California Supreme Court Revisits Employment Arbitration Agreements
On January 5, 2016, the California Supreme Court heard oral argument in Baltazar v. Forever 21 Inc., S208345. The case raised important questions about the enforceability of employment arbitration agreements, particularly whether such agreements lack mutuality and are substantively unconscionable.
The plaintiff, a former employee, alleged racism, gender discrimination, and sexual harassment. When she filed suit in superior court, the employer moved to compel arbitration under a signed arbitration agreement—setting the stage for a broader review of California arbitration law.
Procedural History of the Baltazar Case
The plaintiff filed her lawsuit in Los Angeles Superior Court in 2011. The employer moved to compel arbitration under a signed arbitration agreement.
- The trial court denied the motion, finding the agreement unreasonable.
- The Second District Court of Appeal reversed, holding the agreement was not substantively unconscionable.
- The plaintiff petitioned for review by the California Supreme Court, arguing the agreement lacked mutuality and was unfairly one-sided.
Why Baltazar Matters for Employment Arbitration
The central issue in Baltazar was whether an arbitration agreement can be considered substantively unconscionable when it appears mutual on its face but effectively channels only employee claims into arbitration.
The plaintiff argued that the agreement listed claims typically brought by employees—such as wage claims, discrimination, or harassment—while omitting claims employers would realistically bring. If true, the agreement may be “inherently one-sided,” raising substantive unconscionability concerns.
A ruling on this issue had the potential to affirm, narrow, or reshape California precedent on mutuality in employment arbitration agreements.
Key Arbitration Cases Shaping California Law
Three cases form the backbone of modern California arbitration law:
- Armendariz v. Health Psychcare Services, Inc. (2000) 24 Cal.4th 90
- Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348
- AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333
Concepcion
The U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempts California rules invalidating class action waivers in arbitration agreements.
Iskanian
The California Supreme Court upheld arbitration agreements containing class action waivers but carved out an important exception: claims under the Private Attorneys General Act (PAGA) could not be waived and forced into arbitration.
Federal Preemption and Ongoing Court Conflict
The U.S. Supreme Court has repeatedly ruled that state-law restrictions on arbitration agreements may be preempted by the FAA—even when grounded in traditional contract doctrines.
This ongoing tension between federal preemption and California’s worker-protective contract doctrines has shaped much of the litigation surrounding arbitration agreements.
Armendariz and the Unconscionability Framework
Armendariz remains a foundational case for evaluating employment arbitration agreements in California.
Under Armendariz, an arbitration agreement may be unenforceable if it is both:
- Procedurally unconscionable (e.g., imposed as a condition of employment without meaningful bargaining power), and
- Substantively unconscionable (e.g., unfairly one-sided in its terms).
In employment settings, procedural unconscionability is often present due to unequal bargaining power, making substantive unconscionability the focal point of most litigation.
Lack of Mutuality in Employment Arbitration Agreements
The concern raised in Baltazar is that even agreements that appear mutual may functionally operate only against employees. Employers rarely bring claims against individual employees in arbitration, and they are unlikely to expend resources to arbitrate disputes they could resolve through other means.
This structural imbalance raises questions about whether such agreements truly bind both parties equally or instead funnel employee claims into arbitration while leaving employers largely unaffected.
The Impact of Justice Scalia’s Death
Justice Antonin Scalia authored the majority opinion in Concepcion, which significantly strengthened FAA preemption over state arbitration restrictions. His passing altered the composition of the U.S. Supreme Court, creating uncertainty about how aggressively the Court might continue to expand FAA preemption.
If a California decision limiting employment arbitration were reviewed by the U.S. Supreme Court, the Court’s composition could influence the scope of federal preemption analysis.
What Employers and Employees Should Watch
Cases like Baltazar highlight continuing uncertainty in employment arbitration law, especially regarding:
- Mutuality in arbitration agreements
- The reach of FAA preemption
- The interaction between arbitration clauses and PAGA claims
Both employers and employees should closely monitor developments in California Supreme Court and federal appellate decisions addressing arbitration enforceability.