Court Uses Full Bag Of Tools To Save Arbitration Provision
Life boat drill. Between ca. 1910 and ca. 1915. Library of Congress.
The Courts of Appeal have many tools for interpreting arbitration provisions, including sliding scales for weighing unconscionability, incorporation by reference, application of the implied covenant of good faith and fair dealing, severability, and “reasonable” interpretation of an undefined term. All those tools were applied to save an arbitration provision from unenforceability in the following employment case, Serpa v. California Surety Investigations, Inc., Case No. B237363 (2nd Dist. Div. 7 April 19, 2013; mod’d April 26, without changing judgment) (Perluss, J., author 3:0) (published).
Plaintiff Serpa sued her employer CSI alleging FEHA claims for sexual harassment, gender discrimination, retaliation, and other employment related claims. The trial court denied the employer’s motion to compel arbitration on the ground that the arbitration provision was unconscionable and therefore unenforceable. The employer appealed.
First, applying the sliding scale of unconscionability, the Court of Appeal found that the contract was indeed one of adhesion, and therefore at least somewhat procedurally unconscionable. However, with a low degree of procedural unconscionability, the degree of substantive unconscionability would have to be high to make the arbitration provision unconscionable.
Second, there was a question as to whether the arbitration provision was written broadly enough so as to result in a mutual obligation to arbitrate. Here, incorporation by reference helped the employer, because the arbitration provision incorporated an employee handbook that evidenced an intent to arbitrate “any dispute” arising out of the employment.
Third, the arbitration provision, which allowed the employer to alter the terms of any policy contained in the handbook at its sole discretion and without notice appeared to be illusory. Not so, said the Court of Appeal, relying on the covenant of good faith and fair dealing implied in every contract. The party with the authority to alter the contract may not change it in such a manner as to frustrate its purpose.
Fourth, the contract explicitly provided that each party would bear its own attorney’s fees. That, said the Court of Appeal, was unconscionable, because it deprived Serpa of an unwaivable statutory remedy to recover fees if she prevailed on her FEHA claims in arbitration. Not to worry – the unconscionable provision could be severed.
Fifth, the Court applied a reasonable interpretation to a seemingly vague provision in the agreement. The agreement required the employee to submit her dispute informally to the company before seeking arbitration. Serpa argued that this unfairly gave her employer a “a free peek” at her case. But the Court interpreted “informal internal efforts”, which were not defined, to mean nothing more “than some informal notice of a grievance before proceeding to arbitration.”
Thus, the Court of Appeal rescued the arbitration provision, finding that it was not unconscionable, and reversing the trial court’s denial of the employer’s motion to arbitrate.