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Arbitration, Unconscionability, and Both Supreme Courts

On January 5, 2016 the California Supreme Court heard oral arguments in Baltazar v. Forever 21 Inc. et al., S208345, which is currently pending for decision. The Plaintiff in Baltazar is a female former employee of Forever 21 who alleged multiple instances of racism and gender bias as well as sexual harassment at work.  The Plaintiff also alleged that her repeated complaints to Human Resources regarding each of these issues were ignored.

The Plaintiff in Baltazar filed her original suit against Forever 21 in the Los Angeles Superior Court in 2011.  The Defendants then moved to compel the Plaintiff’s case to arbitration, but were denied by the Superior Court judge after the judge found the arbitration agreement unconscionable.  The Defendants then appealed to California’s Second Appellate District, which reversed the Superior Court’s prior ruling after the appellate court found that the arbitration agreement was not substantive unconscionable.  The Plaintiff then appealed that reversal to the California Supreme Court, asserting amongst other concerns that the arbitration agreement was not mutual.

Baltazar is an important case to watch as it offers the California Supreme Court an opportunity to revisit arbitration agreements, specifically arbitration agreements in the employment context. Particularly of note is that the Plaintiff in Baltazar asserts that the arbitration agreement in question is “inherently one-sided, and accordingly, substantively unconscionable… when it only enumerates employee-initiated disputes as arbitrable[.]”  In plainer terms, one of the important issues that the Plaintiff in Baltazar has requested the Court decide is that substantive unconscionability can exist in a situation where the language of the arbitration agreement itself appears mutual in applicability, but the arbitration agreement only recites example claims more likely to be brought by employees than their employer.  A new decision on this issue offers an opportunity to affirm, call into question, or even revoke several major cases regarding the mutuality of employment arbitration agreements in California. More so, Baltazar could find inclusion of common language referencing disputes over wages or for harassment additional grounds for finding such an agreements unconscionable.

Three major cases are particularly important to understand when looking at the present state of the law on arbitration agreements in California.  Armendariz v. Health Foundation Psychcare Services Inc. (2000) 24 Cal.4th 90;  Iskanian  v. CLS Transp. Los Angeles (2014)  59 Cal.4th 348; and the U.S. Supreme Court decision in ATT Mobility LLC v. Concepcion 563 U.S. 333 (2011).

Concepcion struck down California’s prior rules and holdings that consumer class action waivers would not be enforced when unconscionable and inequitable. In Iskanian, the California Supreme Court moved away from its prior resistance to Concepcion, holding that an arbitration agreement with class action waiver would be enforceable, but preserving the right of an employee to bring a Private Attorney General Act (“PAGA”) action.  This PAGA action allowed an employee to still act on behalf a collective group of aggrieved employees, which Iskanian held could not be compelled to arbitration.

The U.S. Supreme Court and the California Supreme Court have been in conflict over similar issues for years, including in the context of consumer contract litigation like Concepcion.  The main source of this conflict is whether individual consumers or employees with claims unrealistically small for individual adjudication could join together even after signing arbitration agreements with class action waivers which have become the norm in employment.  The United States Supreme Court, has ruled that individual state restrictions on arbitration are pre-empted by federal law, namely the Federal Arbitration act (“FAA”).  The Court reached this conclusion in Concepcion despite California contract law regarding the enforceability of contracts.

Armendariz, is one of the last remaining cases used to combat arbitration agreements in the state of California.  Specifically, Armendariz outlines several factors that can render an arbitration agreement unconscionable if the agreement is found to be both procedurally and substantively unconscionable.  Many employment contracts with arbitration agreements and even standalone arbitration agreements given by employers to their employees are found to be procedurally unconscionable.  Typically, this procedural unconscionability arises from the employee having no power in negotiating the agreement before signing, or because the employee was required to sign the agreement as a condition of employment.  As such, the main point of contention in regular litigation practice on these agreements is their substantive unconscionability.

What Baltazar represents is another opportunity for the courts to recognize the inherent lack of mutuality in employment arbitration agreements. Specifically, Baltazar points out the clear disconnect between arbitration agreement language stating that the agreement is equally binding on both the employer and the employee and the reality that an employer is unlikely to ever bring a cause of action against any employee, much less pay an arbitrator to rule on the disputes an employer may have with its employees.

Until recently the Baltazar case had a dubious ability to effect long term change on the issue.  Even if the California Supreme Court were to preserve or enhance the Armendariz exception, the case would likely be appealed again and heard by the U.S. Supreme Court.  There, the Justices would likely have ruled once more to find that the FAA preempted and that the arbitration agreement was valid or even further limiting Armendariz protections. The legal climate changed, however, with the death of Justice Antonin Scalia.

Justice Scalia authored the Supreme Court’s majority opinion in Concepcion.  Justice Scalia’s passing is of particular note here as Concepcion was one of the Supreme Court’s rare, but press worthy 5-4 decisions.  More so, the five justice majority was comprised of Justice Scalia and the other four conservative justices, with all four of the liberal justices making up the dissenters.  Assuming a more liberal justice joins the Supreme Court in Justice Scalia’s place Baltazar represents one of the many cases which may limit or ultimately overturn Concepcion’s protection of arbitration agreements. For now, Baltazar is worth watching in California for its impact here and potential for further appeal.

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