Drafting an Enforceable Mandatory Arbitration Agreement ... - ALI CLE

Drafting an Enforceable
Mandatory Arbitration Agreement
in the Employment Setting
Amy McDowell
California’s latest Supreme Court decision has bark
and bite—and it is likely to set a pattern for the
way other state courts interpret mandatory
arbitration agreements in the employment context.
THIS SUMMER, as the dog days of August
drew to a close, the California Supreme Court
ruled on the enforceability of mandatory arbitration
agreements in a decision with a resounding
bark and a significant bite. The “bark”:
Despite the fact that the case only directly regulates
California employers, it is expected to set
the tone for other state and federal courts across
the country, paving the way for enforceable predispute
arbitration contracts in employment
settings. The “bite”: Although the decision is
generally viewed as positive for employers, it
imposes strict standards for enforceability, requiring
every employer to carefully review and
Amy McDowell is an associate in the Labor and Employment Department of Jeffer, Mangels, Butler & Marmaro,
in Los Angeles. Her practice includes counseling and litigating all aspects of employment and labor law.
39

40 The Practical Lawyer December 2000
revise their arbitration clauses. This article analyzes
the holding in Armendariz v. Foundation
Health Psychcare Services, Inc., 6 P.3d 669 (Cal.
2000), and provides practical guidance on how
to draft an enforceable agreement.
WHAT IS A MANDATORY PRE-DISPUTE
ARBITRATION AGREEMENT • Mandatory
pre-dispute arbitration agreements are contracts,
signed before a dispute arises (often at
the outset of employment), requiring the parties
to submit their claims and conflicts to an arbitrator
rather than a court of law. For the purpose
of this article, they will be referred to as “mandatory
arbitration agreements.” Before the
Armendariz case, there was some question
whether or not employers could require employees
to sign these contracts as a condition of
employment, and, if so, what provisions the
contracts could contain. Now, at least under
California law, it is clear that employers may
ask their workers to sign the agreement on a
“take-it-or-leave-it” basis, subject to certain specific
requirements.
WHAT MAKES A MANDATORY ARBITRA-
TION AGREEMENT UNENFORCEABLE •
The gist of the Armendariz decision is that employers
can require workers to sign arbitration
agreements but they can’t abuse their superior
bargaining power to make the employee give
up certain rights. Specifically, the employer
can’t take advantage of its bargaining power in
a way goes beyond merely choosing an arbitral
forum for dispute resolution and instead drastically
limits an employee’s (but not the employer’s)
options and remedies.
Using four disputed out of five total factors
derived from the Supreme Court’s ruling in
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20
(1991), the Armendariz court reviewed the mandatory
arbitration agreement and found it unconscionable
and unenforceable. Those four
disputed factors were:
• Limitation of remedies;
• Adequate discovery;
• Written arbitration award and judicial review;
and
• Mandatory employee payment of unreasonable
costs and fees.
Finally, the court reviewed the agreement under
general principles of unconscionability, finding
that a lack of mutuality renders mandatory arbitration
agreements signed as a condition of
employment unenforceable.
Limitation of Remedies
The court held that mandatory arbitration
agreements may not limit statutorily imposed
remedies such as punitive damages or attorneys’
fees. Because the agreement required the employee
to arbitrate statutory claims, and then limited
the damages the employee could seek under
those claims, it went beyond merely choosing an
arbitral forum and was unenforceable.
Drafting Tip
The solution to this drafting mistake is simple—don’t
include any provisions in your arbitration
agreement which limit the employee’s
remedies to less than applicable law, statutory
or otherwise, allows.
Adequate Discovery
The court recognized that one of the purposes
of arbitration is to streamline the dispute resolution
process, and acknowledged that limiting
discovery, to some extent, was allowable.
However, mandatory arbitration agreements
must not limit discovery so much that the employee
cannot obtain “discovery sufficient to
adequately arbitrate” the claim, because such
limitation may lead to a de facto frustration of
the employee’s statutory rights.

Mandatory Arbitration 41
Drafting Tip
Providing for “adequate” discovery is an ambiguous
concept, and it can be difficult to differentiate
between appropriately streamlined discovery
and unenforceable, insufficient discovery.
However, it is advisable to either incorporate
the discovery provisions of a reputable and
respected arbitration service, such as the American
Arbitration Association, or, in the alternative,
concurrently provide for a limited amount
of discovery and a means for seeking more discovery
after the arbitrator’s approval.
Written Arbitration Award
and Judicial Review
To ensure that arbitrators comply with the
statutes at issue in arbitration, mandatory arbitration
agreements must not limit judicial review.
Since the court was not presented with
the precise issue of whether or not a particular
arbitration award was enforceable in the
Armendariz case, it declined to articulate a precise
standard of judicial review required for
mandatory arbitration agreements. However,
the court did hold that, for successful and
meaningful judicial review, the arbitrator
would have to issue a written decision that reveals
“the essential findings and conclusions
on which the award is based.”
Drafting Tip
This drafting mistake is also easily remedied.
When preparing a mandatory arbitration agreement,
clearly state that the arbitrator will be required
to issue a written ruling regarding the
dispute, and do not attempt to limit a court’s review
of that decision.
Mandatory Employee Payment
of Unreasonable Costs and Fees
The largest portion of the court’s Gilmer factors
discussion was devoted to the employee’s
payment of unreasonable costs and fees. The
agreement at issue in Armendariz provided that
the employee “pay his pro rata share of the expenses
and fees of the neutral arbitrator, together
with other expenses of the arbitration incurred
or approved by the neutral arbitrator,” as
set out in California Code of Civil Procedure
section 1284.2.
The court devoted considerable attention to
Cole v. Burns Intern. Security Services, 105 F.3d
1465 (D.C. Cir. 1997), and quoted its discussion
regarding arbitration financing at length, noting
that possible costs include arbitrators’ fees ranging
from $500-$1,000 per day or more, a $500 filing
fee, and $150 per day for administrative
fees, in addition to room rental and court reporter
fees. Although some of these fees mirror
costs required of a plaintiff when filing a claim
in court, and were thus reasonable, the court
pointed out that an employee would never be
required to pay for a judge in order to have
claims heard.
Finally, the holding pointed out that other
courts, including the Tenth and Eleventh Circuits
in particular, had reached essentially the
same decision regarding arbitration financing,
concluding that when mandatory arbitration
agreements are signed as a condition of employment,
the employer must bear the arbitrators’
fees.
Drafting Tip
Do not include any provisions that may ultimately
require the employee to pay the arbitrators’
fees, even as part of an award of damages.
Consider including other provisions clearly
stating that each party will be required to pay its
own other costs, such as witness fees, filing fees,
or other amounts which they would be required
to pay as part of litigating a claim in court.
Lack of Mutuality
In determining whether or not the Armendariz
agreement was unconscionable, the court re-