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Just finished a commercial for my law practice. Very excited! Check it out:

Big win in federal court today before Judge Breyer. Business litigation case involving multimillion dollar real estate development in India dismissed after 2 years on the basis that the suit had already been adequately litigated in an Indian forum. Many thanks to TIm Cronin and Jordan Stanzler, co-counsel of record, for all the hard work. The case is captioned: Walia v. Aegis Center Point Developers Private LTD., United States District Court for the Northern District of California, Case Number 3:12-cv-04660-CRB.

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Just finished a commercial for my law practice. Very excited! Check it out:

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If you are a business owner with employees, paying your employees properly is vital. Failure to do so can result in a judgment for unpaid wages and associated penalties, interest and attorney's fees. To determine the requirements for paying your California employees, the Department of Industrial Relations has created this PDF: This post should not be construed as legal advice. Please consult an attorney for any specific inquiries.

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My colleague Jordan Stanzler at The Stanzler Law Group recently wrote this article -- to be published soon -- about an insurance company's duty to settle environmental claims pre-litigation when liability is reasonably clear. A recent decision by the Ninth Circuit has clarified that insurance companies cannot wait for an action to be filed in court before seeking to settle a covered claim. This case law is particularly important in environmental litigation arising out of PCE contamination -- a solvent commonly used in dry cleaning operations from the 1960s onward.  

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The California Supreme Court recently decided that attorney's fees are not available for lawsuits alleging violations of California Labor Code section 226.7 -- the Labor Code section governing remedies for violations of meal and rest break requirements. The decision has a potentially wide-ranging impact on the decision to litigate meal and rest break violations and is generally viewed as favorable to employers.

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Here is a good starting point for analyzing the California Supreme Court's recent decision in Brinker Restaurant Corp. v. Superior Court (Hohnbaum). The decision clarifies employer obligations with respect to providing meal and rest breaks for California nonexempt employees.

Arbitration Agreements: Not All Terms Are Created Equal, Or Enforceable

Arbitration is a private dispute resolution process which has become an increasingly popular forum to resolve employment disputes. As a result, understanding the arbitration process has become increasingly important, both for employers and employees.

Under federal as well as California law, there is a strong public policy favoring arbitration, but an accompanying foundational precept that claims should be arbitrated only to the extent the parties have agreed. Granite Rock Co. v. International Brotherhood of Teamsters, __ U.S. __, 130 S.Ct. 2847, 2856, 2859-2860 (2010). This article examines the extent to which parties can be considered to have “agreed” to arbitrate. While parties are generally given wide latitude in fashioning both the scope and terms of arbitration agreements, there are certain terms in arbitration agreements which California courts have refused to enforce.

Employers must be aware of whether the terms in their standard arbitration agreements are enforceable. Otherwise, employers risk a finding that their dispute cannot be determined through arbitration – or must be determined on terms the employer did not anticipate.

Employees, on the other hand, should carefully review the terms of arbitration agreements which are proposed to them, not only to point out potentially unenforceable terms, but also to take the opportunity to negotiate for more favorable terms. As mentioned in my previous post, too often employees take contracts as a take-it-or-leave-it proposition, instead of a starting point for negotiations.

I. Unconscionability And The Enforcement Of An Agreement To Arbitrate

Arbitration agreements are valid, irrevocable, and enforceable, except upon grounds that exist for the revocation of contracts generally. Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 97-99, 114 (2000). One of the most common bases for attacking the enforceability of an arbitration agreement is that it would be “unconscionable” to require the parties to comply with the agreement.

The basic test for unconscionability is “whether . . . the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.” American Software, Inc. v. Ali, 46 Cal. App. 4th 1386, 1390 (1996). Therefore, unconscionability is determined at the moment both parties enter into the contract, not in light of subsequent events. A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982).

In determining whether the terms of an arbitration agreement are sufficiently one-sided to be unconscionable, both the procedural and substantive aspects of unconscionability must be examined. By the use of a sliding scale, a greater showing of procedural or substantive unconscionability will require less of a showing of the other to invalidate the agreement.

Procedural unconscionability pertains to the making of the arbitration agreement. It focuses on the oppression that arises from unequal bargaining power and the surprise to the weaker party that results from hidden terms or the lack of informed choice. Dotson v. Amgen, Inc., 181 Cal.App.4th 975, 980 (2010); see Higgins v. Superior Court, 140 Cal.App.4th 1238, 1252 (2006)(referring to oppression and surprise, which is a function of the disappointed reasonable expectations of the weaker party); 24 Hour Fitness, Inc. v. Superior Court , 66 Cal.App.4th 1199, 1213 (1998)(referring to unequal bargaining positions and hidden terms).

Substantive unconscionability, on the other hand, arises when a contract imposes unduly harsh, oppressive, or one-sided terms. Armendariz, supra, 24 Cal.4th at 113 (provision in adhesion contract will not be enforced if it does not fall within the reasonable expectations of the weaker or adhering party or if, in context, it is unduly oppressive or unconscionable).

II. Procedural Unconscionability

There are several factors which many courts have taken into consideration when determining the issue of procedural unconscionability. The two most important factors are: (1) whether the relatively weaker party has an alternative source with which it could contract; and (2) whether the contract term in question was in fact negotiable. Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308 (6th Cir. 1998). Other matters a court may consider are whether the parties had a reasonable opportunity to understand the terms and conditions of the agreement; whether the stronger party utilized deceptive practices so as to obscure key provisions; and whether the weaker party received an appropriate explanation of the terms of the agreement. All of these factors have a bearing on whether or not procedural unconscionability is found to exist. However, no single factor is dispositive.

Arbitration agreements typically arise in the employment context as part of a larger employment agreement presented to the employee. The finding that an arbitration provision was part of a non-negotiated employment agreement establishes, by itself, some degree of procedural unconscionability. Such contracts are usually drafted and imposed by a party of superior bargaining strength, leaving the employee with only the option of adhering to the contract or rejecting it. 24 Hour Fitness, supra, 66 Cal.App.4th at 1213. However, where there is no other indication of oppression or surprise, the degree of procedural unconscionability of a take-it-or-leave it agreement is low, and the agreement will be enforceable unless the degree of substantive unconscionability is high. Dotson, supra, 181 Cal.App.4th at 981-982.

III. Substantive Unconscionability

In Cole v. Burns Int’l Sec. Serv., Inc., 105 F.3d 1465 (D.C. Cir. 1997), the court devised five minimum requirements for lawful arbitration in the employment context. In general, the arbitration agreement must:

(1) provide for neutral arbitrators; (2) provide for more than minimal discovery; (3) require a written award; (4) provide for all the types of relief that would otherwise be available in court; and (5) not require employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum.

These minimum requirements have been adopted by California courts. Armendariz, supra, 24 Cal. 4th at 102. With respect to selecting an arbitrator, the arbitration agreement itself must set forth an impartial method for selecting arbitrators. Arbitration agreements which allow an employer to select the arbitrator, or which otherwise do not give one party an equal opportunity in the selection of an arbitrator, will not be enforced by a California court.

Moreover, adequate discovery is necessary for the vindication of statutory claims. In Armendariz, the court inferred that “when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim.” Id. at 106. Thus, in the employment context, parties must have, in essence, similar rights to discovery as they would have in a court of law.

Arbitration agreements which place limits on employees’ remedies have consistently been found unconscionable. Similarly, courts do not treat arbitration agreements favorably when they restrict an employee’s ability to obtain appropriate relief but not an employer’s. To avoid a charge of unconscionability stemming from failure to provide relief when drafting an arbitration agreement, employers should provide that when resolving a statutory claim, the arbitrator may award any remedy available in a court of law.

Arbitration agreements must also preserve an employee’s right to pursue statutory claims without the payment of costs which an employee would not be compelled to pay in a court of law and which amount to a barrier to the employee asserting their Constitutional rights. Put simply, “ . . . the imposition of substantial forum fees is contrary to public policy, and is therefore grounds for invalidating or revoking an arbitration agreement and denying a petition to compel arbitration under Code of Civil Procedure sections 1281 and 1281.2.” Id. at 110.

Arbitration agreements must provide that the decision of the arbitrator be in writing. This is simply good practice, even if it were not required by case law, due to the difficulties inherent in enforcing an arbitration award which is not in writing.

In addition, the court in Ajamin v. CantorC02E, L.P. (San Francisco County Super. Ct. No. CGC-10-503339) recently confirmed that provisions for the award of attorney’s fees must benefit both parties to the arbitration agreement; however, an employee cannot waive his or her right to statutory attorney’s fees or damages. In addition, the court reasoned that an agreement by an employee to provide attorney’s fees to her former employer (in the event the employer prevailed) would be unenforceable on unconscionability grounds, because she would not be obligated to pay such fees by statute.

IV. Severability Of Unenforceable Terms

If a term (or terms) of an arbitration agreement is found to be unenforceable, the next step is to analyze whether the agreement is unenforceable as a whole, or whether the offending terms may be severed from the remainder of the agreement.

In deciding whether to sever terms rather than to preclude enforcement of an arbitration provision altogether, the overarching inquiry is whether the interests of justice would be furthered by severance. The strong preference is to sever unless the agreement is “permeated” by unconscionability. Dotson, supra, 181 Cal.App.4th at 985-986 (where only one provision of agreement is unconscionable and it can be easily severed without affecting the remainder, the proper course is to do so).

An employment arbitration agreement can be considered permeated by unconscionability if it contains more than one unlawful provision. Multiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer’s advantage. Murphy v. Check 'N Go of California, Inc., 156 Cal. App. 4th 138, 149 (2007). Moreover, the entire provision is unenforceable if the only way to cure the unconscionability in effect to rewrite the agreement.

V. Conclusion

An Agreement to arbitrate an employment dispute will be enforced unless the agreement is both procedurally and substantively unconscionable. Procedural unconscionability normally presents itself in the form of one-sided, take-it-or-leave it agreements. Courts will analyze the facts and circumstances surrounding the parties’ agreement to arbitrate in order to determine the degree of procedural unconscionability. The greater the procedural unconscionability, the less substantive unconscionability is required in order to render the offending term (or entire agreement) unenforceable, and vice-versa.

Substantive unconscionability refers to the fairness of the terms of the arbitration agreement. California courts have required the following terms to create an enforceable arbitration agreement: (1) the provision for neutral arbitrators; (2) the provision for more than minimal discovery; (3) a written award; (4) the provision for all the types of relief that would otherwise be available in court; and (6) no requirement for employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum. In addition, attorney’s fees clauses should not limit employees’ statutory rights under California law.

Arbitration Agreements: A Cost/Benefit Analysis for Employers and Employees

Although arbitration agreements arise in many different contexts, this post concerns arbitration agreements in the employment context. Many employers present employees with arbitration agreements (or arbitration clauses within larger agreements) either at the beginning of their employment or as a result of changes in the terms of their employment. It is important for both employers and employees to understand the costs and benefits of arbitration agreements in advance of deciding on whether to enter into such an agreement.

When determining the costs/benefits of arbitration, it's important to ask: "What is the alternative?" The alternative is adjudication in a court of law. A court of law is what the typical person will think of as "going to court". An arbitration, on the other hand, is a dispute resolution process held before a private tribunal. Arbitration entities are not a function of the government. Instead, they are private entities which adjudicate disputes based on the consent of the parties to the jurisdiction of the arbitration entity.

Under federal as well as California law, there is a strong public policy favoring the enforcement of arbitration agreements, "but an accompanying foundational precept that claims should be arbitrated only to the extent the parties have agreed". Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847, 2856 (2010). Therefore, unless otherwise agreed, the default setting for a legal dispute is a court of law.

Still with me? Good. Now for the cost/benefit analysis: generally speaking, arbitration may be favored by employers because it is: (1) confidential; (2) relatively fast; (3) allows for greater choice of venue and rules; and (4) arguably benefits repeat players.

With respect to confidentiality, unlike a court of law, the papers filed in -- and the hearings conducted for -- an arbitration are not subject to public scrutiny. This can benefit either an employer or employee. Relevant considerations include: (a) the potential for exposure of personal, private information; and (b) the potential for disclosure of damaging information, including proprietary information or spurious allegations. Arbitration can also be more fast-paced than a court of law: arbitrators are not bound by many of the time-consuming procedures in courts of law, and arbitrators may also have a lighter docket than a typical California court. An employer can also review the various arbitration entities and determine beforehand which ones suit its needs. These considerations can include applicable fees and costs and procedural rules. Finally, large employers may have a steady diet of pending litigation. If these disputes are referred to a private arbitration entity, the employer will generally enjoy the advantages typical of an incumbent member of a given system. Based on these considerations, many employers decide it is worthwhile to enter into arbitration agreements with their employees.

For the employee, arbitration agreements may be disfavored because of: (1) cost; (2) lack of access to a jury; (3) the language of the arbitration agreement itself; and (4) non-repeat player status.

With respect to cost, arbitration fees can be more expensive than a court of law, especially considering the up-front fees routinely demanded in arbitration settings. For a cost-conscious employee, this can be a significant hurdle to adjudicating their dispute. Also, an arbitration does not involve a jury, which potentially limits the recovery an employee may reasonably expect to obtain. With respect to the language of the arbitration agreement, such agreements are usually drafted by attorneys for an employer. Therefore, absent some negotiation over the terms of the arbitration agreement, the typical agreement will contain terms favorable to the employer. Finally, an employee is (hopefully) not a repeat player in the arbitration context. This means that an employee lacks all of the benefits which one would expect to come from regularly appearing before a given entity.

Stay tuned to this post for a further discussion about the legality of certain terms which tend to be included in arbitration agreements.

As always, this post is not meant to provide specific legal advice. If you have specific questions or concerns about arbitration agreements, seek the advice of an attorney.
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