California Court Sidesteps The Supreme Court's Decision In Concepcion

On February 27, 2012, in Mayers v. Volt Management Corp., the California Court of Appeal upheld an order denying a defendant's motion to compel arbitration. In doing so, the court limited the application of the United States Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion.

Case Background

Stephen Mayers sued his former employer, Volt Management, on various discrimination claims under the California Fair Employment and Housing Act ("FEHA"). Volt moved to compel arbitration based on an agreement to submit employment-related claims to arbitration, as evidenced by various employment documents reciting that the Federal Arbitration Act ("FAA") governed the agreement to arbitrate.

Mayers resisted arbitration on the ground that the arbitration provisions contained unconscionable elements, even though they were featured prominently in the employment application, the employment agreement, and the employee handbook. Specifically, Mayers argued that the arbitration provisions were procedurally unconscionable because (a) Volt drafted the provisions and gave them to Mayers on a "take-it-or-leave-it" basis and (b) the provisions stated that the "applicable rules of the American Arbitration Association in the state where [Plaintiff] was last employed" would govern the arbitration, yet Mayers was never provided with a copy of the applicable rules, nor information about how to access them. He also maintained that the arbitration provisions were substantively unconscionable because they permitted the arbitrator to award attorney fees to the prevailing party on FEHA claims, thereby placing Mayers at a greater risk for paying the defendant's attorney fees in arbitration than he would face if he pursued such claims in court.

Volt did not dispute that the arbitration agreement was a mandatory condition of employment. It maintained that Mayers would have received a copy of the applicable American Arbitration Association ("AAA") rules had he only requested them, and that he had one week to consider the employment agreement before signing it. Volt argued that the court should sever any offending portions of the arbitration provisions and direct the parties to resolve their dispute in arbitration.

When the trial court denied Volt's motion to compel arbitration, Volt appealed.

The Court's Holding

The Court of Appeal affirmed the trial court's denial of the motion to compel arbitration. The court distinguished this case from AT&T Mobility LLC v. Concepcion, the recent decision in which the United States Supreme Court, citing the FAA, upheld an arbitration provision in the context of a consumer class action. Although Mayers and the company stipulated that the FAA governed their arbitration agreement, the Court of Appeal reasoned that the FAA was consistent with general principles of unconscionability under California law. The court stated that Concepcion did not foreclose the application of general contract defenses to arbitration agreements, provided that doing so would not present an obstacle to the accomplishment of the FAA's promotion of arbitration.

The Court of Appeal, applying California principles concerning unconscionability, concluded that the arbitration provisions were unenforceable, agreeing with Mayers that the arbitration provisions were procedurally unconscionable. Volt's failure to identify the particular set of AAA rules that governed the arbitration agreement subjected Mayers to "unreasonable surprise and oppression."

The Court of Appeal also deemed the arbitration provisions substantively unconscionable. Under California law, a prevailing FEHA defendant may recover attorney fees only where the plaintiff's action was frivolous or brought in bad faith. The arbitration agreement, by contrast, empowered the arbitrator to award prevailing-party attorney fees to a defendant without limitation. Thus, Mayers would have faced a greater risk of suffering an adverse fee award by pursuing his claims in arbitration rather than in court.

Last, the court likewise affirmed the trial court's refusal to sever the unconscionable portions of the arbitration agreement, determining that the provisions were permeated with unconscionability in light of the failure to identify the applicable AAA rules, as well as the improper fee-shifting clause.

What Mayers Means For Employers

Mayers confirms that California courts will find ways to distinguish the arbitration-friendly Concepcion decision, by concluding that Concepcion permits plaintiffs to rely on general contract defenses against the enforceability of arbitration agreements even where the agreements are expressly governed by the FAA. Thus, the viability of California contractual defenses to employment-related arbitration agreements, such as unconscionability, arguably remains unchanged in light of Concepcion.

Mayers also emphasizes that California employers must ensure that their arbitration agreements clearly set forth all terms of the parties' agreement to arbitrate employment-related disputes. Specifically, employers should (a) identify the applicable rules of the arbitration services provider in their arbitration agreements and (b) attach copies of these rules to the arbitration agreements, or at a minimum, ensure that the arbitration agreements direct employees to a website where the rules can be accessed.

Finally, Mayers reinforces that California employers should ensure that fee-shifting clauses in their arbitration agreements specifically exclude FEHA claims, or expressly provide that the same standards for awarding attorney fees apply in arbitration that would apply in court.

By: Eric Lloyd

Eric Lloyd is an associate in Seyfarth's San Francisco office. If you would like further information, please contact your Seyfarth attorney or Eric Lloyd at elloyd@seyfarth.com.