by Jackson Lewis

The U.S. Court of Appeals ruled that an employer's alternate dispute resolution ("ADR") program was unconscionable under California law and thus was unenforceable. Davis v. O'Melveny & Myers, No. 04-56039 (9th Cir. May 14, 2007). Specifically, the court found that the ADR program was procedurally unconscionable because it did not allow employees to opt out of the program. The court also found that the notice provision, the confidentiality provision, a limited exemption from arbitration for the employer, and the limitation on initiating administrative actions were overbroad and substantively unconscionable. The court declined to strike the overly broad provisions and declared the ADR program void.

The employer, a law firm, adopted an ADR program in 2002. The plan was distributed through interoffice mail and posted on the firm's intranet site. It applied to all employees who were hired by, or who continued to work for, the employer after its adoption. The ADR program covered most employment-related claims, other than EEOC and similar state administrative charges. It provided for final and binding arbitration to resolve employment-related matters, including claims regarding compensation or wages. The ADR program required employees to provide written notice of any claim and a demand for mediation within one year from when the basis of the claim was known or should have been known. It included a confidentiality provision prohibiting disclosure of the existence of a controversy or the fact of mediation or arbitration and permitted the employer, but not employees, to seek equitable relief to preserve matters of attorney-client privilege, work product, and confidential information.

The plaintiff, a paralegal who was subject to ADR program, worked for the employer until 2003. In 2004, the plaintiff filed a lawsuit under the Fair Labor Standards Act and California state law alleging that the employer failed to pay overtime and denied her rest and meal periods. The plaintiff sought a declaration that the ADR program was unconscionable and void. The employer moved to dismiss the action and to compel arbitration. The district court granted the motion and upheld the ADR program.

The plaintiff appealed, arguing that the ADR program was procedurally and substantively unconscionable. Both procedural and substantive unconscionability must exist under California law before a contract, such as an arbitration agreement, is invalidated. Addressing procedural unconscionability, the appeals court examined whether the ADR program was imposed on the employees as a condition of employment. The court determined that the ADR program was a "take it or leave it program." Employees did not have the opportunity to "opt out" of the ADR program and preserve their job. The only option available to employees was to leave and work elsewhere. The court concluded this requirement was procedurally unconscionable.

Addressing substantive unconscionability, the court examined whether the four challenged provisions were "so one-sided as to shock the conscience." With respect to the one-year notice provision, the court concluded that it was unconscionable because it shortened the statute of limitations for employment-related claims, and, in particular, barred "continuing violation" claims. Regarding the confidentiality provision, the court found that the provision stifled employees' ability to investigate their claims and placed the employer in a superior legal position. Thus, the court concluded that the confidentiality clause was overbroad.

Regarding the employer's exemption from the arbitration provision, the court noted that it permitted the employer to seek equitable relief not only to preserve attorney-client privilege and work product, but also to prevent disclosure of any confidential material. The court found that the extension of the exemption to "any confidential material" rendered the provision overly one-sided and thus unconscionable.

Regarding the limitation on administrative actions, the court stated that, although arbitration generally is favored, "an arbitration agreement may not function so as to require employees to waive potential recovery for substantive statutory rights in an arbitral forum, especially for statutory rights established 'for a public reason,'" such as anti-discrimination laws. In other words, an arbitration forum must allow for the pursuit of the legal rights and remedies provided by such statutes. The court found that rights under the FLSA and California Labor Code were analogous to federal and state anti-discrimination statutes. The court concluded that the agreement's bar to most administrative actions, except EEOC and similar state charges, was overly broad because it precluded complaints to the California Labor Commissioner or the U.S. Department of Labor.

Finally, the court determined that, in light of the number of provisions that are unconscionable, it could not sever the offending provisions and enforce the remainder of the agreement. Accordingly, the court declared the entire ADR program void.

This case demonstrates that even sophisticated employers may have difficulty in enforcing an ADR program. Before implementing an ADR program, employers should consider the business needs warranting such a program. Employers should develop ADR programs consistent with those needs and not attempt to impose more expansive terms. Employers should consult with counsel to ensure that any ADR program is consistent with federal and state law. Employers with an existing ADR program are also advised to review their program with counsel periodically to ensure the program complies with new court decisions in this continually developing area of the law.



For more information on the Trade Secrets, Non-Comptes and Workplace Technology Practice Group, please visit www.jacksonlewis.com/pa . The Group assists employers in establishing policies, hold procedures and complex e-discovery matters.