## Facts

- Fred Nyulassy worked for approximately 20 years for companies later acquired by Lockheed Martin Corporation.
- After his termination in 1994, Nyulassy sued for, among other things, age discrimination; the case settled in 1997.
- The settlement included a confidential agreement requiring Lockheed to rehire Nyulassy under a new written employment contract.
- The employment contract contained a mandatory arbitration clause requiring Nyulassy to arbitrate employment disputes through the American Arbitration Association.
- The arbitration scheme (1) required Nyulassy to arbitrate without equally requiring Lockheed to arbitrate its claims, (2) imposed a multi-level internal, management-controlled dispute process as a precondition to arbitration, and (3) shortened the time to initiate claims to 180 days.
- In 2002, Nyulassy alleged he was wrongfully demoted in retaliation for protected workplace activity.
- In 2003, he sued for breach of contract, breach of the implied covenant of good faith and fair dealing, wrongful demotion in violation of public policy, and Labor Code § 6310 retaliation.

## Issues

1. Whether the employment arbitration agreement governing future disputes was procedurally and substantively unconscionable and therefore unenforceable.
2. Whether standards applied to mandatory employment arbitration agreements under Armendariz applied where the clause was executed in connection with settlement of earlier litigation.
3. Whether any unconscionable terms could be severed to enforce the remainder of the arbitration agreement.

## Decision

- The Court of Appeal affirmed the order denying Lockheed’s motion to compel arbitration and stay proceedings.
- The court held the arbitration agreement was both procedurally and substantively unconscionable and therefore unenforceable.
- The court rejected Lockheed’s contention that the clause should be treated as a postdispute agreement exempt from Armendariz scrutiny because it governed future employment disputes.
- The court declined severance, concluding the agreement was permeated by unconscionability.

## Legal Principles

- An employment arbitration agreement is unenforceable if it is unconscionable under California contract law, considering both procedural unconscionability (oppression/surprise) and substantive unconscionability (overly harsh or one-sided terms).
- An arbitration clause governing future employment disputes remains subject to employment-arbitration fairness standards even if executed as part of settling an earlier lawsuit.
- Substantive unconscionability may be shown by lack of mutuality, including provisions that require the employee (but not the employer) to arbitrate.
- Requiring an employee to complete an employer-controlled, non-neutral pre-arbitration process as a condition precedent to arbitration may be unfair where it gives the employer advance access to the employee’s case.
- A contractual limitations period that drastically shortens the time to bring employment-related claims may be substantively unconscionable, particularly when it impairs the practical ability to pursue statutory or contract remedies.
- Severance is inappropriate when multiple central provisions create a one-sided arbitration system, indicating the agreement is permeated by unconscionability.

## Conclusion

The court refused to compel arbitration because the arbitration arrangement governing Nyulassy’s future employment disputes was imposed through an adhesive employment contract and contained multiple one-sided terms—non-mutual arbitration, an employer-controlled precondition process, and a 180-day filing deadline—rendering it unconscionable and not salvageable by severance.


Nyulassy v. Lockheed Martin Corp., 120 Cal. App. 4th 1267, 16 Cal. Rptr. 3d 296 (Cal. Ct. App. 2004)