Arbitration Process Issues

In this case, a former employee of a retail store appealed to the California Supreme Court seeking reversal of an appellate court decision which found that an arbitration agreement in her employment application was not unconscionable.

An employee originally filed a suit against Forever 21 and individual defendants for harassment, race and sex discrimination and retaliation.  The defendants moved to compel arbitration based on the arbitration agreement in the employment application which was executed by the employee.  The California trial court denied the motion, finding that the agreement was unconscionable.  A California Court of Appeal reversed, finding that there was no substantive unconscionability in the agreement.  The California Supreme Court granted the employee’s petition to review, and affirmed the Court of Appeal’s judgment.

In its decision, the California Supreme Court found that an arbitration agreement, which authorized the parties to seek provisional relief in a judicial action while still compelling the remainder of the dispute to arbitration, was enforceable, noting that the clause “does no more than restate existing law . . . [and] does not render the agreement unconscionable.”  The court also held that an arbitration agreement remains enforceable when the claims it specifically lists that are subject to arbitration are claims that would likely be brought by an employee because the employer’s claims, even though not listed, would also be subject to arbitration.  It also found that a provision in the arbitration agreement that required both parties to agree that during arbitration “all necessary steps will be taken” to protect from disclosure the company’s trade secrets and proprietary and confidential information, was not unduly one-sided.  Lastly, the court held that the fact that the arbitration agreement stated that the arbitration would be conducted under the model rules of the American Arbitration Association, and the employee was not provided with a copy of the AAA rules, did not make the agreement procedurally unconscionable.

Thus, the California Supreme Court concluded that the arbitration agreement was not unconscionable and was enforceable.  Baltazar v. Forever 21, Inc. et al., No. S208345 (Cal. Mar. 28, 2016).

This post written by Jeanne Kohler.
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A South Carolina federal court dismissed a petition to compel class arbitration, reasoning “that whether the arbitration clause permits class arbitration is a simple contractual interpretation issue, and because the question ‘concerns the procedural arbitration mechanisms available to the [respondent]’, the threshold inquiry is a question for the arbitrator rather than for the court.” The Fourth Circuit Court of Appeals reversed the decision, and found the question of whether a sales agreement authorized class arbitration should be determined by the court.  Other circuit courts have similarly held.

Relying on Supreme Court precedent, the Court identified two categories of threshold questions: (1) procedural questions to be decided by the arbitrator and; (2) questions of arbitrability for the court. As to the latter category, whether or not the underlying controversy will proceed to arbitration on the merits is a question of arbitrability for the court to decide.  Moreover, it cautioned that, “courts should not assume that the parties agreed to arbitrate arbitrability absent “clear and unmistakable evidence”.

The Court concluded by noting in class arbitrations, as compared to bilateral arbitrations, there are higher risks for defendants as the result of the limited scope of judicial review. While this is a cost defendants may be willing to accept in bilateral arbitration – since any errors impact only the limited size of the individual dispute – “betting the company” without such review “is a cost of class arbitration that defendants would not lightly accept.”  Lastly, class arbitrations require more procedural formality, and thwart the benefits of arbitration by increasing cost and decreasing the speed of proceedings.  Dell Webb Communities, Inc. v. Roger F. Carlson, No. 15-1385 (4^th Cir. Mar. 28, 2016).

This post written by Nora A. Valenza-Frost.
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The Ninth Circuit reversed a district court ruling that had compelled arbitration, holding that a party may not enforce an arbitration agreement where the clause is contained in a nonbinding contract. The parties had entered into two contracts in Italy. The first contract was a commercial franchise agreement containing an arbitration clause. The second contract disclaimed any liability on the parties resulting from the first contract until a new franchise agreement was signed in the United States. The party seeking to avoid arbitration argued that the first contract was signed to allow them to obtain proper visas into the United States and not actually confer any contractual rights. The district court ruled that “the issue of whether the broad arbitration clause contained in the first contract survives after the second contract should be submitted to the arbitrator.” The Ninth Circuit, however, disagreed. Turning to traditional principles of contract interpretation, the appellate court held that the parties did not manifest express or implied consent to be bound to the original contract, because the original contract was a sham. The court concluded: “Because we find that the document the parties described as the Commercial Contract was a sham, the arbitration clause is no more enforceable than any other provision in that document.” Casa Del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, Case No. 13-56091 (9th Cir. Mar. 15, 2016).

This post written by Joshua S. Wirth.

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