Even though American Arbitration Association rules were not attached to an arbitration agreement and the agreement did not expressly provide for discovery, the California Court of Appeal has found a former employee’s arbitration agreement with his employer was valid and reversed the trial court’s denial of the employer’s motion to compel arbitration as to the employee’s claims wrongful termination and Labor Code violations. Lane v. Francis Capital Mgmt. LLC, No. B245661 (Cal. Ct. App. Mar. 11, 2014). The Court ruled the former employee’s claim for unpaid wages, however, may proceed in court.

Background

Martin Keith Lane, Jr., worked for Francis Capital Management LLC (“FCM”) as an analyst at an annual salary of $150,000. He also participated in FCM’s bonus program. An arbitration agreement between Lane and FCM stated that “all claims, disputes and controversies arising out of, relating to or in any way associated with [Lane’s] employment by [FCM] or the termination of that employment shall be submitted to final and binding arbitration.” The agreement also provided that arbitration would be conducted under the “applicable employment dispute resolution rules of the American Arbitration Association then current Employment Arbitration Rules and Mediation Procedures….”

Lane alleged that FCM failed to pay him a bonus and terminated him after he complained about it. Lane sued FCM for wrongful termination and violations of the California Labor Code, including failure to pay wages and overtime and to provide rest and meal periods, among other things. FCM asked the trial court to compel arbitration based on the arbitration agreement. The trial court denied the motion, finding that the California Labor Code precluded arbitration of Lane’s claims and that the arbitration agreement was unconscionable. FCM appealed. 

California Section 229

Under California Labor Code Section 229, claims listed under Sections 200 to 244 of the Labor Code can be maintained in court, despite an agreement to arbitrate, unless preempted by the Federal Arbitration Act (“FAA”). Section 229 provides that “[a]ctions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate,” except as to an agreement to arbitrate in a collective bargaining agreement. Further, Section 229 does not apply to all statutory wage and hour claims.

FCM argued the trial court erred in finding Section 229 applied to all of Lane’s claims, and the appellate court agreed. The Court found only one of Lane’s claims – for unpaid wages – was subject to Section 229, and, in the absence of FAA preemption, could be maintained in court. 

FCM next argued the FAA preempted Lane’s unpaid wage claim. The Court disagreed. It found FCM failed to demonstrate the agreement involved interstate commerce, a prerequisite for FAA coverage. The Court stated, “FCM’s bare assertion that ‘Mr. Lane was a security analyst at a firm which manages capital investments’ [was] insufficient to support a finding that Lane’s employment involved interstate commerce.” Accordingly, the Court ruled Lane’s claim for unpaid wages may proceed in court.

Unconscionability

In deciding whether to enforce an arbitration agreement, California courts examine whether its terms are both procedurally and substantively unconscionable. A sliding scale is used to assess procedural unconscionability in relation to substantive unconscionability: the more substantively oppressive a contract term, the less evidence of procedural unconscionability is required to conclude that the term is unenforceable, and vice versa. 

A procedural unconscionability inquiry requires a court to examine two factors: oppression and surprise. “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” while “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.” 

Substantive unconscionability occurs when an arbitration agreement is “one-sided” in favor of the employer without sufficient justification.

Lane argued the agreement was procedurally unconscionable because FCM failed to attach a copy of the American Arbitration Association (“AAA”) rules to the agreement. The Court rejected Lane’s contention, explaining that such a failure could render the agreement procedurally unconscionable if it resulted in surprise to the other party. Here, however, as the AAA rules were readily available on the Internet, the Court observed that Lane, a “formerly well-paid professional analyst,” did not lack the “means or capacity” to locate and retrieve a copy of the AAA rules. Accordingly, the Court declined to find the failure to attach a copy of the AAA rules rendered the agreement procedurally unconscionable.

Lane next argued the agreement was substantively unconscionable because it incorporated the AAA rules by reference and did not specifically provide for discovery. The Court rejected Lane’s arguments. Declining to find the act of incorporation alone as substantively unconscionable, the Court stated, “Like any other contract, an arbitration agreement may incorporate other documents by reference.” It also disagreed that the agreement was rendered substantively unconscionable because it did not expressly provide for discovery. The Court noted the AAA rules gave the arbitrator authority to order necessary discovery. Accordingly, the Court concluded the agreement was not unconscionable.