Arbitration Clause In CEO’s Employment Agreement Found Unenforceable Where Employer Did Not Provide Copy Of Arbitration Rules
Many employers require their employees to sign an employment agreement that provides for binding arbitration of claims arising from the employment. While such clauses are generally enforceable, courts will not enforce arbitration clauses that are deemed to be unconscionable. For example, in a recent case, the court refused to enforce an arbitration clause that referred to the rules of the American Arbitration Association where the employer did not provide the employee with a copy of those rules.
A court will deem an arbitration clause unconscionable when it finds the clause to be both procedurally and substantively unconscionable. Procedural unconscionability refers to the process of obtaining the employee’s agreement. In Trivedi v. Curexo Technology Corp., the court found an arbitration clause procedurally unconscionable because the employer drafted the agreement, presented it to the employee (in this case the CEO of the company) on a take it or leave it basis, and the agreement referred to arbitration rules without providing the employee with a copy of the rules.
However, procedural unconscionability alone is not enough for the court to find an arbitration clause unenforceable. The court must also find the substance of the provision to be unconscionable. In the Trivedi case, the arbitration clause stated that the party prevailing in the arbitration could recover its attorneys’ fees. Normally a California employer will not be able to recover its attorneys fees in a dispute with an employee. The Trivedi court found that the attorneys’ fee provision in the employment agreement was substantively unconscionable because it would discourage an employee from asserting his or her rights. Since the court found both procedural and substantive unconscionability, the court ruled that the arbitration clause was not enforceable.
Employers seeking to incorporate arbitration clauses into employment agreements should carefully review the process used in obtaining the agreement, ensure that the employee is provided with a copy of the rules governing the arbitration. Further, the employer should be careful not to include provisions that might impose on the employee burdens not normally imposed in court. As shown in the Trivedi case, these principles apply even to agreements with top level employees who would presumably have the education, experience, and/or resources to make a meaningful decision whether to sign the agreement.