Arbitration Provision Allowing Appeal to Second Arbitrator Is Unenforceable

By Joanne Deschenaux March 2, 2021
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A provision in an arbitration agreement that allowed either party to appeal an initial decision to a second arbitrator cannot be enforced, a California appeals court ruled. Although the provision applied to both parties, only the employer was likely to take advantage of it. Employees would have to spend additional time and money to secure an award in their favor, so the provision was unfair, the court said.

However, because the agreement allowed for the severability of one or more clauses, the problematic provision could be stricken and the remainder of the agreement enforced, the court held, reversing a trial court decision finding the entire agreement unenforceable.

When the employee began working for the employer, she signed an agreement stating that workplace disputes would be settled through binding arbitration. She was fired two years later and sued the employer, alleging wrongful discharge and violations of California's Fair Employment and Housing Act, among other claims. The employer filed a motion to compel arbitration. The trial court denied the motion, and the employer appealed.

Unconscionability

A trial court must make two determinations when ruling on a motion to compel arbitration, the appeals court said. First, the trial court must determine whether there is a valid agreement to arbitrate. If the agreement is valid, then the trial court must grant the order unless there is a legal reason to revoke the agreement. For example, agreements can be revoked for unfairness or "unconscionability."

The appeals court found that the agreement in this case was valid and turned to the question of unconscionability.

The unconscionability doctrine has both a procedural and substantive element. The procedural element focuses on oppression or surprise in the negotiation or formation of the contract due to the unequal bargaining power of the parties. Substantive unconscionability pertains to the fairness of an agreement's actual terms and assessments of whether they are overly harsh or one-sided.

Both procedural and substantive unconscionability must be shown for the defense to be established, but they need not be present to the same degree, the court said. Instead, they are evaluated on a sliding scale. The more substantively oppressive a contract, the less evidence of procedural unconscionability is required to conclude that it is unenforceable. Conversely, if the bargaining tactics used are particularly deceptive or coercive, less substantive unfairness is required.

The ultimate issue in every case is whether the terms of the contract are sufficiently unfair in light of all relevant circumstances so that a court should block enforcement.

The trial court in this case found both procedural and substantive unconscionability and refused to enforce the agreement.

As to procedural unconscionability, the court noted that the agreement was sent to the employee by mail and she had at least 24 hours to copy, read and consider it. The arbitration agreement was only two pages long, was typed in readable print and contained short, easily understood paragraphs. Although the employee was more comfortable speaking Spanish, the appellate court noted that the employer was not required to give the employee a Spanish translation because she did not show she lacked English language skills.

The appellate court therefore found only very limited procedural unconscionability stemming from the fact that, when arbitration is a condition of employment, there is inherent economic pressure on the employee to accept arbitration.

The only element of substantive unconscionability found by the trial court was the option to have a second arbitrator review a decision. The appellate court agreed that this provision was substantively unconscionable because, although it permitted either party to obtain review, in practice, the provision would benefit the employer.

If an employee receives an award that he or she believes is too low, it is unlikely that an arbitrator who acts merely in a reviewing capacity will increase an award against the employer, the court explained. However, if the employee receives a substantial award, the employer can seek review and increase the expense and possibly the length of time required for the employee to obtain confirmation of the award, with very little risk to itself, the court stressed.

Furthermore, the provision did not explain how the second review was to be implemented or if it was an attempt to replace a court review, the appellate court noted.

However, the arbitration agreement allowed clauses to be severed, so, the court said, the provision could be stricken from the agreement without impacting its other terms. The rest of the agreement could be enforced if the provision was removed, the court concluded.

The appellate court reversed the trial court's decision and ordered the parties to proceed to arbitration.

Alvarez v. Altamed Health Services Corp., Calif. Ct. App., No. B305155 (Feb. 4, 2021).

Professional Pointer: Organizations should regularly take steps to ensure the continuing enforceability of mandatory arbitration agreements. One recommendation is to include a severability clause that states that if one portion of the agreement is found to be unenforceable or illegal, it can be severed, and the other provisions would remain in effect.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md. 

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