California Federal Court Compels Worker to Arbitrate State Law Discrimination Claims

A restaurant worker must arbitrate his California state law discrimination claims in accordance with his agreement to arbitrate all disputes relating to his employment relationship with the employer, the U.S. District Court for the Northern District of California has ruled. Cornejo v. Spenger’s Fresh Fish Grotto, No. C 09-05564 MHP (N.D. Cal. May 17, 2010). The court held that even though the arbitration agreement was a “contract of adhesion,” it complied with the California’s requirements for such agreements and it was not unconscionable.

Background

Ivan Cornejo, a Hispanic, worked as a busboy at Spenger’s Fresh Fish Grotto, from 2004 until his termination on April 30, 2009. Cornejo alleged that during his employment, Spenger’s managers harassed him because of his race, failed to accommodate his disability, and retaliated against him when he complained to the California Department of Fair Employment and Housing.

Cornejo sued Spenger’s and its parent company, McCormick and Schmick Restaurant Corp. (“M&S”). M&S had the action moved to federal court on the basis of diversity of the parties (they were from different states) and requested an order directing arbitration of the dispute.

In support of its motion to compel arbitration, M&S submitted a copy of its Agreement to Arbitrate Disputes. The Agreement provided, in relevant part:

All disputes relating to their employment relationship or the termination of that relationship that are not resolved informally (or through conciliation of claims filed before the Equal Employment Opportunity Commission (“EEOC”) or a state Fair Employment practices Agency), shall be fully and finally resolved exclusively by binding arbitration as set forth in this Agreement.

The agreement further provided, “All arbitration proceedings conducted pursuant to this agreement shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the [American Arbitration Association (AAA)] in effect at the time a demand for arbitration is made . . . .”

The Agreement also required a neutral arbitrator, whose decision “shall be final and binding and is not subject to appeal.”

Cornejo opposed M&S’s motion to compel arbitration, arguing that the agreement did not meet the requirements set forth in the California Supreme Court’s seminal decision, Armendariz v. Foundation Health Psychare Services, 24 Cal. 4th 83 (2000), regarding the arbitration of FEHA claims, and that the agreement was unconscionable.

Armendariz Standard

In Armendariz, the California Supreme Court held that arbitration agreements that include FEHA claims are permitted so long as those agreements allow employees to vindicate all of the rights to which they are entitled under FEHA. To be enforceable, such arbitration agreements must provide for:

1. no limitation of remedies available to employees,
2. adequate discovery,
3. a written arbitration award and judicial review,
4. no unreasonable costs or arbitration fees on employees, and
5. a neutral arbitrator.

Cornejo argued that the agreement failed to satisfy Armendariz because it did not provide for a written arbitration decision or judicial review.

The court, rejecting Cornejo’s arguments, found that although the Agreement did not expressly provide for a written decision or award, it did incorporate the AAA’s Rules for the Resolution of Employment Disputes. Those Rules require an arbitration award to be in writing and include the reasons for the award. By adopting the AAA’s Rules, the agreement provided for a written decision, the court ruled.

With respect to Cornejo’s judicial review argument, the court found that “Cornejo misapprehend[ed] the extent of judicial review required by Armendariz.” California Code of Civil Procedure section 1286.2 governs judicial review of arbitration decisions. Because the agreement did not preclude review under section 1286.2, the court held that the agreement satisfied Armendariz.

Unconscionability

Under California law, an arbitration agreement would be invalidated if it is both procedurally and substantively unconscionable. A sliding scale is used to assess procedural unconscionability in proportion to substantive unconscionability. The California Supreme Court explained in Armendariz, “The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”

When examining the procedural unconscionability, a court examines two factors — oppression and surprise. “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.”

Cornejo argued that the Agreement was both oppressive and the product of surprise. M&S conceded that the agreement was a contract of adhesion (employees were required to sign the Agreement as a condition of employment with the company and were provided with no opportunity to negotiate any of the terms). The court noted, “[T]his fact alone, however, fails to render the arbitration provision unenforceable.”

The court then turned to the issue of surprise and found Cornejo’s claim carried “less, if any, weight.” The court noted that the Agreement was clearly labeled and “should have provided Cornejo with the necessary procedural notice regarding the waivers it contained.” It court further observed that Cornejo’s signature on the Agreement was sufficient evidence that he reviewed the Agreement. Accordingly, the court held that the agreement, as an adhesion contract, possessed some, but not a substantial, degree of procedural unconscionability.

Turning to substantive unconscionability issue, the court stated, “[A]n arbitration agreement is only substantively unconscionable if it fails to satisfy any of the five Armendariz requirements . . . or if the agreement is unfairly tilted in favor of the employer.” Because the court had found the Agreement satisfied the Armendariz requirements, it examined whether the Agreement was unfairly tilted in favor of M&S. The court concluded that the Agreement was not. The Agreement was bilateral and required all disputes relating to the employment relationship between Cornejo and M&S be submitted to arbitration, regardless of which party institutes the proceedings. Accordingly, the court found that the Agreement was valid and granted M&S’s motion to compel arbitration.

Implications for Employers

This case is a significant win for employers, given the general hostility of California courts toward arbitration agreements. With careful drafting, an arbitration provision in a contract of adhesion can be enforced under Armendariz.

Jackson Lewis attorneys are available to answer inquiries regarding this case and other workplace laws.