Armendariz v. Foundation Health Psychcare Services, Inc.
99 Cal. Rptr. 2d 745 (2000)
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Rule of Law:
Mandatory employment arbitration agreements are enforceable with respect to unwaivable statutory rights, such as those under the Fair Employment and Housing Act (FEHA), only if the arbitration process permits the employee to vindicate their statutory rights by meeting five minimum requirements. Furthermore, such agreements must possess a 'modicum of bilaterality' and will be found unconscionable and unenforceable if they require employees to arbitrate claims but do not compel the employer to do the same for its claims against the employee.
Facts:
- Foundation Health Psychcare Services, Inc. (employer) hired Marybeth Armendariz and Dolores Olague-Rodgers (employees).
- As a condition of their employment, the employees signed an arbitration agreement.
- The agreement required the employees to submit any wrongful termination claims to binding arbitration.
- The agreement limited the employees' available remedies to the amount of wages they would have earned between their termination and the date of the arbitration award, excluding other damages or equitable relief like reinstatement.
- The agreement did not require the employer to arbitrate any claims it might have against the employees.
- The employer terminated both employees approximately one year after they were hired.
- The employees alleged they were terminated because of their perceived sexual orientation and had been subjected to sexually based harassment during their employment.
Procedural Posture:
- Marybeth Armendariz and Dolores Olague-Rodgers (employees) sued Foundation Health Psychcare Services, Inc. (employer) in state trial court for wrongful termination and violation of the Fair Employment and Housing Act (FEHA).
- The employer filed a motion to compel arbitration based on the agreement signed by the employees.
- The trial court denied the employer's motion, finding the arbitration agreement to be an unconscionable contract of adhesion.
- The employer, as appellant, appealed the trial court's decision to the California Court of Appeal.
- The Court of Appeal, as the intermediate appellate court, reversed the trial court, ruling that the unconscionable damages provision could be severed and the remainder of the arbitration agreement enforced.
- The employees petitioned the California Supreme Court for review, which was granted.
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Issue:
Is a mandatory employment arbitration agreement that contains an unlawful damages limitation and an unconscionably unilateral clause compelling only employee claims to arbitration enforceable?
Opinions:
Majority - Mosk, J.
No. A mandatory employment arbitration agreement that contains multiple unlawful provisions, including an invalid damages limitation and an unconscionable unilateral arbitration clause, is unenforceable. For an arbitration agreement covering unwaivable statutory claims to be valid, it must meet five minimum requirements: (1) provide for a neutral arbitrator, (2) allow for more than minimal discovery, (3) require a written award, (4) permit all types of relief that would be available in court, and (5) not require employees to bear costs unique to arbitration. The court found the agreement here unlawfully limited the employees' remedies, violating public policy. It was also substantively unconscionable because it unfairly compelled only employees to arbitrate their claims while leaving the employer free to pursue its claims in court, lacking a 'modicum of bilaterality.' Because these multiple defects indicated a systematic effort to create an inferior forum for employees, the agreement was permeated by unconscionability, and the trial court correctly refused to sever the illegal parts and voided the entire agreement.
Concurring - Brown, J.
The opinion agreed with the majority's overall conclusion but disagreed on the issue of arbitration costs. Instead of adopting a bright-line rule that the employer must always pay all costs unique to arbitration, the concurring opinion argued that the apportionment of costs should be decided by the arbitrator on a case-by-case basis. This approach would consider factors like the employee's ability to pay and the overall expense compared to litigation. The opinion suggests that any unfair cost allocation by the arbitrator could be corrected during judicial review of the arbitration award, which avoids a preemptive rule that might not fit the unique circumstances of every case.
Analysis:
This landmark decision established the 'Armendariz factors,' a five-part test that sets the minimum standards for the enforceability of mandatory employment arbitration agreements covering California statutory rights. It significantly strengthened employee protections by requiring arbitration to be a fair substitute for a judicial forum, not an inferior one. The ruling also solidified the requirement for bilateral arbitration clauses in adhesive employment contracts, making it difficult for employers to impose one-sided dispute resolution systems. By refusing to sever multiple unconscionable clauses, the court signaled to employers that they cannot draft agreements with several illegal provisions expecting courts to simply reform them, thus deterring the creation of systematically unfair arbitration schemes.
