Want to Arbitrate? Not So Fast. California Court of Appeals Decision Illustrates Limits to Contractual Obligation to Arbitrate

January 3, 2017

On December 27, 2016, the California Court of Appeals published a decision on the enforceability of an Alternative Dispute Resolution Agreement (the "Agreement") in the context of an employee-employer relationship.  The issue before the California Court of Appeals was whether or not a former employer could compel arbitration under the Agreement signed by the employee.  The Court's decision further illustrates California's  history of closely examining agreements to arbitrate in the context of employee-employer relationships, and its reticence to enforce such agreements.

In its published opinion, Flores v. Nature's Best Distribution, the Court of Appeals affirmed the trial court's order denying defendants' (plaintiff's former employer) petition to compel arbitration.  Defendants' appeal contended that the trial court erroneously concluded that defendants failed to establish an agreement to arbitrate existed and that the arbitration provision was unconscionable and therefore unenforceable.  

The matter arose after plaintiff Julie Flores ("plaintiff") was terminated from employment at Nature's Best.  She subsequently sued Nature's Best and affiliated companies ("defendants") for wrongful termination and violations of the California Fair Employment and Housing Act.  In response to the suit, defendants filed a petition to compel arbitration pursuant to the Agreement.  

The provision at issue provided for a multi-step alternative dispute resolution process, which is common in many agreements, employment and otherwise.  The dispute resolution process involved an initial internal resolution process, followed by mediation, and ending with arbitration.  As to the arbitration provision, it stated that either party may elect arbitration and that the cost was to be shared equally by the parties.  It further provided that the arbitration was to be conducted in accordance with rules of the American Arbitration Association ("AAA").

In opposition to defendant's petition to compel arbitration, plaintiff argued that: 1) she did not recall signing the Agreement; 2) the Agreement was ambiguous because it did not specify which set of AAA rules applied; and 3) that the Agreement was unconscionable because it was a take-it-or-leave it condition of employment, plaintiff was required to pay unlawful fees, and denied plaintiff's appeal rights. 

The Court of Appeals' analysis started and ended with the following: "[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists."  (Rosenthal v. Great Western Fin. Securities Corp.)  In this case, the Court of Appeals found that no Agreement was reached on multiple levels.  While the Agreement seemingly bore the contested signature of the plaintiff, a signature from a company representative was absent from the Agreement.  This would seemingly be sufficient because the employer never signed the Agreement to which it was a party, but the Court went further in its analysis.  The Court of Appeals went on to find that the agreement was ambiguous because it failed to: 1) specify which disputes would be subject to arbitration; and 2) which of the multiple sets of AAA rules would apply to arbitration.  In affirming the trial court's order, the Fourth District Court of Appeals found that the Agreement was ambiguous at best and that defendants failed to prove that the parties reached a "final and binding" agreement on arbitration of claims.  The Court of Appeals declined to analyze the issue of unconscionability because there was no agreement to begin with.

Although some may consider such an arbitration provision to be boilerplate in the context of the overall agreement, this case illustrates the importance of consulting an attorney to facilitate and assist in the execution of your company’s standard employee agreements in an effort to avoid situations such as this.