California Court of Appeal Reinforces Prior Holdings and Allows Employer to Enforce Arbitration Award in Contract of Adhesion

In Da Loc Nguyen v. Applied Medical Resources, No. G057702 (Cal. Ct. App. October 14, 2016) (hereinafter “Nguyen”), the California Court of Appeal upheld a ruling compelling arbitration of plaintiff’s individual claims despite his argument that an arbitration provision in an employment application was procedurally and substantively unconscionable.  The Court of Appeal’s decision, replete with statements acknowledging the procedural and substantive unconscionability of the arbitration clause, highlights the continuing trend towards finding any possible means to enforce an arbitration award, including reading mutual arbitration obligations into the contract and severing an otherwise impermissible costs provision.

The plaintiff in Nguyen sued his former employer, individually and on behalf of a putative class, seeking unpaid overtime, meal and rest period compensation, penalties plus injunctive and equitable relief and Defendant moved to compel arbitration based on the arbitration clause in plaintiff’s employment application (hereinafter, the “Application”).  Importantly, the Application contained an instruction to “PLEASE READ CAREFULLY, INITIAL EACH [OF FOUR] PARAGRAPH[S] BELOW.”  The third paragraph, which plaintiff initialed, contained Defendant’s arbitration provision, including four important clauses that impacted the lower court and Court of Appeal’s decision.  First, plaintiff agreed to submit to binding arbitration of “all disputes and claims arising out of or relating to [the Application].”  Second, Plaintiff agreed to “arbitrate all disputes relating to his employment that could not be resolved by informal resolution.”  Third, the arbitration provision stated that arbitration would be conducted under the rules of the American Arbitration Association (hereinafter “AAA”) (but did not attach those rules).  And, fourth, the arbitration provision stated that the plaintiff and company would each pay one-half of the costs and expenses of arbitration. 

The lower court struck the class action allegations, ordered plaintiff to arbitrate his individual claims, and ordered the defendant to pay all costs of arbitration other than those that plaintiff would necessarily pay in a court proceeding.  Plaintiff sought an immediate appeal under the death knell doctrine applicable to putative class actions or, in the alternative, as a petition for writ of mandate.  The Court of Appeal accepted it as a petition for writ of mandate, holding that the death knell doctrine did not apply.

Turning to plaintiff’s arbitration claims, the Court of Appeal reiterated that an arbitration clause will be enforced unless it is both procedurally and substantively unconscionable.  Beginning with procedural unconscionability, the Court of Appeal stated, and Defendant admitted, that the arbitration provision was, to some extent, procedurally unconscionable because it was a contract of adhesion.  Here, the Court ruled that the Application only gave rise to modest unconscionability because plaintiff was sufficiently educated and competent in the English language to understand the arbitration clause and obtain a copy of the AAA rules.  Furthermore, the Court ruled that failing to attach the AAA rules was not procedurally unconscionable because plaintiff’s arguments did not rise from the rules themselves, but from the wording of the arbitration clause.

After determining that the procedural unconscionability was only modest, the Court addressed each of plaintiff’s substantive unconscionability arguments.  First, the Court ruled that the Application was not substantively unconscionable because it was unilateral.  While the Court acknowledged that unilateral arbitration clauses, like the one at issue, containing the words “I agree” may be substantively unconscionable, the Court read a mutual arbitration obligation into the Application, noting that the Application repeatedly referred to “all disputes” – suggesting that it also applied to defendant’s disputes.  Second, the Court also ruled that the Application was not substantively unconscionable because it did not give defendant a free peek at the plaintiff’s claims.  The Court held that the informal resolution provision was not unilateral and did not require disclosure of the basis for plaintiff’s claims.  Third, the Court acknowledged that the requirement that plaintiff pay half of the arbitration fees was substantively unconscionable, but the Court avoided this issue by upholding striking that provision from the arbitration clause.  Finally, the Court determined that the Application was not substantively unconscionable, despite the fact that it failed to provide the procedural requirements enumerated in Armendariz v. Foundation Health Psychare Services, Inc. (2000) 24 Cal.4th 83, because the Application incorporated the AAA rules which, in turn, provide adequate procedural safeguards to satisfy Armendariz.  In light of the foregoing, the Court determined that there was not sufficient substantive unconscionability to hold the arbitration clause unenforceable.

For employers, the Nguyen decision is important because it highlights the degree to which courts are willing to go in order to enforce what may be an unconscionable arbitration provision.  It also highlights three important ways to ensure that arbitration clauses are enforceable.  Specifically, arbitration clauses should: (1) clearly state that both parties agree to arbitration – making the arbitration obligation mutual; (2) specify the type of AAA rules that will govern a dispute and – ideally – provide both parties with a copy of those rules; and (3) in the employment context, specify that the employer will bear the costs of arbitration.  These slight modifications will ensure that a court does not have to go to extreme lengths to find an arbitration clause enforceable.