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Litigation: Drafting enforceable arbitration clauses

Two California cases have shown that courts are being more unfriendly than usual when it comes to enforceability

While it is becoming more and more common for employers to require potential employees to sign employment contracts that include a “binding arbitration” clause, recent court decisions serve to remind employers of requirements necessary to make those clauses enforceable. In February 2012, two California appellate courts invalidated arbitration agreements contained in employment contracts; one that seemingly contained all of the required elements.

In the first case, Ajamian v. CantorCO2E, the court was presented with a rather poorly drafted arbitration provision representing an example of what employers should avoid. In the subject arbitration clause: the fees provision favored the employer; punitive and statutory damages were precluded; the arbitrator was to be chosen by the employer; and the arbitration was to occur in New York, despite the fact the employee lived and worked on the west coast, thus imposing a travel hardship on her. Additionally, the employee was not provided with a copy of the arbitration rules.

Therefore, despite the fact that the employee was highly educated, was given six months to review the employment contract that contained the arbitration provision and had an attorney advise her on the contract, the court found the arbitration provision unconscionable and struck it from the employment contract.

As to the arbitration clause in the second case, Mayers v. Volt Management Corp., one would have expected it to have been enforced given the facts presented. The arbitration agreement, in bold, all-capital letters, was included on the first pages of the employment contract, the employment application and the employee handbook. Moreover, all of those documents were signed by the employee. Additionally, the fees were mutual and not one-sided, and nothing in the provision prevented the employee from seeking relief with a separate governmental or administrative body.

However, the arbitration clause did specify that the arbitration would be done through the American Arbitration Association (AAA), and under that organization’s rules. Despite the seeming fairness of the provision, the court struck it down as unconscionable due to the employer’s failures to:

  • Inform the employee as to which of the several AAA rules applied
  • Give the AAA rules to the employee
  • Tell the employee where to find the rules

Based on this, the court found that the actual terms of the arbitration were a “surprise” to the employee. 

These cases show how courts are being more unfriendly than usual when it comes to the enforceability of arbitration clauses in the employment context. In-house counsel are encouraged to look over their organization’s employment agreements, new employee applications that contain arbitration clauses and employee handbooks. Make sure the enforceability of these provisions is not at risk due to any of the aforementioned deficiencies.

Contributing Author

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Matthew Walsh

Matthew Walsh is a partner in the Chicago office of Hinshaw & Culbertson LLP and co-leader of the firm's Business Litigation Department. His practice concentrates...

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