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

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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-
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