The California Court of Appeal has rejected a class action waiver in an employment agreement on the basis that the waiver (or agreement) was unconscionable.
The plaintiff in Compton v. American Management Services, LLC, brought a putative class action for various wage and hour violations under the California Labor Code. During her employment, Compton agreed that she would not assert a class action against her employer and, instead, agreed to submit any legal claims she had to binding arbitration.
The California Court of Appeal for the Second District held that Compton was not bound by her agreement because the agreement was unconscionable and one-sided. For example, the agreement required employees to arbitrate virtually all of their disputes but allowed AMS to litigate in court claims that were important to it, such as injunctive or equitable relief arising from alleged unfair competition, trade secret violations or confidential information disclosures. The agreement also required employees to demand arbitration within one year of the alleged illegal conduct, which, in some cases, shortened the statutory limitations period on certain employment-related claims. At the same time, the agreement allowed AMS to retain a four-year statute of limitations on some of its court claims such as those under California’s unfair competition law.
Citing the United States Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, the Court held that while the Federal Arbitration Act (FAA) preempts any state law prohibiting class action waivers in arbitration agreements, it does not preempt California state law’s unconscionability rule under Armendariz v. Superior Court. According to the Court, Armendariz held that the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself. It then found that “Concepcion did not discuss the modicum of bilaterality standard adopted by Armendariz…[a]nd Concepcion did not overrule Armendariz.” Notably, the Court stated that the class action waiver found in the agreement played no part in its analysis. Instead, its decision was based on the “generally applicable contract defense of unconscionability in light of the very one-sided nature of the arbitration provision” which was established in Armendariz and its progeny.
While addressing the unique situation of bilaterality in arbitration agreements, Compton follows other recent California decisions which have rejected class action waivers in arbitration agreements as unconscionable, even in light of Concepcion. Compton therefore, reinforces that employers should take care to craft arbitration agreements that are not unsconscionable and should evaluate whether the agreement could be interpreted as one-sided should it be subsequently challenged.