Q. As part of the employee onboarding process, my company requests that employees sign several documents, including an arbitration agreement and confidentiality agreement, on the first day of employment. Is the arbitration agreement enforceable?
A. In the famous words of all attorneys, it depends. Even if an arbitration agreement is otherwise enforceable, California courts may consider terms of other documents presented with the arbitration agreement to render the arbitration agreement unconscionable and unenforceable.
On April 19, the California Court of Appeal for the Second District affirmed a trial court decision that invalidated an otherwise enforceable arbitration agreement because it was presented to the employee at the same time as a separate and distinct confidentiality agreement and its addendum, which contained unconscionable provisions.
The court acknowledged that the arbitration agreement and confidentiality agreement did not incorporate one another, but nevertheless concluded that the agreements should be read together. Specifically, the court reasoned that because the agreements were executed on the same day and governed dispute resolution procedures applicable to the employee, the agreements were therefore part of a “single primary transaction” (e.g., the employee’s hiring) consistent with CA Civil Code Section 1642, which states that “several papers relating to the same subject matter and executed as part of a single transaction, are to be construed together, even if they do not expressly refer to one another.”
What Provisions of the Confidentiality and Arbitration Agreements Did the Court Take Issue With?
The confidentiality agreement (and its addendum) (i) prohibited employees from discussing wages in violation of CA Labor Code Section 232; and (ii) waived the employer’s need to obtain a bond before seeking an injunction, (iii) required employees to agree in advance to the existence of an irreparable injury, and (iv) required employees to consent to the issuance to an injunction, which the court noted was unconscionable and nonmutual.
The only issue that the court noted with the arbitration agreement itself was the blanket waiver of Private Attorney General Act (PAGA) claims, which, the court noted, violated public policy. Still, the court upheld the trial court’s decision not to sever the unconscionable provisions from the arbitration agreement and instead invalidated all of the agreements because they were “permeated” by unconscionability. Notably, the trial court emphasized that, “standing alone, none of these clauses would necessitate a conclusion that the agreement is permeat[ed by] unconscionability. However, taken together, such a conclusion is required.”
What Should Employers Do to Increase the Chances of Enforcing Their Arbitration Agreements?
Employers can expect that employees will attempt to circumvent otherwise enforceable arbitration agreements by pointing to unconscionability in other employment documents presented with the arbitration agreement. In addition to ensuring that the arbitration agreements are compliant and up to date, employers should review provisions of all other onboarding documents presented with arbitration agreements to ensure that there are no unlawful or otherwise unconscionable terms.