New Court of Appeal Decision Makes It More Difficult for Employers to Require Arbitration of Employment Disputes

A new decision from the California Court of Appeal makes it more difficult for employers to enforce arbitration clauses in employment agreements that provide for an award of attorney’s fees and costs to the prevailing employer and that allow the parties to seek injunctive relief in court.

Executive Summary

In Trivedi v. Curexo Technology Corporation, 2010 WL 3760224 (2010), the Court of Appeal, First District, Division 4, affirmed the trial court’s denial of a motion to compel arbitration brought by employer Curexo Technology Corporation (Curexo) of employment-related claims brought by its former employee, Trivedi. The arbitration clause drafted by Curexo allowed for the recovery of attorney’s fees and costs to the prevailing party in an arbitration, which went beyond the law governing California’s Fair Employment and Housing Act that limited Curexo’s right to recover its fees to instances where the employee’s claims were “frivolous, unreasonable, without foundation, or brought in bad faith.” Curexo’s arbitration provision also allowed any party to seek injunctive relief in court. Nonetheless, the appellate court concluded that it is far more likely that employers will go to court to stop unfair employee competition or to protect intellectual property. The appellate court was also concerned about the manner in which the arbitration provision had been presented to Trivedi (i.e., procedurally unconscionable), in part because Curexo had not provided Trivedi with a copy of the arbitration rules under which he would have to arbitrate a dispute.

Practical Implications for Employers

This new court decision adds more complexity to the steps employers should take to maximize the enforceability of their arbitration provisions. First, arbitration provisions discussing attorney’s fees and costs are most likely to be upheld (and, thus, less likely to invalidate an arbitration clause) if they simply state that costs and fees will be recoverable “in accordance with applicable law.” Second, the risk of “carve-outs” or references to injunctive relief in court should be weighed against the potential value to employers, keeping in mind that California arbitration law already provides for injunctive relief in limited circumstances. Third, employers should seriously consider providing each employee with a copy of the applicable rules that will govern the arbitration proceeding, and obtaining a signed acknowledgment from the employee of having received a copy of those rules.

Detailed Summary of Trivedi v. Curexo Technology Corporation

Trivedi filed a complaint against Curexo and others asserting 10 separate causes of action arising out of his termination as its president and CEO. The causes of action included one alleging age discrimination in violation of Fair Employment and Housing Act (FEHA), race and color discrimination in violation of FEHA, national origin discrimination in violation of FEHA, and unlawful business practices in violation of Business and Professions Code section 17200. In addition, the complaint asserted claims for breach of employment contract, bad faith, intentional infliction of emotional distress, and three causes of action for employment discharge in violation of California public policy.

Attached with the complaint was a copy of the parties’ employment agreement that included an arbitration clause under which the parties agreed, among other things, to resolve any dispute through arbitration before a sole arbitrator selected from the American Arbitration Association (AAA) pursuant to the AAA National Rules for the Resolution of Employment Disputes.

Curexo filed a motion to compel arbitration and to dismiss or stay the action, which the trial court ultimately denied, after finding the arbitration clause to be both procedurally and substantively unconscionable. The trial court declined to sever the “problematic provisions,” and instead concluded that the arbitration clause was unenforceable.

The Court of Appeal affirmed, concluding that the arbitration clause was procedurally unconscionable for three reasons: (1) the agreement was prepared by the stronger party, Curexo; (2) the arbitration clause was a mandatory part of the employment agreement; and (3) the employee was not furnished with a copy of the AAA Rules.

The appellate court found the arbitration clause to be substantively unconscionable on two separate grounds. First, the court concluded that a mandatory attorney’s fee and cost provision in favor of the prevailing party within the arbitration agreement was unconscionable because it placed the employee at greater risk to pay Curexo’s fees and costs than if he had retained the right to bring his FEHA claims in court.

The court relied on Government Code section 12965, subdivision (b), which allows for the discretionary recovery of attorney’s fees and costs, including expert fees, by a prevailing party to a claim brought under FEHA, as recently interpreted by the California Supreme Court in Chavez v. City of Los Angeles, 47 Cal. 4th 970 (2010). Under Chavez, the California Supreme Court adopted the rule used in federal Title VII cases for awarding fees and costs that permits a prevailing plaintiff to recover attorney’s fees unless special circumstances would render the award unjust, whereas a prevailing defendant may recover attorney’s fees only when the plaintiff’s action was determined to be “frivolous, unreasonable, without foundation, or brought in bad faith.”

The arbitration clause drafted by Curexo allowed for the recovery of attorney’s fees and costs to the prevailing party in an arbitration, whereas pursuant to the pertinent case law under FEHA, the agreement failed to limit Curexo’s right to recover its fees solely to instances where the employee’s claims were found to be frivolous, unreasonable, without foundation, or brought in bad faith.