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Arbitrator Not Allowed To Determine Validity of Arbitration Agreement

Another California Appellate Court recently held that the court, not the arbitrator, can determine whether an arbitration clause in an employment agreement is valid. Because California courts have frequently refused to enforce arbitration agreements in the employment context, many employers have started inserting provisions that require the arbitrator, not the court, to determine the validity of the arbitration agreement.

In Murphy v. Check ‘n Go of California, Inc. (2007) 156 Cal.App.4th 138, the court refused to uphold a similar provision, finding that “While the language of the agreement [regarding arbitration of unconscionability issues] could not be clearer, plaintiff’s alleged assent to this provision was vitiated by the fact that it was set forth in a contract of adhesion, i.e., a standardized contract drafted by the stronger party and presented to the weaker party on a take it or leave it basis [citation].” Now, a second appellate court came to the same conclusion. See Ontiveros v. DHL Express 08 C.D.O.S. 8379.

The decision is not all that surprising, as arbitration agreements have taken a tough beating in the last decade. Under current laws many, if not most, arbitration agreements between employees and employers in California are unenforceable. Those that are enforceable usually require the employer to pay for the cost of arbitration. In many cases the costs of arbitration are greater than the amount the plaintiff would have been awarded in court.

I know many employers desire arbitration agreements, but I don’t know that arbitration is necessarily a wise decision. There used to be two main benefits to arbitration: 1) Arbitration was considered less costly and less time-consuming and 2) Employers could avoid a runaway jury.

Recent court decisions have eradicated the first benefit by requiring employers to pay for almost 100% of the arbitration costs and allowing virtually full discovery in the arbitration proceedings. Now, instead of allowing a judge or jury to decide the case for free or for nominal jury fees, the employer must pay an arbitrator between $450 to $750 per hour or more to review the case, rule on any applicable motions and decide the merits of the case. Our office handled one particularly contentious arbitration where the client paid over $200,000.00 in arbitrator fees alone.

As to the other main benefit (avoiding the runaway jury), I’m not convinced this is sufficient justification to throw money at an arbitrator. Some assume that a jury tends to award more to a plaintiff than an arbitrator, but I have not seen any statistics supporting this assumption. Even if it is true, keep in mind that only 1% of the cases that are filed in court go all the way to trial. This statistic is essentially the same in arbitration. That means you are paying an arbitrator’s fees to avoid the 1% of cases that go to trial. Also keep in mind that, at least in many counties, more than half the cases that go to trial result in a defense verdict. So, really, the employer is paying the arbitrator’s fees in 100% of cases to avoid less than one-half of 1% of the cases that might possibly result in a runaway jury verdict.

There are several other justifications for arbitration, but I can’t say I am convinced by any of them. Some argue that arbitrators are more likely to rule in favor of the employer because the employer is more likely to appear before that arbitrator in the future. Having spoken with numerous arbitrators and people that conduct arbitration on a frequent basis I have never heard of an instance where the “repeat-player” effect had any impact on a case. Because many lawyers still hold to this belief, or for some reason do not want to litigate in arbitration, some lawyers may avoid cases with enforceable arbitration agreements. Therefore, having an enforceable arbitration agreement may help decrease the number of lawsuits that actually get filed against the company. This is just an assumption and it’s not likely we could ever really find out how many cases were NOT filed as a result of an arbitration clause.

Drafting an enforceable arbitration agreement is possible, but be careful what you wish for. Keep in mind that in order to be enforceable with respect to most of the claims an employee might bring, the employer will have to pay for the arbitration fees and afford the employee the same protections the employee would have in court. Employers should carefully considering the consequences before using arbitration agreements.

The Law Office of Phillip J. Griego
95 South Market Street, Suite 520
San Jose, CA 95113
Tel. 408-293-6341
Original article by Robert E. Nuddleman, former associate of The Law Office of Phillip J. Griego.

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Phillip J. Griego represents employees and businesses throughout Silicon Valley and the greater San Francisco Bay Area including Palo Alto, Menlo Park, Mountain View, Los Altos, San Jose, the South Bay Area, Campbell, Los Gatos, Cupertino, Morgan Hill, Gilroy, Sunnyvale, Santa Cruz, Saratoga, and Alameda, San Mateo, Santa Clara, San Benito, Mendocino, and Calaveras counties.