resist arbitration, even where the provision is substantively one-sided.
Dan Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at the San Diego State University Fowler College of Business where he teaches classes in business ethics and employment law. He may be reached at [email protected]. His Twitter handle is @DanEatonlaw.
