California Court Finds Arbitration Agreement Unconscionable

Employment Law

An employer’s arbitration agreement was both procedurally and substantively unconscionable, a California appellate panel determined, affirming a trial court’s denial of an employer’s motion to compel arbitration.

Anthony De Leon filed a lawsuit against Pinnacle Property Management Services, alleging that he was a nonexempt employee whom the company did not compensate for his overtime work or certain business expenses and that he was provided with inaccurate wage statements, according to his 13-count complaint.

Pinnacle moved to compel arbitration. When De Leon submitted an employment application in 2016, he electronically signed an “issue resolution agreement” (IRA), which he was required to sign as a precondition to employment.

The IRA provided for mandatory arbitration for any and all “claims, disputes or controversies arising out of or relating to [De Leon’s] application or candidacy for employment, employment, and/or cessation of employment with Pinnacle.”

In addition, the agreement included a statute of limitations provision of one year only, along with a discovery provision that allowed for only one set of 20 interrogatories (which could include a request for documents) and three depositions per side.

De Leon objected to arbitration, arguing that the IRA was unconscionable, particularly given the shortened statute of limitations and limited discovery. He claimed that he would need to serve at least 50 interrogatories and 70 requests to produce documents and depose seven specified individuals.

The trial court denied the motion, finding the IRA both procedurally and substantively unconscionable.

Pinnacle appealed, arguing that the IRA had low procedural unconscionability and contained only one substantively unconscionable provision.

The appellate panel disagreed, affirming the denial of the motion to compel arbitration.

Although the defendants conceded that the IRA was procedurally unconscionable as a contract of adhesion, they claimed it had a “low” level of unconscionability because it was not buried in an employment agreement and was instead contained in a stand-alone arbitration agreement.

The court agreed that this lessened the level of unconscionability, but also noted that De Leon claimed that he was “pressured” to sign the agreement and did not know “how one-sided, unfair and illegal it was.”

Turning to substantive unconscionability, the court found that the one-year statute of limitations was unconscionable “because many of [De Leon’s] claims have longer statute of limitations.”

The court also found that the discovery limitations in the IRA were unconscionable. While superficially neutral, the restrictions favored the defendants, the panel wrote.

“Here, [De Leon] set forth facts tending to show he would be unable to vindicate his statutory rights under the discovery limitations of the IRA,” the court said, estimating the need for more depositions, interrogatories and requests for production than the agreement allowed.

“Under these circumstances, it is reasonable to conclude the IRA’s default discovery limits are insufficient for [De Leon] to pursue his 13 causes of action concerning wage and hour claims, whistleblower retaliation, wrongful termination and [Fair Employment and Housing Act] issues,” the court wrote.

The panel declined to sever the troublesome provisions.

“Given the multiple unconscionable provisions in the IRA, the agreement is permeated by unconscionability,” the court said. “The agreement ‘contains more than one unlawful provision;’ it has both an unconscionable statute of limitations provision and an unconscionable discovery provision. ‘Such multiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer’s advantage.’”

The court affirmed the denial of the employer’s motion to compel arbitration.

To read the opinion in De Leon v. Pinnacle Property Management Services, LLC, click here.

Why it matters: The combination of both procedural and substantive unconscionability meant the IRA was unconscionable and unenforceable, the appellate panel held, continuing California courts’ complicated relationship with arbitration. Employers facing scrutiny of arbitration agreements should also be aware of the recent prohibitions enacted by Congress, with a new law that invalidates arbitration agreements and precludes the enforcement of class action waivers for claims involving sexual assault or sexual harassment.



pursuant to New York DR 2-101(f)

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