State High Court Limits Companies’ Use of Arbitration

In a ruling that establishes new protections for workers, the California Supreme Court on Thursday sharply limited the kinds of mandatory arbitration agreements that companies can impose on their employees.

Workers may still be required to give up their right to sue over discriminatory firings or disciplinary actions, the justices said in a unanimous decision. But the deals must permit employees the chance to collect as much money as the law would allow in a jury trial, and the company must pay the costs of arbitration, the court held.

“Given the lack of choice and the potential disadvantages that even a fair arbitration system can harbor for employees,” Justice Stanley Mosk wrote for the court, “we must be particularly attuned to claims that employers with superior bargaining power have imposed one-sided, substantively unconscionable terms as part of an arbitration agreement.”

The court also held that the arbitrators must be neutral, a worker with a civil rights complaint must be allowed to compel the employer to produce documents during discovery and arbitrators must make their decisions in writing so courts can review them.

The decision “is a clear message that the California Supreme Court, which is very influential, will not uphold employment programs that are on their face unfair and stacked against the employee,” said Robert E. Meade, senior vice president of the American Arbitration Assn., the nation’s largest provider of dispute resolution services.

Many arbitration policies already in place will have to be rewritten or dropped to meet the new requirements, according to lawyers for companies and workers.

Moreover, the ruling is likely to deter some companies from imposing arbitration on their workers because the firms now will have to foot the bill, even if the worker loses. Arbitrators, on average, are paid between $200 and $400 an hour.

“It is going to make it more expensive for employers to arbitrate than it was before,” said Glenn Clark, a lawyer who represented the workers in the case decided by the court. Many employers may now be dissuaded from imposing arbitration because of costs, he added.

But George S. Howard, who represents the Employers Group, the largest association of employers in the state, said companies will still come out ahead after paying an arbitrator because “the savings in time and money are so great” when the courts are bypassed.

Companies have been increasingly requiring workers to waive their right to sue as a condition of getting a job. Instead of going to a court, workers covered by such requirements must take their claims before private judges--arbitrators.

The decision contained some elements that disappointed both sides. Although the court criticized mandatory employment arbitration--and professional arbitrators generally oppose it--the justices declined to ban the practice, as some employee lawyers had urged.

“It’s obviously a big step forward, but it didn’t go far enough,” said Cliff Palefsky, a lawyer who represents workers.

Deputy Atty. Gen. Kathleen W. Mikkelson, whose office supported the employees in the case, described the decision as “good, but it could have been better.” Her office argued that workers should not be compelled to arbitrate discrimination claims.

“It doesn’t rule out mandatory arbitration, but it says if you are going to do it, you have to put in all these protections,” Mikkelson said.

At the same time, Steven Drapkin, who wrote a brief in the case on behalf of the Employers Group, objected that some of the rules the justices imposed are unrealistic.

In the near term, many agreements may have to be redrafted and lawsuits will follow, he said. He described the use of arbitration agreements among large employers in California as “very prevalent.”

The court’s decision came in Armendariz vs. Foundation Health Psychcare, a sex discrimination case against a managed care company. The court decided that the company’s arbitration agreement was illegal, and allowed two former employees to bring a lawsuit against the firm to court.

Marybeth Armendariz and Dolores Olague brought the case against Foundation Health Psychcare Services Inc. after they were removed from supervisory posts. The women said they were harassed and discriminated against by gay supervisors because they are heterosexual.

After consulting a lawyer, they learned that the employment application they had signed with Foundation required them to arbitrate such disputes. The agreement also permitted them to obtain only a fraction of the damages they could have been awarded by a jury.

Although the employment application said workers had to arbitrate disputes, the company was free to pursue any claims against its employees in court. There also was no cap on the amount of money the company could recover from workers in litigation.

That lid on damages and the unequal treatment of the employer and workers made the agreement unenforceable, the court ruled. The justices also said workers should not be prevented from filing discrimination claims simply because they cannot afford to pay arbitrators.

When a company requires arbitration, “it cannot generally require the employee to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court,” Mosk wrote.

He noted that arbitration generally benefits employers. Most workers cannot afford to refuse to sign an arbitration agreement when it is a condition of a job, and studies show that arbitration pacts reduce litigation and the amount of money employees eventually are awarded, he wrote.

Given these disadvantages for workers, courts must ensure that agreements are fair, he said.

“An employer may not impose a system of arbitration on an employee that seeks to maximize the advantages and minimize the disadvantages of arbitration for itself at the employee’s expense,” Mosk wrote.

Lisa Haines, a representative for Foundation Health Systems Inc., the parent company of Psychcare Services, said the 12,000-employee managed care firm was disappointed by the decision.

She said Foundation no longer requires new employees to sign arbitration agreements.