United States: Recent Developments in California: Employee Arbitration Agreements

We want to bring to your attention two recent developments concerning arbitration. First, a split panel for the 9th Circuit U.S. Court of Appeals held in EEOC v. Luce, Forward, Hamilton & Scripps that an employer could lawfully require its applicants and employees to arbitrate Title VII employment discrimination claims as a condition of employment. Shortly after that, California Governor Gray Davis vetoed Senate Bill 1538, which sought to undermine recent court decisions that permitted employers to require employees and job applicants to sign pre-dispute agreements to arbitrate certain California statutory claims.

In Luce, Forward, legal secretary Donald Lagatree applied for a position with a law firm. The firm granted him a conditional offer of employment, but sent him an offer letter that included an arbitration provision requiring Lagatree to submit all "claims arising from or related to his employment" to binding arbitration. After Lagatree refused to sign the arbitration provision, the firm withdrew its job offer. Lagatree sued the firm in Los Angeles Superior Court for wrongful termination. The Superior Court granted the firm's motion to dismiss, holding that it did not unlawfully discharge Lagatree when he refused to sign the arbitration agreement. The Superior Court's decision was affirmed by a California Court of Appeal.

After Mr. Lagatree's Superior Court action was dismissed, the EEOC brought suit against the firm in United States District Court on the grounds that: 1) the firm's standard and compulsory employee arbitration agreement was unlawful under federal law, including Title VII, and 2) the firm had unlawfully retaliated against Lagatree in violation of Title VII by terminating him when he refused to sign the agreement. The District Court enjoined the firm from requiring its employees to agree to arbitrate their Title VII claims as a condition of their employment; the firm appealed.

The Ninth Circuit concluded that the firm had a right to refrain from hiring Lagatree when he refused to sign the mandatory arbitration agreement and that the firm had not unlawfully retaliated against him by thereafter terminating his employment. The Ninth Circuit declared that its own precedent, Duffield v. Robertson Stephens & Co., 144 F. 3d 1182 (9th Cir. 1998) was no longer "good law." (In Duffield, the Ninth Circuit had held that employers could not compel individuals to waive their Title VII rights to a judicial forum through compulsory arbitration agreements. As a result of the Duffield decision, the Ninth Circuit was previously at odds with other circuits and the California Supreme Court, which had each repudiated the decision.) The Luce, Forward Court stated that its earlier decision in Duffield was "fruitful error" and that its new holding was consistent with the United States Supreme Court's decision in Circuit City Stores, Inc. v. Saint Clair Adams, 532 U.S. 105 (2001), holding that employment arbitration agreements can be enforced under the Federal Arbitration Act. (See, e.g., March 22, 2001 Business Update). The Luce, Forward decision is not yet final and a rehearing en banc could occur.

California Senate Bill 1538 sought to prohibit employers from requiring employees to sign pre‑dispute agreements to arbitrate discrimination claims arising under California's Fair Employment and Housing Act ("FEHA."). The vetoed legislation also sought to make it an unlawful employment practice for an employer to take adverse action against an employee for refusing to waive rights and procedures established by the FEHA. Governor Davis stated in his veto message that while there is "no question" that employees have a right to be free from discrimination and harassment on the job, he was not prepared in "difficult economic times" to "place additional burdens on employers by preventing them from requiring alternative dispute resolution of employment claims."

The Luce, Forward decision and Governor Davis's veto of Senate Bill 1538 have together provided encouragement to employers who wish to require employees to arbitrate claims. But California employers considering pre-dispute arbitration agreements for applicants and employees should continue to be mindful of the California Supreme Court's five requirements for a valid, mandatory pre-dispute employment arbitration agreement covering statutory claims under California law: 1) no limitation on statutory remedies, 2) adequate discovery, 3) the opportunity for a written arbitration award and judicial review, 4) no arbitration fees in excess of those an employee would incur in a judicial forum, and 5) mutuality. (See, e.g., discussion of Armendariz v. Foundation Health Pscyhcare Servs., 24 Cal. 4th 83 (2000) in August 2000 Business Update.) California employers considering implementing or enforcing pre-dispute arbitration agreements with their employees should also continue to consult closely with counsel at all stages.

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