Arbitration Agreements Providing For Provisional Remedies May Be Proper

Deviating from the trend of invalidating employment arbitration agreements, on December 20, 2012, the California Court of Appeal, in Baltazar v. Forever 21, Inc., reversed a trial court order denying the defendant employer's motion to compel arbitration. Significantly, the Baltazar court concluded that an arbitration agreement is not unconscionable for incorporating California Code of Civil Procedure section 1281.8, which authorizes parties to arbitration agreements to pursue provisional remedies in court.

Factual Background

Maribel Baltazar sued her employer Forever 21 (a clothing retail merchandiser), her supervisor, and two coworkers for discriminatory harassment and constructive discharge. All the defendants filed a petition to compel Baltazar to comply with the Arbitration Agreement ("Agreement") she signed upon commencing her employment. Baltazar responded that she had been forced to sign the Agreement as a condition of being hired, and that enforcing the agreement would be unconscionable.

The Trial Court Decision

The trial court ruled that the Agreement was substantively unconscionable because (1) it required arbitration of employee claims but not employer claims, (2) it allowed Forever 21 to take "all necessary steps" to protect trade secrets or other confidential information, and (3) it mandated arbitration even if the Agreement was unenforceable.

The Court of Appeal Decision

The Court of Appeal first considered whether the Agreement was governed by the Federal Arbitration Act ("FAA") or the California Arbitration Act ("CAA"). Although the Agreement was silent on the issue, the Court of Appeal determined that it was subject to the CAA, and not the FAA. The Court of Appeal reasoned that the FAA applies only to contracts "evidencing a transaction involving commerce." Because there was no evidence that Baltazar's employment, or any relevant transaction, involved interstate commerce, the FAA was deemed inapplicable.

The Court of Appeal next concluded that the agreement was procedurally unconscionable because Baltazar was "required to sign the Agreement as a condition of employment, was unable to negotiate the terms of the Agreement, and had no meaningful choice in the matter." But the Agreement would not be unenforceable, the Court of Appeal explained, unless it were also substantively unconscionable.

Having determined that the Agreement was bilateral, requiring both Forever 21 and Baltazar to resolve any dispute or controversy by final and binding arbitration, the Court of Appeal continued its analysis of substantive unconscionability by examining the Agreement's incorporation of California Code of Civil Procedure section 1281.8. The Agreement cited that section in providing that either party "may apply to a California court for any provisional remedy, including a temporary restraining order or preliminary injunction." The Court of Appeal explained that, contrary to Baltazar's arguments, prior cases do not stand for the proposition that incorporating section 1281.8 into an arbitration agreement renders it unconscionable.

In earlier cases, agreements that authorized provisional relief did so only for claims more likely to be brought by an employer, and were thereby unconscionable. The Agreement in Baltazar, however, allowed for either party to seek provisional relief irrespective of the type of claim involved. Therefore, this provision was not unfairly one-sided. The Court of Appeal further reasoned that because the CAA governed, the Agreement was simply recognizing the rights the parties already had to seek injunctive relief and other provisional remedies in court.

Baltazar also argued that the Agreement was substantively unconscionable because it required the Parties to "take all necessary steps" to protect Forever 21's "valuable trade secrets and proprietary and confidential information . . . in the course of any arbitration proceeding." The Court of Appeal concluded that this clause did not unlawfully restrain employment, as it was consistent with Section 3426.5 of the Uniform Trade Secrets Act, which empowers courts to "preserve the secrecy of an alleged trade secret by reasonable means, which may include…ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval."

Finally, the Court of Appeal concluded that the Agreement was not unconscionable by virtue of adopting the CAA's rules as a backup if the American Arbitration Association's rules, (the application of which is mandated under the Agreement), are found unenforceable.

What Baltazar Means for Employers

Baltazar makes clear that arbitration agreements may provide for the provisional remedies that the CAA contemplates, provided that the remedies are available to either party and for all claims, even though it is the employer who most often would seek injunctive relief pending arbitration, as that kind of relief can be essential to protect trade secrets and other proprietary information. At the same time, employers must be mindful that arbitration agreements providing for provisional remedies can be problematic if they exempt the arbitration of claims more likely to be brought by an employer than by an employee.