United States: Provisions Limiting Relief And Requiring Strict Confidentiality Doom Arbitration Agreement

Seyfarth Synopsis: The Court of Appeal has invalidated an arbitration agreement between a law firm and its "partner" because the agreement restricted the scope of arbitral relief available and made pre-arbitration proceedings "strictly confidential."

The Facts

Constance Ramos, a former partner of the Winston & Strawn law firm, sued Winston under California statutes addressing discrimination, retaliation, wrongful termination, and unfair pay. Winston moved to compel arbitration pursuant to the parties' partnership agreement, which required any arbitration of any dispute "arising under or related to" the partnership or the partnership agreement. The agreement also required the panel of arbitrators to be selected only from partners of law firms of more than 500 attorneys, required the parties to share the costs associated with arbitration, designated an exclusive venue of Chicago, and provided that each party would bear its own attorneys' fees. The agreement further provided that "all aspects of the arbitration" were to be maintained in "strict confidence" between the parties.

The agreement also prohibited the arbitrators from substituting their judgment for that of Winston's partnership "with respect to any determination made or action committed to by such parties, unless such action or determination violates a provision of this Agreement."

The trial court upheld the agreement after severing the provisions on cost-sharing and venue, and compelled arbitration. Although generally an order to compel arbitration is not appealable, Ramos obtained appellate review by way of a successful petition for a writ of mandate.

The Appellate Court Decision

The Court of Appeal ruled in Winston's favor on the threshold issue of whether the arbitration agreement covered the statutory claims Ramos had brought. The agreement covered all claims "arising under or related to" the partnership and the partnership agreement. The "related to" language was broad enough to encompass the claims at issue, which concerned alleged unfair pay and discriminatory conduct by the partnership. 

The Court of Appeal rejected Winston's position that U.S. Supreme Court jurisprudence on the Federal Arbitration Act has undermined the California Supreme Court's 2000 decision in Armendariz v. Foundation Health Psychcare Services, Inc., which imposes special requirements on arbitration agreements that employers impose on employees, especially as to claims asserting non-waivable statutory rights. The Court of Appeal held that Armendariz is still "controlling law" notwithstanding recent U.S. Supreme Court decisions in AT&T Mobility LLC v. Concepcion and Epic Systems Corp. v. Lewis. The Court of Appeal also rejected Winston's attempt to distinguish Armendariz on the basis that Ramos was not an "employee" but rather was a Winston "partner." The Court of Appeal found that without regard to the asserted lack of an employment relationship, Ramos was in an inferior bargaining position with respect to Winston, and concluded that this "power imbalance" was sufficiently analogous to an employee-employer relationship to make Armendariz apply.

The Court of Appeal then applied Armendariz. The Court of Appeal rejected Ramos's arguments that the arbitration agreement was unenforceable because it called for arbitrators who were partners in large law firms, because it called for venue in Chicago, because it failed to expressly provide for discovery, and because it failed to expressly provide for a written arbitration award. In each case the agreement's provision was either consistent with Armendariz or compliance with an Armendariz requirement could be fairly implied.

At the same, the Court of Appeal struck down the arbitration agreement because it was invalid under Armendariz in these respects:

  • The provision prohibiting the arbitrators from substituting their own judgment for Winston's judgment on matters other than the agreement itself impermissibly limited the full remedies available, particularly remedies available under the California Fair Employment and Housing Act. For example, to award lost pay, the arbitrators would have to substitute their own judgment for Winston's that Ramos was not entitled to the pay. Likewise, the provision saying each party would recover its own attorneys' fees was inconsistent with the statutory right to recover attorney fees under the FEHA. 
  • The provision requiring the parties to share arbitration costs would make Ramos pay forum fees (here, the arbitrator's fees) beyond the forum fees she would have to pay in court.
  • The agreement was procedurally unconscionable even though Ramos was a highly educated, sophisticated litigator, because the agreement was take-it-or-leave-it—Ramos could not negotiate any term. The procedural unconscionability was "relatively minimal," however, in light of Ramos's sophisticated status.
  • The agreement was substantively unconscionable, because of the limitations on relief and the required sharing of fees, and also because the agreement required the parties to keep "all aspects of the arbitration" in "strict confidence." This provision unfairly impaired Ramos's ability to conduct any informal discovery, including contacting any witnesses.    

Rather than sever offending provisions, the Court of Appeal held that the arbitration agreement was void in its entirety. The unlawful provisions could not be severed, because the "unique provision" restricting the arbitrators' ability to second guess Winston's decisions could not be stricken without fundamentally altering the entire scope of the arbitration. Striking this provision, plus the several other invalid provisions, would require the trial court to impermissibly reform the entire agreement.

What Ramos Means For Employers

Ramos presents a reminder to review employment arbitration agreements for provisions that could run afoul of the numerous requirements set forth in Armendariz. Employers should be particularly cautious about the inclusion of any term that could restrict the scope or nature of statutory relief that would otherwise be available to an employee pursuing claims in court.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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