Paul J. Dubow
Paul Dubow is an arbitrator and mediator in San Francisco. He specializes in employment, insurance, franchise, financial and other commercial law matters. He is a past president of the California Dispute Resolution Council, a fellow of the College of Commercial Arbitrators, and a founder and past president of The Mediation Society of San Francisco.
The cases discussed below are those issued by California courts and federal courts that have jurisdiction over California. The cases may be of interest to attorneys drafting contracts containing arbitration or mediation clauses.
The trial court found the arbitration agreement to be procedurally unconscionable because rules of the American Arbitration Association ("AAA"), the arbitral forum, were not attached. It found the agreement to be substantively unconscionable because: 1) it provided that either party could go to court to obtain injunctive relief; 2) it required the parties to maintain the confidentiality of Forever 21's trade secrets; and 3) there was no mutuality because the agreement appeared to limit arbitration to issues that only the employee could bring.
The supreme court rejected all of these arguments. With respect to the failure to attach the provider rules, the court of appeal decisions that found a failure to attach the provider rules to be unconscionable stood for the proposition that courts will more closely scrutinize the substantive unconscionability of terms that were "artfully hidden" or otherwise not available. Accordingly, the plaintiff's argument might have had force if her unconscionability challenge concerned some element of the AAA rules of which she had been unaware when she signed the arbitration agreement, but her challenge to the enforcement of the agreement had nothing to do with the AAA rules.
In addition, the supreme court was not persuaded that the injunction provision favored the employer because the employer was more likely to seek injunctive relief. It was willing to accept for the sake of argument that employers are, in general, more likely than employees to seek provisional relief during the pendency of an arbitration. But the provisional relief clause did no more than recite the procedural protections already secured by Code of Civil Procedure section 1281.8(b), which expressly permits parties to an arbitration to seek preliminary injunctive relief during the pendency of the arbitration. The clause merely confirmed, rather than expanded, rights available to the parties under that code section.
The supreme court also found that the insertion of a confidentiality requirement did not make the agreement substantively unconscionable. A contract can provide a margin of safety that provides the party with superior bargaining strength a type of extra protection for which it has a legitimate commercial need without being unconscionable. Here, the basis for the extra measure of protection was a legitimate commercial need to protect Forever 21's "valuable trade secrets and proprietary and confidential information" from public disclosure.
The lack of mutuality argument was based on the fact that the arbitration agreement listed specific claims that were arbitrable, all of which were claims that were more likely to be brought by the employee. The illustrative list of claims subject to the agreement was just that; the agreement specifically stated that such claims "include but are not limited to" the enumerated claims, thus making clear that the list was not intended to be exhaustive. The arbitration agreement, however, made clear that the parties mutually agreed to arbitrate, "any claim or action arising out of or in any way related to the hire, employment, remuneration, separation or termination of Employee." That provision clearly covered claims an employer might bring as well as those an employee might bring.
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Comment. A reference to injunctions in an arbitration agreement has often been a bane to drafters who want the right to determine arbitrability to be delegated to the arbitrator, rather than a court. The delegation clause must be "clear and unmistakable."1 However, some arbitration agreements state that, notwithstanding that disputes covered therein shall be arbitrated, the parties retain the right to obtain injunctive or other provisional relief from a court of competent jurisdiction. The reference to a court of competent jurisdiction renders the delegation clause ambiguous and hence unenforceable.2 The fatal reference to a court of competent jurisdiction was not present in the agreement at issue in this case. Drafters should also make sure that an injunction provision in an arbitration agreement does not give the stronger party greater rights than those permitted by the statute.3
This decision also clears up whether a failure to attach provider rules is an element of procedural unconscionability. The rule now appears to be that a failure to attach the rules is not procedurally unconscionable unless the rules are not easily available elsewhere.4
The trial court declined to enforce defendant's motion to compel arbitration on the ground that the agreement was procedurally unconscionable for failure to attach the provider rules, and was substantively unconscionable because it allowed the employer defendant to obtain an injunction in court barring the employee's use of the employer's trade secrets, notwithstanding the requirement to arbitrate all disputes. The court of appeal affirmed. The arbitration agreement stated that the AAA rules would apply, but failed to state which set of AAA rules applied. With respect to the finding of substantive unconscionability, defendant contended that the injunctive relief carve-out was not substantively unconscionable because it did not provide defendant with any rights beyond those already granted to both it and Carbajal by the California Arbitration Act. According to defendant, Code of Civil Procedure section 1281.8 allowed it to seek injunctive relief from a court "both before and while arbitration is pending," and therefore the carve-out provision granted it no new rights. The injunctive relief carve-out provision, however, allowed defendant to seek broader relief in court than the cited code section. Code of Civil Procedure section 1281.8(b) only authorizes a party to an arbitration agreement to seek a preliminary injunction or other provisional remedy "upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief." In contrast, the injunctive relief carve-out broadly authorized defendant to seek any type of injunctive relief in court, including a permanent injunction.
Comment. This case is yet another example of how a reference to the right to obtain an injunction may doom an arbitration agreement. It is best not to even refer to the right to seek an injunction in an arbitration agreement, since section...
