Arbitration Agreements Just Got Trickier


December 23, 2021

If you have arbitration agreements that ask current or prospective employees to waive certain class action rights, stop what you’re doing! Employers should make immediate changes to their standard arbitration agreements with current and prospective employees in light of a recent ruling from a California Court of Appeal in Najarro v. Superior Court (“Najarro”). Najarro gives crucial guidance on several important arbitration matters that could lead to the unenforceability of arbitration agreements.

All Parties Must Sign

Employers and employees must both sign an arbitration agreement for it to be valid. Mutual assent is necessary for contract enforceability. To find mutual assent there must be evidence of each party’s intention to be bound by the agreement. In this case, the Najarro court did not find mutual assent because the employer never signed any of the arbitration agreements and the employer’s arbitration agreements never identified who the employee’s counterparty was supposed to be (the agreements said “Company” but never identified a specific person or contracting party).  The court used the lack of mutuality as a basis to find the agreement substantively unconscionable.

No Waiver of Private Attorneys General Act Actions

Currently, California arbitration agreements should not include language asking an employee to waive their right to bring a representative action under the California Labor Code Private Attorneys General Act of 2004 (PAGA). The Najarro court found that an arbitration agreement provision that asks an employee to waive their right to bring a representative action under the California Labor Code Private Attorneys General Act of 2004 (PAGA) is substantively unconscionable because “an employee’s right to bring a PAGA action is unwaivable”. It is important to note that this provision was deemed substantively unconscionable even though the plaintiffs did not bring a PAGA action.

Provide a Copy of the Arbitration Rules at the Time of Signing

If your arbitration agreement incorporates specific arbitration rules (i.e., the American Arbitration Association rules), a copy of the rules must be provided to the employee along with the arbitration agreement. The Appellate Court found “some degree of procedural unconscionability” existed where a copy of the named arbitration rules was not provided to the employee at the time they were asked to sign the agreement because it forces the employees to make further efforts to fully understand the implications of what they are signing.[1]

Unacceptable Employer Actions Amounting to Fraud

In Najarro, the court highlighted specific conduct that could lead to a finding of fraud in the execution. Fraud in the execution can be found if a court determines there were deceptions or misrepresentations made during the formation of the agreement that would render the contract void. In order to avoid a finding of fraud in the execution, employees must have an opportunity to read and understand what they are signing. The Najarro court decided the following actions amount to fraud in the execution: telling an employee an arbitration agreement is “nothing important”, refusing to explain the agreement, statements pressuring the employee to sign, and failing to advise an employee to seek counsel, especially where the employee has a limited understanding of English.

Clear and Unmistakable Delegation Clause

If your delegation clause is not clear and unmistakable, the court will find they have the authority to step in and decide issues included in your arbitration agreement, even if you intended them to be decided by an arbitrator. In order to be clear and unmistakable, the delegation clause must give sole arbitrability to the arbitrator without referencing “a court of competent jurisdiction”.

Looking Forward

On December 15th, 2021, the United States Supreme Court agreed to hear Viking River Cruises Inc. v Angie Moriana. Viking is asking the Supreme Court to review California decisions that have held arbitration agreements are unenforceable if it waives the right to bring PAGA representative actions.  McKague Rosasco LLP is closely monitoring the situation. For now, stay tuned for an update in a future article once the Supreme Court issues their ruling. If you need assistance updating or assessing your arbitration agreements for compliance, contact McKague Rosasco LLP

 

[1] Both procedural and substantive unconscionability must be present for a court to find a contract or provision is unenforceable due to unconscionability.

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