Written by Paul J. Dubow*
The matters discussed below include cases issued in 2023 by California courts and federal courts that have jurisdiction over California that may be of interest to attorneys drafting contracts containing arbitration or mediation clauses.
When plaintiff Alberto was hired by Cambrian, she signed an agreement to arbitrate. At the same time, she signed a confidentiality agreement where she agreed to preserve Cambrian's trade secrets and if she failed to do so, she agreed to permit Cambrian to file an injunction without the need to file a bond or show irreparable harm. The confidentiality agreement also prohibited Alberto from discussing salary with other employees. Subsequently, she filed a lawsuit against Cambrian alleging that it had violated the wage and hour laws. Cambrian's motion to compel arbitration was denied by the trial court. It held that the confidentiality agreement was part of the agreement to arbitrate and that the aforementioned provisions in the confidentiality agreement were unconscionable. Cambrian appealed, arguing that even if the provisions were unconscionable. they were not part of the agreement to arbitrate.
The court of appeal affirmed. Under California Civil Code section 1642, it is the general rule that several papers relating to the same subject matter and executed as parts of substantially one transaction, are to be construed together as one contract. According to that rule, documents executed as part of a single transaction are construed together, even if they do not expressly refer to one another. The arbitration agreement and the confidentiality agreement should be read together because they were executed on the same day and were separate aspects of a single primary transaction—Alberto's hiring. They both governed, ultimately, the same issue—how to resolve disputes arising between Alberto and Cambrian arising from Alberto's employment. So, unconscionability in the confidentiality agreement can, and does, affect whether the arbitration agreement is also unconscionable. To hold otherwise would let Cambrian impose unconscionable arbitration terms, and then avoid a finding of unconscionability because it put the objectionable terms in a separate document.1
The court then held that the provision in the confidentiality agreement that barred salary discussions was unconscionable. If Alberto sought to avail herself of her rights under the Labor Code, she would be faced with either the inability to discuss or disclose salary information with other employees under the threat of litigation, including potential liability for attorneys''
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fees and costs. This provision dissuaded employees from bringing claims and impeded the ability for employees to investigate facts that might be used in an individual or representative action.2
The provision allowing Cambrian to seek an injunction was also unconscionable. Provisions that allow employers to seek a preliminary injunction outside of arbitration for breach of a confidentiality agreement are not, by themselves, unconscionable, simply because they primarily benefit employers. But additional provisions that waive the employer's need to obtain a bond before seeking an injunction, waive the employer's need to show irreparable harm, and require an employee to consent to an immediate injunction are unconscionable. They exceed the legitimate "margin of safety" for the employer and are not mutual.3
Comment. Employers have a legitimate reason to keep salaries confidential. But employees may need to discuss earnings information with fellow employees and others when pursuing a claim where such information is crucial, such as discrimination and wage and hour disputes. The provision in the confidentiality agreement that prohibited the discussion of wages might have passed muster if it made an exception for this type of litigation.
It also may not be necessary to include an injunction provision in an arbitration agreement. Code of Civil Procedure section 1281.8(b) allows a party to an arbitration agreement to file an application for a provisional remedy in court in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief. An attempt to preserve a confidentiality agreement could fall into this category. However, if an injunction provision is included and allows the stronger party to avoid the requirements for an injunction, such as the requirement for a bond or a showing of irreparable harm, that will normally lead to a finding of unconscionability.
Plaintiff sued defendant employer seeking to recover civil penalties under the Private Attorneys General Act (PAGA).4 Defendant moved to compel arbitration. The trial court denied the motion based on a clause in the arbitration agreement which carved out claims "under PAGA" from the agreement. At the time that the agreement was executed, individual PAGA claims were not arbitrable.5 That situation was reversed by Viking River Cruises, Inc, v. Moriana.6 Defendant appealed, arguing that it intended that the carveout only apply to non-arbitrable claims.
The court of appeal affirmed. It held that defendant's argument failed to consider Code of Civil Procedure section 1858, which states: "In the construction of a statute or instrument, the office of the Judge is simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted."7
Comment. As a consequence of the Iskanian decision,8 PAGA claims were not arbitrable when the agreement was executed and the specific exclusion of PAGA claims from the agreement was helpful to employees because they would know from the outset about the arbitrable status of PAGA claims. However, there were a host of suits in the appellate courts challenging Iskanian at the time and so there was a possibility that the ban on PAGA arbitrability would either be modified or eliminated. The employer here could have prepared for such an eventuality by excluding "non-arbitrable PAGA claims" rather than all PAGA claims from the scope of the agreement. The lesson is that where a court's ruling that a particular cause of action is non-arbitrable is under challenge, arbitration agreements executed during that period should not exclude the cause of action. If the challenges are successful, the employer would not have the problem that the defendant here faced. If the challenges are unsuccessful, the employer can refrain from filing an arbitration demand.
Plaintiff sued Skillz, alleging violations of the Unfair Competition Law (UCL)9 and California Legal Remedies Act (CLRA).10 Skillz's motion to compel arbitration was denied on grounds of unconscionability.
Skillz appealed. As a threshold matter, Skillz argued that the issue of the arbitration agreement's enforceability was required to be decided by the arbitrator because the agreement stated that the rules of the American Arbitration Association (AAA) applied and the court of appeal had previously ruled that such language was sufficient to establish a delegation clause, citing Dream Theater, Inc. v. Dream Theater.11 However, Dream Theater involved a purchase agreement and subsequent business dispute between corporate buyers and sellers of a business. Thus, the disputants were sophisticated parties of reasonably equal bargaining power. Here, the parties were a mobile application business and a user of its service. The court held that although incorporation of AAA arbitration rules by reference may fairly be deemed a clear and unmistakable delegation where there are sophisticated parties, a different result may be obtained where one party is unsophisticated. For an unsophisticated customer to discover he or she had agreed to delegate gateway
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questions of arbitrability, the customer would need to locate the arbitration rules at issue, find and read the relevant rules governing delegation, and then understand the importance of a specific rule granting the arbitrator jurisdiction over questions of validity. Thus, the court held that there was no delegation to the arbitrator.12
The court then found the agreement substantively unconscionable for several reasons. First, there was a lack of mutuality because the arbitration provisions were one-sided. They excluded claims related to Skillz's (but not plaintiff's) intellectual property rights; granted Skillz (but not plaintiff) authority to seek appropriate equitable remedies with respect to plaintiff's violation of the terms of the user agreement in any court of competent jurisdiction without bond, other security, or proof of damages; and provided that Skillz (but not plaintiff) could institute civil proceedings for claims related to billing and alleged "unfair methods in participating in Services or using the Software." Second, the agreement required all claims to be filed within one year, even though the statute of limitations for CLRA violations is three years and the limitations period for UCL claims is four years. Third, it required all Skillz' customers, no matter where they lived, to arbitrate their claims in San Francisco. Fourth, the arbitration provision stated that each party pay an equal share of the fees and costs of the arbitrator and AAA and that the arbitrator could award to the prevailing party reimbursement of its reasonable attorneys' fees and costs and/or the fees and costs of the arbitrator.13 This latter provision contravened the CLRA, which requires that court costs and attorney's fees be awarded to a prevailing plaintiff but only permits attorney's fees to a prevailing defendant upon a finding by the...
