Facts
- Two employees, Marybeth Armendariz and Dolores Olague‑Rodgers, were required as a condition of employment to sign arbitration provisions covering wrongful termination disputes.
- The employees later signed stand-alone arbitration agreements mandating binding arbitration of wrongful termination-related claims.
- The agreements capped recoverable damages at “lost earnings” up to the arbitration award date and excluded reinstatement, punitive damages, and other relief otherwise available under the Fair Employment and Housing Act (FEHA).
- The arbitration terms were presented on a take-it-or-leave-it basis and were not negotiable.
- After about a year of employment, both employees were terminated and alleged harassment, discrimination (including based on perceived sexual orientation), and wrongful termination under FEHA.
- The employer sought to compel arbitration; the trial court refused to enforce the arbitration agreement as unconscionable and contrary to public policy.
- The Court of Appeal severed the damages limitation and compelled arbitration.
- The California Supreme Court granted review.
Issues
- Whether FEHA discrimination and wrongful termination claims may be compelled to arbitration by a mandatory employment arbitration agreement.
- Whether the arbitration agreement was procedurally and substantively unconscionable, and thus unenforceable.
- Whether any unconscionable provisions could be severed to enforce the remainder of the agreement.
Decision
- The California Supreme Court held that FEHA claims are arbitrable in principle, but only if the arbitral forum permits employees to vindicate statutory rights.
- The Court found the agreement procedurally unconscionable because it was imposed as a condition of employment in an adhesive, nonnegotiable form.
- The Court found the agreement substantively unconscionable due to pervasive one-sided terms, including limitations that stripped employees of FEHA remedies and a lack of mutuality favoring the employer.
- The Court rejected severance because the agreement contained multiple unlawful terms reflecting an effort to impose an inferior dispute forum.
- The Court reversed the order compelling arbitration and directed affirmance of the trial court’s denial of the petition to compel arbitration.
Legal Principles
- Statutory employment claims under FEHA may be subject to mandatory arbitration only if arbitration allows effective enforcement of statutory rights and remedies.
- Minimum fairness requirements for mandatory arbitration of nonwaivable statutory rights include: a neutral arbitrator, adequate discovery, a written decision permitting limited judicial review, and limits on employee cost burdens that would deter enforcement.
- Arbitration agreements may not require employees to forfeit substantive statutory remedies available under FEHA, including full compensatory and punitive damages and appropriate equitable relief.
- California unconscionability requires both procedural unconscionability (oppression or surprise in contracting) and substantive unconscionability (overly harsh or one-sided terms), assessed on a sliding scale.
- In the employment context, arbitration provisions imposed through adhesion must show a “modicum of bilaterality”; requirements imposed primarily on employees, or carve-outs preserving employer access to court for employer-favored claims, support a finding of substantive unconscionability.
- Courts may sever unconscionable terms, but need not do so when illegality is pervasive rather than collateral.
Conclusion
FEHA claims can be arbitrated only under agreements that preserve employees’ substantive statutory rights in a fair arbitral process; because the employer’s mandatory arbitration agreement was adhesive, one-sided, and limited FEHA remedies in a way that could not be cured by severance, it was unenforceable and arbitration could not be compelled.